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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-K





(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended June 28, 2008

or



| ̈ | 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 1-10031





NOBEL LEARNING COMMUNITIES,
INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-2465204                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|1615 West Chester Pike, Suite 200 West Chester, PA             |  | 19382                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (484) 947-2000

Securities registered pursuant to Section 12(b) of the Act:



|                                        |  |                                               
|--------------------------------------- |  | ----------------------------------------------
|Title of Each Class                     |  | Name of Each Exchange on Which Registered     
|Common Stock, par value $.001 per share |  | Nasdaq Stock Market LLC (Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ̈    No  x

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 (§229.405 of this chapter) 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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act).

Large accelerated filer   ̈            
Accelerated filer  x             Non-accelerated filer   ̈             Small reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ̈    No  x

The aggregate market value of the
voting and non-voting common stock held by non-affiliates of the registrant as of December 28, 2007 (the last business day of the registrants most recently completed second fiscal quarter) was approximately $105,443,000 (based upon the
closing sale price of these shares on such date as reported by the Nasdaq Global Market). The number of shares of the registrants common stock, par value $0.001 per share, outstanding at September 3, 2008, was 10,440,010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 6, 2008 (the Proxy Statement) and to be filed within 120 days after the registrants fiscal year ended
June 28, 2008 are incorporated by reference in Part III.









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TABLE OF CONTENTS



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|Item No. |  |                                                                                                                 |  | Page
|         |  | PART I                                                                                                          |  |     
|1.       |  | Business                                                                                                        |  | 1   
|1A.      |  | Risk Factors                                                                                                    |  | 10  
|1B.      |  | Unresolved Staff Comments                                                                                       |  | 14  
|2.       |  | Properties                                                                                                      |  | 14  
|3.       |  | Legal Proceedings                                                                                               |  | 14  
|4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 14  
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |     
|         |  |                                                                                                                
|5.       |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
Securities |  | 15  
|6.       |  | Selected Financial Data                                                                                         |  | 17  
|7.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 20  
|7A.      |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 46  
|8.       |  | Financial Statements and Supplementary Data                                                                     |  | 47  
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 47  
|9A.      |  | Controls and Procedures                                                                                         |  | 47  
|9B.      |  | Other Information                                                                                               |  | 50  
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |     
|         |  |                                                                                                                
|10.      |  | Directors and Executive Officers and Corporate Governance                                                       |  | 51  
|11.      |  | Executive Compensation                                                                                          |  | 51  
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 51  
|13.      |  | Certain Relationships and Related Transactions and Director Independence                                        |  | 51  
|14.      |  | Principal Accountant Fees and Services                                                                          |  | 51  
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |     
|         |  |                                                                                                                
|15.      |  | Exhibits and Financial Statement Schedules                                                                      |  | 52  



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CAUTIONARY STATEMENTS ABOUT
FORWARD-LOOKING INFORMATION

Statements included or incorporated herein which are not
historical facts are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When the Company uses words such as believes, expects, anticipates,
plans, estimates, projects, may, intends, seeks or similar expressions, the Company is making forward-looking statements, but these terms are not the exclusive means of
identifying forward-looking statements.

Forward-looking statements reflect managements current views with respect to future events
and financial performance and are based on currently available competitive, financial and economic data and managements assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking
statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in
greater detail under Item 7; Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 1A Risk Factors. In addition, the Companys results may be affected by general
factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes and laws and regulations affecting it in markets where it competes.

Readers are cautioned that the forward-looking statements reflect managements analysis only as of the date hereof and the Company assumes no
obligation to update or revise these statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, whether as a result of new information, future developments or otherwise.



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PART I



|ITEM1. | BUSINESS.
|------ | ---------

General

Nobel Learning Communities, Inc. (collectively with its subsidiaries, the Company or
Nobel Learning Communities) is a national network of nonsectarian private schools, including preschools, elementary schools, middle schools and specialty high schools in 15 states and the District of Columbia serving approximately 28,000
students. Nobel Learning Communities provides high-quality private education, with small schools and class sizes, qualified teachers and attention to individual learning styles. Nobel Learning Communities also offers an array of supplemental
educational services, including before- and after-school programs, the Camp Zone® summer program, learning support programs and technology camps. These schools operate under various brand
names and are located in the District of Columbia, Arizona, California, Florida, Illinois, Maryland, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Virginia, and Washington. As of September 10, 2008, the
Company operated 178 schools.

The following trademarks are in use by the Company,
all of which have either been registered or are in the process of being registered in the United States Patent and Trademark Office: Chesterbrook Academy® , Merryhill Country School®, Discovery Isle, Enchanted Care, Camelback Desert Schools, The Honor Roll School® , Camp Zone®, Paladin Academy®, Rocking Horse Child Care Centers® Southern Highlands Preparatory School, and
Houston Learning Academy. We believe that certain of our service marks have substantial value in our marketing in the respective areas in which our schools operate.

Our corporate office is located at 1615 West Chester Pike, Suite 200, West Chester, PA 19382-6223. Our telephone number is (484) 947-2000. Nobel Learning Communities, Inc., a Delaware corporation, was formed on
March 30, 1983.

Educational Philosophy and Implementation

Our educational philosophy is based on a foundation of sound research and innovative instructional strategies, along with quality practices and curricula developed by experienced educators. Our programs stress the
development of the whole child and are based on concepts of multi-sensory, integrated and age-appropriate learning. Our curricula are not only designed to allow each child to develop according to his or her own abilities and timetable, but also seek
to prepare every student for achievement in accordance with national content standards and goals. Our schools monitor student progress against curriculum objectives, as well as the development of cognitive, social, emotional and physical skills. The
result is the opportunity for each of our students to develop a strong foundation in academic learning, positive self-esteem and emotional and physical well-being.

We have created developmental goals and curriculum guidelines for each age level, grade level and content area to assist principals and teachers in planning their daily and weekly programs. We maintain that small
schools, small classes, clearly articulated curricular guidelines and excellent educational materials, delivered by qualified, innovative and enthusiastic teachers comprise the basic ingredients of a quality education. Our philosophy is based on
personalized instruction that leads to a students active involvement in learning and understanding. The programs for our schools are skills-based and delivered through a developmentally appropriate, comprehensive curriculum in each
developmental program or grade level. We implement each curriculum in ways that stimulate a learners curiosity, support a students individual learning style and employ processes that contribute to lifelong achievement. Academic areas
addressed include reading, writing, spelling, mathematics, science, social studies, visual and graphic arts, music, physical education/wellness and world language (Spanish). Additionally, non-cognitive skills or executive skills, such as
perseverance, self-confidence, self-discipline, communication, social responsibility, teamwork and conflict resolution skills are continuously reinforced through curriculum infusion and meta-cognitive dialogue. The critical areas of technology
literacy, economics and study skills are integrated into the programs, as appropriate, in most content areas through the use of classroom-based technologies, media centers and computer labs.



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Athletic Activities and Supplemental Programs

Our schools offer athletic activities and supplemental programs, which include day field trips
coordinated with curriculum to zoos, libraries, museums and theaters and, at the middle schools, overnight trips to such places as national parks and historical locations, and select summer trips to European destinations. Schools arrange classroom
presentations by parents, community leaders and other volunteers to supplement instruction. We also organize programs that allow students to present to community groups and organizations. To enhance the childs physical, social, emotional and
intellectual growth, schools may provide extra-curricular experiences (some fee-based) tailored to particular families interests. These activities include but are not limited to dance, gymnastics, instrumental music lessons and computer based
technology programs. Additionally, students expand their horizons through participation in science fairs, drama clubs and local and regional academic competitions. This past academic year (2007/2008), we expanded our shared, distance learning
projects, called Learning Without Walls, to full rollouts or tests in our 4th, 5th, and 8thgrades in our schools around the country. These programs included a 4thgrade project on Global Warming, a 5thgrade
project on Waterways and an 8thgrade project building leadership skills and researching entrepreneurship. For the upcoming 2008/2009 school
years our Learning Without Walls projects will be expanded to include the 4th, 5th, 6th, 7th, and 8thgrades. This will include the addition of a 6thgrade project exploring mathematics through the examination of systems, and a 7thgrade project which will include an investigation of European countries with a culminating documentary activity.

Teachers

We recognize that maintaining the quality of our teachers capabilities and professionalism is essential to sustaining our students high level
of academic achievement and our profitability. We sponsor professional development days covering various aspects of teaching and education, using both internal trainers and external consultants. Our educators serve on Company task forces and
committees that review and revise curricular guidelines, programs, support materials and current teaching methods.

Training

School-based leadership teams (Principals and Assistant Principals) also actively engage in professional development and self-improvement. Staff training
is provided by our education department and other experts within the education industry. Through participation in our annual National Principals Conference, seasoned administrators as well as new recruits are kept abreast of up-to-date
research, changing trends and sound pedagogical practices. In addition, many of our highest performing principals are utilized as trainers to help with professional development and curriculum implementation in our schools.

Accreditation

We seek to ensure that our schools
meet or exceed the standards of appropriate accrediting agencies through an internal quality assurance program. Although not mandated by any governmental or regulatory authority, many of our schools are accredited, or are currently seeking
accreditation through the Commission on International and Trans-Regional Accreditation (CITA) with various regional accreditation agencies throughout the United States. Regional accreditation agencies include:

Middle States Association of Colleges and Schools

North Central Association of Colleges and Schools

Northwest Association of Accredited Schools

Western Association of Schools and Colleges

Southern Association of Colleges and Schools

The Company is currently scheduled to go through CITA re-accreditation by June 2009.



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School Operations

Standards

In order to seek to maintain appropriate standards, our schools share consistent educational goals and operating
procedures. While we have a national curriculum, principals may tailor curricula, within the standards of Nobel Learning Communities, to meet local and state requirements. Members of our management team visit schools and centers on a regular basis
to review program, facility and staff quality. Hiring and retaining quality personnel at our schools and in operational management positions is a critical success factor in driving success in both operational and financial performance.

Our school Principals and Assistant Principals are responsible for all facets of school operations including curriculum implementation, ensuring
student achievement and success, personnel and financial management, community outreach, student discipline and implementing local sales and marketing strategies. The Principals and Assistant Principals are supported by our regional education and
human resources teams and our centralized marketing, real estate, facilities and finance organizations.

We operate and review our
performance based on both geographic cluster and individual school based performance. Our operations have annual budgets and financial and operating information is collected daily. Certain measures of school and cluster performance are reviewed
weekly and others are reviewed monthly or quarterly to budget depending on the significance to meeting operational and financial objectives. For example, net revenue, tuition revenue, certain operating costs and student census information are
monitored weekly in relation to our objectives.

Executive Directors

Executive Directors oversee the Principals and schools and report to a Regional Vice President. Executive Directors are responsible for ensuring the qualifications of Principals and Assistant Principals, as well as
training and development. School Principals and Executive Directors work closely with regional and corporate management, particularly in the regular assessment of program quality and school performance.

We hire qualified candidates and attempt to promote from within when possible. Candidate credentials are reviewed through employment references, criminal
background checks and appropriate education verification in order to establish an understanding of the candidates skills, professionalism and character. After hiring, it is our policy that employees receive regular performance feedback
including a formal annual performance evaluation. Our Principals and Executive Directors may be eligible for incentive compensation based on the performance of their schools.

Private Pay Schools

General Education
Schools. Our preschool and elementary/middle school strategy is based on clustering of preschools around an elementary school in order to provide a continuum of education and consistent curriculum for children from infancy through 8thgrade. Clusters of schools are placed in geographic markets where the economy and population meet our demographic profile. In several markets, students from
our preschools can easily matriculate into our elementary/middle school programs. In addition, we can potentially convert students from our other specialty programs to our general education programs.

We also operate schools that are not part of a complete geographic cluster. Many of these schools were built or purchased prior to the implementation of
our cluster strategy or may be the initial school in a new market. In some cases, these schools may become part of a cluster if we determine the demographic profile in the market provides a growth opportunity.

We seek to distinguish our schools from our competition with our qualitative and quantitative program outcomes. Our schools generally span a broader
range of ages and grades than many of our competitors. At each age and grade level, we support a childs development with appropriate curriculum-based programs. During the



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fiscal year ended June 28, 2008, we implemented the roll out of a new national elementary school curriculum for kindergarten through 8thgrade. This renewed curriculum provides principals and teachers the strong foundations they need to plan and develop student centered lessons that promote
high levels of integration, differentiation and opportunities for authentic assessment.

During the fiscal year ended June 30, 2007,
we finished the roll out of a new national preschool curriculum for children between six weeks and five years of age. This curriculum, called Links to Learning, is a three tiered academic program. It provides teachers with a scope and sequence
for developmentally appropriate skill introduction, integration and acquisition. The program also provides quality control instruments for Principals and offers strong communication materials for parents through curriculum connected print
materials, developmental communications and authentic assessment. We foster an individualized approach to learning in small group sizes and integrate the fundamental preschool areas of language and literacy, mathematics, community, world languages,
social and emotional development, art, music, and wellness.

Further, in certain elementary locations, we provide programs and schools for
the learning challenged as well as special purpose high schools. We believe that empirical data as well as quantitative results support the quality of our programs. Standardized test results have consistently shown that our students perform at or
above national grade performance norms in reading and mathematics.

Many of our preschools and elementary schools allow for early drop-off
and late pick-up to accommodate parent schedules. In most preschool locations, programs are available for children starting at six weeks of age. We believe that parents can feel comfortable leaving their children at one of our schools knowing the
children will receive both a quality education and engage in well-supervised developmental, recreational and enrichment activities.

Most
of our preschools and elementary schools complement their educational programs with enrichment programs, arts programs, before-and-after-school programs and summer programs or camps. In addition to those revenue generating programs, our schools seek
to improve margins by providing ancillary services and products, such as portrait photos, books and uniform sales.

Before-and-After
School Programs.During Fiscal 2008 the Company acquired the Enchanted Care Learning Centers in the central Ohio market. In addition to nine preschools, these centers include six standalone buildings operating as Kids Campuses. The
Kids Campus locations provide before-and-after programs in state-of-the-art facilities dedicated exclusively to elementary school-aged children. The programs help children mature socially and academically, and our well-trained teachers learn
and work with a childs individual learning style. We offer a variety of activities and resources, including:



| |  |  | Computer & Animal Science Laba place to learn about different animals while developing computer and research skills
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Basketball Gymfully equipped for healthy competition, fitness and team building
| | - |  | --------------------------------------------------------------------------------



| |  |  | Music & Drama Dance Stageactivities incorporate costumes, dance, drama and music and culminate in fun theatrical productions
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Art Studiochildren explore their creativity through painting, drawing, and sculpting
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Movie Theatrea full schedule of educational and exciting films fill our big screen
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Cafeteria/Make & Bake Kitchenchildren learn what makes up a nutritious meal, while picking up basic cooking and baking skills
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Homework Librarya quiet place to do homework, study, read and interact with teachers.
| | - |  | --------------------------------------------------------------------------------------

The Kids Campuses also provide locations where we offer summer camp programs for preschool and school age children.



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The Kids Campus locations, plus one additional before and after school location acquired in the
Dallas area and operating as part of our Merry Hill Schools, provide additional growth potential in existing and new markets for the Company.

Organization Sponsored Centers.During Fiscal 2007, the Company was awarded a contract to operate the Esther Peterson Child Development Center at the Department of Labor in Washington, D.C. This school is the Companys first
corporate market model school serving a defined customer base, usually with a common employer, and many times with some revenue or expense subsidy. The second type of this model is our school at the University of Illinois Research Park, which has
some portion of the land cost and enrollment slots supported by outside organizations. This school opened August 13, 2007. This differs from the rest of our schools, which serve the general public and do not have a company or organization
support and some financial aspect of the school. This delivery model represents a new market opportunity for the Company. The Company does not specifically seek out this type of preschool model, but will respond to requests from sponsoring
organizations, when appropriate, given our operating model and our geographic market coverage.

Paladin Academy®. Our Paladin Academy® school and programs serve the needs of children
with mild to moderate learning challenges from kindergarten through 8thgrade. Our mission is to improve the learning process and achievement levels
of children with dyslexia, attention deficit disorder, dysgraphia and other mild learning difficulties through stand-alone schools and school-based programs. We offer developmental testing, full-day clinics and summer programs. The primary goals of
our Paladin Academy® program is to enable students to mainstream back into the general school population.

We operate one stand-alone Paladin Academy® school and six school-based programs or clinics integrated within our elementary schools. Paladin Academy® schools and/or programs are now located in Florida, North Carolina,
Pennsylvania and Virginia. At the end of Fiscal 2008, we re-located our stand-alone Paladin Academy to a new site in the existing geographic market area.

Houston Learning Academy. Under the name Houston Learning Academy (HLA), we operate five special purpose high schools in the Houston metropolitan marketplace. HLA schools, which are
fully accredited by the Southern Association of Colleges and Schools, offer a half-day high school program, as well as evening and summer school programs. HLA also provides a tutor and special education classes in a residential hospital. HLA schools
and programs feature individualized attention, primarily for those students who are at risk of not completing their high school requirements in a more traditional setting and/or are attracted to the schools program and flexible hours of
service.

Marketing

We generate new
enrollments primarily from word-of-mouth recommendations from parents, direct mail campaigns, internet advertising, search engine marketing, yellow page listings, print advertisements and public relations programs. We market to our own database of
inquirers through ongoing direct mail and email communications. We also have developed a sophisticated search engine marketing program over the internet to develop new customer leads that support each individual market and can be customized to the
products and programs in each individual school by market.

Marketing efforts are directed by a central marketing team working with school
operations management and the education team to develop consistent brand positioning and communication strategies, with the goal of continuously improving customer acquisition and retention. Our marketing team conducts enrollment marketing
campaigns throughout the year in each of our geographic areas and centrally supports our school clusters and individual schools. These major campaigns are supplemented by community-based activities conducted by our local Executive Directors and
Principals.



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Our annual marketing calendar is synchronized to the typical customer demand cycle for enrollment. We
direct marketing resources towards our preschool enrollments during spring and summer and towards our elementary/middle schools during fall and winter. To a lesser degree, there is enrollment activity in the other seasonal periods for all schools.

The Company has implemented a number of marketing communication tools to strengthen our communications with existing customers and
increase customer retention and length of stay. These tools include, but are not limited to, e-mail based newsletters, enhanced school specific websites and updated in-school and in-classroom communication materials.

Corporate DevelopmentStrategy and Implementation

Our growth strategy in the private education market includes internal growth of our enrollment at existing schools, expansion of current facilities, new school development in both existing and new markets and strategic acquisitions.

Much of our focus is on increasing occupancy and ancillary program revenue in our existing schools and leveraging the investment in those
assets. Management has implemented new training programs designed to strengthen Principals and Executive Directors sales and customer service skills and invests in school administrative staffing. In addition, to broaden the potential
career path opportunities for employees, we have provided employees the ability to move between locations as appropriate opportunities arise. The similar business and education model our schools operate under permits the Company to execute on this
career path strategy. As our growth has increased, we now have a number of examples where our principals or assistant principals have transferred to other schools in different geographic markets.

While a portion of our efforts have focused on improving the performance of existing schools, the Company continues its increased efforts to identify
opportunities to develop and open new schools and to acquire schools in support of our demographically profiled geographic market cluster strategy, in both existing and new markets.

While we do not currently anticipate exiting any of our geographic markets, we regularly analyze the profitability of our existing school and real estate
portfolio to identify schools that are underperforming and/or do not fit our business model or demographic based geographic cluster strategies. We then develop plans either to improve these schools or remove them from our portfolio. This represents
an important activity in reallocating capital to the balance of our schools in order to ensure the continued improvement of our program offerings and overall company performance.

New School Development

During the first quarter of Fiscal 2009, the Company opened two additional
preschools and has three preschools and one middle school expansion under construction.

For new school development we typically engage a
developer or contractor to build a facility to our specifications. We also look to occupy existing buildings that are appropriate for our schools and that are located in growth areas that meet our demographic requirements. The Company continues, as
part of its strategy, to focus on private pay markets supported by complementary demographics.

Our new school development strategy builds upon our practice of clustering of preschools around an elementary school in order to provide a continuum of education and consistent curriculum for children from infancy
through 8thgrade. Clusters of schools are placed in geographic markets where the economy and population meet our demographic profile. In several
markets, students from our preschools can easily matriculate into our elementary/middle school programs. In addition, we can potentially convert students from our specialty and before-and-after programs to our general education programs.



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Acquisitions

We expect to use strategic acquisitions to expand our business. Key acquisition criteria include reputation, location in markets meeting our target demographics, growth prospects, quality of personnel and the ability to integrate into
existing market clusters or become the platform for new market clusters. Our acquisition strategy primarily focuses on schools that fit our demographic and cluster strategy and which serve the preschool and/or kindergarten through eighth grade
market, either directly serving the consumer or supporting a corporation or other entity in providing preschool and other related services to their employees. From time to time we evaluate opportunities which, while all related in educational
content, may provide the Company entry into a variety of other business models. These may include companies that have business models that focus on enrichment programs, summer camps, technology based before and after schools programs, high school
grades, and the use of our existing concepts with a focus on international students or entry into international education markets.

The
Company seeks to identify acquisition opportunities at appropriate prices that will allow the acquisition to create stockholder value in an appropriate time frame.

At the end of Fiscal 2006, the Company made its first acquisitions in over three years. The
Company has continued to acquire schools since the end of Fiscal 2006. These acquisitions demonstrate two different approaches to implementing the Companys strategy. The Honor Roll School® acquisition allowed the Company to enter a new geographic market by purchasing an already successful K-8 program. This acquisition provided the Company the opportunity to expand The Honor Roll School® brand by developing or acquiring new preschools in the Houston market to develop a robust feeder system to the K-8 school. The Company also entered a new geographic market with the acquisition of the six Discovery
Isle preschools in San Diego, California. In this case, the acquisition provides the Company the opportunity to expand the Discovery Isle preschool brand through the development or acquisition of additional preschools and also add elementary and/or
middle school(s) that could utilize the Discovery Isle preschools as a feeder system for elementary school students.

During Fiscal 2008
the Company acquired Enchanted Care Learning Centers, and as described under the Private Pay Schools section above, the acquisition included six standalone facilities offering before-and-after school programs for elementary school age
children under the Kids Campus trade name. This acquisition provides the Company opportunities in existing or new geographic markets to further develop its growth strategy. In addition, the Fiscal 2008 acquisition of the Ivy Glen Schools in
the Dallas market also provided the company with one standalone before-and-after school program.

The table below gives the Companys
recent history of acquisitions:



|                                       |  |                     |  |                               |  |             |  |                      |  |                   |  |                   
|-------------------------------------- |  | ------------------- |  | ----------------------------- |  | ----------- |  | -------------------- |  | ----------------- |  | ------------------
|                                       |  |                     |  | Number of facilities acquired |  | Market     
|Name of Acquisition                    |  | Fiscal YearAcquired |  | Preschool                     |  | PreK &K - 8 |  | Before-and-After (1) |  | Description       |  | (N)ew or(E)xisting
|The Honor Roll School                  |  | 2006                |  | 1                             |  | 1           |  |                     |  | Sugarland, TX     |  | N                 
|Discovery Isle                         |  | 2007                |  | 6                             |  |            |  |                     |  | San Diego, CA     |  | N                 
|Learning Ladder (2)                    |  | 2008                |  | 4                             |  |            |  |                     |  | Lancaster, PA     |  | E                 
|Teddy Bear Treehouse                   |  | 2008                |  | 2                             |  |            |  |                     |  | San Diego, CA     |  | E                 
|Ivy Glen Schools                       |  | 2008                |  | 3                             |  |            |  | 1                    |  | Dallas, TX        |  | E                 
|Enchanted Care Learning Centers        |  | 2008                |  | 9                             |  |            |  | 6                    |  | Columbus, OH      |  | N                 
|Camelback Desert Schools               |  | 2008                |  |                              |  | 2           |  |                     |  | Phoenix, AZ       |  | N                 
|Southern Highlands Preparatory Schools |  | 2009                |  | 1                             |  | 1           |  |                     |  | Las Vegas, NV     |  | E                 
|Ivy Kids Early Learning Center         |  | 2009                |  | 1                             |  |            |  |                     |  | Missouri City, TX |  | E                 



|(1) | Before-and-After facilities are intergral to adjacent school facilities and as such are not incremental to total school count.
|--- | ------------------------------------------------------------------------------------------------------------------------------



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|(2) | In conjunction with the acquisition of Learning Ladder schools the Company determined one location would be closed. This location is included in acquired schools and closed
locations in the rollforward provided under the Management Discussion and Analysis section below.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Seasonality

Our elementary/middle schools historically have lower operating revenues in the summer due to the end of the traditional academic year and seasonally
lower enrollment and related fees in summer programs. Summer revenues of preschools are, to a lesser degree, subject to the same seasonality. Management seeks to reduce the seasonal fluctuations of the Companys revenue stream by adding to its
schools a mix of products and services, such as camp programs, in the lower revenue seasons.

Industry and Competition

Education reform movements in the United States are providing new alternatives to the public schools. These reforms include charter schools, private
management of public schools, home schooling, private schools, virtual schools and voucher programs. Our strategy is to provide parents a quality alternative to public schools through our privately owned and operated schools, utilizing proven
curriculum in a safe and challenging environment. While our schools do not currently reside in any school voucher markets, we believe voucher programs may be a positive development for our schools, should we choose to accept them. We consider
each of these alternatives to be competition for our schools and the expansion or contraction of funding and/or public support of these alternatives may impact the demand for our product, available real estate and our ability to increase or maintain
our operating margins.

Furthermore, we compete with other for-profit private schools, charter schools, non-profit schools, sectarian
schools and home schooling. We also face competition with respect to preschool services and before- and after-school programs from public schools, government-based providers and religiously affiliated, community-based or other non-profit programs
that may offer such services at little or no cost to parents. We anticipate that, given the perceived potential of the education market, well-financed competition may emerge, including possible competition from the large for-profit child care
companies and international school operators. We believe the only large for-profit competitors that integrate preschool, elementary education and school age programs and that currently compete beyond a regional level are privately held Knowledge
Learning Corp., Bright Horizons Family Solutions, Inc. and Mini-Skools and publicly held ABC Learning (ABS.AX). We also face competition in each of our demographic markets from local operators of individually owned private schools. Finally, public
school systems may become stronger competitors at the preschool level if additional states pass or expand universal pre-K legislation that provides public funds for preschool for three and four year olds and do not allow for-profit preschool
operators to participate in these programs, or fund payments to for-profit operators at lower than market prices or costs.

While price is
an important factor in competing in both the preschool and elementary school markets, we believe that other competitive factors also are important, including professionally developed educational programs, qualified and trained school administrators,
well-equipped facilities, trained teachers and a broad range of ancillary services, including before- and after- school programs, transportation and infant care. Some of these services are not offered by some of our competitors. We conduct annual
tuition rate surveys and believe we are competitively priced in each of our markets.

Regulation

Our schools are subject to national, state and local regulations and licensing requirements. We have policies and procedures in place to assist in
complying with such regulations and requirements. These regulations and the administrative bodies in charge of these regulations vary from jurisdiction to jurisdiction and may apply differently within the same jurisdiction to a preschool, elementary
or middle school. The regulatory and licensing



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requirements tend to be more stringent with respect to preschools, as government agencies generally review the fitness and adequacy of buildings and
equipment, the ratio of staff personnel to enrolled children, staff training, record keeping, childrens dietary program, daily curriculum and compliance with health and safety standards. In most jurisdictions, these agencies conduct scheduled
and unscheduled inspections of the schools and licenses must be renewed periodically. Most jurisdictions establish requirements for background checks or other clearance procedures for new employees of schools. Repeated failures of a school to comply
with applicable regulations can subject the school to sanctions, which might include probation or, in more serious cases, suspension or revocation of the schools license to operate and could also lead to investigations of our other schools
located in the same jurisdiction. In addition, this type of action could lead to negative publicity extending beyond that jurisdiction and potentially affecting our other locations. We believe that our operations are in substantial compliance with
all material regulations applicable to our business. However, there is no assurance that a licensing authority will not determine a particular school to be in violation of applicable regulations and take action against that school and possibly other
schools in the same jurisdiction. In addition, there may be unforeseen changes in regulations and licensing requirements, such as changes in the required ratio of child center staff personnel to enrolled children that could have a material adverse
effect on our operations. States in which we operate routinely review the adequacy of regulatory and licensing requirements and implement changes, which may significantly increase our costs to operate in those states.

Environmental Compliance

We are not aware of any
existing environmental conditions that currently or in the future could reasonably be expected to have a material adverse effect on our financial position, operating results or cash flows and we have not incurred material expenditures to address
environmental conditions at any school. Although we have periodically conducted limited environmental investigations and remedial activities at some of our schools, we have not undertaken an in-depth environmental review of all of our schools and
accordingly, there may be material environmental liabilities of which we are unaware. In addition, no assurances can be given that future laws or regulations will not impose any material environmental liability.

Insurance

We currently maintain comprehensive
general liability, workers compensation, automobile liability, property, excess umbrella liability, terrorism, student accident insurance and directors and officers liability insurance. The policies provide a variety of coverages
and limits. Companies involved in the education and care of children, however, may not be able to obtain insurance for the total risks inherent in their operations. In particular, general liability coverage can have sublimits per claim for child
abuse. Although we believe we have adequate insurance coverage at this time, claims in excess of, or not included within, our coverage may be asserted. In addition, there can be no assurance that in future years we will not become subject to lower
limits or substantial increase in insurance premiums.

Employees

As of September 10, 2008, we employed approximately 4,700 persons. None of the Companys employees are represented by a labor union. We believe that our relationship with our employees is satisfactory.

Recently the child care industry in general saw an increase in organized labor contacts with child care workers and preschool teachers,
especially in states such as Washington and California. While there have been no specific attempts to organize our teachers or other employees, there is no assurance that in future years we or the industry will not be subject to some form of labor
organization attempt.

Available Information

We file electronically with the Securities and Exchange Commission (the SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d)



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of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SECs Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

A free copy of
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports may be obtained (as soon as reasonably practicable after we file or furnish such reports with the SEC) on our website at
http://www.nobellearning.com. The information on our website is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this report. This website is and is only intended to be an inactive
textual reference.



|ITEM1A. | RISK FACTORS.
|------- | -------------

Each
of the following risks, individually or in a group, could have a material adverse affect on the Companys business, results of operations, financial condition or cash flows.

The Companys Ability to Hire and Retain Qualified Executive Directors, Principals, Teachers and Teachers Aides

The Company may experience difficulty in attracting and retaining qualified personnel in various markets necessary to meet growth opportunities. Hiring and retaining qualified personnel may require increased salaries
and enhanced benefits in more competitive markets. Difficulties in hiring and retaining qualified personnel may also impact the Companys ability to obtain additional, and retain existing enrollment at its preschools and elementary schools. In
addition, while the Companys wage ranges are generally materially above minimum wage, recent federal and state changes to the minimum wage may reduce the qualified applicant pool or increase our wage costs.

The Companys Ability to Retain Key Individuals in Acquired Schools and/or Successfully Identify, Acquire, Grow and Integrate Acquired Schools Operations

Acquisitions are an ongoing part of the Companys growth strategy. Acquisitions involve numerous risks, including potential
difficulties in the assimilation of acquired operations, not meeting financial objectives, additional need for capital investment, undisclosed liabilities not covered by insurance or indemnification provisions in the acquisition agreement, diversion
of managements attention in connection with an acquisition and potential loss of key employees of the acquired operation. No assurance can be given as to the success of the Company in identifying, executing and assimilating acquisitions in the
future or the ability to identify satisfactory acquisition targets and successfully complete any acquisition.

The Companys Inability to Defend
Successfully Against or Counter Negative Publicity Associated with Claims Involving Alleged Incidents at its Schools

Because of the
nature of its business, the Company is and expects that in the future it will be subject to claims and litigation alleging negligence, inadequate supervision and other grounds for liability arising from injuries or other harm to the people it
serves, primarily children. In addition, claimants may seek damages from the Company for child abuse, sexual abuse and other acts allegedly committed by Company employees. There can be no assurance that additional lawsuits will not be filed, that
the Companys insurance will be adequate to cover liabilities resulting from any claim or that any such claim or the publicity resulting from it will not have a material adverse effect on the Companys business, results of operations and
financial condition including, without limitation, adverse effects caused by increased cost or decreased availability of insurance and decreased demand for the Companys services.



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Changing Economic Conditions

The Companys revenue and net income are subject to general economic conditions. The Companys revenues depend, in part, on the number of dual-income families and working single parents who require child
development, child care or educational services. A deterioration of general economic conditions, including a soft housing market, may adversely impact the Company because of the tendency of out-of-work parents to diminish or discontinue utilization
of these services. In addition, the Company may not be able to increase tuition at a rate consistent with increases in wages, health insurance and other operating costs or continue tuition increases at historical rates experienced in the industry.
In addition, there can be no assurance that demographic trends, including the number of dual-income families in the work force, will continue to lead to increased market share.

Recently, the economy and cost of energy has caused some public school systems to study moving to a four day school week or year round school calendar.
To the extent that there are any material changes to the traditional school year schedule, it may impact our business, although we do not have an indication as to whether these changes will be implemented in any of our markets and if so, what the
impact on our business may be. Additionally, due to the rising price of fuel, many public school systems are changing their policy relating to providing transportation for children within the school district, but who attend private school. While we
have few schools whose students receive transportation through public school systems, there may be some minimal impact on students in some of our schools, should the public school systems change their transportation policies.

Competitive Conditions in the Pre-school and Elementary School Education and Services Industry

The Company competes for individual enrollment in a highly fragmented market. For enrollment, the Company competes with residential based child care
(operated out of the caregivers home) and center-based child care which may include work-site child care centers, full and part-time child care centers and preschools, private and public elementary schools, and church-affiliated and other
not-for-profit providers and schools. In addition, substitutes for organized preschool, child care, and educational services, such as relatives and others caring for a child or home schooling, can represent lower cost alternatives to the
Companys services. Management believes the Companys ability to compete successfully depends on a number of factors, including qualifications of principals and teachers, quality of care, quality of curriculum, site convenience and cost.
The Company often is at a price disadvantage with respect to these alternative providers, who operate with little or no rental expense, little or no curriculum expense, and generally may not comply or are not required to comply with the same health,
safety, insurance and operational regulations as the Company. Competitors in the private pay education service segment also may offer similar or competing services at a lower price than the Company and some may have access to greater financial
resources than the Company. The Company also competes with many not-for-profit providers of child care and preschools, as well as elementary schools, some of which are able to offer lower pricing than the Company. There can be no assurance that the
Company will be able to compete successfully against current and future competitors.

The Companys Ability to Find Affordable Real Estate and
Renew Existing Locations on Terms Acceptable to the Company

The Company may experience an inability to identify and successfully
negotiate or renew existing leases at attractive rents; which may impact the Companys profitability. In addition, if the Company cannot renew school leases for an appropriate term length, it may impact enrollment should parents become
concerned with the length of time a school will remain open in a particular location.

The Companys Ability to Obtain the Capital Required to
Implement Fully its Business and Strategic Plan

Our ability to execute our business and strategic plan is dependent upon the
availability of adequate financing sources on acceptable terms. Our efforts to execute our business plan and open or acquire new schools are subject to our ability to finance such growth. In the event current financing resources are inadequate to
support new school openings or acquisitions from time to time, we may be required to seek additional capital to



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support such expansion efforts. Such additional capital may take the form of the issuance of debt or equity securities, among other forms. Beyond our
existing revolving senior credit facility, we presently have no commitments to provide the Company with any additional capital should we determine that additional capital is required. In the event that management determines that additional capital
is required to support the Companys business and strategic plan, there is no assurance that we will be able to secure such financing on acceptable terms. If we are unable to secure needed additional capital, our growth efforts may be curtailed
and we may have to forego opening or acquiring new schools.

Government Regulations Affecting School Operations

The Companys locations are subject to numerous national, state and local regulations and licensing requirements. Although these regulations vary
greatly from jurisdiction to jurisdiction, government agencies generally review, among other things, the adequacy of buildings and equipment, licensed capacity, the ratio of staff to children, educational qualifications of teachers and staff
training, record keeping, the dietary program, the daily curriculum, hiring practices and compliance with health and safety standards. Failure of any location to comply with applicable regulations and requirements could subject it to governmental
sanctions, which might include fines, corrective orders, probation, or, in more serious cases, suspension or revocation of the locations license to operate or an award of damages to private litigants and could require significant expenditures
by the Company to bring its location into compliance. Many government agencies may publish or publicly report major and/or minor regulatory violations and the Company may suffer adverse publicity, which could result in a loss of enrollment in a
school or market.

We have five special purpose high schools that provide our graduates with state approved high school diplomas. There
have been instances in the past when the local school district has determined our education materials or curriculum did not meet requirements for credit in their district thereby limiting our ability to successfully attract students.

The Establishment of Government Mandated Universal Pre-K or Similar Programs or Benefits that Do Not Allow for Participation by For-Profit Operators or Allows for
Participation at Low Reimbursement Rates

National, state or local child care and early age education benefit programs relying primarily
on subsidies in the form of tax credits or other direct financial aid could provide the Company opportunities for expansion in additional markets, especially where these benefits are universal based on residency and age, as opposed to those based on
socio-economic need or measures. However, a universal benefit with governmentally mandated or publicly provided child care could reduce the demand for educational services at the Companys existing locations. Even in situations where the
Company was allowed to provide publicly funded early age education programs, the amount of public funding, the rates at which the subsidies are granted, our subsidy participation requirements or restrictions could have a material adverse effect on
the Companys business and financial condition if the Company were to undertake these programs.

Environmental or Health Related Events that could
Affect Schools in Areas Impacted by Such Events

A regional or global health pandemic could severely disrupt our business. A health
pandemic is a disease that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If a regional or global health pandemic were to occur, depending upon its severity and duration, the
Companys business could be severely affected. Enrollment in our schools could experience sharp declines as parents might avoid taking their children out in public in the event of a health pandemic, and local, regional or national governments
might limit or ban public interactions to halt or delay the spread of disease causing business disruptions and the temporary closure of our schools. Additionally, a health pandemic could also impair our ability to hire and retain an adequate level
of staff. The impact of a health pandemic on the Company might be disproportionately greater than on other companies that depend less on the interaction of people for the sale of their products and services.



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Our financial and operating performance may be adversely affected by acts of God, such as natural
disasters, in locations where we own and/or lease school properties. Some types of losses, such as those from earthquakes, hurricanes, terrorism and environmental hazards, may be either uninsurable or too expensive to justify insuring against.
Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the school. In that event, we might nevertheless
remain obligated for any lease obligations, mortgage debt or other financial obligations related to the property. In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent
operational continuity and consequently impact the value of the reputation of our business.

A Small Number of Shareholders Control a Majority of the
Outstanding Common Stock of the Company

A limited number of our shareholders can exert significant influence over us. As of
September 9, 2008, three shareholders and their affiliates controlled over 65% of the Companys outstanding Common Stock. This share ownership would permit these and other stockholders, if they chose to act together, to exert significant
influence over the outcome of stockholder votes, including votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests and other significant corporate transactions.

Ability to Maintain Effective Controls over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. A control system can only provide reasonable, not absolute, assurance that misstatements in
financial reporting will be detected or prevented. The effectiveness of a system of internal controls may deteriorate if controls become inadequate due to changes in conditions or if compliance with the policies or procedures declines. The key
element to a system of internal control is competent personnel implementing the controls; the Company may not be able to hire enough competent personnel.

The Effect of Anti-Takeover Provisions in the Companys Certificate of Incorporation, Bylaws and Delaware Law and Shareholders Rights Plan

The Companys certificate of incorporation and bylaws contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These
provisions establish staggered terms for members of the Companys Board of Directors and include advance notice procedures for stockholders to nominate candidates for election as directors of the Company and for stockholders to submit proposals
for consideration at stockholders meetings. In additions, the Company is subject to Section 203 of the Delaware General Corporation Law (DGCL) which limits transactions between a publicly held company and interested
stockholders (generally, those stockholders who, together with their affiliates and associates, own 15% or more of a companys outstanding capital stock). This provision of DGCL may have the effect of deterring certain potential
acquisitions of Nobel Learning Communities. In 2005, the Companys Board of Directors terminated the Companys shareholders rights plan that was then in effect. The Companys certificate of incorporation provides for 8,936,170
authorized but unissued shares of preferred, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Companys Board of Directors without any further action by stockholders.

On July 20, 2008, the Companys Board of Directors adopted a limited duration Shareholder Rights Plan designed to protect the Companys
shareholders in the event of an attempt to acquire control of the Company on terms which do not secure fair value for all of the Companys shareholders. The Board has adopted a limited duration Plan that expires in four years, rather than the
more common ten-year term. The four-year term was selected to provide the Company with an opportunity to maximize long-term shareholder value by enabling management of the Company to execute on its growth strategy, while protecting shareholders from
a creeping acquisition or other tactics to gain control of the Company without offering all shareholders an adequate price. In addition, the Plan is not intended to prevent a takeover. Instead, it is intended to encourage anyone seeking to



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acquire the Company to negotiate with the Companys Board of Directors prior to attempting a takeover in order to ensure that any takeover reflects an
adequate price and that the interests of the Companys shareholders and other constituencies are protected.

ITEM 1B.   UNRESOLVED STAFF COMMENTS.

None.



|ITEM2. | PROPERTIES.
|------ | -----------

At September 9,
2008, we operated 178 schools on 6 owned and 172 leased properties in 15 states and the District of Columbia. Our schools are geographically distributed as follows:



|                     |  |                 
|-------------------- |  | ----------------
|Location             |  | Number ofSchools
|Arizona              |  | 2               
|California           |  | 37              
|District of Columbia |  | 1               
|Florida              |  | 7               
|Illinois             |  | 20              
|Maryland             |  | 1               
|Nevada               |  | 8               
|New Jersey           |  | 9               
|North Carolina       |  | 16              
|Oregon               |  | 3               
|Ohio                 |  | 9               
|Pennsylvania         |  | 23              
|South Carolina       |  | 2               
|Texas                |  | 15              
|Virginia             |  | 19              
|Washington           |  | 6               
|                     |  |                 
|Total                |  | 178             
|                     |  |                 

The land and buildings that we own are subject to mortgages and security interests on the real
property. Our leased properties are leased under long-term leases which are typically triple-net leases requiring us to pay all applicable real estate taxes, utility expenses, insurance and operating costs. These leases usually contain inflation
linked rent escalators.

We lease 22,500 square feet of space for our corporate offices in West Chester, Pennsylvania. This space is
adequate for our current needs.



|ITEM3. | LEGAL PROCEEDINGS.
|------ | ------------------

We are a party in various suits and claims that arise in the ordinary course of our business. Our management currently believes, based on consultations with counsel, that the ultimate disposition of all such pending matters will not have a
material adverse effect on our consolidated financial position or results of operations. The significance of these pending matters on our future operating results and cash flows depends on the level of future results of operations and cash flows as
well as on the timing and amounts, if any, of the ultimate outcome.



|ITEM4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|------ | ----------------------------------------------------

None.



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PART II



|ITEM5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------ | -------------------------------------------------------------------------------------------------------------

Market Information

Our common stock trades on The
Nasdaq Global Market under the symbol NLCI.

The table below sets forth the quarterly high and low sales prices for our common stock as
reported by Nasdaq for each quarter during the period from July 2, 2006 through June 28, 2008.



|                                            |  |      |       |     |   |      
|------------------------------------------- |  | ---- | ----- | --- | - | -----
|                                            |  | High |       | Low
|Fiscal 2007 (July 2, 2006 to June 30, 2007) |  |      |       |     |   |      
|First Quarter                               |  | $    | 10.56 |     | $ | 9.98 
|Second Quarter                              |  |      | 11.61 |     |   | 10.00
|Third Quarter                               |  |      | 16.34 |     |   | 11.10
|Fourth Quarter                              |  |      | 16.10 |     |   | 13.37
|                                            |  |     
|Fiscal 2008 (July 1, 2007 to June 28, 2008) |  |      |       |     |   |      
|First Quarter                               |  | $    | 15.75 |     | $ | 13.05
|Second Quarter                              |  |      | 15.44 |     |   | 12.32
|Third Quarter                               |  |      | 14.90 |     |   | 12.51
|Fourth Quarter                              |  |      | 15.41 |     |   | 12.20

Holders

At September 3, 2008, there were approximately 300 holders of record of shares of our common stock.

Dividend
Policy

We have never paid a dividend on our common stock and do not expect to do so in the foreseeable future. Although the payment of
dividends is at the discretion of the Board of Directors, we intend to retain our earnings in order to finance our ongoing operations and to develop and expand our business. Our credit facility with our senior lender prohibits us from paying
dividends on our common stock or making other cash distributions on our common stock without the lenders consent.



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STOCK PERFORMANCE

The peer group includes other public entities that provide education services; the group includes K12 Inc., Leapfrog Enterprises, Inc., Plato Learning Inc., Princeton Review, Inc., Renaissance Learning Inc. and
Voyager Learning, Inc.

The following line graph compares the cumulative total stockholder return on the Common Stock with the total return
of the Nasdaq (U.S. Companies) and the industry peer group described above for the period June 30, 2003 through June 28, 2008 as calculated by Morningstar, Inc. The graph assumes that the value of the investment in the Common Stock and
each index was $100 at June 30, 2003 and that all dividends paid by the companies included in the indexes were reinvested.

LOGO

ASSUMES $100 INVESTED ON JUNE 30, 2003

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING JUNE 28, 2008



|                                  |  |               |  |              |  |              |  |              |  |               |  |              
|--------------------------------- |  | ------------- |  | ------------ |  | ------------ |  | ------------ |  | ------------- |  | -------------
|Total Return Index for:           |  | June 30, 2003 |  | July 3, 2004 |  | July 2, 2005 |  | July 1, 2006 |  | June 30, 2007 |  | June 28, 2008
|Nobel Learning Communities, Inc.  |  | 100.00        |  | 188.28       |  | 239.78       |  | 276.84       |  | 397.28        |  | 379.29       
|Nasdaq Stock Market(US Companies) |  | 100.00        |  | 129.38       |  | 129.98       |  | 140.70       |  | 171.34        |  | 150.71       
|Peer Group                        |  | 100.00        |  | 84.30        |  | 71.46        |  | 46.01        |  | 41.59         |  | 38.14        



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|ITEM6. | SELECTED FINANCIAL DATA.
|------ | ------------------------

The following table sets forth selected historical consolidated financial and other data, with dollars in thousands, except per share amounts. See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data included elsewhere in this report. The historical operating results below have been recast to reflect the reclassification of discontinued
operations from continuing operations to loss from discontinued operations.



|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                          |  | For the Fiscal Year Ended |        
|                                                                          |  | June 28, 2008             |         |   | June 30, 2007 |   |         | July 1, 2006 |  |   | July 2, 2005 |   |  | July 3, 2004 |        
|Operating Data:                                                           |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Revenue                                                                   |  | $                         | 206,214 |   |               | $ | 182,817 |              |  | $ | 161,757      |   |  | $            | 157,535 |   |  | $ | 151,440 |  
|Cost of services                                                          |  |                           | 175,677 |   |               |   | 155,325 |              |  |   | 138,710      |   |  |              | 135,507 |   |  |   | 131,218 |  
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                                              |  |                           | 30,537  |   |               |   | 27,492  |              |  |   | 23,047       |   |  |              | 22,028  |   |  |   | 20,222  |  
|Goodwill and other asset impairments (a)                                  |  |                           |        |   |               |   |        |              |  |   |             |   |  |              | 86      |   |  |   | 3,368   |  
|General and administrative expenses (b)                                   |  |                           | 18,516  |   |               |   | 16,993  |              |  |   | 13,523       |   |  |              | 14,548  |   |  |   | 14,256  |  
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Operating income (loss)                                                   |  |                           | 12,021  |   |               |   | 10,499  |              |  |   | 9,524        |   |  |              | 7,394   |   |  |   | 2,598   |  
|Interest expense (c)                                                      |  |                           | 475     |   |               |   | 1,385   |              |  |   | 1,469        |   |  |              | 2,692   |   |  |   | 3,632   |  
|Other income, net (d)                                                     |  |                           | (326    | ) |               |   | (3,871  | )            |  |   | (350         | ) |  |              | (184    | ) |  |   | (46     | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes              |  |                           | 11,872  |   |               |   | 12,985  |              |  |   | 8,405        |   |  |              | 4,886   |   |  |   | (988    | )
|Income tax expense (benefit)                                              |  |                           | 4,571   |   |               |   | 5,064   |              |  |   | 3,285        |   |  |              | 1,831   |   |  |   | 147     |  
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations                                  |  |                           | 7,301   |   |               |   | 7,921   |              |  |   | 5,120        |   |  |              | 3,055   |   |  |   | (1,135  | )
|Income (loss) from discontinued operations, net of income tax benefit (e) |  |                           | 377     |   |               |   | (556    | )            |  |   | (641         | ) |  |              | (539    | ) |  |   | (4,946  | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                                         |  |                           | 7,678   |   |               |   | 7,365   |              |  |   | 4,479        |   |  |              | 2,516   |   |  |   | (6,081  | )
|Preferred stock dividends                                                 |  |                           |        |   |               |   | 325     |              |  |   | 487          |   |  |              | 642     |   |  |   | 516     |  
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss) available for common stockholders                       |  | $                         | 7,678   |   |               | $ | 7,040   |              |  | $ | 3,992        |   |  | $            | 1,874   |   |  | $ | (6,597  | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Basic income (loss) per share:                                            |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                              |  | $                         | 0.70    |   |               | $ | 0.85    |              |  | $ | 0.62         |   |  | $            | 0.34    |   |  | $ | (0.17   | )
|Discontinued operations                                                   |  |                           | 0.04    |   |               |   | (0.06   | )            |  |   | (0.08        | ) |  |              | (0.07   | ) |  |   | (0.76   | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss) per share                                               |  | $                         | 0.74    |   |               | $ | 0.79    |              |  | $ | 0.54         |   |  | $            | 0.27    |   |  | $ | (0.93   | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Diluted income (loss) per share:                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                              |  | $                         | 0.69    |   |               | $ | 0.75    |              |  | $ | 0.51         |   |  | $            | 0.31    |   |  | $ | (0.17   | )
|Discontinued operations                                                   |  |                           | 0.04    |   |               |   | (0.05   | )            |  |   | (0.07        | ) |  |              | (0.05   | ) |  |   | (0.76   | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss) per share                                               |  | $                         | 0.72    |   |               | $ | 0.70    |              |  | $ | 0.44         |   |  | $            | 0.26    |   |  | $ | (0.93   | )
|                                                                          |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Weighted average common shares outstanding (in thousands):                |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Basic                                                                     |  |                           | 10,382  |   |               |   | 8,957   |              |  |   | 7,473        |   |  |              | 7,064   |   |  |   | 6,512   |  
|Diluted                                                                   |  |                           | 10,630  |   |               |   | 10,580  |              |  |   | 10,080       |   |  |              | 9,719   |   |  |   | 6,512   |  
|Number of weeks included in fiscal year                                   |  |                           | 52      |   |               |   | 52      |              |  |   | 52           |   |  |              | 52      |   |  |   | 53      |  
|Balance Sheet Data:                                                       |  |                           |         |   |               |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Cash and cash equivalents                                                 |  | $                         | 1,064   |   |               | $ | 3,814   |              |  | $ | 9,837        |   |  | $            | 2,925   |   |  | $ | 2,716   |  
|Goodwill and intangible assets, net                                       |  |                           | 72,303  |   |               |   | 51,681  |              |  |   | 39,902       |   |  |              | 36,937  |   |  |   | 37,167  |  
|Total assets                                                              |  |                           | 113,148 |   |               |   | 88,244  |              |  |   | 86,419       |   |  |              | 78,344  |   |  |   | 85,865  |  
|Deferred revenue                                                          |  |                           | 15,003  |   |               |   | 12,835  |              |  |   | 11,885       |   |  |              | 10,457  |   |  |   | 9,470   |  
|Short term debt and current portion of long term debt                     |  |                           |        |   |               |   |        |              |  |   | 2,180        |   |  |              | 2,281   |   |  |   | 2,405   |  
|Long term debt                                                            |  |                           | 12,500  |   |               |   |        |              |  |   | 11,000       |   |  |              | 13,180  |   |  |   | 22,931  |  
|Stockholders equity                                                      |  |                           | 62,914  |   |               |   | 54,218  |              |  |   | 46,280       |   |  |              | 37,390  |   |  |   | 34,275  |  



17



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|(a) | During the year ended July 2, 2005 (Fiscal 2005), the Company recorded an impairment charge of $86,000 related to fixed asset impairments in accordance with
Statement of Financial Accounting Standard (SFAS) 144, Accounting for Impairment or Disposal of Long-Lived Assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the year ended July 3, 2004 (Fiscal 2004), the Company recorded impairment of goodwill of $2,273,000 in accordance with SFAS 142, Goodwill and Other Intangibles and an impairment
charge of $1,095,000 related to fixed asset impairments in accordance with SFAS 144.

|(b) | During Fiscal 2007, general and administrative expense included a charge of $341,000 for accelerated depreciation as a result of a change in accounting estimate regarding the
remaining life of the Companys existing payroll system.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During Fiscal 2005, general and administrative expenses include
an additional charge of $1,500,000 related to the reserve of the Companys investment in Total Education Solutions (TES).

During Fiscal 2004, general and administrative expenses includes a charge of $1,500,000 related to the present value of future payments with respect to consulting agreements with two former executives of approximately $1,290,000 and charges
for future health insurance coverage for these two individuals of approximately $210,000.

|(c) | During Fiscal 2007, the Company recorded a charge of $562,000 to write off unamortized loan origination fees as the Companys prior senior term loan credit agreement was
extinguished and replaced with a new $50,000,000 revolving credit facility.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | During Fiscal 2007, the Company received a payment from TES in the amount of $3,510,000. This payment settled all outstanding receivables from TES. Upon receipt of this payment, TES
was released from all obligations to the Company. Payment of this note resulted in the recognition of $3,300,000 of other income in continuing operations. Also, during Fiscal 2007, the Company received payments from Franklin Town Charter High School
(FTCHS) in the amount of $1,028,000. The Company had a sublease agreement with FTCHS, which included rental payments for tenant improvements that were funded by the Company. FTCHS purchased the property that the Company had subleased to
it from the Companys landlord. The payment to the Company released FTCHS from its sublease obligations to the Company and transferred ownership of leasehold improvements and other assets that the Company had funded on behalf of FTCHS. This
resulted in the recognition of $310,000 of other income in continuing operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Discontinued operations contain the following (dollars in thousands):
|--- | ---------------------------------------------------------------------



|                                                                     |  |                     |       |   |               |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------- | ----- | - | ------------- | - | ------ | ------------ |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | -
|                                                                     |  | For the Years Ended |      
|                                                                     |  | June 28, 2008       |       |   | June 30, 2007 |   |        | July 1, 2006 |  |   | July 2, 2005 |   |  | July 3, 2004 |      
|Revenues                                                             |  | $                   | 44    |   |               | $ | 4,155  |              |  | $ | 6,572        |   |  | $            | 7,053 |   |  | $ | 12,353 |  
|Cost of services                                                     |  |                     | (214  | ) |               |   | 4,939  |              |  |   | 7,851        |   |  |              | 7,506 |   |  |   | 14,573 |  
|                                                                     |  |                     |       |   |               |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|Gross loss                                                           |  |                     | (170  | ) |               |   | (784   | )            |  |   | (1,279       | ) |  |              | (453  | ) |  |   | (2,220 | )
|Goodwill and intangible impairment                                   |  |                     |      |   |               |   |       |              |  |   |             |   |  |              |      |   |  |   | (1,052 | )
|Write down of property and equipment                                 |  |                     |      |   |               |   |       |              |  |   |             |   |  |              | (130  | ) |  |   | (1,151 | )
|Gain on Sale of Assets                                               |  |                     |      |   |               |   | 1,900  |              |  |   |             |   |  |              |      |   |  |   |       |  
|Gain from settlement of sublease                                     |  |                     | 1,028 |   |               |   |       |              |  |   |             |   |  |              |      |   |  |   |       |  
|(Increase) reduction of future lease obligations for closed schools  |  |                     | (245  | ) |               |   | (2,027 | )            |  |   | 228          |   |  |              | (277  | ) |  |   | (3,556 | )
|                                                                     |  |                     |       |   |               |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |                     | 613   |   |               |   | (911   | )            |  |   | (1,051       | ) |  |              | (860  | ) |  |   | (7,979 | )
|Income tax (expense)/benefit                                         |  |                     | (236  | ) |               |   | 355    |              |  |   | 410          |   |  |              | 321   |   |  |   | 3,033  |  
|                                                                     |  |                     |       |   |               |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  
|Income (loss) from discontinued operations                           |  | $                   | 377   |   |               | $ | (556   | )            |  | $ | (641         | ) |  | $            | (539  | ) |  | $ | (4,946 | )
|                                                                     |  |                     |       |   |               |   |        |              |  |   |              |   |  |              |       |   |  |   |        |  

During Fiscal 2008, the Company settled a contract dispute relating to the sublease of a school on
which the Company had discontinued operations. The settlement is in the amount of $1,250,000 to be paid to the Company over five years. The net gain resulting from this settlement is $1,028,000 after costs and discount for the five year collection
period.



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During Fiscal 2007, the Company completed the sale of seven schools resulting in before tax gain of
$1,900,000. Also, during Fiscal 2007, the Company recorded before tax charges of $2,027,000 which included an estimate for rent payments as well as estimated legal and broker fees to be incurred with respect to two closed schools for which a new
tenant has not been identified and one closed school for which the Company is obligated to subsidize rent and property taxes on behalf of a sub-tenant through May 2008. Although the Company has recorded similar lease reserves in the past and will
continue to evaluate lease reserves in the future, the facts and circumstances described above have resulted in charges considerably larger than those recorded in the recent past and similar charges of this size are not anticipated in the future.



19



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##### Table of Contents

|ITEM7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
|------ | --------------------------------------------------------------------------------------

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

The Company has made statements in this report that constitute forward-looking statements as that term is defined in the federal securities laws. These forward-looking statements concern the Companys operations,
economic performance and financial condition and may include statements regarding: opportunities for growth; the number of preschool and elementary schools expected to be added in future years; the profitability of newly opened schools; capital
expenditure levels; the ability to incur additional indebtedness; strategic acquisitions, investments and other transactions; and changes in operating systems and policies. The forward-looking statements are subject to various known and unknown
risks, uncertainties and other factors. When words such as believes, expects, anticipates, plans, estimates, projects or similar expressions are used in this Annual Report on
Form 10-K, the Company is making forward-looking statements.

Although the Company believes that any forward-looking statements are based
on reasonable assumptions, expected results may not be achieved. Actual results may differ materially from the Companys expectations. In addition to the risk factors described in Item 1A of this document and that are discussed from time
to time in the Companys other SEC reports and filings, important factors that could cause actual results to differ from expectations include:



| |  |  | the Companys ability to hire and retain qualified executive directors, principals, teachers and teachers aides;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to retain key individuals in acquired schools and/or successfully grow and integrate acquired schools operations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys inability to defend successfully against or counter negative publicity associated with claims involving alleged incidents at its schools;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changing economic conditions;
| | - |  | -----------------------------



| |  |  | competitive conditions in the pre-school and elementary school education and services industry, such as the growth of competitors as possible alternatives to the
public school system, including virtual charter schools, charter schools and magnet schools;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to find affordable real estate and renew existing locations on terms acceptable to the Company and the impact this may have on
enrollment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to obtain the capital required to implement fully its business and strategic plan;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | government regulations affecting school operations, including student/teacher ratios, accreditation, and the acceptance of course credits from our special purpose
high schools;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the establishment of governmental mandated universal pre-K or similar programs or benefits that do not allow for participation by for-profit operators or allows for
participation at low reimbursement rates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | a small number of shareholders control a majority of the outstanding common stock of the Company;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain effective controls over financial reporting;
| | - |  | --------------------------------------------------------------------



| |  |  | the effect of anti-takeover provisions in the Companys certificate of incorporation, bylaws and Delaware law.
| | - |  | --------------------------------------------------------------------------------------------------------------

Readers are cautioned that these risks may not be exhaustive. The Company operates in a continually changing business and regulatory environment and new
risks and requirements emerge from time to time.



20



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##### Table of Contents

Readers should not rely upon forward-looking statements except as statements of managements present intentions and expectations that may or may not
occur. Readers should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. The Company assumes no obligation to update or revise the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking statements.

Introduction

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

Change in Fiscal Year End

The Company fiscal year is either 52 or 53 weeks ending on the Saturday
closest to June 30. The fiscal years ended June 28, 2008 (Fiscal 2008), June 30, 2007 (Fiscal 2007), and July 1, 2006 (Fiscal 2006) each include 52 weeks.

Reclassifications

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

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

Results of Operations

Results from operations are measured each fiscal period by reporting and
analyzing results at the Company level. Additionally, the Company seeks to measure and balance revenue and profit growth in four growth initiative categories: 1) Comparable Schools, 2) Core Schools, 3) New Schools and 4) Acquired Schools or
businesses. Management seeks to balance growth in order to improve revenue and gross profit while adding to overall system capacity and total company performance. These four categories are measured individually and through different metrics to help
management better understand where growth is derived and facilitate the balance between growth, investment and profitability the Company seeks to achieve. It is important to note that the set of schools in each category may differ from reporting
period to reporting period as schools may be opened, acquired, closed or become comparable at different times during the fiscal year. The four categories are more fully described below:



| | 1) | Comparable Schoolsthose identical schools open for each of the entire periods being reported. By definition, Comparable Schools are always the same number of schools in
each period. Comparing results of the performance of these schools provides an apples-to-apples comparison of results between periods. Results are measured by revenue, operating expense and gross profit performance for this identical
group of schools for the current period versus the prior period. Management seeks to grow revenue and increase gross margin in this category through annual tuition rate increases, enrollment growth, and expense management. Information related to
Comparable Schools is included in each relevant section below and summarized in the Gross Profit sections below.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Core Schoolsconsists of schools reported as Comparable Schools for each specific period presented. By definition the population of Core Schools is
schools open and comparable versus the prior period at a fixed point in time. The number and specific Core Schools may be different in each period as the Company continues to add schools. We measure Core Schools performance as a percent of
revenue to
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

| | develop period over period trends to understand the contribution provided by our efforts to grow the Core School base. The table presented in the gross
profit sections below shows this information.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | New Schoolsconsists of newly developed schools. By definition the population of schools in each period should be different for each period as the Company continues to
add schools.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

New Schools are an integral part of the Companys business development strategy and are defined as newly
developed schools as compared to Acquired Schools as discussed below. In planning new school development activity, management typically seeks to balance the pre-opening costs and start-up losses associated with the ramp up of new schools
with achieving an appropriate growth and profitability balance for the Company as a whole.

New School revenue is measured by New School
revenue as a percent of total operating revenue for each comparative period. This information is included in the revenue section below. We also measure New School gross profit, gross margin and expense items as a percent of revenue to develop period
over period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve New School period over period performance by minimizing the impact of pre-opening and ramp up costs
and the time it takes a new school to ramp up. The tables presented in the gross profit sections below shows New School percent of revenue information for each period presented.



| | 4) | Acquired Schoolspurchased schools previously operated by independent third parties.
| | -- | ------------------------------------------------------------------------------------

Acquired Schools are an integral part of the Companys business development strategy. Management seeks to acquire schools that fill out existing
markets or provide platforms for additional growth in new markets within our demographic parameters. For acquired school activity, management seeks to add schools in pursuit of adding to the appropriate growth and profitability balance described
above. While the company has typically acquired schools that are already profitable, in some cases a school is acquired that may be either early in its respective ramp up period and so not yet profitable, or in the case of Camelback Desert Schools
in a well matched demographic but with issues that have made them not profitable but acquired for their potential as we believe our core competencies are appropriate to solve the schools issues and move them to profitability.

Acquired Schools revenue is measured by the Acquired Schools revenue as a percent of total operating revenue for each comparative period. This
information is included in the revenue section below. We measure Acquired School gross profit, gross margin and expense items as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts from
this activity when compared to the prior period. We seek to improve Acquired School period over period performance by honing our screening and due diligence processes and streamlining our integration activities. The table presented in the gross
profit sections below shows Acquired School percent of revenue information for each period presented.

When presenting Core School results,
as is the case in regard to Fiscal 2006, there may be schools included within Core School results that were subsequently classified as discontinued operations. In this case, the results of activities from these schools are presented as discontinued
operations in the Companys current Form 10K, yet for the purpose of reporting Core School revenue and gross profit performance, they are included in Fiscal 2006 Core School results.

Results of OperationsFiscal 2008 compared to Fiscal 2007

At June 28, 2008, the Company operated 173 schools. Between June 30, 2007 and June 28, 2008, the Company has opened five new preschools, acquired eighteen preschools, one of which was subsequently
closed within the same fiscal quarter, and acquired two elementary schools. Included with the acquired preschools are seven before- and after- school program buildings; the Company does not count these facilities or programs as separate schools.
Additionally, two preschools were closed during Fiscal 2008.



22



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##### Table of Contents

School counts for Fiscal 2008 and Fiscal 2007 are as follows:



|                                             |  |        |   |  |      |  
|-------------------------------------------- |  | ------ | - |  | ---- | -
|                                             |  | Fiscal |  
|                                             |  | 2008   |   |  | 2007 |  
|Number of schools at the beginning of period |  | 151    |   |  | 150  |  
|New                                          |  | 5      |   |  | 3    |  
|Acquired                                     |  | 20     |   |  | 6    |  
|Closed or sold                               |  | (3     | ) |  | (8   | )
|                                             |  |        |   |  |      |  
|Number of schools at the end of the period   |  | 173    |   |  | 151  |  
|                                             |  |        |   |  |      |  

Operating results include two preschools closed during the fourth quarter of Fiscal 2008 and two
preschools closed during the fourth quarter of Fiscal 2007. Results from six preschools that were closed and sold during the third and fourth quarters of Fiscal 2007 are included in the Companys income (loss) from discontinued operations.

The table below indentifies schools and the periods they were acquired or opened for Fiscal 2008 and Fiscal 2007. During Fiscal 2008 the
results of one preschool acquired and closed in the same fiscal quarter are not included in the Companys operating income; rather these results are included in the Companys income (loss) from discontinued operations. This school is
included in the count of Acquired Schools in the table below and in the Acquired Schools and Closed Schools in the roll-forward above.



|         |  |             |  |            |  |            |  |            |  |      
|-------- |  | ----------- |  | ---------- |  | ---------- |  | ---------- |  | -----
|         |  | Fiscal 2008
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 4           |  |           |  |           |  | 1          |  | 5    
|Acquired |  | 6           |  |           |  | 12         |  | 2          |  | 20   
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 10          |  |           |  | 12         |  | 3          |  | 25   
|         |  |             |  |            |  |            |  |            |  |      
|         | 
|         |  | Fiscal 2007
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 1           |  | 1          |  | 1          |  |           |  | 3    
|Acquired |  |            |  | 6          |  |           |  |           |  | 6    
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 1           |  | 7          |  | 1          |  |           |  | 9    
|         |  |             |  |            |  |            |  |            |  |      

The following table sets forth certain statement of operations data as a percent of revenue for
Fiscal 2008 and Fiscal 2007 (dollars in thousands):



|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|----------------------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ------ |  | ---- | -
|                                    |  | Fiscal2008 |         | Percent ofRevenues |       |   | Fiscal2007 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |       
|Revenues                            |  | $          | 206,214 |                    | 100.0 | % |            | $ | 182,817            |  | 100.0 | %                    |  | $               | 23,397 |  | 12.8 | %
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Personnel costs                     |  |            | 98,981  |                    | 48.0  |   |            |   | 86,822             |  | 47.5  |                      |  |                 | 12,159 |  | 14.0 |  
|School operating costs              |  |            | 27,181  |                    | 13.2  |   |            |   | 24,815             |  | 13.6  |                      |  |                 | 2,366  |  | 9.5  |  
|Rent and other                      |  |            | 49,515  |                    | 24.0  |   |            |   | 43,688             |  | 23.9  |                      |  |                 | 5,827  |  | 13.3 |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Cost of services                    |  |            | 175,677 |                    | 85.2  |   |            |   | 155,325            |  | 85.0  |                      |  |                 | 20,352 |  | 13.1 |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Gross profit                        |  |            | 30,537  |                    | 14.8  |   |            |   | 27,492             |  | 15.0  |                      |  |                 | 3,045  |  | 11.1 |  
|General and administrative expenses |  |            | 18,516  |                    | 9.0   |   |            |   | 16,993             |  | 9.3   |                      |  |                 | 1,523  |  | 9.0  |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Operating income                    |  | $          | 12,021  |                    | 5.8   | % |            | $ | 10,499             |  | 5.7   | %                    |  | $               | 1,522  |  | 14.5 | %
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  



23



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##### Table of Contents

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



|                |  |        |  |     
|--------------- |  | ------ |  | ----
|                |  | Fiscal
|School Category |  | 2008   |  | 2007
|Comparable      |  | 140    |  | 140 
|                |  |        |  |     
|Core            |  | 140    |  | 139 
|New             |  | 8      |  | 4   
|Acquired        |  | 25     |  | 8   
|                |  |        |  |     
|Total           |  | 173    |  | 151 
|                |  |        |  |     

Revenue

Revenue for Fiscal 2008 increased $23,397,000 or 12.8% to $206,214,000 from $182,817,000 from Fiscal 2007. The revenue increase for Fiscal 2008 as compared to Fiscal 2007 is as follows (dollars in thousands):



|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|------------------------ |  | ------ | ------- | ----------------- | -------- | ------- | ------ |  | ----------------- | ------- |  | ----- | -
|                         |  | Fiscal |         |                   | Increase |        
|                         |  | 2008   |         | 2007              |          |         | Dollar |  | Percent           |        
|Total Company revenue    |  | $      | 206,214 |                   | $        | 182,817 |        |  | $                 | 23,397  |  | 12.8  | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|Comparable Schools       |  | $      | 176,933 |                   | $        | 170,080 |        |  | $                 | 6,853   |  | 4.0   | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|                         |  |        |         |                  
|                         |  | 2008   |         | Percent ofRevenue |          |         | 2007   |  | Percent ofRevenue |        
|Core Schools             |  | $      | 176,933 |                   |          | 85.8    | %      |  | $                 | 164,801 |  | 90.1  | %
|New Schools              |  |        | 7,035   |                   |          | 3.4     | %      |  |                   | 4,504   |  | 2.5   | %
|Acquired Schools         |  |        | 20,249  |                   |          | 9.8     | %      |  |                   | 12,051  |  | 6.6   | %
|Closed schools and other |  |        | 1,997   |                   |          | 1.0     | %      |  |                   | 1,461   |  | 0.8   | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|                         |  | $      | 206,214 |                   |          | 100.0   | %      |  | $                 | 182,817 |  | 100.0 | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  

Revenue trends

Comparable Schools net revenue increased $6,853,000 or 4.0% for Fiscal 2008 compared to Fiscal 2007. Revenue increases were due primarily to average tuition increases of approximately 3.8% and an increase in
average enrollments. Management believes it is an industry practice to increase tuition annually and that industry norms in recent years have seen increases in approximately a 3% to 5% range. Management expects this will continue to be the industry
trend for the foreseeable future.

During Fiscal 2008 and Fiscal 2007, approximately 97% of the Companys gross revenue came directly
from our customers versus 3% from government agencies. Management believes this is significantly different from many providers in the education industry where a more significant portion of revenue is generated through government and other public pay
sources.

Other, non-school revenues decreased by $1,174,000 during Fiscal 2008 as compared to the prior fiscal year. This decrease is
primarily related to a reduction in back office management services contracts and sublease terminations in our charter school management business.

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This
category of costs is partially variable and primarily affected by incentive compensation, health care benefit and participant rate increases, staffing ratio requirements and changes in enrollment. The category tends to be variable as a step



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function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools, personnel costs
tend to be higher as a percentage of revenue as a base level of personnel and associated costs are established in the early years of a schools life and which are expected to leverage as enrollments increase.



|                   |  |        |        |          |   |        |  |         |        |  |      |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ------ |  | ---- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2008   |        | 2007     |   | Dollar |  | Percent |       
|Total              |  | $      | 98,981 |          | $ | 86,822 |  | $       | 12,159 |  | 14.0 | %
|                   |  |        |        |          |   |        |  |         |        |  |      |  
|Comparable Schools |  | $      | 84,372 |          | $ | 81,372 |  | $       | 3,000  |  | 3.7  | %
|                   |  |        |        |          |   |        |  |         |        |  |      |  

For Fiscal 2008, personnel cost increased $12,159,000 or 14.0% to $98,981,000 from $86,822,000 for
Fiscal 2007. The 14.0% increase was primarily driven by increases of wages and benefits of $9,303,000 from schools opened or acquired during Fiscal 2008 or from New Schools opened during Fiscal 2008 and Fiscal 2007 as compared to Fiscal 2007.

Personnel costs for Comparable Schools increased $3,000,000. The 3.7% increase was primarily driven by increases in wage rates and
associated payroll taxes, incentive compensation growth and higher employee benefit rates for both participation and cost for Comparable Schools operated by the Company during Fiscal 2008 as compared to Fiscal 2007.

Personnel costs increased to 48.0% of revenue for Fiscal 2008 as compared to 47.5% for Fiscal 2007. This is a result of higher personnel costs in New
Schools, previously vacant positions being filled and other positions that were added or upgraded at a faster pace than revenue growth. This trend may continue in the near term as the Company continues to implement its strategy to add personnel in
key positions and upgrade its school teams. While this trend may continue, the Company anticipates stronger revenue growth in the future that will ultimately result in leveraging this investment in school personnel and associated payroll expense. In
addition, the increase in personnel cost as a percent of revenue increased from several Acquired Schools with lower than average occupancy levels than exist in our Comparable Schools. These schools higher personnel costs as a percent of
revenue are a result of being in an early stage of the schools operating life cycle or as the result of low occupancy due to its operating history prior to our acquiring the school. The Company expects these schools will leverage their
personnel cost to revenue as enrollments increase.

School operating costs

School operating costs primarily include food, utilities, transportation, maintenance, janitorial, supplies, school level marketing spending and ancillary
programs. This category is partially variable with increases primarily driven by additional enrollment. In the case of New Schools, school operating costs tend to be higher as a percent of revenue as a base level of costs are incurred in the early
period of a schools life and are expected to leverage in as enrollments increase.



|                   |  |        |        |          |   |        |  |         |       |  |     |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ----- |  | --- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2008   |        | 2007     |   | Dollar |  | Percent |      
|Total              |  | $      | 27,181 |          | $ | 24,815 |  | $       | 2,366 |  | 9.5 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  
|Comparable Schools |  | $      | 23,716 |          | $ | 23,394 |  | $       | 322   |  | 1.4 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  

For Fiscal 2008, school operating costs increased $2,366,000 to $27,181,000 from $24,815,000 for
Fiscal 2007. This 9.5% increase was primarily driven by a $2,261,000 increase in operating costs from New Schools or Acquired Schools during Fiscal 2008 as compared to Fiscal 2007.

Operating costs from Comparable Schools operated by the Company during the entire year for Fiscal 2008 and Fiscal 2007 increased $322,000 to $23,716,000
for Fiscal 2008 as compared to $23,394,000 for Fiscal 2007.



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This 1.4% increase was the result of increases in food costs of $297,000, facility maintenance costs of $290,000, utility costs of $124,000, teaching and
office supply costs of $108,000 and other increased operating costs of $67,000 which were partially offset by lower program costs of $346,000 and a $218,000 reduction of bad debt expense.

School operating costs decreased to 13.2% of revenue for Fiscal 2008 as compared to 13.6% for Fiscal 2007. This reduction was the result of the continued
focus on improving school operations, cost controls and comparable school revenue growth.

As discussed in the personnel costs section
above certain acquired schools with lower than average comparable school occupancy levels negatively impacted this category of costs relative to revenue.

Rent and other

Rent and other costs primarily include property rent and property taxes, the portion of claims
retained by the Company for workers compensation and property damage, depreciation and amortization, regional and school marketing, vehicle and equipment rent, and pre-opening costs. This category of costs is relatively fixed in nature with
increases related to contractual obligations, changes in marketing initiatives and the addition of new or acquired schools.



|                   |  |        |        |          |   |        |  |         |       |  |      |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ----- |  | ---- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2008   |        | 2007     |   | Dollar |  | Percent |      
|Total              |  | $      | 49,515 |          | $ | 43,688 |  | $       | 5,827 |  | 13.3 | %
|                   |  |        |        |          |   |        |  |         |       |  |      |  
|Comparable Schools |  | $      | 41,301 |          | $ | 40,142 |  | $       | 1,159 |  | 2.9  | %
|                   |  |        |        |          |   |        |  |         |       |  |      |  

For Fiscal 2008, rent and other expenses increased $5,827,000 or 13.3% to $49,515,000 from
$43,688,000 for Fiscal 2007. Rent and other increased to 24.0% of revenue for Fiscal 2008 from 23.9% of revenue for Fiscal 2007.

The
$5,827,000 increase was primarily driven by a $5,254,000 increase in rent and other costs from New Schools or Acquired Schools during Fiscal 2008 as compared to Fiscal 2007. The increase as a percentage of revenue was primarily impacted by the New
Schools opened in the period, as these schools are in the initial phase of adding enrollment. As occupancy in these schools increases, this cost category will decrease as a percentage of revenue.

Rent and other costs from Comparable Schools operated by the Company during the entire year for Fiscal 2008 and Fiscal 2007 increased $1,159,000 or 2.9%.
This increase was the result of increases in occupancy costs of $592,000, an increase in property damage and workers compensation claims retained by the Company of $408,000 and increased marketing costs of $83,000, and other increased costs of
$76,000. The increase in occupancy costs in Comparable Schools is mainly due to contractual rent increases driven by the Consumer Price Index (CPI), certain lease renewals or extensions and property tax increases.

In the Other, non-school portion of our business, rent and other costs decreased by $573,000 or 100.0%. This consisted of a decrease in rents and
depreciation of equipment related to a charter school that subleased a property through the Company. During Fiscal 2007, the lease rights to this property were transferred by the Company to the charter school and the Company no longer has any
obligations for that property.



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##### Table of Contents

Gross profit

As a result of the factors mentioned above, gross profit for Fiscal 2008 increased $3,045,000 or 11.1% to $30,537,000 from $27,492,000 for Fiscal 2007. Gross profit was 14.8% of revenue for Fiscal 2008 and 15.0% of
revenue for Fiscal 2007. The change in gross profit for Fiscal 2008 as compared to the same period in the prior year is as follows (dollars in thousands):



|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|---------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ------ |  | ---- | -
|                       |  | Fiscal2008 |         | Percent ofRevenues |       |   | Fiscal2007 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |       
|Revenues               |  | $          | 206,214 |                    | 100.0 | % |            | $ | 182,817            |  | 100.0 | %                    |  | $               | 23,397 |  | 12.8 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Personnel costs        |  |            | 98,981  |                    | 48.0  |   |            |   | 86,822             |  | 47.5  |                      |  |                 | 12,159 |  | 14.0 |  
|School operating costs |  |            | 27,181  |                    | 13.2  |   |            |   | 24,815             |  | 13.6  |                      |  |                 | 2,366  |  | 9.5  |  
|Rent and other         |  |            | 49,515  |                    | 24.0  |   |            |   | 43,688             |  | 23.9  |                      |  |                 | 5,827  |  | 13.3 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Cost of services       |  |            | 175,677 |                    | 85.2  |   |            |   | 155,325            |  | 85.0  |                      |  |                 | 20,352 |  | 13.1 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Gross profit           |  | $          | 30,537  |                    | 14.8  | % |            | $ | 27,492             |  | 15.0  | %                    |  | $               | 3,045  |  | 11.1 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  

The table below shows the change in gross profit for Fiscal 2008 as compared to the same period in
the prior year for Comparable Schools:



|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|---------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ----- |  | --- | -
|                       |  | Fiscal2008 |         | Percent ofRevenues |       |   | Fiscal2007 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |      
|Revenues               |  | $          | 176,933 |                    | 100.0 | % |            | $ | 170,080            |  | 100.0 | %                    |  | $               | 6,853 |  | 4.0 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Personnel costs        |  |            | 84,372  |                    | 47.7  |   |            |   | 81,372             |  | 47.8  |                      |  |                 | 3,000 |  | 3.7 |  
|School operating costs |  |            | 23,716  |                    | 13.4  |   |            |   | 23,394             |  | 13.8  |                      |  |                 | 322   |  | 1.4 |  
|Rent and other         |  |            | 41,301  |                    | 23.3  |   |            |   | 40,142             |  | 23.6  |                      |  |                 | 1,159 |  | 2.9 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Cost of services       |  |            | 149,389 |                    | 84.4  |   |            |   | 144,908            |  | 85.2  |                      |  |                 | 4,481 |  | 3.1 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Gross profit           |  | $          | 27,544  |                    | 15.6  | % |            | $ | 25,172             |  | 14.8  | %                    |  | $               | 2,372 |  | 9.4 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  



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The table below shows comparative information as a percent of revenue for Core Schools, New Schools and
Acquired Schools:



|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|---------------------- |  | ---------- | ------- | - | ----------------- | ----- | -- | ---------- | - | ----------------- |  | ----- | -
|                       |  | Fiscal2008 |         |   | Percent ofRevenue |       |    | Fiscal2007 |   | Percent ofRevenue | 
|Core Schools           |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Revenue                |  | $          | 176,933 |   |                   | 100.0 | %  |            | $ | 164,801           |  | 100.0 | %
|Personnel Cost         |  |            | 84,372  |   |                   | 47.7  |    |            |   | 78,860            |  | 47.9  |  
|School Operating Cost  |  |            | 23,716  |   |                   | 13.4  |    |            |   | 22,857            |  | 13.9  |  
|Rent and Other         |  |            | 41,301  |   |                   | 23.3  |    |            |   | 39,188            |  | 23.8  |  
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Gross Profit           |  | $          | 27,544  |   |                   | 15.6  | %  |            | $ | 23,896            |  | 14.5  | %
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|                       |  |            |         |  
|New Schools            |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Revenue                |  | $          | 7,035   |   |                   | 100.0 | %  |            | $ | 4,504             |  | 100.0 | %
|Personnel Costs        |  |            | 3,899   |   |                   | 55.4  |    |            |   | 2,258             |  | 50.1  |  
|School Operating Costs |  |            | 876     |   |                   | 12.5  |    |            |   | 474               |  | 10.5  |  
|Rent and Other         |  |            | 2,658   |   |                   | 37.8  |    |            |   | 1,219             |  | 27.1  |  
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Gross Profit           |  | $          | (398    | ) |                   | (5.7  | %) |            | $ | 553               |  | 12.3  | %
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|                       |  |            |         |  
|Acquired Schools       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Revenue                |  | $          | 20,249  |   |                   | 100.0 | %  |            | $ | 12,051            |  | 100.0 | %
|Personnel Costs        |  |            | 9,710   |   |                   | 48.0  |    |            |   | 5,645             |  | 46.8  |  
|School Operating Costs |  |            | 2,262   |   |                   | 11.2  |    |            |   | 1,364             |  | 11.3  |  
|Rent and Other         |  |            | 5,175   |   |                   | 25.6  |    |            |   | 2,689             |  | 22.3  |  
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  
|Gross Profit           |  | $          | 3,102   |   |                   | 15.3  | %  |            | $ | 2,353             |  | 19.5  | %
|                       |  |            |         |   |                   |       |    |            |   |                   |  |       |  

Gross profit for Core Schools increased as a percentage of revenue, to 15.6% during Fiscal 2008 as
compared to 14.5% for Core Schools as they were reported in the prior fiscal year.

Gross profit for New Schools declined during Fiscal
2008 to (5.7%) of revenue as compared to 12.3% for those New Schools reported in the prior fiscal period. New Schools in Fiscal 2008 reflect the performance of eight schools compared to three schools in Fiscal 2007. Two of the three New Schools
included in Fiscal 2007 performance were land banked schools where the Company held the rights to the land for a period of time prior to development so that those markets were more fully developed (hence able to ramp up quickly due to
more mature markets). The third was a corporate contract school taken over by the Company from a previous operator. This compares to the five new schools opened in Fiscal 2008 which were opened in newer path-of-progress markets which
management expects to continue to develop.

Gross profit for Acquired Schools declined during Fiscal 2008 to 15.3% of revenue as compared
to 19.5% for those reported in the prior fiscal year. Acquired schools in Fiscal 2008 reflect the performance of 25 schools compared to eight schools in Fiscal 2007. Acquired school performance for Fiscal 2008 is lower due to the fact that several
of the acquired schools are relatively new and in the early stages of their ramp-up. In addition, in the case of Camelback Desert Schools, these schools were not profitable when they were acquired, but the Company believes they do present an
opportunity to improve their performance based on the strong demographic market in which these schools operate and our past history of improving school performance.

General and administrative expenses

General and administrative expenses for Fiscal 2008
increased $1,523,000 to $18,516,000 from $16,993,000 for Fiscal 2007. General and administrative expenses decreased to 9.0% of revenue for Fiscal 2008 from 9.3% of revenue for Fiscal 2007.



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##### Table of Contents

The overall increase in general and administrative expenses was driven by several key items including
increased consulting and professional fees of $640,000 primarily attributable to the Companys update of its strategic plan and work performed for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, amortization cost from
acquisitions of $412,000, increased corporate personnel costs of $215,000, costs of $210,000 for potential new schools that were cancelled either due to recent acquisitions making the new schools duplicative to a certain market or failure to reach a
lease agreement or construction budget with acceptable economic terms, recruiting fees and relocation costs of $143,000, training and seminar costs of $94,000, board fees of $65,000 and other increased general and administrative costs of $104,000.
These increases were offset by a decrease in corporate depreciation expense of $360,000 primarily due to the retirement of the Companys payroll system during Fiscal 2007.

Corporate personnel costs for Fiscal 2008 as compared to Fiscal 2007 increased approximately $215,000. Wages and benefit costs increased $538,000 due in
large part to the addition of management personnel to direct new regions that are a result of the Companys recent acquisition activity. In addition, the deferred compensation plan implemented in early Fiscal 2007 added $98,000 in the period.
These increases were partially offset by a $421,000 decrease in performance-based incentive compensation (based on targets as determined by the Compensation Committee and approved by the Board of Directors during the fourth quarter of Fiscal 2007).

Increases in amortization expense reflect the amortization of intangible assets acquired from the acquisition of the Discovery Isle,
Learning Ladder, Teddy Bear Tree House, Ivy Glen, Enchanted Care and Camelback Desert schools which were all acquired subsequent to the first quarter of Fiscal 2007.

Operating Income

As a result of the factors mentioned above, operating income increased
$1,522,000 or 14.5% to $12,021,000 for Fiscal 2008 from $10,499,000 for Fiscal 2007. Operating income increased in Fiscal 2008 to 5.8% of revenue from 5.7% in Fiscal 2007.

Interest expense

Interest expense decreased $910,000 or 65.7% to $475,000 for Fiscal 2008
from $1,385,000 for Fiscal 2007.

The decrease was the result of two factors: 1) a reduction of average debt outstanding and lower average
rates during Fiscal 2008 as compared to Fiscal 2007 and, 2) during the second quarter of Fiscal 2007, the Companys senior debt with Harris Bank N.A. was extinguished and the Company recognized $562,000 of unamortized loan origination fees
associated with the Prior Credit Agreement (as defined below) included in interest expense. This charge resulted in a charge to Fiscal 2007 basic and diluted earning per share of $0.04 and $0.03, respectively.

Income tax expense

Income tax expense from
continuing operations for Fiscal 2008 was $4,571,000 as compared to $5,064,000 for Fiscal 2007. The Companys effective tax rate for Fiscal 2008 was 38.5%, the Companys effective tax rate for Fiscal 2007 was 39.0%. Income tax expense was
computed by applying estimated effective income tax rates to the income or loss before income taxes. Income tax expense varies from the statutory federal income tax rate due primarily to state income taxes and non-deductible expenses and credits.

At June 28, 2008 and June 30, 2007, the Company had net deferred tax assets totaling $47,000 and $353,000, respectively.
Deferred tax assets, net of valuation allowances, have been recognized to the extent that their realization is more likely than not. However, the amount of the deferred tax assets considered realizable could be adjusted in the future as estimates of
taxable income or the timing thereof are revised. If the Company is unable to generate sufficient taxable income in the future through operating results, increases in the valuation allowance may be required through an increase to tax expense in
future periods. Conversely, if the Company recognizes taxable income of a suitable nature and in the appropriate periods, the deferred tax assets will more likely than not be realized.



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Other Income

Other income for Fiscal 2008 decreased $3,545,000 to $326,000 from $3,871,000 for Fiscal 2007.

During the
second quarter of Fiscal 2008, the Company received a payment of $300,000 for the settlement and release of a contract for which the Company no longer has performance obligations. The settlement of this contract resulted in an increase to Fiscal
2008 basic and diluted earnings per share of $0.02.

Other income for Fiscal 2007 primarily resulted from $2,500,000 subordinated note
receivable the Company had previously reserved that was due May 2005 pursuant to a Credit Agreement entered into in Fiscal 2000 with Total Education Solutions, Inc. (TES). During Fiscal 2003, the Company reserved $1,000,000 of the note
receivable with TES. Due to TESs continued performance deterioration during Fiscal 2005, the Company reserved the remainder of the TES note of $1,500,000. TES also had senior debt in the amount of $1,000,000. Subsequently, TES advised that it
was in default under the terms of its senior debt. During the first quarter of Fiscal 2007, the Company acquired the $1,000,000 TES senior debt from TESs senior lender for $200,000 in order, among other things, to give the Company a first
security position in the TES debt. Later in Fiscal 2007, TES effected a recapitalization of its debt and the Company received a payment from TES in the amount of $3,510,000. This payment settled all outstanding receivables from TES. Upon receipt of
this payment, TES was released from all obligations to the Company. Payment of this note resulted in the recognition of $3,300,000 of other income during Fiscal 2007. Payment of this note resulted in an increase to Fiscal 2007 basic and diluted
earning per share of $0.22 and $0.19, respectively.

During the second quarter of Fiscal 2007, the Company received payments from Franklin
Town Charter High School (FTCHS) in the amount of $1,028,000. The Company had a sublease agreement with FTCHS that included rental payments for tenant improvements that were funded by the Company. FTCHS purchased the property that the
Company had subleased to it from the Companys landlord. The payment to the Company released FTCHS from its sublease obligations to the Company and transferred ownership of leasehold improvements and other assets that the Company had funded on
behalf of FTCHS. This resulted in the recognition of $310,000 of other income in continuing operations. The sale of these assets resulted in an increase to Fiscal 2007 basic and diluted earning per share of $0.02.

Discontinued operations

At the beginning of
Fiscal 2007, discontinued operations consisted of fifteen schools, eight of which the Company did not operate during Fiscal 2007 and seven of which the Company continued to operate until they were sold during the third and fourth quarters of Fiscal
2007. In addition to the remaining eight schools classified as discontinued operations during Fiscal 2007, as part of an acquisition during the first quarter of Fiscal 2008, one additional school was added to discontinued operations. This school was
operated by the Company during part of the first quarter of Fiscal 2008 and then closed during the same period; subsequently the Company terminated its lease with the landlord of this property and was released from all future obligations.

During the fourth quarter of Fiscal 2008, the Company settled a contract dispute in amount of $1,250,000 to be paid to the Company over
five years. The net gain resulting from this settlement is $1,028,000 after costs and discount for the five year collection period. This gain resulted in an increase to Fiscal 2008 basic and diluted earnings per share of $0.06.



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The operating results for discontinued operations in the statements of income for Fiscal 2008 and Fiscal
2007, net of tax are as follows (dollars in thousands):



|                                                                     |  |        |       |   |      |   |        |  
|-------------------------------------------------------------------- |  | ------ | ----- | - | ---- | - | ------ | -
|                                                                     |  | Fiscal |      
|                                                                     |  | 2008   |       |   | 2007 |  
|Revenues                                                             |  | $      | 44    |   |      | $ | 4,155  |  
|Cost of services                                                     |  |        | (98   | ) |      |   | (3,684 | )
|Rent and other                                                       |  |        | (116  | ) |      |   | (1,255 | )
|Closed school lease reserves                                         |  |        | (245  | ) |      |   | (2,027 | )
|Gain from sale of schools                                            |  |        |      |   |      |   | 1,900  |  
|Gain from contract settlement                                        |  |        | 1,028 |   |      |   |       |  
|                                                                     |  |        |       |   |      |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | 613   |   |      |   | (911   | )
|Income tax benefit (expense)                                         |  |        | (236  | ) |      |   | 355    |  
|                                                                     |  |        |       |   |      |   |        |  
|Income (loss) from discontinued operations                           |  | $      | 377   |   |      | $ | (556   | )
|                                                                     |  |        |       |   |      |   |        |  

Net Income

As a result of the above factors, the Companys net income was $7,678,000 for Fiscal 2008 as compared to $7,365,000 for Fiscal 2007.

Results of OperationsFiscal 2007 compared to Fiscal 2006

At June 30, 2007, the Company
operated 151 schools. Since July 1, 2006, the Company acquired six preschools and opened three new preschools. Comparable schools include 139 schools that operated during the entire period of Fiscal 2007 and Fiscal 2006.

School counts for Fiscal 2007 and Fiscal 2006 are as follows:



|                                             |  |        |   |  |      |  
|-------------------------------------------- |  | ------ | - |  | ---- | -
|                                             |  | Fiscal |  
|                                             |  | 2007   |   |  | 2006 |  
|Number of schools at the beginning of period |  | 150    |   |  | 149  |  
|Acquired                                     |  | 6      |   |  | 2    |  
|Opened                                       |  | 3      |   |  | 1    |  
|Closed or sold                               |  | (8     | ) |  | (2   | )
|                                             |  |        |   |  |      |  
|Number of schools at the end of the period   |  | 151    |   |  | 150  |  
|                                             |  |        |   |  |      |  

Operating results include two preschools closed during the fourth quarter of Fiscal 2007. Results
from six preschools that were closed and sold during the third and fourth quarters of Fiscal 2007, one preschool closed during fourth the quarter of Fiscal 2006 and one elementary school closed during the fourth quarter of Fiscal 2006 are included
in the Companys income (loss) from discontinued operations.



31



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##### Table of Contents

The table below indentifies schools and the periods they were acquired or opened for Fiscal 2007 and
Fiscal 2006.



|         |  |             |  |            |  |            |  |            |  |      
|-------- |  | ----------- |  | ---------- |  | ---------- |  | ---------- |  | -----
|         |  | Fiscal 2007
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 1           |  | 1          |  | 1          |  |           |  | 3    
|Acquired |  |            |  | 6          |  |           |  |           |  | 6    
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 1           |  | 7          |  | 1          |  |           |  | 9    
|         |  |             |  |            |  |            |  |            |  |      
|         | 
|         |  | Fiscal 2006
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 1           |  |           |  |           |  |           |  | 1    
|Acquired |  |            |  |           |  |           |  | 2          |  | 2    
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 1           |  |           |  |           |  | 2          |  | 3    
|         |  |             |  |            |  |            |  |            |  |      

The following table sets forth certain statement of operations data as a percent of revenue for
Fiscal 2007 and Fiscal 2006 (dollars in thousands):



|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|----------------------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ------ |  | ---- | -
|                                    |  | Fiscal2007 |         | Percent ofRevenues |       |   | Fiscal2006 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |       
|Revenues                            |  | $          | 182,817 |                    | 100.0 | % |            | $ | 161,757            |  | 100.0 | %                    |  | $               | 21,060 |  | 13.0 | %
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Personnel costs                     |  |            | 86,822  |                    | 47.5  |   |            |   | 75,901             |  | 46.9  |                      |  |                 | 10,921 |  | 14.4 |  
|School operating costs              |  |            | 24,815  |                    | 13.6  |   |            |   | 22,937             |  | 14.2  |                      |  |                 | 1,878  |  | 8.2  |  
|Rent and other                      |  |            | 43,688  |                    | 23.9  |   |            |   | 39,872             |  | 24.6  |                      |  |                 | 3,816  |  | 9.6  |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Cost of services                    |  |            | 155,325 |                    | 85.0  |   |            |   | 138,710            |  | 85.8  |                      |  |                 | 16,615 |  | 12.0 |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Gross profit                        |  |            | 27,492  |                    | 15.0  |   |            |   | 23,047             |  | 14.2  |                      |  |                 | 4,445  |  | 19.3 |  
|General and administrative expenses |  |            | 16,993  |                    | 9.3   |   |            |   | 13,523             |  | 8.4   |                      |  |                 | 3,470  |  | 25.7 |  
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Operating income                    |  | $          | 10,499  |                    | 5.7   | % |            | $ | 9,524              |  | 5.9   | %                    |  | $               | 975    |  | 10.2 | %
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  

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



|                |  |        |  |     
|--------------- |  | ------ |  | ----
|                |  | Fiscal
|School Category |  | 2007   |  | 2006
|Comparable      |  | 139    |  | 139 
|Core            |  | 139    |  | 145 
|New             |  | 4      |  | 3   
|Acquired        |  | 8      |  | 2   
|                |  |        |  |     
|Total           |  | 151    |  | 150 
|                |  |        |  |     



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##### Table of Contents

Revenue

Revenue for Fiscal 2007 increased $21,060,000 or 13.0% to $182,817,000 from $161,757,000 from Fiscal 2006. The revenue increase for Fiscal 2007 as compared to Fiscal 2006 is as follows (dollars in thousands):



|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|------------------------ |  | ------ | ------- | ----------------- | -------- | ------- | ------ |  | ----------------- | ------- |  | ----- | -
|                         |  | Fiscal |         |                   | Increase |        
|                         |  | 2007   |         | 2006              |          |         | Dollar |  | Percent           |        
|Total Company revenue    |  | $      | 182,817 |                   | $        | 161,757 |        |  | $                 | 21,060  |  | 13.0  | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|Comparable Schools       |  | $      | 164,801 |                   | $        | 157,904 |        |  | $                 | 6,897   |  | 4.4   | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|                         |  |        |         |                  
|                         |  | 2007   |         | Percent ofRevenue |          |         | 2006   |  | Percent ofRevenue |        
|Core Schools             |  | $      | 164,801 |                   |          | 90.1    | %      |  | $                 | 161,550 |  | 96.5  | %
|New Schools              |  |        | 12,051  |                   |          | 6.6     | %      |  |                   | 3,673   |  | 2.2   | %
|Acquired Schools         |  |        | 4,596   |                   |          | 2.5     | %      |  |                   |        |  | 0.0   | %
|Closed schools and other |  |        | 1,369   |                   |          | 0.7     | %      |  |                   | 2,128   |  | 1.3   | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  
|                         |  | $      | 182,817 |                   |          | 100.0   | %      |  | $                 | 167,351 |  | 100.0 | %
|                         |  |        |         |                   |          |         |        |  |                   |         |  |       |  

Revenue trends

Comparable Schools net revenue increased $6,897,000 or 4.4% for Fiscal 2007 compared to Fiscal 2006. Revenue increases were due primarily to average tuition increases of approximately 3.5% to 4.0% and an
increase in average enrollments. Management believes it is an industry practice to increase tuition annually and that industry norms in recent years have seen increases in approximately a 3% to 5% range. Management expects this will continue to be
the industry trend for the foreseeable future.

During Fiscal 2007, approximately 98% of the Companys gross revenue came directly
from our customers versus 2% from governmental agencies. During Fiscal 2006, approximately 97% of the Companys gross revenue came directly from our customers. Management believes this is significantly different from many providers in the
education industry where a more significant portion of revenue is generated through government and other public pay sources.

Other,
non-school revenues decreased by $1,174,000 during Fiscal 2008 as compared to the prior fiscal year. This decrease is primarily related to a reduction in back office management services contracts and sublease terminations in our charter school
management business.

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This category of costs is partially variable and primarily affected by incentive compensation, health care benefit rate increases, staffing ratio
requirements and changes in enrollment. The category tends to be variable as a step function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of new schools, a base level of
personnel and associated costs are established in the early years of a schools life which are leveraged as enrollments ramp up.



|                   |  |        |        |          |   |        |  |         |        |  |      |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ------ |  | ---- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2007   |        | 2006     |   | Dollar |  | Percent |       
|Total              |  | $      | 86,822 |          | $ | 75,901 |  | $       | 10,921 |  | 14.4 | %
|                   |  |        |        |          |   |        |  |         |        |  |      |  
|Comparable Schools |  | $      | 78,860 |          | $ | 75,101 |  | $       | 3,759  |  | 5.0  | %
|                   |  |        |        |          |   |        |  |         |        |  |      |  



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##### Table of Contents

For Fiscal 2007, personnel cost increased $10,921,000 or 14.4% to $86,822,000 from $75,901,000 for Fiscal
2006. The 14.4% increase was primarily driven by increases of wages and benefits of $7,352,000 from schools opened or acquired during Fiscal 2007 or Fiscal 2006 as compared to Fiscal 2006. The remaining $3,569,000 increase was primarily driven by
increases in total wages, incentive compensation, payroll tax and vacation pay for comparable schools operated by the Company during Fiscal 2007 as compared to Fiscal 2006.

Personnel costs increased to 47.5% of revenue for Fiscal 2007 as compared to 46.9% for Fiscal 2006. This is a result of higher personnel costs in New
Schools, previously vacant positions being filled and other positions that were added or upgraded at a faster pace than revenue growth. This trend may continue in the near term as the Company continues to implement its strategy to add personnel in
key positions and upgrade its school teams. While this trend may continue, the Company anticipates stronger revenue growth in the future that will ultimately result in leveraging this investment in school personnel and associated payroll expense.

School operating costs

School
operating costs primarily include maintenance, janitorial, food, supplies, utilities, transportation, school level marketing and ancillary programs. The category is partially variable with increases in revenue primarily when those revenue increases
are driven by additional enrollment. In the case of new schools, a base level of costs are established in the early years of a schools life, which are leveraged in later years as enrollments ramp up.



|                   |  |        |        |          |   |        |  |         |       |  |     |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ----- |  | --- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2007   |        | 2006     |   | Dollar |  | Percent |      
|Total              |  | $      | 24,815 |          | $ | 22,937 |  | $       | 1,878 |  | 8.2 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  
|Comparable Schools |  | $      | 22,857 |          | $ | 22,583 |  | $       | 274   |  | 1.2 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  

For Fiscal 2007, school operating costs increased $1,878,000 to $24,815,000 from $22,937,000 for
Fiscal 2006. This 8.2% increase was primarily driven by a $1,700,000 increase in operating costs from schools opened or acquired during Fiscal 2007 as compared to Fiscal 2006.

Operating costs from comparable schools operated by the Company during the entire year for Fiscal 2007 and Fiscal 2006 increased $274,000 to $22,857,000
for Fiscal 2007 as compared to $22,583,000 for Fiscal 2006. This 1.2% increase was the result of increases in food costs of $372,000 and facility maintenance costs of $332,000, which were partially offset by lower bad debt of $339,000 and other
reduced operating costs of $91,000.

School operating costs decreased to 13.6% of revenue for Fiscal 2007 as compared to 14.2% for Fiscal
2006. This reduction was the result of the continued focus on improving school operations, cost controls and comparable school revenue growth. The Companys school operating system provides greater visibility to school billing, collections and
expenditure activities.

Rent and other

Rent and other costs primarily include property rent and taxes, the Companys retention of a portion of claims including workers compensation and property damage, depreciation and amortization, marketing, vehicle and equipment
rent and pre-opening costs. This category of costs is relatively fixed in nature with increases related to contractual occupancy obligations, changes in marketing initiatives and the addition of new or acquired schools.



|                   |  |        |        |          |   |        |  |         |       |  |     |  
|------------------ |  | ------ | ------ | -------- | - | ------ |  | ------- | ----- |  | --- | -
|                   |  | Fiscal |        | Increase |  
|                   |  | 2007   |        | 2006     |   | Dollar |  | Percent |      
|Total              |  | $      | 43,688 |          | $ | 39,872 |  | $       | 3,816 |  | 9.6 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  
|Comparable Schools |  | $      | 39,188 |          | $ | 38,138 |  | $       | 1,050 |  | 2.8 | %
|                   |  |        |        |          |   |        |  |         |       |  |     |  



34



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##### Table of Contents

For Fiscal 2007, rent and other expenses increased $3,816,000 or 9.6% to $43,688,000 from $39,872,000 for
Fiscal 2006. Rent and other decreased to 23.9% of revenue for Fiscal 2007 from 24.6% of revenue for Fiscal 2006.

The $3,816,000 increase
was primarily driven by a $3,363,000 increase in rent and other costs from schools opened or acquired during Fiscal 2007 as compared to Fiscal 2006.

Rent and other costs from comparable schools operated by the Company during the entire year for Fiscal 2007 and Fiscal 2006 increased $1,050,000 or 2.8%. This increase was the result of increases in occupancy costs of
$628,000, marketing costs of $288,000 and depreciation expense of $289,000. These increases were offset by decreases in property damage and workers compensation claims retained by the Company of $160,000.

The increase in occupancy costs in comparable schools is mainly due to contractual rent increases driven by the Consumer Price Index (CPI),
certain lease renewals or extensions and property tax increases. Corporate marketing costs increased due to an increase in overall marketing spending as well as a shift in school based marketing spending that was previously classified as a school
operating expense. Property damages decreased, as there were no major hurricanes or other significant weather events during Fiscal 2007, unlike during the first quarter of Fiscal 2006 when certain of the Companys facilities sustained damage or
interruptions from Hurricane Wilma.

Rent and other costs decreased by $498,000 or 46.5% for other, non-school items, which consisted of a
decrease in rents and depreciation of equipment related to a charter school that subleased a property through the Company. During Fiscal 2007 the lease rights to this property were transferred by the Company to the charter school.

Gross profit

As a result of the factors
mentioned above, gross profit for Fiscal 2007 increased $4,445,000 or 19.3% to $27,492,000 from $23,047,000 for Fiscal 2006. Gross profit was 15.0% of revenue for Fiscal 2007 and 14.2% of revenue for Fiscal 2006. The change in gross profit for
Fiscal 2007 as compared to the same period in the prior year is as follows (dollars in thousands):



|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|---------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ------ |  | ---- | -
|                       |  | Fiscal2007 |         | Percent ofRevenues |       |   | Fiscal2006 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |       
|Revenues               |  | $          | 182,817 |                    | 100.0 | % |            | $ | 161,757            |  | 100.0 | %                    |  | $               | 21,060 |  | 13.0 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Personnel costs        |  |            | 86,822  |                    | 47.5  |   |            |   | 75,901             |  | 46.9  |                      |  |                 | 10,921 |  | 14.4 |  
|School operating costs |  |            | 24,815  |                    | 13.6  |   |            |   | 22,937             |  | 14.2  |                      |  |                 | 1,878  |  | 8.2  |  
|Rent and other         |  |            | 43,688  |                    | 23.9  |   |            |   | 39,872             |  | 24.6  |                      |  |                 | 3,816  |  | 9.6  |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Cost of services       |  |            | 155,325 |                    | 85.0  |   |            |   | 138,710            |  | 85.8  |                      |  |                 | 16,615 |  | 12.0 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  
|Gross profit           |  | $          | 27,492  |                    | 15.0  | % |            | $ | 23,047             |  | 14.2  | %                    |  | $               | 4,445  |  | 19.3 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |        |  |      |  

The table below shows the change in gross profit for Fiscal 2007 as compared to the same period in
the prior year for Comparable Schools:



|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|---------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | --------------- | ----- |  | --- | -
|                       |  | Fiscal2007 |         | Percent ofRevenues |       |   | Fiscal2006 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease |      
|Revenues               |  | $          | 164,801 |                    | 100.0 | % |            | $ | 157,904            |  | 100.0 | %                    |  | $               | 6,897 |  | 4.4 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Personnel costs        |  |            | 78,860  |                    | 47.9  |   |            |   | 75,101             |  | 47.6  |                      |  |                 | 3,759 |  | 5.0 |  
|School operating costs |  |            | 22,857  |                    | 13.9  |   |            |   | 22,583             |  | 14.3  |                      |  |                 | 274   |  | 1.2 |  
|Rent and other         |  |            | 39,188  |                    | 23.8  |   |            |   | 38,138             |  | 24.2  |                      |  |                 | 1,050 |  | 2.8 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Cost of services       |  |            | 140,905 |                    | 85.5  |   |            |   | 135,822            |  | 86.0  |                      |  |                 | 5,083 |  | 3.7 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Gross profit           |  | $          | 23,896  |                    | 14.5  | % |            | $ | 22,082             |  | 14.0  | %                    |  | $               | 1,814 |  | 8.2 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  



35



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##### Table of Contents

The table below shows comparative information as a percent of revenue for Core Schools, New Schools and
Acquired Schools:



|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|---------------------- |  | ---------- | ------- | ----------------- | ----- | - | ---------- | - | ----------------- |  | ----- | -
|                       |  | Fiscal2007 |         | Percent ofRevenue |       |   | Fiscal2006 |   | Percent ofRevenue | 
|Core Schools           |  |            |         |                   |       |   |            |   |                   |  |       |  
|Revenue                |  | $          | 164,801 |                   | 100.0 | % |            | $ | 161,550           |  | 100.0 | %
|Personnel Cost         |  |            | 78,860  |                   | 47.9  |   |            |   | 77,359            |  | 47.9  |  
|School Operating Cost  |  |            | 22,857  |                   | 13.9  |   |            |   | 23,376            |  | 14.5  |  
|Rent and Other         |  |            | 39,188  |                   | 23.8  |   |            |   | 37,678            |  | 23.3  |  
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|Gross Profit           |  | $          | 23,896  |                   | 14.5  | % |            | $ | 23,137            |  | 14.3  | %
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|New Schools            |  |            |         |                   |       |   |            |   |                   |  |       |  
|Revenue                |  | $          | 4,504   |                   | 100.0 | % |            | $ | 3,673             |  | 100.0 | %
|Personnel Costs        |  |            | 2,258   |                   | 50.1  |   |            |   | 1,763             |  | 48.0  |  
|School Operating Costs |  |            | 474     |                   | 10.5  |   |            |   | 579               |  | 15.8  |  
|Rent and Other         |  |            | 1,219   |                   | 27.1  |   |            |   | 1,124             |  | 30.6  |  
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|Gross Profit           |  | $          | 553     |                   | 12.3  | % |            | $ | 207               |  | 5.6   | %
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|Acquired Schools       |  |            |         |                   |       |   |            |   |                   |  |       |  
|Revenue                |  | $          | 12,051  |                   | 100.0 | % |            | $ |                  |  | n.a.  |  
|Personnel Costs        |  |            | 5,645   |                   | 46.8  |   |            |   |                  |  | n.a.  |  
|School Operating Costs |  |            | 1,364   |                   | 11.3  |   |            |   |                  |  | n.a.  |  
|Rent and Other         |  |            | 2,689   |                   | 22.3  |   |            |   |                  |  | n.a.  |  
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  
|Gross Profit           |  | $          | 2,353   |                   | 19.5  | % |            | $ |                  |  | n.a.  |  
|                       |  |            |         |                   |       |   |            |   |                   |  |       |  

Gross profit for Core Schools increased as a percentage of revenue, to 14.5% during Fiscal 2007 as
compared to 14.3% for Core Schools as they were reported in the prior fiscal year.

Gross profit for New Schools increased during Fiscal
2007 to 12.3% of revenue as compared to 5.6% for those New Schools reported in the prior fiscal period. New Schools in Fiscal 2007 reflect the performance of four schools compared to three schools in Fiscal 2006. Three of the four New Schools
included in Fiscal 2007 performance were land banked schools where the Company held the rights to the land for a period of time prior to development so that those markets were more fully developed (hence able to ramp up quickly due to
more mature markets). The fourth was a corporate contract school taken over by the Company from a previous operator. This compares to the three new schools opened in Fiscal 2006 which were land banked schools.

General and administrative expenses

General
and administrative expenses for Fiscal 2007 increased $3,470,000 to $16,993,000 from $13,523,000 for Fiscal 2006. General and administrative expenses increased to 9.3% of revenue for Fiscal 2007 from 8.4% of revenue for Fiscal 2006.

The Compensation Committee of the Board of Directors, working with an outside, independent compensation consultant, implemented a new comprehensive
executive management compensation program beginning in Fiscal 2007, which included a performance-based annual non-equity incentive plan with specific target measurements. The targets are selected by the Board of Directors to coincide with and
support the creation of long term stockholder value. The performance incentive plan established by the Compensation Committee and approved by the full Board of Directors provides for management to receive incentive compensation when the
Companys performance meets specific targets that the Committee and Board believes enhance stockholder value.



36



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##### Table of Contents

In Fiscal 2007, the Company substantially achieved the performance targets established by the Board of
Directors Compensation Committee. Consequently, performance-based non-equity incentive compensation increased $1,055,000 in Fiscal 2007 compared to Fiscal 2006, when the Company did not fully achieve its targets set under a previous plan and
related performance-based non-equity incentive compensation was minimal. The Compensation Committee, with approval of the full Board of Directors, has indicated that the absolute dollars available for performance-based non-equity incentive
compensation in Fiscal 2008 should not vary considerably from the dollar amount that was available in Fiscal 2007.

Deferred compensation
expense increased $204,000 for Fiscal 2007. During Fiscal 2007, as part of the comprehensive management compensation program, the Company initiated a deferred compensation plan that permits certain management and other highly compensated employees
to defer up to 100% of their compensation and for identified individuals to receive a contribution from the Company. Company contributions are made at the discretion of the Compensation Committee of the Companys Board of Directors. Deferred
compensation expense incurred for Fiscal 2007 was for approximately nine months of the fiscal year; for Fiscal 2008 it is expected this cost may increase proportionately to accommodate implementation of the program for an entire fiscal year as well
as the potential for an increase in the number of plan participants eligible for a company contribution.

Stock based compensation
increased $121,000 for Fiscal 2007, primarily as a result of an increase in the Companys stock price, which impacted the valuation of stock options granted during Fiscal 2007.

Salaries, taxes and benefits increased $1,127,000 for Fiscal 2007. This increase was a result of the addition of a Senior Vice President of Corporate
Development, the addition of personnel to manage newly acquired schools and filling certain other vacant positions.

Amortization expense
increased $294,000 reflecting the amortization of intangible assets acquired from the acquisition of The Honor Roll and Discovery Isle schools, which was partially offset by other intangible assets that were fully amortized during Fiscal 2007.

Corporate depreciation expense increased $835,000 as the Company invested in information technology enhancements during Fiscal 2007 and
Fiscal 2006. These enhancements included the roll-out of new information systems, which provide fully integrated general ledger and ERP capabilities. The increase in depreciation expense also included a charge of $341,000, as a result of a change in
an accounting estimate regarding the remaining useful life of the Companys existing payroll system. This change in estimate resulted in a charge to basic and diluted income per share of $0.02 for Fiscal 2007. The Company is currently migrating
to an outsourced payroll provider to better support the Companys growth strategy.

Operating Income

As a result of the factors mentioned above, operating income increased $975,000 or 10.2% to $10,499,000 for Fiscal 2007 from $9,524,000 for Fiscal 2006.
Operating income decreased in Fiscal 2007 to 5.7% of revenue from 5.9% in Fiscal 2006.

Interest expense

Interest expense decreased $84,000 or 5.7% to $1,385,000 for Fiscal 2007 from $1,469,000 for Fiscal 2006.

The decrease was the result of a reduction of average debt outstanding during Fiscal 2007 as compared to Fiscal 2006. In late Fiscal 2006, the
Companys senior debt with Harris Bank N.A. was amended, reducing its effective interest rate in late Fiscal 2006 and early Fiscal 2007. During the second quarter of Fiscal 2007, the Companys senior debt with Harris Bank N.A. was
extinguished. In the second quarter of Fiscal 2007 the Company obtained a new line of credit with BMO Capital that further reduced its effective interest rate.



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At the beginning of Fiscal 2007, the Company had a Credit Agreement with Harris Trust in the amount of
$25,000,000 of which $15,000,000 was for a Term Loan, $10,000,000 was for a Revolving Credit Commitment and up to $3,500,000 was for letters of credit as a sub-limit of the Revolving Credit Commitment (Prior Credit Agreement). The Prior
Credit Agreement was scheduled to terminate on February 20, 2009. On October 30, 2006, the Company retired the loan facility under its Prior Credit Agreement. At July 1, 2006, the outstanding balance on the Prior Credit Agreement was
$11,000,000. At the time of retirement, the outstanding amount of the Prior Credit Agreement of $12,500,000 was paid and the Company recognized in interest expense $562,000 of unamortized loan origination fees associated with the Prior Credit
Agreement. This charge resulted in a charge to Fiscal 2007 basic and diluted earning per share of $0.04 and $0.03, respectively.

Income tax expense

Income tax expense for Fiscal 2007 was $5,064,000 as compared to $3,285,000 for Fiscal 2006. The Companys effective tax rate
for Fiscal 2007 was 39.0%, equal to the statutory rate. Income tax expense was computed by applying estimated effective income tax rates to the income or loss before income taxes. Income tax expense varies from the statutory federal income tax rate
due primarily to state income taxes and non-deductible expenses and credits.

At June 30, 2007 and July 1, 2006, the Company had
net deferred tax assets totaling $47,000 and $2,345,000, respectively. Deferred tax assets, net of valuation allowances, have been recognized to the extent that their realization is more likely than not. However, the amount of the deferred tax
assets considered realizable could be adjusted in the future as estimates of taxable income or the timing thereof are revised. If the Company is unable to generate sufficient taxable income in the future through operating results, increases in the
valuation allowance may be required through an increase to tax expense in future periods. Conversely, if the Company recognizes taxable income of a suitable nature and in the appropriate periods, the deferred tax assets will more likely than not be
realized.

Other Income

Other
income for Fiscal 2007 increased $3,521,000 to $3,871,000 from $350,000 for Fiscal 2006.

The Company had a $2,500,000 subordinated note
receivable, due May 2005, pursuant to a Credit Agreement entered into in Fiscal 2000 with Total Education Solutions, Inc. (TES). During Fiscal 2003, the Company reserved $1,000,000 of the note receivable with TES. Due to TESs
continued performance deterioration during Fiscal 2005, the Company reserved the remainder of the TES note of $1,500,000. TES also had senior debt in the amount of $1,000,000. Subsequently, TES advised that it was in default under the terms of its
senior debt. During the first quarter of Fiscal 2007, the Company acquired the $1,000,000 TES senior debt from TESs senior lender for $200,000 in order, among other things, to give the Company a first security position in the TES debt. Later
in Fiscal 2007, TES effected a recapitalization of its debt and the Company received a payment from TES in the amount of $3,510,000. This payment settled all outstanding receivables from TES. Upon receipt of this payment, TES was released from all
obligations to the Company. Payment of this note resulted in the recognition of $3,300,000 of other income during Fiscal 2007. Payment of this note resulted in an increase to Fiscal 2007 basic and diluted earning per share of $0.22 and $0.19,
respectively.

During the second quarter of Fiscal 2007, the Company received payments from Franklin Town Charter High School
(FTCHS) in the amount of $1,028,000. The Company had a sublease agreement with FTCHS that included rental payments for tenant improvements that were funded by the Company. FTCHS purchased the property that the Company had subleased to it
from the Companys landlord. The payment to the Company released FTCHS from its sublease obligations to the Company and transferred ownership of leasehold improvements and other assets that the Company had funded on behalf of FTCHS. This
resulted in the recognition of $310,000 of other income in continuing operations. The sale of these assets resulted in an increase to Fiscal 2007 basic and diluted earning per share of $0.02.



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Discontinued operations

Discontinued operations included fifteen schools, eight of which the Company no longer operates and seven of which the Company continued to operate until they were sold during the third and fourth quarters of Fiscal
2007.

Management periodically analyzes the profitability of existing schools and the Companys real estate portfolio to identify
schools that are underperforming or do not fit its business model, demographic or cluster strategies. The Company will then develop plans either to improve these schools or remove them from its portfolio. During the second quarter of Fiscal 2007,
management initiated a plan to sell seven schools with demographic or cluster characteristics that were inconsistent with the Companys long term strategy. This plan required the Company to reclassify the operations of these seven schools from
continuing operations to discontinued operations for all periods presented in this Form 10-K. During the third quarter of Fiscal 2007, the Company completed the sale of one of these schools and received net proceeds of approximately $1,920,000,
resulting in a gain before tax of $813,000. During the fourth quarter of Fiscal 2007, the Company completed the sale of remaining six schools and received net proceeds of approximately $2,100,000, resulting in a gain before tax of $1,087,000. The
sale of these schools resulted in an increase to Fiscal 2007 basic and diluted earning per share of $0.13 and $0.11, respectively.

Charges
recognized during Fiscal 2007 related to changes in estimated lease obligations totaled approximately $2,027,000. These charges resulted in a charge to Fiscal 2007 basic and diluted earnings per share of $0.14 and $0.12, respectively. As of
June 30, 2007, the total lease reserve for these schools was $2,193,000. As of June 30, 2007, the Company had continuing lease obligations for eight closed schools, six of which were subleased and two of which were vacant.

During Fiscal 2007, one property that had been previously occupied under a sublease was vacated. During the third quarter of Fiscal 2007, the Company
entered into an agreement to sublease this property. Under the terms of the agreement, the Company is obligated to pay rent and property taxes on behalf of the subtenant through May 31, 2008. Based upon the terms of this agreement, the
Company increased the reserve related to this closed school by $1,284,000. The reserve amount also includes estimated legal and broker fees that have been incurred to consummate this transaction.

During Fiscal 2007, a property that had previously been occupied under a sublease was vacated. The building was then occupied by a sub-tenant during the
first quarter of Fiscal 2008 and the remaining lease obligation was partially offset by payments from the subtenant. Accordingly, a charge of $102,000 had been recorded to reflect the Companys estimated remaining lease obligation for this
property.

Another school was closed during Fiscal 2007 and remains vacant. Accordingly, during Fiscal 2007 a charge of $636,000 has been
recorded to reflect an estimate of time that management believes will be required to find a new tenant, subsequent estimated sublease income and anticipated broker commissions. The Company believes the current reserve is sufficient for the
Companys remaining obligations which are not covered by the sublease.

During Fiscal 2007, the Company has recognized $5,000 in
expense in regard to the present value difference of the Companys lease obligations and subtenant payments for three properties that are subleased for amounts less than the Companys lease obligation.



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The operating results for discontinued operations in the statements of income for Fiscal 2007 and Fiscal
2006, net of tax are as follows (dollars in thousands):



|                                                                     |  |        |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | -
|                                                                     |  | Fiscal |       
|                                                                     |  | 2007   |        |   | 2006 |  
|Revenues                                                             |  | $      | 4,155  |   |      | $ | 6,572  |  
|Cost of services                                                     |  |        | (3,684 | ) |      |   | (5,661 | )
|Rent and other                                                       |  |        | (1,255 | ) |      |   | (1,734 | )
|Closed school lease reserves                                         |  |        | (2,027 | ) |      |   | (228   | )
|Gain from sale of schools                                            |  |        | 1,900  |   |      |   |       |  
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | (911   | ) |      |   | (1,051 | )
|Income tax benefit                                                   |  |        | 355    |   |      |   | 410    |  
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations                           |  | $      | (556   | ) |      | $ | (641   | )
|                                                                     |  |        |        |   |      |   |        |  

Net Income

As a result of the above factors, the Companys net income was $7,365,000 for Fiscal 2007 as compared to $4,479,000 for Fiscal 2006.

Liquidity and Capital Resources

Cash Flow

The Companys principal sources of liquidity are cash flow from operations and amounts available under its Revolving Credit Commitment under the 2008
Credit Agreement. During Fiscal 2008, the Company generated additional net cash increases of approximately $300,000 for the settlement and release of a contract for which the Company no longer has performance obligations. The Company evaluates
opportunities from time to time to sell properties to third parties. Principal uses of liquidity are debt service, capital expenditures related to the renovation and maintenance of its existing schools and capital expenditures related to new school
development, furniture, fixtures, technology and curriculum. During Fiscal 2008, the Company also used $21,061,000 for the acquisition of five school businesses. Under the 2008 Credit Agreement, at June 28, 2008, there was $12,500,000
outstanding and at September 3, 2008, there was $14,425,000 outstanding. In addition, there was $2,437,000 outstanding for letters of credit as of June 28, 2008 and September 10, 2008, respectively. The total unused and available
portion of the 2008 Credit Agreement, after allowance for the letters of credit, at June 28, 2008 was $60,063,000 and at September 10, 2008 was $58,138,000.

Cash provided by operating activities for Fiscal 2008, 2007 and 2006 was $14,333,000, $19,004,000 and $13,644,000, respectively. The $4,671,000 decrease in Fiscal 2008 as compared to Fiscal 2007 was primarily due to
an increase in net income of $314,000, an increase from adjustments to net income of $1,734,000 offset by a decrease in cash from working capital items of $6,719,000. The large decrease in cash from working capital included an increase in income
taxes paid of $5,577,000 during Fiscal 2008 compared to $1,052,000 during Fiscal 2007. The $5,360,000 increase in Fiscal 2007 as compared to Fiscal 2006 was primarily due to an increase in net income of $2,886,000, a net increase in cash from
working capital items of $4,086,000, offset by a decrease from adjustments to net income of $1,612,000.

Cash used in investing activities
for Fiscal 2008, 2007 and 2006 was $29,353,000, $11,233,000, and $8,244,000, respectively. The $18,120,000 increase in Fiscal 2008 as compared to Fiscal 2007 was primarily due to cash used for the acquisition of five school businesses of
$21,061,000, an increase of $9,045,000 as compared to acquired school investments during Fiscal 2007, increased capital improvements spending of $610,000, a decrease of cash proceeds from the sale of properties and the collection of a note
receivable that occurred in



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Fiscal 2007 totaling $8,295,000, and a $170,000 investment in product rights and trade names during Fiscal 2008. The $2,989,000 increase in Fiscal 2007 as
compared to Fiscal 2006 was primarily due to an increase in cash used for the acquisition of assets and investment in trade names of $9,161,000, resulting from the Discovery Isle school acquisition in Fiscal 2007 relative to The Honor Roll School
acquisition in Fiscal 2006, an increase in capital improvements spending of $2,123,000, and the purchase of a note receivable for $200,000; offset by proceeds from the sale of assets of $4,985,000 and proceeds from the collection of a note
receivable of $3,510,000.

Cash provided by financing activities for Fiscal 2008 was $12,270,000 compared to cash used by financing
activities in Fiscal 2007 of $13,794,000 and cash provided by financing activities in Fiscal 2006 of $1,512,000. Cash provided in Fiscal 2008 was primarily due to the net proceeds from borrowing activities of $12,500,000 during Fiscal 2008 compared
to a net reduction of borrowings of $13,180,000 during Fiscal 2007. Cash used in Fiscal 2007 was primarily due to the repayment of term debt for the credit facility extinguished in the second quarter of Fiscal 2007. Cash provided in Fiscal 2006 was
primarily due to the exercise of a common stock warrant for the purchase of 585,803 shares of the company common stock offset by repayments of senior long term debt, which provided $3,639,097.

As a result of the above cash flow activity, total cash and cash equivalents decreased by $2,750,000 from $3,814,000 at June 30, 2007 to $1,064,000
at June 28, 2008.

Revolving Credit Agreement

At the beginning of Fiscal 2007, the Company had a credit agreement with Harris Trust (now BMO Capital Markets) in the amount of $50,000,000, which
provided for a $50,000,000 Revolving Credit Commitment and up to $3,500,000 in letters of credit as a sub-limit of the Revolving Credit Commitment (Prior Credit Agreement). The Prior Credit Agreement was scheduled to terminate on
October 29, 2011. During Fiscal 2008, on June 6, 2008, the Company amended the loan facility under its Prior Credit Agreement (the 2008 Credit Agreement) with BMO Capital Markets. The 2008 Credit Agreement provides for a
$75,000,000 Revolving Credit Commitment with a $25,000,000 accordion feature permitting the Company to increase the size of the facility under its current terms and conditions by obtaining additional credit availability from either participating or
new banks. Under terms of the 2008 Credit Agreement, proceeds may be used to fund permitted acquisitions, capital expenditures and ongoing business operations. The borrowing rates on the 2008 Credit Agreement are provided by a leverage based matrix
associated with Libor indexed borrowings. The 2008 Credit Agreement has a five year term that ends on June 5, 2013. As of June 28, 2008, outstanding borrowings equaled $12,500,000 and outstanding letters of credit equaled $2,437,000.

The 2008 Credit Agreement contains customary covenants and provisions that restrict the Companys ability to change its business,
declare dividends, grant liens, incur additional indebtedness, make capital expenditures and use proceeds from disposition of assets or equity related transactions. In addition, the 2008 Credit Agreement provides that the Company must meet or exceed
amounts for defined EBITDA and fixed charges and must not exceed leverage ratios. The Companys loan covenants under its 2008 Credit Agreement limit the amount of senior debt borrowings.

Long-Term Obligations and Commitments

The Company has certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a loan agreement or lease agreement.
Commercial commitments represent potential obligations for performance in the event of demands by third parties, such as letters of credit. At June 28, 2008, letter of credit commitments totaled $2,437,000.

The Companys most significant contractual obligations are real estate leases for its schools. Additionally, the Company has closed locations for
which it continues to have cash obligations under lease agreements with



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third party landlords. The Company attempts to mitigate these cash payment obligations by subleasing the locations to third parties. The Company has cash
risk for the future real estate leases for closed schools for which it does not have third party sublease coverage or where third party sublease coverage on any specific sublease may not equal the total cash obligation under the lease agreement for
that property.

Future minimum lease obligations, by year and in the aggregate, for all real properties, vehicle and other leases that the
Company and its subsidiaries have entered into, consisted of the following at June 28, 2008 (dollars in thousands):



|                    |                         |                             |                          |                                                       |                                  |                               |  |   |        |  |   |         |  |   |        |  |   |        
|------------------- | ----------------------- | --------------------------- | ------------------------ | ----------------------------------------------------- | -------------------------------- | ----------------------------- |  | - | ------ |  | - | ------- |  | - | ------ |  | - | -------
|Fiscal Year         |                         | Operating Lease Commitments |                          | Closed LocationCash SubleaseAmounts Dueto the Company |                                  | Net OperatingLeaseCommitments
|                    | Continuing Operations   |                             | DiscontinuedOperations   |                                                       | TotalOperatingLeaseCommitments   |                               | 
|                    | Vehicle andOther Leases |                             | School RealEstate Leases |                                                       | Closed LocationReal EstateLeases |                               |  |  
|2009                |                         | $                           | 846                      |                                                       | $                                | 34,514                        |  | $ | 2,271  |  | $ | 37,631  |  | $ | 1,886  |  | $ | 35,745 
|2010                |                         |                             | 667                      |                                                       |                                  | 33,676                        |  |   | 2,259  |  |   | 36,602  |  |   | 1,775  |  |   | 34,827 
|2011                |                         |                             | 449                      |                                                       |                                  | 31,122                        |  |   | 2,205  |  |   | 33,776  |  |   | 1,754  |  |   | 32,022 
|2012                |                         |                             | 374                      |                                                       |                                  | 28,316                        |  |   | 1,894  |  |   | 30,584  |  |   | 1,547  |  |   | 29,037 
|2013                |                         |                             | 78                       |                                                       |                                  | 24,308                        |  |   | 1,759  |  |   | 26,145  |  |   | 1,390  |  |   | 24,755 
|2014 and thereafter |                         |                             | 37                       |                                                       |                                  | 141,312                       |  |   | 3,982  |  |   | 145,331 |  |   | 1,677  |  |   | 143,654
|                    |                         |                             |                          |                                                       |                                  |                               |  |   |        |  |   |         |  |   |        |  |   |        
|Total               |                         | $                           | 2,451                    |                                                       | $                                | 293,248                       |  | $ | 14,370 |  | $ | 310,069 |  | $ | 10,029 |  | $ | 300,040
|                    |                         |                             |                          |                                                       |                                  |                               |  |   |        |  |   |         |  |   |        |  |   |        

Most of the above real estate leases contain annual rent increase provisions based on changes in
consumer price indexes or other formulas, which are not reflected in the above schedule. Rent expense for all operating leases included in continuing operations was $32,254,000 $28,298,000 and $25,455,000 for Fiscal 2008, Fiscal 2007 and Fiscal
2006, respectively.

Net operating lease commitments are the net cash amounts due from the Company to third party landlords not covered by
underlying sub-leases from a third party sub-tenant or assignee. The amount is the net of closed location real estate leases less closed location cash sublease amounts due to the Company. The Companys liability with respect to closed location
real estate leases could change if a sublessee defaults under their sublease with the Company or if the Company is successful in subleasing additional closed schools, extending existing sublease agreements or mitigating the commitment in some other
form. Some of the closed location real estate lease obligations extend beyond the term of the current subleases on those properties. The leases on the closed schools expire between 2009 and 2017.

In addition to the lease obligations noted above, the Company also has made guarantees for ten leases that were assigned to a third party on or before
Fiscal 2000 and four properties during Fiscal 2007 (the 2007 properties). In accordance with FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, the Company has assessed its exposure regarding the assignment of the 2007 properties and has determined that the fair value of this exposure is diminimus and therefore has not recorded a liability for this contingency.
The maximum potential undiscounted amount of future payments the Company could be required to pay under these guarantees at June 28, 2008 is $870,000.

Capital Expenditures

During Fiscal 2008, the Company opened five new preschools and acquired eighteen preschools and two
elementary schools. Company funded capital expenditures for new school development includes school equipment, furniture, fixtures and curricula purchased by the Company for the operations of the school. The capital expenditure funds to open or
acquire these schools were provided by cash flow from operations or our Revolving Credit Agreement. Renovations and equipment purchases are capital expenditures incurred for



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existing schools in order to maintain the operations and, where necessary, upgrade the school facility and in some cases to extend the service life of the
school. The Companys current senior bank credit facility has annual limitations on the amount of capital expenditures. For Fiscal 2008, this limitation was $10,500,000.

During Fiscal 2007, the Company opened three new preschools and acquired six preschools. Company funded capital expenditures for new school development
includes school equipment, furniture, fixtures and curricula purchased by the Company for the operations of the school. The capital expenditure funds to open or acquire these schools were provided by cash flow from operations or asset sales.

During Fiscal 2006, the Company opened one preschool. The capital expenditure funds to open this school was provided by cash flow from
operations and our credit facilities.

Capital expenditures were as follows (dollars in thousands):



|                                    |  |        |       |      |   |       |  |   |      
|----------------------------------- |  | ------ | ----- | ---- | - | ----- |  | - | -----
|                                    |  | Fiscal
|                                    |  | 2008   |       | 2007 |   | 2006 
|New school development              |  | $      | 1,716 |      | $ | 1,054 |  | $ | 293  
|Fixed assets from acquisitions      |  |        |      |      |   |      |  |   | 175  
|Renovations and equipment purchases |  |        | 4,932 |      |   | 5,471 |  |   | 2,911
|Corporate and information systems   |  |        | 1,474 |      |   | 987   |  |   | 2,010
|                                    |  |        |       |      |   |       |  |   |      
|                                    |  | $      | 8,122 |      | $ | 7,512 |  | $ | 5,389
|                                    |  |        |       |      |   |       |  |   |      

Insurance

Companies involved in the education and care of children may not be able to obtain insurance for the totality of risks inherent in their operations. In particular, general liability coverage can have insurance
sub-limits per claim for child abuse. The Company believes it has adequate insurance coverage at this time. There can be no assurance that in future years the Company will not become subject to lower limits or substantial increases in insurance
premiums.

Recently Issued Accounting Standards

In June 2008, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for the Company in fiscal 2009. After
the effective date of FSP EITF 03-6-1, all prior-period earnings per share data presented must be adjusted retrospectively. The Company is currently evaluating the potential impact of adopting FSP EITF 03-6-1.

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162
is intended to improve financial reporting by identifying a consistent framework or hierarchy for selecting accounting principles to be used in preparing financial statements in conformity with U.S. GAAP. The Company does not expect that
SFAS 162 will have an impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of SFAS 133 (SFAS 161). This new standard requires enhanced disclosures for



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derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after
November 15, 2008 and will be applicable to the Company in the first quarter of fiscal 2010. The Company is assessing the potential impact that the adoption of SFAS 161 may have on its financial statements.

In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110). SAB 110
amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment, of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the Staff regarding the use of the
simplified method in developing an estimate of the expected term of plain vanilla share options and allows usage of the simplified method for share option grants prior to December 31, 2007. SAB 110
allows public companies which do not have historically sufficient experience to provide a reasonable estimate of the expected term of outstanding options to continue use of the simplified method for estimating the expected term of
plain vanilla share option grants after December 31, 2007. The Company will continue to use the simplified method until it has enough historical experience to provide a reasonable estimate of expected term in
accordance with SAB 110.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date.
SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, SFAS 141(R) requires that acquisition costs generally be
expensed in the period incurred and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact income tax expense. SFAS 141(R) is effective for the Companys
fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation to SFAS 141(R) will have on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB
No. 51 (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of
equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be
recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for the Companys fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation of
SFAS 160 will have on the consolidated financial statements.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Actual results may vary from estimates in amounts
that may be material to the Companys consolidated financial statements.

The Companys significant accounting policies are
described in Note 1 to the Companys consolidated financial statements. The following accounting policies are considered critical to the preparation of the Companys consolidated financial statements due to the estimation processes and
judgment involved in their application.



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Revenue Recognition

The recognition of net revenues meets the following criteria: the existence of an arrangement through a registration, an enrollment agreement or a contract, the rendering of educational services over time, a specific
tuition rate and/or fee and probable collection. Net revenues include tuition, fees and other net revenues, reduced by discounts. Fees are received for registration, other educational services and charter school management fees. Ancillary income is
primarily comprised of supplemental fees from certain after school programs, summer programs, camps and field trips. Tuition revenues, net of discounts and other revenues, are recognized as services are performed. Tuition payments received in
advance of the time period for which service is to be performed are recorded as deferred revenue. Registration fees are recognized over the applicable school period. Charter school management fees are recognized based on a contractual relationship
with the charter school and do not include any tuition revenue received by the charter school. Certain fees may be received in advance of services being rendered, in which case the fee revenue is deferred and recognized over the appropriate period
of service.

Accounts Receivable

The
Companys accounts receivable are comprised primarily of tuition due from governmental agencies and parents. Accounts receivable are presented at estimated net realizable value. The Company uses estimates in determining the collectibility of
its accounts receivable and must rely on its evaluation of its experience with historical trends, governmental funding processes, specific customer issues and current economic trends to arrive at appropriate reserves. Material differences may result
in the amount and timing of bad debt expense if actual experience differs from managements estimates. Customer accounts are considered due when services are rendered and are considered for write-off when open for sixty days subsequent to the
service date. Accounts due from governmental agencies are due within the terms as outlined within each agency agreement.

The Company
provides education services to the parents and guardians of the children attending its schools. In certain circumstances, the Company grants small amounts of credit to its customers for a limited period of time. Exposure to losses on receivables is
principally dependent on each persons financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Companys schools are located in 15 states and the District of Columbia
and, as a result, the Company is not dependent on economic conditions in any one geographic area or market.

Long-lived and Intangible Assets

In accordance with Statement of Accounting Standard (SFAS) No. 144, Accounting for the Impairment of Long-Lived
Assets (SFAS 144), long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An
assets value is impaired if managements estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors
such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value
of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.

During Fiscal 2006, asset impairment charges of $30,000 are included in loss from discontinued operations. There were no impairment charges recorded
during Fiscal 2008 or Fiscal 2007.

Goodwill

As required by Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the Company estimates fair values for each reporting unit using discounted cash flow projections in evaluating
and measuring a potential impairment charge on an annual basis in the fourth quarter of each fiscal year, and if



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necessary the Company performs the level two analysis in order to determine the amount of goodwill impaired. Any impairment of goodwill resulting from the
required testing by SFAS No. 142 is recorded as a charge to income from operations.

Lease Reserves

In accordance with Statement of Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146), the Company records estimated costs for school closures when they are incurred rather than at the date of a commitment to an exit or disposal plan.

Stock Compensation

Effective July 3, 2005, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board (FASB) SFAS Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method. Under that method, compensation cost recognized includes:
(a) compensation cost for all share-based payments granted prior to, but not yet vested as of July 2, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost
for all share-based payments granted on and subsequent to July 3, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). For purposes of calculating grant-date fair value, the value of the options
is estimated using a Black-Scholes optionpricing formula and amortized to expense over the options requisite service period, generally the vesting period. Stock compensation expense is recognized only for the grants expected to vest,
which is total estimated value less estimated forfeitures.

Income Taxes

The Company accounts for income taxes using the asset and liability method, in accordance with SFAS No. 109, Accounting for Income Taxes.
Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty
regarding the deferred tax assets that will ultimately be realized.

The Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on July 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute criteria for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. As a result of the adoption of FIN 48, the Company recognized a $44,000 reduction of its current deferred tax asset, which was accounted for as an increase to accumulated deficit on July 1, 2007.

The Company files a U.S. federal income tax return and various state income tax returns, which are subject to examination by tax authorities. This
process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The Companys estimated tax liability is subject to change as
examinations of specific tax years may occur in the respective jurisdictions, which may include possible adjustments related to the nature and timing of deductions and the local attribution of income.



|ITEM7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or
cash flows of the Company. The Company is exposed to market risk in the areas of interest rates and interest rate swap agreements.



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Interest Rates

The Companys exposure to market risk for changes in interest rates relate primarily to debt obligations. The Company has cash flow risk on its 2008 Credit Agreement. The 2008 Credit Agreement is, and the Prior
Credit Agreement was, subject to variable LIBOR and prime base rate pricing. Accordingly, a 1.0% change in the LIBOR rate or the prime rate would have resulted in interest expense changing by approximately $32,000 in Fiscal 2008. As of June 28,
2008, under the 2008 Credit Agreement the Company had outstanding $12,500,000 in borrowings and $2,437,000 in letter of credit commitments.



|ITEM8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------ | --------------------------------------------

Financial statements and supplementary financial information specified by this Item, together with the Reports of the Companys independent
registered public accounting firm thereon, are included in this Annual Report on Form 10-K on pages F-1 through F-31 below.



|ITEM9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
|------ | -------------------------------------------------------------------------------------

None.



|ITEM9A. | CONTROLS AND PROCEDURES.
|------- | ------------------------

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting during our most recent fiscal year.

Managements Annual Report on
Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of June 28, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.



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Based on this assessment management believes that, as of June 28, 2008, our internal control over
financial reporting is effective.

Our independent registered public accounting firm, Grant Thornton LLP, audited the Companys
internal control over financial reporting as of June 28, 2008 and their report dated September 9, 2008 expressed an unqualified opinion on our internal control over financial reporting and is included in this Item 9A.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Nobel Learning Communities, Inc.

We have audited Nobel Learning Communities, Inc. (a Delaware corporation) and subsidiaries (the Company) internal control over financial
reporting as of June 28, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Nobel Learning Communities, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
June 28, 2008, based on criteria established in Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nobel Learning Communities, Inc. and subsidiaries as of June 28, 2008 and June 30, 2007 and the related consolidated statements
of operations, stockholders equity and comprehensive income and cash flows for the fiscal years (52 weeks) ended June 28, 2008 and June 30, 2007, and our report dated September 9, 2008, which includes an explanatory paragraph
regarding the adoption of Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn interpretation of FASB Statement No. 109 on July 1, 2007, expressed an unqualified opinion.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

September 9, 2008



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|ITEM9B. | OTHER INFORMATION.
|------- | ------------------

None.



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PART III



|ITEM10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|------- | -------------------------------------------------------

The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement.



|ITEM11. | EXECUTIVE COMPENSATION.
|------- | -----------------------

The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement.



|ITEM12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|------- | -----------------------------------------------------------------------------------------------

The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement.



|ITEM13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
|------- | -------------------------------------------------------------------------

The information required by this Item is incorporated herein by reference to the information
set forth in the Proxy Statement.



|ITEM14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|------- | ---------------------------------------

The information required by this Item is incorporated herein by reference to the information set forth in the Proxy Statement.



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PART IV



|ITEM15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|------- | -------------------------------------------



| | (a) | Documents filed as a part of this Report:
| | --- | -----------------------------------------



|                                                                                |  |     
|------------------------------------------------------------------------------- |  | ----
|                                                                                |  | Page
|(1)    Financial Statements.                                                    |  |     
|                                                                                | 
|Report of Independent Registered Public Accounting Firm                         |  | F-1 
|Consolidated Balance Sheets                                                     |  | F-3 
|Consolidated Statements of Operations                                           |  | F-4 
|Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) |  | F-5 
|Consolidated Statements of Cash Flows                                           |  | F-6 
|Notes to Consolidated Financial Statements                                      |  | F-8 
|                                                                                | 
|(2)    Financial Statement Schedules.                                           |  |     
|                                                                                | 
|Report of Independent Registered Public Accounting Firm                         |  | 49  
|Schedule II  Valuation and Qualifying Accounts                                 |  | S-1 

All other schedules have been omitted as not applicable or not required under the
instructions contained in Regulation S-X or the information is included elsewhere in the financial statements or notes thereto.



| | (b) | Exhibits required to be filed by Item 601 of Regulation S-K.
| | --- | ------------------------------------------------------------

The exhibits to this Annual Report on Form 10-K are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed or furnished as part of the Annual Report on Form 10-K.



|              |  |                                                                                                                                                                                                                                                                 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                          
|3.1           |  | The Registrants Certificate of Incorporation, as amended and restated. (Filed as Exhibit 3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998 and incorporated herein by reference.)                                    
|              | 
|3.2           |  | The Registrants Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock. (Filed as Exhibit 3.4 to the Registrants Current Report on Form 8-K,
filed on September 11, 1995 and incorporated herein by reference.)           
|              | 
|3.3           |  | The Registrants Amended and Restated By-laws as modified November 15, 2001. (Filed as Exhibit 3.4 to the Registrants Quarterly Report on Form 10-Q for the quarter ended December 31,
2001 and incorporated herein by reference.)                             
|              | 
|3.4           |  | The Registrants Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock. (Filed as Exhibit 3.6 to the Registrants Annual Report on Form 10-K for
the fiscal year ended June 30, 2003 and incorporated herein by reference.)
|              | 
|3.5           |  | Certificate of Elimination of the Designation of the Series E Convertible Preferred Stock (Filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K, filed on May 18, 2007, and
incorporated herein by reference.)                                   
|              | 
|3.6           |  | The Registrants Certificate of Designation, Preferences and Rights of Series F Convertible Preferred Stock. (Filed as Exhibit 3.7 to the Registrants Annual Report on Form 10-K for
the fiscal year ended June 30, 2003 and incorporated herein by reference.)
|              | 
|3.7           |  | Certificate of Elimination of the Designation of the Series F Convertible Preferred Stock (Filed as Exhibit 3.2 to the Registrants Current Report on Form 8-K, filed on May 18, 2007, and
incorporated herein by reference.)                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.8           |  | The Registrants Certificate of Designation of the Series A Junior Preferred Stock (Filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K, filed on July 21, 2008, and
incorporated herein by reference.)                                                                                                                                                                                                                                                                                                   
|              | 
|4.1           |  | Executive Nonqualified Excess Plan of Registrant Plan Document (Filed as Exhibit 4.1 to the Registrants Registration Statement on Form S-8, filed on February 7, 2007, and incorporated
herein by reference.)                                                                                                                                                                                                                                                                                                            
|              | 
|4.2           |  | Executive Nonqualified Excess Plan of Registrant Adoption Agreement (Filed as Exhibit 4.2 to the Registrants Registration Statement on Form S-8, filed on February 7, 2007, and incorporated
herein by reference.)                                                                                                                                                                                                                                                                                                       
|              | 
|4.3           |  | Rights Agreement, dated as of July 20, 2008, between the Registrant and StockTrans, Inc. (Filed as Exhibit 4.1 to the Registrants Current Report on Form 8-K, filed on July 21, 2008 and
incorporated herein by reference.)                                                                                                                                                                                                                                                                                              
|              | 
|10.1          |  | Investment Agreement dated as of June 30, 1998 between the Registrant and its subsidiaries and Allied Capital Corporation. (Filed as Exhibit 4.11 to the Registrants Annual Report on
Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)                                                                                                                                                                                                                              
|              | 
|10.2          |  | 1995 Stock Incentive Plan of the Registrant, as amended. (Filed as Exhibit 10.3 to the Registrants Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and
incorporated herein by reference.)                                                                                                                                                                                                                                                                                                
|              | 
|10.3          |  | Form of Non-Qualified Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. (Filed as Exhibit 10.4 to the Registrants Annual Report on Form 10-K for the
transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)                                                                                                                                                                                                                                                  
|              | 
|10.4          |  | Form of Incentive Stock Option Agreement, for stock option grants under 1995 Stock Incentive Plan. (Filed as Exhibit 10.4 to the Registrants Annual Report on Form 10-K for the transitional
fiscal year ended June 30, 1998 and incorporated herein by reference.)                                                                                                                                                                                                                                                      
|              | 
|10.5          |  | Investment Agreement dated as of August 30, 1995 by and among the Registrant, certain subsidiaries of the Registrant and Allied Capital Corporation and its affiliated funds. (Certain schedules
(and similar attachments) to Exhibit 4.1 have not been filed. The Registrant will furnish supplementally a copy of any omitted schedules or attachments to the SEC upon request.) (Filed as Exhibit 4A to the Registrants Current Report on Form
8-K, filed on September 11, 1995 and incorporated herein by reference.)
|              | 
|10.6          |  | Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied Capital Corporation to purchase up to 531,255 shares (subject to adjustment) of the common stock of the Registrant.
(Filed as Exhibit 10.13 to the Registrants Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)                                                                                                                                                           
|              | 
|10.7          |  | First Amended and Restated Registration Rights Agreement dated as of June 30, 1998 by and between the Registrant and Allied Capital Corporation. (Filed as Exhibit 10.14 to the Registrants
Annual Report on Form 10-K for the transitional fiscal year ended June 30, 1998 and incorporated herein by reference.)                                                                                                                                                                                                       
|              | 
|10.8          |  | First Amendment dated as of June 17, 2003 to First Amended and Restated Registration Rights Agreement between the Registrant and Allied Capital Corporation. (Filed as Exhibit 10.24 to the
Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.)                                                                                                                                                                                                        
|              | 
|10.9*         |  | The Registrants Senior Executive Severance Pay Plan Statement and Summary Plan Description as modified February 3, 2000 and December 21, 2001. (Filed as Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and incorporated herein by reference.)                                                                                                                                                                                                                   



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                              
|10.10*        |  | The Registrants Executive Severance Pay Plan Statement and Summary Plan Description as modified February 3, 2000 and December 21, 2001. (Filed as Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and incorporated herein by reference.)                                                                                                    
|              | 
|10.11         |  | Registration Rights Agreement dated as of June 17, 2003 among the Registrant, Camden Partners Strategic Fund II-A, L.P. and Camden Partners Strategic Fund II-B, L.P. (Filed as Exhibit 10.46 to
the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.)                                                                         
|              | 
|10.12         |  | First Amendment dated as of September 9, 2003 to Registration Rights Agreement among the Registrant, Camden Partners Strategic Fund II-A, L.P. and Camden Partners Strategic Fund II-B, L.P.
(Filed as Exhibit 10.47 to the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.)                                                  
|              | 
|10.13         |  | Registration Rights Agreement dated as of September 9, 2003 among the Registrant, Camden Partners Strategic Fund II-A, L.P., Camden Partners Strategic Fund II-B, L.P., Allied Capital
Corporation, Mollusk Holdings, L.L.C. and Blesbok, LLC. (Filed as Exhibit 10.50 to the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.)
|              | 
|10.14*        |  | Omnibus Incentive Equity Compensation Plan of the Registrant, (Filed as Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (Registration Statement No. 333-124247)
filed on April 22, 2005 and incorporated herein by reference.)                                                                                                                                                  
|              | 
|10.15         |  | Employment Agreement dated as of May 10, 2006 between the Registrant and Lee Bohs. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed May 17, 2006 and incorporated
herein by reference.)                                                                                                                                                                                 
|              | 
|10.16         |  | Form of Incentive Stock Option Certificate, for stock option grants under the Omnibus Incentive Equity Compensation Plan. (Filed as Exhibit 10.1 to the Registrants Quarterly Report on Form
10-Q for the quarter ended October 1, 2005, and incorporated herein by reference.)                                                                                                                    
|              | 
|10.17         |  | Form of Non-Qualified Stock Option Agreement (Non-Employee Director), for stock option grants under the Omnibus Incentive Equity Compensation Plan. (Filed as Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference.)                                                                                          
|              | 
|10.18         |  | Form of Non-Qualified Stock Option Agreement (Employee), for stock option grants under the Omnibus Incentive Equity Compensation Plan. (Filed as Exhibit 10.3 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference.)                                                                                                       
|              | 
|10.19         |  | Form of Stock Award certificate, for stock option grants under the Omnibus Incentive Equity Compensation Plan. (Filed as Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended October 1, 2005, and incorporated herein by reference.)                                                                                                                               
|              | 
|10.20         |  | Amended and Restated Credit Agreement dated as of October 30, 2006 between the Registrant and Harris, N.A., as administrative agent (Filed as Exhibit 10.1 to the Registrants Current Report
on Form 8-K, filed November 3, 2006, and incorporated herein by reference.)                                                                                                                           
|              | 
|10.21         |  | First Amendment to the Amended and Restated Credit Agreement dated October 24, 2007 (Filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September
29, 2007 and incorporated herein by reference.)                                                                                                                                                        
|              | 
|10.22         |  | First Amendment to the Amended and Restated Credit Agreement dated October 24, 2007 (Filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September
29, 2007 and incorporated herein by reference.)                                                                                                                                                        



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|              |  |                                                                                                                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                     
|10.23         |  | Amended and Restated Security Agreement dated as of October 30, 2006 between the Registrant and Harris, N.A., as administrative agent (Filed as Exhibit 10.2 to the Registrants Current
Report on Form 8-K, filed November 3, 2006, and incorporated herein by reference.)
|              | 
|10.24         |  | Amended and Restated Employment Agreement dated as of April 6, 2007 between the Registrant and George Bernstein. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed
on April 18, 2007, and incorporated herein by reference.)                    
|              | 
|10.25         |  | Amendment to the Amended and Restated Employment Agreement between the Registrant and George Bernstein, dated as of May 8, 2008 (Filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K, filed on May 14, 2008 and incorporated herein by reference.)        
|              | 
|10.26         |  | Amendment to the Amended and Restated Employment Agreement between the Registrant and George Bernstein, dated as of May 8, 2008 (Filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K, filed on May 14, 2008 and incorporated herein by reference.)        
|              | 
|10.27         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and George Bernstein. (Filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on April 18, 2007,
and incorporated herein by reference.)                                          
|              | 
|10.28         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and Thomas Frank. (Filed as Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed on April 18, 2007, and
incorporated herein by reference.)                                              
|              | 
|10.29         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and Patricia B. Miller. (Filed as Exhibit 10.4 to the Registrants Current Report on Form 8-K, filed on April 18, 2007,
and incorporated herein by reference.)                                        
|              | 
|10.30         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and Jeanne Marie Welsko. (Filed as Exhibit 10.5 to the Registrants Current Report on Form 8-K, filed on
April 18, 2007, and incorporated herein by reference.)                                       
|              | 
|10.31         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and Osborne F. Abbey. (Filed as Exhibit 10.6 to the Registrants Current Report on Form 8-K, filed on April 18, 2007,
and incorporated herein by reference.)                                          
|              | 
|10.32         |  | Severance Agreement dated as of April 6, 2007 between the Registrant and G. Lee Bohs. (Filed as Exhibit 10.7 to the Registrants Current Report on Form 8-K, filed on April 18, 2007, and
incorporated herein by reference.)                                               
|              | 
|10.33         |  | Amended and Restated Credit Agreement with Harris N.A., as agent for the lenders, dated as of June 6, 2008 (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on
June 11, 2008, and incorporated herein by reference.)                            
|              | 
|10.34         |  | Amended and Restated Security Agreement, dated as of June 6, 2005 (Filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on June 11, 2008 and incorporated herein by
reference.)                                                                     
|              | 
|14.1          |  | Code of Business Conduct and Ethics of the Registrant, as adopted June 3, 2004. (Filed as Exhibit 99.1 to the Registrants Current Report on Form 8-K, filed on October 5, 2004, and
incorporated herein by reference.)                                                    
|              | 
|16.1          |  | Letter from BDO Seidman, LLP to the SEC, dated June 6, 2007 regarding change in certifying accountant. (Filed as Exhibit 16.1 to the Registrants Current Report on Form 8-K, filed on June
8, 2007, and incorporated herein by reference.)                                
|              | 
|21.1          |  | List of subsidiaries of the Registrant. (Filed herewith.)                                                                                                                                                                                                                  



55



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|23.1          |  | Consent of Grant Thornton, LLP. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|23.2          |  | Consent of BDO Seidman, LLP. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|31.1          |  | Certifications of the Chief Executive Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|31.2          |  | Certifications of the Chief Financial Officer of the Registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. (Filed herewith.)                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|32.1          |  | Certifications of the Chief Executive Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.) (Filed herewith.)
|              | 
|32.2          |  | Certifications of the Chief Financial Officer of the Registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.) (Filed herewith.)



|* | Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*)
|- | -----------------------------------------------------------------------------------------------------------------



| | (c) | Financial Statement Schedules.
| | --- | ------------------------------

Exhibits Required
by Item 601 of Regulation S-K: The exhibits to this report are listed under Item 15(a)(2) above.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                         |  |  |  |                                 |  |                            |  |                        
|------------------------ |  |  |  | ------------------------------- |  | -------------------------- |  | -----------------------
|Date: September 10, 2008 |  |  |  | NOBEL LEARNING COMMUNITIES, INC
|                         |  |  | 
|                         |  |  |  | By:                             |  | /S/    GEORGE H. BERNSTEIN
|                         |  |  |  |                                 |  |                            |  | George H. Bernstein    
|                         |  |  |  |                                 |  |                            |  | Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.



|                                                 |  |                                                                      |  |                   
|------------------------------------------------ |  | -------------------------------------------------------------------- |  | ------------------
|Signature                                        |  | Position                                                             |  | Date              
|                                                 |  |                                                                     
|/S/    GEORGE H.
BERNSTEIN George H. Bernstein   |  | Chief Executive Officer and Director (Principal
Executive Officer)   |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    THOMAS
FRANK Thomas Frank                 |  | Chief Financial Officer (Principal Financial and
Accounting Officer) |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    THERESE KREIG
CRANE Therese Kreig Crane   |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    DAVID
BEALE David Beale                   |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    STEVEN B.
FINK Steven B. Fink             |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    PETER H.
HAVENS Peter H. Havens           |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    RICHARD J.
PINOLA Richard J. Pinola       |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    MICHAEL J.
ROSENTHAL Michael J. Rosenthal |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    RALPH
SMITH Ralph Smith                   |  | Director                                                             |  | September 10, 2008
|                                                 |  |                                                                     
|/S/    DAVID L.
WARNOCK David L. Warnock         |  | Director                                                             |  | September 10, 2008



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SCHEDULE II

Nobel Learning Communities, Inc.

Valuation and Qualifying Accounts.

(dollars in thousands)



|                                |  |                              |     |                  |     |            |        |   |                        |   |    
|------------------------------- |  | ---------------------------- | --- | ---------------- | --- | ---------- | ------ | - | ---------------------- | - | ---
|                                |  | Balance atbeginningof period |     | Charge toexpense |     | Write-offs |        |   | Balanceat endof period
|Year ended June 28, 2008        |  |                              |     |                  |     |            |        |   |                        |   |    
|Allowance for doubtful accounts |  | $                            | 187 |                  | 312 |            | (272   | ) |                        | $ | 227
|                                |  |                              |     |                 
|Year ended June 30, 2007        |  |                              |     |                  |     |            |        |   |                        |   |    
|Allowance for doubtful accounts |  | $                            | 698 |                  | 588 |            | (1,099 | ) |                        | $ | 187
|                                |  |                              |     |                 
|Year ended July 1, 2006:        |  |                              |     |                  |     |            |        |   |                        |   |    
|Allowance for doubtful accounts |  | $                            | 879 |                  | 962 |            | (1,143 | ) |                        | $ | 698



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Nobel Learning Communities, Inc.

We have audited the accompanying consolidated balance sheets of Nobel Learning Communities, Inc. (a Delaware corporation) and subsidiaries (the
Company) as of June 28, 2008 and June 30, 2007, and the related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for the fiscal years (52 weeks) ended June 28, 2008 and
June 30, 2007. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under item 15(a) (2). These financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 Nobel Learning Communities, Inc. and subsidiaries as of June 28, 2008
and June 30, 2007, and the results of their operations and their cash flows for the fiscal years (52 weeks) ended June 28, 2008 and June 30, 2007 in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the financial statements, the Company has adopted Financial Accounting Standards Board Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income TaxesAn interpretation of FASB Statement No. 109 on July 1, 2007.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nobel Learning Communities, Inc. and subsidiaries internal control over financial reporting as of June 28, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our reported dated September 9, 2008 expressed an unqualified opinion.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

September 9, 2008



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Nobel Learning Communities, Inc

West Chester, PA

We have audited the accompanying
consolidated statements of income, stockholders equity and comprehensive income and cash flows of Nobel Learning Communities, Inc. and Subsidiaries for the year ended July 1, 2006. We have also audited the schedule in the accompanying index
for the year ended July 1, 2006. These financial statements and the schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements
and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations
and cash flows of Nobel Learning Communities, Inc. and Subsidiaries for the year ended July 1, 2006, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein for the year ended July 1, 2006.

BDO Seidman, LLP

Philadelphia, Pennsylvania

September 12, 2006, except for Note 15 which is as of September 10, 2007



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars
in thousands, except share amounts)



|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                       |  | June 28, 2008 |         |   | June 30, 2007 |  
|ASSETS                                                                                                                                                                 |  |               |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                              |  | $             | 1,064   |   |               | $ | 3,814   |  
|Customer accounts receivable, less allowance for doubtful accounts of $227 at June 28, 2008 and $187 at June 30,
2007                                                  |  |               | 922     |   |               |   | 949     |  
|Deferred tax asset                                                                                                                                                     |  |               | 221     |   |               |   | 458     |  
|Prepaid rent                                                                                                                                                           |  |               | 3,086   |   |               |   | 2,664   |  
|Prepaid expenses and other current assets                                                                                                                              |  |               | 3,467   |   |               |   | 3,142   |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Current Assets                                                                                                                                                   |  |               | 8,760   |   |               |   | 11,027  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Property and equipment, at cost                                                                                                                                        |  |               | 76,253  |   |               |   | 69,665  |  
|Accumulated depreciation and amortization                                                                                                                              |  |               | (48,155 | ) |               |   | (45,253 | )
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Property and equipment, net                                                                                                                                            |  |               | 28,098  |   |               |   | 24,412  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Goodwill                                                                                                                                                               |  |               | 65,223  |   |               |   | 47,499  |  
|Intangible assets, net                                                                                                                                                 |  |               | 7,080   |   |               |   | 4,182   |  
|Note Receivable                                                                                                                                                        |  |               | 1,138   |   |               |   |        |  
|Deposits and other assets                                                                                                                                              |  |               | 2,849   |   |               |   | 1,194   |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Assets                                                                                                                                                           |  | $             | 113,148 |   |               | $ | 88,314  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |               |         |   |               |   |         |  
|Accounts payable and other current liabilities                                                                                                                         |  | $             | 18,606  |   |               | $ | 16,141  |  
|Income taxes payable                                                                                                                                                   |  |               | 1,271   |   |               |   | 2,514   |  
|Current portion of lease obligations for discontinued operations                                                                                                       |  |               | 265     |   |               |   | 1,174   |  
|Deferred revenue                                                                                                                                                       |  |               | 15,003  |   |               |   | 12,835  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Current Liabilities                                                                                                                                              |  |               | 35,145  |   |               |   | 32,664  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Long-term obligations                                                                                                                                                  |  |               | 12,500  |   |               |   |        |  
|Long-term portion of lease obligations for discontinued operations                                                                                                     |  |               | 800     |   |               |   | 1,019   |  
|Deferred tax liability                                                                                                                                                 |  |               | 174     |   |               |   | 70      |  
|Other long term liabilities                                                                                                                                            |  |               | 1,615   |   |               |   | 343     |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Liabilities                                                                                                                                                      |  |               | 50,234  |   |               |   | 34,096  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Commitments and Contingencies                                                                                                                                          |  |               |         |   |               |   |         |  
|Stockholders Equity:                                                                                                                                                  |  |               |         |   |               |   |         |  
|Preferred stock, $0.001 par value per share; 10,000,000 shares authorized; 1,063,830 shares issued and outstanding                                                     |  |               | 1       |   |               |   | 1       |  
|Common stock, $0.001 par value; 20,000,000 shares authorized; 10,394,177 and 10,365,610 shares issued and outstanding at June 28, 2008
and June 30, 2007, respectively |  |               | 10      |   |               |   | 10      |  
|Additional paid-in capital                                                                                                                                             |  |               | 57,729  |   |               |   | 56,676  |  
|Retained earnings (accumulated deficit)                                                                                                                                |  |               | 5,165   |   |               |   | (2,469  | )
|Accumulated other comprehensive income                                                                                                                                 |  |               | 9       |   |               |   |        |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Stockholders Equity                                                                                                                                             |  |               | 62,914  |   |               |   | 54,218  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                                             |  | $             | 113,148 |   |               | $ | 88,314  |  
|                                                                                                                                                                       |  |               |         |   |               |   |         |  

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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands, except per share data)



|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------- | ------------ |  | - | ------- | -
|                                                                                                                       |  | For the Fiscal Year Ended |        
|                                                                                                                       |  | June 28, 2008             |         |   | June 30, 2007 |   |         | July 1, 2006 | 
|Revenues, net                                                                                                          |  | $                         | 206,214 |   |               | $ | 182,817 |              |  | $ | 161,757 |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Cost of services:                                                                                                      |  |                           |         |   |               |   |         |              |  |   |         |  
|Personnel costs                                                                                                        |  |                           | 98,981  |   |               |   | 86,822  |              |  |   | 75,901  |  
|School operating costs                                                                                                 |  |                           | 27,181  |   |               |   | 24,815  |              |  |   | 22,937  |  
|Rent and other                                                                                                         |  |                           | 49,515  |   |               |   | 43,688  |              |  |   | 39,872  |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Total Cost of Services                                                                                                 |  |                           | 175,677 |   |               |   | 155,325 |              |  |   | 138,710 |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Gross profit                                                                                                           |  |                           | 30,537  |   |               |   | 27,492  |              |  |   | 23,047  |  
|General and administrative expenses                                                                                    |  |                           | 18,516  |   |               |   | 16,993  |              |  |   | 13,523  |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Operating income                                                                                                       |  |                           | 12,021  |   |               |   | 10,499  |              |  |   | 9,524   |  
|Interest expense                                                                                                       |  |                           | 475     |   |               |   | 1,385   |              |  |   | 1,469   |  
|Other income, net                                                                                                      |  |                           | (326    | ) |               |   | (3,871  | )            |  |   | (350    | )
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Income from continuing operations before income taxes                                                                  |  |                           | 11,872  |   |               |   | 12,985  |              |  |   | 8,405   |  
|Income tax expense                                                                                                     |  |                           | 4,571   |   |               |   | 5,064   |              |  |   | 3,285   |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Income from continuing operations                                                                                      |  |                           | 7,301   |   |               |   | 7,921   |              |  |   | 5,120   |  
|Income (loss) from discontinued operations, net of income tax benefit (expense) of ($236), $355 and $410, respectively |  |                           | 377     |   |               |   | (556    | )            |  |   | (641    | )
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Net income                                                                                                             |  |                           | 7,678   |   |               |   | 7,365   |              |  |   | 4,479   |  
|Preferred stock dividends                                                                                              |  |                           |        |   |               |   | 325     |              |  |   | 487     |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Net income available to common stockholders                                                                            |  | $                         | 7,678   |   |               | $ | 7,040   |              |  | $ | 3,992   |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Basic income per share:                                                                                                |  |                           |         |   |               |   |         |              |  |   |         |  
|Income from continuing operations                                                                                      |  | $                         | 0.70    |   |               | $ | 0.85    |              |  | $ | 0.62    |  
|Income (loss) from discontinued operations                                                                             |  |                           | 0.04    |   |               |   | (0.06   | )            |  |   | (0.08   | )
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Net income per share                                                                                                   |  | $                         | 0.74    |   |               | $ | 0.79    |              |  | $ | 0.54    |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Diluted income per share:                                                                                              |  |                           |         |   |               |   |         |              |  |   |         |  
|Income from continuing operations                                                                                      |  | $                         | 0.69    |   |               | $ | 0.75    |              |  | $ | 0.51    |  
|Income (loss) from discontinued operations                                                                             |  |                           | 0.04    |   |               |   | (0.05   | )            |  |   | (0.07   | )
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Net income per share *                                                                                                 |  | $                         | 0.72    |   |               | $ | 0.70    |              |  | $ | 0.44    |  
|                                                                                                                       |  |                           |         |   |               |   |         |              |  |   |         |  
|Weighted average common stock outstanding (in thousands):                                                              |  |                           |         |   |               |   |         |              |  |   |         |  
|Basic                                                                                                                  |  |                           | 10,382  |   |               |   | 8,957   |              |  |   | 7,473   |  
|Diluted                                                                                                                |  |                           | 10,630  |   |               |   | 10,580  |              |  |   | 10,080  |  



|* | Net income per share totals may not sum due to rounding.
|- | --------------------------------------------------------

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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity and Comprehensive Income

For the Fiscal Years Ended June 28, 2008, June 30, 2007, and July 1, 2006

(Dollars in thousands except share data)



|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|------------------------------------------------------------- |  | --------------- | - |  | ------------ | -- | ------------- | ------ | ---------- | ------------------------ | - | -- | ------------------------------------- | - | ---- | ----------------------------------- |  | - | ------ | - |  | - | ------- | - |  | - | --- | - |  | - | ------ | -
|                                                              |  | Preferred Stock |   |  | Common Stock |    | TreasuryStock |        |            | AdditionalPaid-InCapital |   |    | RetainedEarnings/(AccumulatedDeficit) |   |      | AccumulatedOtherComprehensiveIncome |  |   | Total  |  
|                                                              |  |                 |   |  |              |    |              
|                                                              |  | Shares          |   |  | Amount       |    |               | Shares |            | Amount                   |   |    |                                       |   |     
|July 2, 2005                                                  |  | 3,175,837       |   |  | $            | 3  |               |        | 7,486,807  |                          | $ | 8  |                                       | $ | (375 | )                                   |  | $ | 51,302 |   |  | $ | (13,501 | ) |  | $ | (47 | ) |  | $ | 37,390 |  
|Comprehensive income:                                         |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Net income                                                    |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | 4,479   |   |  |   |    |   |  |   | 4,479  |  
|Swap contract, net of tax                                     |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   |        |   |  |   | 47  |   |  |   | 47     |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Total comprehensive income                                    |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   | 4,526  |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Issuance of preferred stock                                   |  | 107,582         |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   | 502    |   |  |   |        |   |  |   |    |   |  |   | 502    |  
|Exercise of warrants                                          |  |                |   |  |              |   |               |        | 585,803    |                          |   |   |                                       |   |     |                                     |  |   | 3,639  |   |  |   |        |   |  |   |    |   |  |   | 3,639  |  
|Stock based compensation                                      |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   | 555    |   |  |   |        |   |  |   |    |   |  |   | 555    |  
|Stock options exercised                                       |  |                 |   |  |              |    |               |        | 20,166     |                          |   |   |                                       |   |     |                                     |  |   | 155    |   |  |   |        |   |  |   |    |   |  |   | 155    |  
|Treasury shares cancelled                                     |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   | 375  |                                     |  |   | (375   | ) |  |   |        |   |  |   |    |   |  |   |       |  
|Preferred dividends                                           |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | (487    | ) |  |   |    |   |  |   | (487   | )
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|July 1, 2006                                                  |  | 3,283,419       |   |  |              | 3  |               |        | 8,092,776  |                          |   | 8  |                                       |   |     |                                     |  |   | 55,778 |   |  |   | (9,509  | ) |  |   |    |   |  |   | 46,280 |  
|Comprehensive income:                                         |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Net income                                                    |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | 7,365   |   |  |   |    |   |  |   | 7,365  |  
|Issuance of preferred stock                                   |  | 36,445          |   |  |              |   |               |        |           |                          |   |   |                                       |   | `    |                                     |  |   | 175    |   |  |   |        |   |  |   |    |   |  |   | 175    |  
|Conversion of Series E and Series F Preferred Stock           |  | (2,256,034      | ) |  |              | (2 | )             |        | 2,256,034  |                          |   | 2  |                                       |   |     |                                     |  |   |       |   |  |   |        |   |  |   |    |   |  |   |       |  
|Stock based compensation                                      |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   | 666    |   |  |   |        |   |  |   |    |   |  |   | 666    |  
|Stock award shares issued                                     |  |                |   |  |              |   |               |        | 10,000     |                          |   |   |                                       |   |     |                                     |  |   | 9      |   |  |   |        |   |  |   |    |   |  |   | 9      |  
|Stock options exercised                                       |  |                |   |  |              |   |               |        | 6,800      |                          |   |   |                                       |   |     |                                     |  |   | 48     |   |  |   |        |   |  |   |    |   |  |   | 48     |  
|Preferred dividends                                           |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | (325    | ) |  |   |    |   |  |   | (325   | )
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|June 30, 2007                                                 |  | 1,063,830       |   |  |              | 1  |               |        | 10,365,610 |                          |   | 10 |                                       |   |     |                                     |  |   | 56,676 |   |  |   | (2,469  | ) |  |   |    |   |  |   | 54,218 |  
|Comprehensive income:                                         |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Net income                                                    |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | 7,678   |   |  |   |    |   |  |   | 7,678  |  
|Change in fair value of swap contract, net of tax             |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   |        |   |  |   | 9   |   |  |   | 9      |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Total comprehensive income                                    |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   | 7,687  |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|Cumulative impact from adoption of FASB Interpretation No. 48 |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   |       |   |  |   | (44     | ) |  |   |    |   |  |   | (44    | )
|Stock based compensation                                      |  |                |   |  |              |   |               |        |           |                          |   |   |                                       |   |     |                                     |  |   | 717    |   |  |   |        |   |  |   |    |   |  |   | 717    |  
|Stock options exercised and related tax benefits              |  |                |   |  |              |   |               |        | 28,567     |                          |   |   |                                       |   |     |                                     |  |   | 336    |   |  |   |        |   |  |   |    |   |  |   | 336    |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  
|June 28, 2008                                                 |  | 1,063,830       |   |  | $            | 1  |               |        | 10,394,177 |                          | $ | 10 |                                       | $ |     |                                     |  | $ | 57,729 |   |  | $ | 5,165   |   |  | $ | 9   |   |  | $ | 62,914 |  
|                                                              |  |                 |   |  |              |    |               |        |            |                          |   |    |                                       |   |      |                                     |  |   |        |   |  |   |         |   |  |   |     |   |  |   |        |  



The accompanying notes are
an integral part of the consolidated financial statements



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)



|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------- | ------------ |  | - | ------ | -
|                                                                                  |  | For the Fiscal Year Ended |        
|                                                                                  |  | June 28, 2008             |         |   | June 30, 2007 |   |         | July 1, 2006 | 
|Cash Flows from Operating Activities:                                             |  |                           |         |   |               |   |         |              |  |   |        |  
|Net income                                                                        |  | $                         | 7,678   |   |               | $ | 7,365   |              |  | $ | 4,479  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |               |   |         |              |  |   |        |  
|Depreciation and amortization                                                     |  |                           | 7,320   |   |               |   | 6,935   |              |  |   | 5,748  |  
|Fixed asset impairments                                                           |  |                           |        |   |               |   |        |              |  |   | 30     |  
|Reserve for lease costs for discontinued operations                               |  |                           | (245    | ) |               |   | 2,028   |              |  |   |       |  
|Provision for losses on accounts receivable                                       |  |                           | 312     |   |               |   | 588     |              |  |   | 962    |  
|Stock based compensation                                                          |  |                           | 717     |   |               |   | 675     |              |  |   | 555    |  
|Provision for deferred taxes                                                      |  |                           | 306     |   |               |   | 2,012   |              |  |   | 1,077  |  
|Gain on recovery of notes receivable                                              |  |                           |        |   |               |   | (3,287  | )            |  |   |       |  
|Gain on sale of assets                                                            |  |                           |        |   |               |   | (2,190  | )            |  |   |       |  
|Gain from sublease settlement                                                     |  |                           | (1,028  | ) |               |   |        |              |  |   |       |  
|Other                                                                             |  |                           |        |   |               |   | (50     | )            |  |   | (49    | )
|Changes in assets and liabilities, net of acquired amounts                        |  |                           |         |   |               |   |         |              |  |   |        |  
|Customer accounts receivable                                                      |  |                           | (243    | ) |               |   | 653     |              |  |   | (1,311 | )
|Prepaid expenses and other current assets                                         |  |                           | (557    | ) |               |   | (250    | )            |  |   | (384   | )
|Other assets and liabilities                                                      |  |                           | (1,603  | ) |               |   | 45      |              |  |   | 1,511  |  
|Deferred revenue                                                                  |  |                           | 1,163   |   |               |   | 849     |              |  |   | 980    |  
|Accounts payable and current liabilities                                          |  |                           | 513     |   |               |   | 3,631   |              |  |   | 46     |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Net Cash Provided by Operating Activities                                         |  |                           | 14,333  |   |               |   | 19,004  |              |  |   | 13,644 |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Cash Flows Used in Investing Activities:                                          |  |                           |         |   |               |   |         |              |  |   |        |  
|Purchase of fixed assets, net of acquired amounts                                 |  |                           | (8,122  | ) |               |   | (7,512  | )            |  |   | (5,389 | )
|Proceeds from sale of property and equipment                                      |  |                           |        |   |               |   | 4,985   |              |  |   |       |  
|Purchase of note receivable                                                       |  |                           |        |   |               |   | (200    | )            |  |   |       |  
|Proceeds from repayment of notes receivable                                       |  |                           |        |   |               |   | 3,510   |              |  |   |       |  
|School acquisitions                                                               |  |                           | (21,061 | ) |               |   | (12,016 | )            |  |   | (2,639 | )
|Investment in product rights and trade names                                      |  |                           | (170    | ) |               |   |        |              |  |   | (216   | )
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Net Cash Used in Investing Activities                                             |  |                           | (29,353 | ) |               |   | (11,233 | )            |  |   | (8,244 | )
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Cash Flows from Financing Activities:                                             |  |                           |         |   |               |   |         |              |  |   |        |  
|Borrowings of long term debt                                                      |  |                           | 76,200  |   |               |   | 40,715  |              |  |   |       |  
|Repayment of long term debt                                                       |  |                           | (63,700 | ) |               |   | (53,895 | )            |  |   | (2,281 | )
|Proceeds from exercise of stock options and warrants                              |  |                           | 213     |   |               |   | 48      |              |  |   | 3,793  |  
|Tax benefits from exercise of stock options                                       |  |                           | 123     |   |               |   |        |              |  |   |       |  
|Payment of debt issuance costs                                                    |  |                           | (566    | ) |               |   | (381    | )            |  |   |       |  
|Dividends paid to preferred stockholders                                          |  |                           |        |   |               |   | (281    | )            |  |   |       |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                           | 12,270  |   |               |   | (13,794 | )            |  |   | 1,512  |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                              |  |                           | (2,750  | ) |               |   | (6,023  | )            |  |   | 6,912  |  
|Cash and cash equivalents at beginning of year                                    |  |                           | 3,814   |   |               |   | 9,837   |              |  |   | 2,925  |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  
|Cash and cash equivalents at end of year                                          |  | $                         | 1,064   |   |               | $ | 3,814   |              |  | $ | 9,837  |  
|                                                                                  |  |                           |         |   |               |   |         |              |  |   |        |  

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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flow (continued)

(Dollars in thousands)



|                                                  |  |                           |       |               |   |              |  |   |      
|------------------------------------------------- |  | ------------------------- | ----- | ------------- | - | ------------ |  | - | -----
|                                                  |  | For the Fiscal Year Ended
|                                                  |  | June 28, 2008             |       | June 30, 2007 |   | July 1, 2006
|Supplemental Disclosures of Cash Flow Information |  |                           |       |               |   |              |  |   |      
|Cash paid during year for:                        |  |                           |       |               |   |              |  |   |      
|Interest                                          |  | $                         | 317   |               | $ | 774          |  | $ | 1,246
|Income taxes                                      |  |                           | 5,577 |               |   | 1,052        |  |   | 99   
|Non-cash investing and financing activities:      |  |                           |       |               |   |              |  |   |      
|Issuance of preferred stock for dividend payments |  | $                         |      |               | $ | 174          |  | $ | 502  
|Paid in kind preferred stock dividends            |  |                           |      |               |   | 44           |  |   | 487  

In connection with the purchase of The Honor Roll School during Fiscal 2006, the Discovery Isle
schools in Fiscal 2007, and the Learning Ladder, Teddy Bear Treehouse, Enchanted, Ivy Glen, and Camelback Desert schools in Fiscal 2008 as discussed in Note 3, the fair value of assets acquired are as follows:



|                                        |  |   |        |  |   |        |  |   |      
|--------------------------------------- |  | - | ------ |  | - | ------ |  | - | -----
|Cash paid                               |  | $ | 21,061 |  | $ | 12,016 |  | $ | 2,639
|Net working capital liabilities assumed |  |   | 1,567  |  |   | 197    |  |   | 516  
|                                        |  |   |        |  |   |        |  |   |      
|Fair value of assets acquired           |  | $ | 22,628 |  | $ | 12,213 |  | $ | 3,155
|                                        |  |   |        |  |   |        |  |   |      





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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.
Summary of Significant Accounting Policies and Company Background:

Nobel
Learning Communities, Inc. (collectively with its subsidiaries, the Company or Nobel Learning Communities) is a national network of nonsectarian private schools, including preschools, elementary schools, middle schools and
specialty high schools in 15 states and the District of Columbia serving approximately 28,000 students. Nobel Learning Communities provides high-quality private education, with small schools and class sizes, qualified teachers and targeted attention
to individual learning styles. Nobel Learning Communities also offers an array of supplemental educational services, including before- and after-school programs, the Camp Zone® summer
program, learning support programs and technology camps. These schools operate under various brand names and are located in the District of Columbia, Arizona, California, Florida, Illinois, Maryland, Nevada, New Jersey, North Carolina, Ohio, Oregon,
Pennsylvania, South Carolina, Texas, Virginia, and Washington.

Principles of Consolidation and Basis of Presentation:

Fiscal Period. The fiscal years ended June 28, 2008 (Fiscal 2008), June 30, 2007 (Fiscal 2007) and July 1,
2006 (Fiscal 2006) each include 52 weeks.

Consolidation. All significant intercompany balances and transactions have been
eliminated.

Reclassifications. As a result of certain school closures in Fiscal 2007 and Fiscal 2006 the Company has conformed amounts
reported for Fiscal years 2007 and 2006 in its Annual Report on Form 10-K to the period ended June 28, 2008. Certain other prior period amounts have been reclassified to conform to the current periods presentation.

Recognition of Revenues:

The
recognition of net revenues meets the following criteria: the existence of an arrangement through a registration, an enrollment agreement or a contract, the rendering of educational services over time, a specific tuition rate and/or fee and probable
collection. Net revenues include tuition, fees and other revenues, reduced by discounts. Fees are received for registration, other educational services and charter school management fees. Ancillary income is primarily comprised of supplemental fees
from certain after school programs, summer programs, camps and field trips. Tuition revenues, net of discounts and other revenues, are recognized as services are performed. Tuition payments received in advance of the time period for which service is
to be performed are recorded as deferred revenue. Registration fees are recognized over the applicable school period. Certain fees may be received in advance of services being rendered, in which case the fee revenue is deferred and recognized over
the appropriate period of service.

Cash and Cash Equivalents:

The Company considers cash on hand, cash in banks and cash investments with maturities of three months or less when purchased as cash and cash
equivalents. The Company maintains funds in accounts in excess of FDIC insurance limits; however, the Company minimizes this risk by maintaining deposits in high quality financial institutions. Amounts receivable from credit card companies are also
considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.

Accounts Receivable and Credit Risk:

The Companys accounts receivable are comprised primarily
of tuition due from parents and governmental agencies. Accounts receivable are presented at estimated net realizable value. The Company uses estimates in



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



determining the collectibility of its accounts receivable and must rely on its evaluation of its experience with historical trends, governmental funding
processes, specific customer issues and current economic trends to arrive at appropriate reserves. Material differences may result in the amount and timing of bad debt expense if actual experience differs from managements estimates. Customer
accounts are considered due when services are rendered and are considered for write-off when open for sixty days subsequent to the service date. Accounts due from governmental agencies are due within the terms as outlined within each agency
agreement.

The Company provides education services to the parents and guardians of the children attending its schools. In certain
circumstances, the Company grants small amounts of credit to its customers for a limited period of time. Exposure to losses on receivables is principally dependent on each persons financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses. The Companys schools are located in 15 states and the District of Columbia and, as a result, the Company is not dependent on economic conditions in any one geographic area or
market.

Property and Equipment:

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets as
follows:



|                                |  |                                                   
|------------------------------- |  | --------------------------------------------------
|Buildings                       |  | 40 years                                          
|Leasehold improvements          |  | The shorter of the leasehold period or useful life
|Furniture and equipment         |  | 3 to 10 years                                     
|Computer software and equipment |  | 3 to 5 years                                      

Maintenance, repairs and minor refurbishments are expensed as incurred. Upon retirement, lease
terminations or other disposition of buildings, the cost of property and equipment associated with the facility and the related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Long-Lived and Intangible Assets:

In
accordance with Statement of Accounting Standard (SFAS) No. 144, Accounting for the Impairment of Long-Lived Assets (SFAS 144), long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assets value is impaired if managements estimate of the aggregate future cash flows, undiscounted and without
interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the
extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience
varies, could result in material differences in the requirements for impairment charges.

During Fiscal 2006, asset impairment charges of
$30,000 are included in loss from discontinued operations. There were no impairment charges recorded during Fiscal 2008 or Fiscal 2007.

Goodwill:

The Company estimates fair values for each reporting unit using discounted cash flow projections in evaluating
and measuring a potential impairment charge on an annual basis in the fourth quarter of each fiscal



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



year or when changes in circumstances warrant. The Company engages an independent, third-party consultant to review its calculations required by SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142) and, if necessary, the level two analysis in order to determine the amount of goodwill impaired. Any impairment of goodwill resulting from the required testing by
SFAS 142 is recorded as a charge to income from operations.

For Fiscal 2008, Fiscal 2007 and Fiscal 2006, the Company performed its annual
impairment test as required by SFAS 142. The level one impairment test for each of these fiscal years indicated that no impairment existed for the Companys reporting units, as such, the Company did not record any goodwill impairments; however,
there can be no assurance that such a charge will not be recorded in future periods.

Advertising Costs:

General advertising costs which include yellow pages and mass media advertising, consulting fees towards the development and delivery of advertising and
marketing strategies and internet based hosting and search engine fees are expensed as incurred. Media production costs, targeted mailings and other marketing collateral are expensed when distributed to schools or when specific marketing events take
place. Advertising and marketing costs were $4,138,000, $3,882,000 and $3,535,000 for Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively. As of June 28, 2008 and June 30, 2007, prepaid advertising expense totaled $575,000 and $493,000,
respectively.

Deferred Financing Costs:

Included in deposits and other assets are deferred financing costs that are incurred by the Company in connection with the issuance of debt. These costs are deferred and amortized to interest expense over the life of
the underlying indebtedness. As of June 28, 2008 and June 30, 2007, $813,000 and $350,000 in unamortized financing costs was carried on the Companys balance sheet, respectively.

Lease Reserves:

In accordance with
Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), the Company records estimated costs for school closures when the lease is terminated or at
the cease use date rather than at the date of a commitment to an exit or disposal plan.

Stock Compensation:

Effective July 3, 2005, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) SFAS
Statement No. 123(R), Share-Based Payment, using the modified prospective-transition method. Under that method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not
yet vested as of July 2, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based payments granted on and subsequent to July 3, 2005, based
on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). For purposes of calculating grant-date fair value, the value of the options is estimated using a Black-Scholes optionpricing formula and amortized to
expense over the options requisite service period, generally the vesting period. Stock compensation expense is recognized only for the grants expected to vest, which is total estimated value less estimated forfeitures.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Income Taxes:

The Company accounts for income taxes using the asset and liability method, in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rate is recognized in income in the period of enactment. A valuation allowance is recorded based on the uncertainty regarding the ultimate realizability of deferred tax assets.

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) on July 1, 2007. FIN 48 prescribes a recognition threshold and measurement criteria attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company files a U.S. federal income tax return and various state income tax returns, which are subject to examination by tax authorities. This process involves estimating the actual current tax exposure together
with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The Companys estimated tax liability is subject to change as examinations of specific tax years may occur in the respective
jurisdictions, which may include possible adjustments related to the nature and timing of deductions and the local attribution of income.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different conditions or if assumptions change. The most significant estimates underlying the accompanying consolidated
financial statements include long-lived assets and goodwill valuations and any potential impairment, the allowance for doubtful accounts, the valuation of stock compensation expense, estimates of future obligations related to closed facilities, the
valuation of our investments and realization of our deferred tax assets.

New Accounting Pronouncements:

In June 2008, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities
prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance in FSP EITF 03-6-1,
unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the
two-class method. FSP EITF 03-6-1 is effective for the Company in fiscal 2009. After the effective date of FSP EITF 03-6-1, all prior-period earnings per share data presented must be adjusted retrospectively. The Company is currently
evaluating the potential impact of adopting FSP EITF 03-6-1.



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework or hierarchy for selecting accounting principles to be used in preparing financial statements in conformity with
U.S. GAAP. The Company does not expect that SFAS 162 will have an impact on its consolidated financial statements.

In March 2008, the
FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS 133 (SFAS 161). This new standard requires enhanced disclosures for derivative instruments, including those used
in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008 and will be applicable to the Company in the first quarter of fiscal 2010. The Company is assessing the potential impact
that the adoption of SFAS 161 may have on its financial statements.

In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin 110 (SAB 110). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment, of the Staff Accounting Bulletin series. Question 6 of
Section D.2 of Topic 14 expresses the views of the Staff regarding the use of the simplified method in developing an estimate of the expected term of plain vanilla share options and allows usage of the simplified
method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate of the expected term of outstanding options to continue use of
the simplified method for estimating the expected term of plain vanilla share option grants after December 31, 2007. The Company will continue to use the simplified method until it has enough historical
experience to provide a reasonable estimate of expected term in accordance with SAB 110.

In December 2007, the FASB issued SFAS
No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of
equity securities, to be determined on the acquisition date. SFAS 141(R) also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition,
SFAS 141(R) requires that acquisition costs generally be expensed in the period incurred and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact income tax
expense. SFAS 141(R) is effective for the Companys fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation to SFAS 141(R) will have on the consolidated financial
statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB No. 51 (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a
component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest
retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for the Companys fiscal year beginning June 28, 2009, with early adoption prohibited. The Company is evaluating the effect the
implementation of SFAS 160 will have on the consolidated financial statements.

2. Earnings (Loss) Per Share:

The Company follows SFAS 128, Earnings Per Share. Under SFAS 128, companies that are publicly held or have complex capital structures are
required to present basic and diluted earnings per share on the face of the



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



statement of operations. Earnings (loss) per share are based on the weighted average number of shares and common stock equivalents outstanding during the
period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Companys non-interest bearing convertible preferred stock and the exercise of options and warrants if they are dilutive. In
the calculation of basic earnings per share, the weighted average number of shares outstanding is used as the denominator.

During Fiscal
2008, 156,000 and during Fiscal 2006, 51,500 stock options were issued and outstanding with exercise prices in excess of the average market price of the Companys stock for the period and were therefore deemed anti-dilutive. These stock options
are not included in the earnings per share calculations. There were no anti-dilutive stock options issued and outstanding during Fiscal 2007.

On January 31, 2006, the Company caused the holders of Series E Preferred Stock to convert their shares into Common Stock in accordance with the terms of the Companys Certificate of Designation. As a result of these conversions,
the number of shares of the Companys common stock outstanding has increased by approximately 1,551,000 shares and no shares of the Series E Preferred Stock remain outstanding. On March 12, 2007, the Company caused the holders of Series F
Preferred Stock to convert their shares into Common Stock in accordance with the terms of the Companys Certificate of Designation. As a result of these conversions, the number of shares of the Companys common stock outstanding has
increased by approximately 705,000 shares and no shares of the Series F Preferred Stock remain outstanding. Since both the Series E and Series F Preferred Stock had previously been accounted for on an if converted basis in the Companys diluted
share base, the conversion will have no future impact on fully diluted per share calculations.

Earnings per share is computed as follows
(dollars in thousands):



|                                                                     |  |                           |            |               |   |              |  |   |           
|-------------------------------------------------------------------- |  | ------------------------- | ---------- | ------------- | - | ------------ |  | - | ----------
|                                                                     |  | For the Fiscal Year Ended
|                                                                     |  | June 28, 2008             |            | June 30, 2007 |   | July 1, 2006
|Basic income per share:                                              |  |                           |            |               |   |              |  |   |           
|                                                                     |  |                           |           
|Net income                                                           |  | $                         | 7,678      |               | $ | 7,365        |  | $ | 4,479     
|Less preferred dividends                                             |  |                           |           |               |   | 325          |  |   | 487       
|                                                                     |  |                           |            |               |   |              |  |   |           
|Net income available to common shareholders                          |  | $                         | 7,678      |               | $ | 7,040        |  | $ | 3,992     
|                                                                     |  |                           |            |               |   |              |  |   |           
|Weighted average common shares outstanding                           |  |                           | 10,382,089 |               |   | 8,956,610    |  |   | 7,473,013 
|                                                                     |  |                           |            |               |   |              |  |   |           
|Basic income per share                                               |  | $                         | 0.74       |               | $ | 0.79         |  | $ | 0.54      
|                                                                     |  |                           |            |               |   |              |  |   |           
|Diluted income per share:                                            |  |                           |            |               |   |              |  |   |           
|                                                                     |  |                           |           
|Net income                                                           |  | $                         | 7,678      |               | $ | 7,365        |  | $ | 4,479     
|Weighted average common shares outstanding                           |  |                           | 10,382,089 |               |   | 8,956,610    |  |   | 7,473,013 
|Dilutive effect of options, warrants and convertible preferred stock |  |                           | 248,378    |               |   | 1,623,810    |  |   | 2,606,637 
|                                                                     |  |                           |            |               |   |              |  |   |           
|Weighted average common stock and dilutive securities outstanding    |  |                           | 10,630,467 |               |   | 10,580,420   |  |   | 10,079,650
|                                                                     |  |                           |            |               |   |              |  |   |           
|Diluted income per share                                             |  | $                         | 0.72       |               | $ | 0.70         |  | $ | 0.44      
|                                                                     |  |                           |            |               |   |              |  |   |           

3. Acquisitions:

During Fiscal 2008, the Company completed five acquisitions. During each of Fiscal 2007 and Fiscal 2006 the Company completed one acquisition. Each of these acquisitions is consistent with the Companys growth



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



strategy in the private pay education market and include both expansion in existing markets and entrance into new markets. The seven acquisitions completed
during the last three fiscal years are summarized as follows:



| |  |  | During the fourth quarter of Fiscal 2008, the Company completed the acquisition of the assets of two Camelback Desert Schools, each of these schools offer
elementary school programs. The Camelback Desert Schools are located in the Phoenix, Arizona market, which is a new geographic market for the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of Fiscal 2008, the Company completed the acquisition of all the outstanding shares of Enchanted Care Learning Centers, Inc.
(Enchanted Care). For U.S. Federal and State tax purposes, this transaction was treated as an asset purchase and the goodwill related to this purchase is tax deductible. Enchanted Care adds nine preschools and six before-and-after school
programs located in the central Ohio market, which is a new geographic market for the Company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of Fiscal 2008, the Company acquired the assets of three Ivy Glen preschools and one before-and-after school program building. Each of
these schools will be rebranded under the Companys existing Merryhill brand. These schools expand the Companys existing market coverage in the Dallas, Texas market.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the second quarter of Fiscal 2008, the Company acquired the assets of two Teddy Bear Tree House preschools. Both schools have been rebranded under the
Companys existing Discovery Isle brand. These schools expand the Companys existing market coverage in the San Diego, California.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first quarter of Fiscal 2008, the Company acquired the assets of four Learning Ladder preschools, three of which have been rebranded under the
Companys existing Chesterbrook Academy brand. The fourth Learning Ladder school was closed during the first quarter of Fiscal 2008. These schools expand the Companys existing market coverage in the Lancaster, Pennsylvania market.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the second quarter of Fiscal 2007, the Company completed the acquisition of all the outstanding shares of Discovery Isle Child Development Center, Inc.
(Discovery Isle). For U.S. Federal and State tax purposes, this transaction was treated as an asset purchase and the goodwill related to this purchase is tax deductible. Discovery Isles six preschools are located in the San Diego,
California market, which at the time of this acquisition was a new geographic market for the Company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the fourth quarter of Fiscal 2006, the Company completed the acquisition of the assets of The Honor Roll Schools. The Honor Roll Schools include both a
preschool and kindergarten through eighth grade school located in separate facilities on a single campus outside of Houston, Texas, which is a new geographic market for the Company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



A summary of the purchase price, allocation of estimated fair value of the assets acquired, and
acquisition costs are presented below (dollars in thousands):



|                               |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|------------------------------ |  | --------------------------------------- | ------ | -------------------------------------------------------------- | --------- | ------ | ---------------------------- |  | ---------------------------------------- | ------ | ---------------------------------- | - | ----- |  | --- |  | - | ----- |  | - |  | - | -----
|                               |  | PurchasePrice,includingtransactioncosts |        | Net WorkingCapitalAssets/(Liabilities)included inpurchaseprice |           |        | Goodwill                     |  | Acquired Intangible Assets at Fair Value |        | Other Long-Term Assetsat FairValue
|Acquired Entity                |  |                                         |        |                                                                | TradeName |        | AmortizableAsset Life(years) |  | StudentRoster                            |        | AmortizableAsset Life(years)       |  
|Fiscal 2008 Acquisitions:      |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Camelback Desert Schools       |  | $                                       | 194    |                                                                | $         | (294   | )                            |  | $                                        | 127    |                                    | $ | 43    |  | 20  |  | $ | 115   |  | 4 |  | $ | 203  
|Enchanted Care                 |  |                                         | 14,303 |                                                                |           | (1,097 | )                            |  |                                          | 12,074 |                                    |   | 608   |  | 20  |  |   | 1,936 |  | 7 |  |   | 782  
|Ivy Glen                       |  |                                         | 2,132  |                                                                |           | 3      |                              |  |                                          | 1,583  |                                    |   |      |  | n/a |  |   | 423   |  | 6 |  |   | 123  
|Teddy Bear Treehouse           |  |                                         | 2,279  |                                                                |           | 4      |                              |  |                                          | 1,925  |                                    |   |      |  | n/a |  |   | 281   |  | 3 |  |   | 69   
|Learning Ladder                |  |                                         | 2,153  |                                                                |           | (183   | )                            |  |                                          | 1,972  |                                    |   |      |  | n/a |  |   | 252   |  | 4 |  | $ | 112  
|                               |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Total-Fiscal 2008 acquisitions |  | $                                       | 21,061 |                                                                | $         | (1,567 | )                            |  | $                                        | 17,681 |                                    | $ | 651   |  |     |  | $ | 3,007 |  |   |  | $ | 1,289
|                               |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Fiscal 2007 Acquisition:       |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Discovery Isle                 |  | $                                       | 12,016 |                                                                | $         | (197   | )                            |  | $                                        | 9,080  |                                    | $ | 1,540 |  | 20  |  | $ | 1,450 |  | 4 |  | $ | 143  
|                               |  |                                         |        |                                                                |           |        |                              | 
|Fiscal 2006 Acquisition:       |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|The Honor Roll                 |  | $                                       | 2,639  |                                                                | $         | (516   | )                            |  | $                                        | 1,755  |                                    | $ | 570   |  | 20  |  | $ | 655   |  | 7 |  | $ | 175  

To date, we have not identified material unrecorded pre-acquisition contingencies where the
related asset, liability or impairment is probable and the amount can be reasonably estimated. Prior to the end of the one-year purchase price allocation period, if information becomes available which would indicate it is probable that such events
existed at the acquisition date and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may adjust goodwill.

The following unaudited pro forma results of operations assume that these acquisitions were completed as of the beginning of Fiscal 2006 (dollars in thousands, except per share data):



|                                     |  |        |         |      |   |         |  |   |        
|------------------------------------ |  | ------ | ------- | ---- | - | ------- |  | - | -------
|                                     |  | Fiscal
|                                     |  | 2008   |         | 2007 |   | 2006   
|Revenues                             |  | $      | 221,070 |      | $ | 209,917 |  | $ | 195,921
|Net Income                           |  |        | 7,843   |      |   | 7,751   |  |   | 4,573  
|Earnings per sharebasic             |  | $      | 0.76    |      | $ | 0.83    |  | $ | 0.55   
|Earnings per shareassuming dilution |  | $      | 0.74    |      | $ | 0.73    |  | $ | 0.45   

Pro-forma data incorporates the use of cash basis accounting of certain acquired entities and
therefore is not indicative of the results that would have been obtained had these events actually occurred at the beginning of the earliest period presented and if recorded under Generally Accepted Accounting Principals, accordingly, this data is
not intended to be a projection of future results.

SEC Regulation S-X does not require any additional pro-forma financial information to
be furnished as a result of any of the above acquisitions.

4. Goodwill and Intangible Assets:

As required by Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the Company estimates
fair values for each reporting unit using discounted cash flow projections in evaluating



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



and measuring a potential impairment charge on an annual basis in the fourth quarter of each fiscal year, and if necessary the Company performs the level two
analysis in order to determine the amount of goodwill impaired. Any impairment of goodwill resulting from the required testing by SFAS No. 142 is recorded as a charge to income from operations. During the fourth quarter of Fiscal 2008 and
Fiscal 2007, the Company performed its annual impairment test. The level one impairment test for Fiscal 2008 and Fiscal 2007 indicated that no impairment existed for the Companys reporting units; as such, the Company did not record goodwill
impairment for Fiscal 2008 or Fiscal 2007.

Intangible assets include non-compete agreements, a franchise agreement and other identifiable
intangibles from acquisitions. At June 28, 2008 and June 30, 2007, the Companys goodwill and intangible assets were as follows (dollars in thousands):



|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |     |  |   |       
|---------------------------- |  | -------------------------------------------- | ------------------- | ------------- | ----------------------- | ------------- | ---------- | ----- | ------------------- | - | ----------------------- |  | ---------- | ------ |  | - | --- |  | - | ------
|                             |  | WeightedAverageAmortizationPeriod (inmonths) |                     | June 28, 2008 |                         | June 30, 2007
|                             |  |                                              | GrossCarryingAmount |               | AccumulatedAmortization |               | NetBalance |       | GrossCarryingAmount |   | AccumulatedAmortization |  | NetBalance
|Goodwill                     |  | n.a.                                         |                     | $             | 65,223                  |               | $          |      |                     | $ | 65,223                  |  | $          | 47,499 |  | $ |    |  | $ | 47,499
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |     |  |   |       
|Amortized intangible assets: |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |     |  |   |       
|Franchise agreement          |  | 130                                          |                     |               | 580                     |               |            | 124   |                     |   | 456                     |  |            | 410    |  |   | 62  |  |   | 348   
|Non-compete agreements       |  | n.a.                                         |                     |               |                        |               |            |      |                     |   |                        |  |            | 405    |  |   | 394 |  |   | 11    
|Trade Names                  |  | 240                                          |                     |               | 2,761                   |               |            | 205   |                     |   | 2,556                   |  |            | 2,110  |  |   | 81  |  |   | 2,029 
|Student Rosters              |  | 66                                           |                     |               | 5,112                   |               |            | 1,044 |                     |   | 4,068                   |  |            | 2,105  |  |   | 311 |  |   | 1,794 
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |     |  |   |       
|Total Intangible Assets      |  |                                              |                     | $             | 8,453                   |               | $          | 1,373 |                     | $ | 7,080                   |  | $          | 5,030  |  | $ | 848 |  | $ | 4,182 
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |     |  |   |       

At June 28, 2008, goodwill totaled $65,223,000, an increase of $17,724,000 from July 1,
2007. Of this increase, $12,074,000 was a result of the purchase of Enchanted Care, which occurred during the third quarter of Fiscal 2008. The remainder of the increase related to the purchase of Learning Ladder, Teddy Bear Treehouse, Ivy Glen, and
Camelback Desert schools. Amortization expense related to intangible assets was $930,000, $518,000 and $223,500 for Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively. Projected amortization expense for the intangible assets above for Fiscal
2009, Fiscal 2010, Fiscal 2011, Fiscal 2012 and Fiscal 2013 is $1,462,000, $1,662,000, $977,000, $540,000 and $423,000, respectively.

5. Cash
Equivalents:

The Company has an agreement with its primary bank that allows the bank to act as the Companys agent in making daily
investments with available funds in excess of a selected minimum account balance. This investment amounted to approximately $350,000 and $2,819,000 at June 28, 2008 and June 30, 2007, respectively. The Companys funds were invested in
money market accounts, which exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents as such deposits are maintained in high quality financial institutions.

6. Note Receivable:

During the fourth quarter of
Fiscal 2008, the Company settled a contract dispute with a former sub-lessee in the face amount of a $1,250,000 note to be paid to the Company over five years, with the first payment scheduled for August 2009. The Company has imputed an interest
rate of 4.25% in determining the present value of this



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



receivable, this rate is consistent with other published discounts for liabilities the payee has with other creditors. The amortization of the discount
related to this note totaled $112,000 will be recognized as income from discontinued operations during the collection period of the note.

7. Property
and Equipment:

The balances of major property and equipment classes were as follows (dollars in thousands):



|                                       |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       
|-------------------------------------- |  | ------------- | ------ | ----------------------- | - | ------------- |  | ---- | ------ | ----------------------- | - | ------------- |  | - | ------ |  | - | ------
|                                       |  | June 28, 2008 |        | June 30, 2007          
|                                       |  | Cost          |        | AccumulatedDepreciation |   | Net BookValue |  | Cost |        | AccumulatedDepreciation |   | Net BookValue
|Land                                   |  | $             | 1,518  |                         | $ |              |  | $    | 1,518  |                         | $ | 1,518         |  | $ |       |  | $ | 1,518 
|Buildings                              |  |               | 5,838  |                         |   | 2,598         |  |      | 3,240  |                         |   | 5,472         |  |   | 2,339  |  |   | 3,133 
|Assets under capital lease obligations |  |               |       |                         |   |              |  |      |       |                         |   | 311           |  |   | 311    |  |   |      
|Leasehold improvements                 |  |               | 30,301 |                         |   | 17,039        |  |      | 13,262 |                         |   | 25,782        |  |   | 14,753 |  |   | 11,029
|Furniture and equipment                |  |               | 37,591 |                         |   | 28,518        |  |      | 9,073  |                         |   | 35,538        |  |   | 27,850 |  |   | 7,688 
|Construction in progress               |  |               | 1,005  |                         |   |              |  |      | 1,005  |                         |   | 1,044         |  |   |       |  |   | 1,044 
|                                       |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       
|                                       |  | $             | 76,253 |                         | $ | 48,155        |  | $    | 28,098 |                         | $ | 69,665        |  | $ | 45,253 |  | $ | 24,412
|                                       |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       

Depreciation expense from continuing operations was $6,381,000, $6,401,000 and $5,316,000, for
Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively.

8. Change in Accounting Estimate:

During the third quarter of Fiscal 2007, the Company recorded a charge for accelerated depreciation of $341,000, as a result of a change in an accounting
estimate regarding the remaining useful life of the Companys existing payroll system. The Company migrated to an outsourced payroll service provider and ceased using the prior payroll system to better support its growth strategy. This change
in estimate resulted in a charge to basic and diluted income per share of $0.02 for Fiscal 2007.

9. Accounts Payable and Other Current Liabilities:

Accounts payable and other current liabilities were as follows, (dollars in thousands):



|                                  |  |               |        |               |   |       
|--------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                  |  | June 28, 2008 |        | June 30, 2007
|Accounts payable                  |  | $             | 6,601  |               | $ | 5,721 
|Accrued payroll and related items |  |               | 6,648  |               |   | 6,377 
|Accrued property taxes            |  |               | 1,083  |               |   | 1,028 
|Accrued rent                      |  |               | 1,073  |               |   | 563   
|Other accrued expenses            |  |               | 3,201  |               |   | 2,452 
|                                  |  |               |        |               |   |       
|                                  |  | $             | 18,606 |               | $ | 16,141
|                                  |  |               |        |               |   |       

10. Debt:

At the end of Fiscal 2007, the Company had a credit agreement in the amount of $50,000,000, which provided for a $50,000,000 Revolving Credit Commitment and up to $3,500,000 in letters of credit as a sub-limit



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



of the Revolving Credit Commitment (Prior Credit Agreement). The Prior Credit Agreement was scheduled to terminate on October 29, 2011.
During Fiscal 2008, the Company amended the loan facility under its Prior Credit Agreement (the 2008 Credit Agreement). The 2008 Credit Agreement provides for a $75,000,000 Revolving Credit Commitment with a $25,000,000 accordion feature
permitting the Company to increase the size of the facility under its current terms and conditions by obtaining additional credit availability from either participating or new banks. Under the terms of the 2008 Credit Agreement, proceeds may be used
to fund permitted acquisitions, capital expenditures and ongoing business operations. The borrowing rates on the 2008 Credit Agreement are adjusted by a debt to EBITDA leverage based matrix with Libor index based borrowings. The 2008 Credit
Agreement has a five year term that ends on June 5, 2013. As of June 28, 2008, outstanding borrowings equaled $12,500,000 and outstanding letters of credit equaled $2,437,000.

The Companys obligations under the 2008 Agreement are guaranteed by subsidiaries which are 80% or more owned by the Company, and collateralized in
part by a pledge of the stock of the Companys subsidiaries and liens on real and personal property. In addition, the 2008 Agreement is secured by liens on all real property owned by the Company.

The 2008 Agreement as well as the Prior Credit Agreement, and the subsequently amended Prior Credit Agreement, bears interest, at the Companys
option, at either of the following rates, which may be adjusted in quarterly increments based on the achievement of performance goals. The applicable rate as of June 28, 2008 is (1) an adjusted LIBOR rate plus a debt to defined
EBITDA-dependant rate or (2) base rate plus a debt to defined EBITDA-dependant rate. The Company also pays a letter of credit fee based on the face amount of each letter of credit calculated at the rate per year then applicable to loans under
the Agreement bearing interest based on an adjusted LIBOR rate plus a debt to defined EBITDA-dependent rate. The range of rates applicable for each of the agreements during Fiscal 2008, Fiscal 2007 and Fiscal 2006 were as follows:



|                                                               |  |                               |  |                               |  |                           
|-------------------------------------------------------------- |  | ----------------------------- |  | ----------------------------- |  | --------------------------
|                                                               |  | July 1, 2005October 25, 2006 |  | October 26, 2006June 5, 2008 |  | June 6, 2008June 28, 2008
|                                                               |  |                               | 
|LIBOR rate plus debt to defined EBITDA-dependant rate          |  | 2.25%  2.75%                 |  | 1.00%  2.00%                 |  | 1.15%  2.40%             
|Base rate plus debt to defined EBITDA-dependant rate           |  | 0.75%  1.25%                 |  | 0.00%  0.50%                 |  | 0.15%  0.90%             
|Letter of Credit fees LIBOR plus defined-EBITDAdependant rate |  | 2.25%  2.75%                 |  | 1.00%  2.00%                 |  | 1.15%  2.40%             

The 2008 Credit Agreement contains customary covenants and provisions that restrict the
Companys ability to change its business, declare or pay dividends, grant liens, incur additional indebtedness, make capital expenditures and governs the use of proceeds from disposition of assets or equity related transactions. In addition,
the 2008 Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charge coverage and must not exceed certain leverage ratios. The Companys loan covenants under its 2008 Credit Agreement limit the
amount of senior debt borrowings permitted.

11. Derivative Financial Instruments:

Cash Flow Hedges:

The Company does not enter into derivative transactions for trading purposes. The
Company had two interest rate swaps outstanding as of June 28, 2008. Under the swaps, $10,000,000 of the Companys 2008 Credit Agreement was allocated to the swap agreements. The Company used these derivative financial instruments to
manage its exposure to fluctuations in interest rates. The instruments involve, to varying degrees, market risk, as



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



the instruments are subject to rate and price fluctuations and elements of credit risk in the event the counterparty should default. At June 28, 2008,
the Company had two interest rate swap contracts outstanding, each had a notional amount of $5,000,000. Under the interest rate swap contracts, the Company agreed to pay fixed rates of 3.68% and 2.74% and the counterparty agreed to make payments
based on the designated LIBOR rate. The market value of the interest rate swap agreements at June 28, 2008 resulted in a long-term net asset of $13,000 and is included as a component of Accumulated Other Comprehensive Loss of $9,000, net of
taxes. The Company utilizes the shortcut method in accounting for its hedged transactions utilizing interest rate swaps. Under the shortcut method, all the critical items of the derivates must match those of the hedged items. Additionally, as the
shortcut method relates to interest rate swaps, there is no requirement for the ongoing assessment of hedge effectiveness.

12. Lease Obligations:

Future minimum lease obligations, by year and in the aggregate, for all real properties, vehicle and other leases that the Company and its
subsidiaries have entered into, consisted of the following at June 28, 2008 (dollars in thousands):



|                    |                         |                             |                          |  |                                   |                                                       |                                 |                               |        |  |   |         |  |   |        |  |   |        
|------------------- | ----------------------- | --------------------------- | ------------------------ |  | --------------------------------- | ----------------------------------------------------- | ------------------------------- | ----------------------------- | ------ |  | - | ------- |  | - | ------ |  | - | -------
|Fiscal Year         |                         | Operating Lease Commitments |                          |  |                                   | Closed LocationCash SubleaseAmounts Dueto the Company |                                 | Net OperatingLeaseCommitments
|                    | Continuing Operations   |                             | DiscontinuedOperations   |  |                                   |                                                       |                                
|                    | Vehicle andOther Leases |                             | School RealEstate Leases |  | Closed LocationReal Estate Leases |                                                       | Total OperatingLeaseCommitments |                               |       
|2009                |                         | $                           | 846                      |  | $                                 | 34,514                                                |                                 | $                             | 2,271  |  | $ | 37,631  |  | $ | 1,886  |  | $ | 35,745 
|2010                |                         |                             | 667                      |  |                                   | 33,676                                                |                                 |                               | 2,259  |  |   | 36,602  |  |   | 1,775  |  |   | 34,827 
|2011                |                         |                             | 449                      |  |                                   | 31,122                                                |                                 |                               | 2,205  |  |   | 33,776  |  |   | 1,754  |  |   | 32,022 
|2012                |                         |                             | 374                      |  |                                   | 28,316                                                |                                 |                               | 1,894  |  |   | 30,584  |  |   | 1,547  |  |   | 29,037 
|2013                |                         |                             | 78                       |  |                                   | 24,308                                                |                                 |                               | 1,759  |  |   | 26,145  |  |   | 1,390  |  |   | 24,755 
|2014 and thereafter |                         |                             | 37                       |  |                                   | 141,312                                               |                                 |                               | 3,982  |  |   | 145,331 |  |   | 1,677  |  |   | 143,654
|                    |                         |                             |                          |  |                                   |                                                       |                                 |                               |        |  |   |         |  |   |        |  |   |        
|Total               |                         | $                           | 2,451                    |  | $                                 | 293,248                                               |                                 | $                             | 14,370 |  | $ | 310,069 |  | $ | 10,029 |  | $ | 300,040
|                    |                         |                             |                          |  |                                   |                                                       |                                 |                               |        |  |   |         |  |   |        |  |   |        

Net operating lease commitments are the net cash amounts due from the Company to third party
landlords not covered by underlying leases from third party sub-tenants or assignee. The amount is the net of closed school lease commitments less closed location cash sublease amounts due to the Company. The Companys liability with respect to
closed school lease commitments could change if sublessees default under their sublease with the Company or if the Company is successful in subleasing additional closed schools or extending existing sublease agreements. Some of the closed school
lease commitments extend beyond the term of the current subleases on those properties.

Most of the above leases are triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses, maintenance and insurance costs, which are not included in the amounts presented above. Most of the above leases contain annual rent increases based on changes in
consumer price indexes or other formulas, which are not reflected in the above schedule. Rent expense for all operating leases included in continuing operations was $32,254,000, $28,298,000 and $25,455,000 for Fiscal 2008, Fiscal 2007 and Fiscal
2006, respectively.

Leases included in discontinued operations total eight leases, seven of which are subleased and one of which remains
vacant. The obligations of the leases that are subject to a sublease are substantially covered by the



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



subtenant. If such parties under the sublease agreements default, the Company has the obligation to pay rent under the terms of these leases. In addition to
the lease obligations noted above, the Company also has made guarantees for ten leases that were assigned to a third party on or before Fiscal 2000 and four properties during Fiscal 2007 (the 2007 property). In accordance with FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company has assessed its exposure regarding the assignment of the 2007
properties and has determined that the fair value of this exposure is diminimus and therefore has not recorded a liability for this contingency. The maximum potential undiscounted amount of future payments the Company could be required to pay under
these guarantees at June 28, 2008 is $870,000.

13. Lease Reserves:

In accordance with Statement of Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146), the Company records estimated costs for school closures when the lease is terminated or at the cease use date rather than at the date of a commitment to an exit or disposal plan. As of June 28, 2008, the
remaining reserves for closed schools were recorded at their estimated fair value by discounting to present value the net of all future rent payments and known or estimated sublease rentals over the respective lease term for the closed schools. The
leases on the closed schools expire between 2009 and 2017. At June 28, 2008 and June 30, 2007 the lease reserve for closed schools was $1,065,000 and $2,193,000, respectively. The following table summarizes activity recorded to the lease
reserves (dollars in thousands):



|                                     |  |                           |        |   |               |   |        |  
|------------------------------------ |  | ------------------------- | ------ | - | ------------- | - | ------ | -
|                                     |  | For the Fiscal Year Ended |       
|                                     |  | June 28, 2008             |        |   | June 30, 2007 |  
|Lease reserve at beginning of period |  | $                         | 2,193  |   |               | $ | 1,764  |  
|Payments against reserve             |  |                           | (1,547 | ) |               |   | (1,598 | )
|Lease reserve from acquisition       |  |                           | 174    |   |               |   |       |  
|Adjustments to reserve               |  |                           | 245    |   |               |   | 2,027  |  
|                                     |  |                           |        |   |               |   |        |  
|Lease reserve at end of period       |  | $                         | 1,065  |   |               | $ | 2,193  |  
|                                     |  |                           |        |   |               |   |        |  

Adjustments to the lease reserve during Fiscal 2007 included charges related to the vacancy of
three properties during Fiscal 2007. One of these properties has subsequently been subleased, however under the terms of the sublease agreement, the Company was obligated to pay rent and property taxes on behalf of the tenant through May 31,
2008. Based upon the terms of this agreement, the Company increased the reserve related to this closed school by $1,284,000 in Fiscal 2007.

14. Other
Income, net:

Other income included the following items:



|                                   |  |        |      |   |      |   |        |      |  |   |      |  
|---------------------------------- |  | ------ | ---- | - | ---- | - | ------ | ---- |  | - | ---- | -
|                                   |  | Fiscal |     
|                                   |  | 2008   |      |   | 2007 |   |        | 2006 | 
|Interest income                    |  | $      | (38  | ) |      | $ | (288   | )    |  | $ | (376 | )
|Recovery of Notes Receivable       |  |        |     |   |      |   | (3,287 | )    |  |   |     |  
|Gain from sale of assets           |  |        |     |   |      |   | (310   | )    |  |   |     |  
|Settlement of outstanding contract |  |        | (300 | ) |      |   |       |      |  |   |     |  
|Rental (income) expense            |  |        |     |   |      |   | (3     | )    |  |   | (31  | )
|Other                              |  |        | 12   |   |      |   | 17     |      |  |   | 57   |  
|                                   |  |        |      |   |      |   |        |      |  |   |      |  
|                                   |  | $      | (326 | ) |      | $ | (3,871 | )    |  | $ | (350 | )
|                                   |  |        |      |   |      |   |        |      |  |   |      |  



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



During the second quarter of Fiscal 2008, the Company received a payment of $300,000 for the
settlement and release of a contract for which the Company no longer has performance obligations. The settlement of this contract resulted in an increase to Fiscal 2008 basic and diluted earnings per share of $0.02.

Other income for Fiscal 2007 primarily resulted from a $2,500,000 subordinated note receivable the Company had previously reserved that was due May 2005
with Total Education Solutions, Inc. (TES). During Fiscal 2003, the Company reserved $1,000,000 of the note receivable with TES. Due to TESs continued performance deterioration during Fiscal 2005, the Company reserved the remainder
of the TES note of $1,500,000. TES also had senior debt in the amount of $1,000,000. Subsequently, TES advised that it was in default under the terms of its senior debt. During the first quarter of Fiscal 2007, the Company acquired the $1,000,000
TES senior debt from TESs senior lender for $200,000 in order, among other things, to give the Company a first security position in the TES debt. Later in Fiscal 2007, TES effected a recapitalization and the Company received a payment from TES
in the amount of $3,510,000. Payment of these notes resulted in the recognition of $3,300,000 of other income and an increase in basic and diluted earnings per share of $0.22 and $0.19, respectively, during Fiscal 2007.

During the second quarter of Fiscal 2007, the Company received payments from Franklin Town Charter High School (FTCHS) in the amount of
$1,028,000. The Company had a sublease agreement with FTCHS that included rental payments for tenant improvements that were funded by the Company. FTCHS purchased the property that the Company had subleased to it from the Companys landlord.
The payment to the Company released FTCHS from its sublease obligations to the Company and transferred ownership of leasehold improvements and other assets that the Company had funded on behalf of FTCHS. This resulted in the recognition of $310,000
of other income in continuing operations and an increase to Fiscal 2007 basic and diluted earnings per share of $0.02.

15. Discontinued Operations:

At the beginning of Fiscal 2007, discontinued operations consisted of fifteen schools, eight of which the Company did not operate
during Fiscal 2007 and seven of which the Company continued to operate until they were sold during the third and fourth quarters of Fiscal 2007. In addition to the remaining eight schools classified as discontinued operations during Fiscal 2007, as
part of an acquisition during the first quarter of Fiscal 2008, one additional school was added to discontinued operations. This school was operated by the Company during part of the first quarter of Fiscal 2008 and closed during the period;
subsequently the Company terminated its lease with the landlord of this property and was released from all future obligations.

During the
fourth quarter of Fiscal 2008, the Company settled a contract dispute in the amount of $1,250,000 to be paid to the Company over five years (see Note 6). The net gain resulting from this settlement is $1,028,000 after costs and discount for the five
year collection period. This gain resulted in an increase to Fiscal 2008 basic and diluted earnings per share of $0.06 included in discontinued operations.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The operating results for discontinued operations in the statements of income for Fiscal 2008, Fiscal
2007 and Fiscal 2006 net of tax are as follows (dollars in thousands):



|                                                                     |  |        |       |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------ | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Fiscal |      
|                                                                     |  | 2008   |       |   | 2007 |   |        | 2006 | 
|Revenues                                                             |  | $      | 44    |   |      | $ | 4,155  |      |  | $ | 6,572  |  
|Cost of services                                                     |  |        | (98   | ) |      |   | (3,684 | )    |  |   | (5,661 | )
|Rent and other                                                       |  |        | (116  | ) |      |   | (1,255 | )    |  |   | (1,734 | )
|Closed school lease reserves                                         |  |        | (245  | ) |      |   | (2,027 | )    |  |   | (228   | )
|Gain from sale of schools                                            |  |        |      |   |      |   | 1,900  |      |  |   |       |  
|Gain from settlement of sublease                                     |  |        | 1,028 |   |      |   |       |      |  |   |       |  
|                                                                     |  |        |       |   |      |   |        |      |  |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | 613   |   |      |   | (911   | )    |  |   | (1,051 | )
|Income tax (expense) benefit                                         |  |        | (236  | ) |      |   | 355    |      |  |   | 410    |  
|                                                                     |  |        |       |   |      |   |        |      |  |   |        |  
|Income (loss) from discontinued operations                           |  | $      | 377   |   |      | $ | (556   | )    |  | $ | (641   | )
|                                                                     |  |        |       |   |      |   |        |      |  |   |        |  

16. Stockholders Equity:

Preferred Stock:

A summary of the
Companys convertible preferred stock is as follows:



|         |  |                    |  |               |  |             
|-------- |  | ------------------ |  | ------------- |  | ------------
|         |  | Outstanding Shares
|         |  | June 28, 2008      |  | June 30, 2007 |  | July 1, 2006
|Series D |  | 1,063,830          |  | 1,063,830     |  | 1,063,830   
|Series E |  |                   |  |              |  | 1,531,523   
|Series F |  |                   |  |              |  | 688,066     
|         |  |                    |  |               |  |             
|         |  | 1,063,830          |  | 1,063,830     |  | 3,283,419   
|         |  |                    |  |               |  |             

On September 9, 2003, the Company issued in a private placement an aggregate of 588,236
shares of Series F Convertible Preferred Stock, $.001 par value, in exchange for an investment of $3,000,000, net of expenses of $106,000. On March 12, 2007, in accordance with the terms of the Companys Certificate of Designation, the
Company caused the holders of Series F Preferred Stock to convert their shares into Common Stock. As a result of these conversions, the number of shares of the Companys common stock outstanding increased by approximately 705,000 shares and no
shares of the Series F Preferred Stock remain outstanding. In accordance with the Companys Certificate of Designation, dividends related to the Series F shares for the years reported herein are as follows:



|                                |  |        |   |      |   |        |  |   |       
|------------------------------- |  | ------ | - | ---- | - | ------ |  | - | ------
|                                |  | Fiscal
|                                |  | 2008   |   | 2007 |   | 2006  
|Paid in kind Dividends (shares) |  |        |  |      |   | 17,302 |  |   | 33,345
|Cash Dividends (in thousands)   |  | $      |  |      | $ | 79     |  | $ |      

On June 17, 2003, the Company issued in a private placement an aggregate of 1,333,333 shares
of Series E Convertible Preferred Stock, $.001 par value, for a purchase price of $6,000,000. On January 31, 2007, in accordance with the terms of the Companys Certificate of Designation, the Company caused the holders of Series E
Preferred Stock to convert their shares into Common Stock in accordance with the terms of the



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Companys Certificate of Designation. As a result of these conversions, the number of shares of the Companys common stock outstanding increased by
approximately 1,551,000 shares and no shares of the Series E Preferred Stock remain outstanding. In accordance with the Companys Certificate of Designation, dividends related to the Series E shares for the years reported herein are as follows:



|                                |  |        |   |      |   |        |  |   |       
|------------------------------- |  | ------ | - | ---- | - | ------ |  | - | ------
|                                |  | Fiscal
|                                |  | 2008   |   | 2007 |   | 2006  
|Paid in kind Dividends (shares) |  |        |  |      |   | 19,143 |  |   | 74,237
|Cash Dividends (in thousands)   |  | $      |  |      | $ | 202    |  | $ |      

In 1995, the Company issued 1,063,830 shares of the Companys Series D Convertible Preferred
Stock for a purchase price of $2,000,000. The Series D Convertible Preferred Stock was convertible, until August 31, 2003, to common stock. The Series D Convertible Preferred Stock is no longer convertible. Holders of Series D Convertible
Preferred Stock are not entitled to dividends, unless dividends are declared on the Companys common stock. Upon liquidation, the holders of shares of Series D Convertible Preferred Stock are entitled to receive, before any distribution or
payment is made upon any common stock, $1.88 per share plus any unpaid dividends. At June 28, 2008, 1,063,830 shares of Series D Convertible Preferred Stock remain outstanding.

Common Stock Warrants:

In connection
with a $10,000,000 senior subordinated note issued in July 1998, the Company issued warrants to acquire an aggregate of 531,255 shares of the Companys common stock at $8.5625 per share. In accordance with terms of the warrant, the number of
shares available for purchase and the price of purchase were adjusted to prevent dilution of the ownership position at the time the warrant was issued. In addition, to accommodate a drop in the price of common stock prior to May 31, 2000, the
exercise price was adjusted to $6.85 per share. In accordance with these terms, the adjusted number of common shares available for purchase increased to 585,803 at $6.21 per share.

In June 2006 the warrants were exercised for the purchase of 585,803 shares of common stock of the Company at $6.21 per share for total proceeds to the
Company of $3,639,097. The exercise represented the purchase of 100% of the shares available under the warrant. Subsequent to the purchase no warrants are outstanding for the purchase of common shares of the Company.

2004 Omnibus Incentive Equity Compensation Plan:

On October 6, 2004, the stockholders approved the 2004 Omnibus Incentive Equity Compensation Plan. Under the Plan, new shares of common stock may be issued in connection with stock grants, incentive stock options
and non-qualified stock options for key employees and outside directors. The purpose of the Plan is to attract and retain quality employees. All grants to date under the Plan have been non-qualified stock options which vest over three years (except
that options issued to directors vest at the end of the fiscal year in which the options were granted and options granted to new directors upon joining the Board of Directors vest immediately).

Beginning July 1, 2007, stock-based compensation awarded to the Companys non-employee Board of Directors was granted in the form of restricted
stock awards (RSA) that vest on the earlier of the first anniversary of the date of the grant or the day prior to the next annual meeting of the Companys stockholders at which directors are elected. The first restricted stock
awards granted to the Companys non-employee Board of Directors were granted during the second quarter of Fiscal 2008. As of June 28, 2008, there were approximately 678,000 stock options and 17,000 restricted stock awards issued and
outstanding and the total number of shares of common stock available for issuance was 853,000 under the Plan.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



2000 Stock Option Plan for Consultants:

In February 2000, the Company established the 2000 Stock Option Plan for Consultants. This plan reserved up to an aggregate of 200,000 shares of common
stock of the Company for issuance in connection with non-qualified stock options for non-employee consultants. Through June 28, 2008, approximately 39,000 non-qualified stock options have been issued under the 2000 Stock Option Plan for
Consultants.

1995 Stock Incentive Plan:

With the approval of the 2004 Omnibus Incentive Equity Compensation Plan, the 1995 Stock Incentive Plan was terminated and the remaining shares reserved for issuance thereunder of 719,044 were cancelled. During Fiscal
2008, Fiscal 2007 and Fiscal 2006, no stock options under this plan were issued. At June 28, 2008, 261,000 non-qualified stock options remain issued under the 1995 Stock Incentive Plan.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used
for grants during:



|                                          |  |         |   |  |         |   |  |         |  
|----------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                          |  | Fiscal  |  
|                                          |  | 2008    |   |  | 2007    |   |  | 2006    |  
|Expected dividend yield                   |  | 0.0     | % |  | 0.0     | % |  | 0.0     | %
|Expected stock price volatility           |  | 21.7    | % |  | 32.6    | % |  | 36.8    | %
|Risk-free interest rate                   |  | 4.2     | % |  | 4.6     | % |  | 4.0     | %
|Weighted average expected life of options |  | 6 years |   |  | 5 years |   |  | 5 years |  
|Expected rate of forfeiture               |  | 7.3     | % |  | 6.4     | % |  | 5.6     | %

Stock options awards are amortized on a straight-line basis over the requisite service periods of
the awards, which are generally the vesting periods. Stock-based compensation expense is included in general and administrative expense in the statements of income for Fiscal 2008, Fiscal 2007 and Fiscal 2006 was approximately $717,000, $675,000 and
$555,000, respectively. As of June 28, 2008, there was approximately $742,000 of total unrecognized stock-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.2 years.
The Company expects to continue its historical practice of issuing stock options, which will result in additional stock based compensation in varying amounts in the future.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



A summary of the status of the Companys stock option plans and other employee options as of
June 28, 2008, June 30, 2007 and July 1, 2006 and changes during the years then ended is as follows:



|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|--------------------------------------------- |  | ------------------------ | ------ |  | ----------- | ----------------------------------- | ----------- | ------ | ----- | ----------------------------------- | ------- |  | - | ----
|                                              |  | SharesAvailablefor Grant |        |  | Outstanding |                                     | Exercisable
|                                              |  |                          | Shares |  |             | WeightedAverageGrant &ExercisePrice |             | Shares |       | WeightedAverageGrant &ExercisePrice
|Balance at July 2, 2005                       |  | 1,329,568                |        |  | 577,532     |                                     |             | $      | 6.38  |                                     | 344,265 |  | $ | 6.68
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                             |  | (200,100                 | )      |  | 200,100     |                                     |             |        | 9.68  |                                     |        |  |   |    
|Cancelled                                     |  | 9,334                    |        |  | (12,784     | )                                   |             |        | 8.35  |                                     |        |  |   |    
|Exercised                                     |  |                         |        |  | (20,166     | )                                   |             |        | 7.64  |                                     |        |  |   |    
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at July 1, 2006                       |  | 1,138,802                |        |  | 744,682     |                                     |             | $      | 7.20  |                                     | 445,549 |  | $ | 6.42
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                             |  | (173,000                 | )      |  | 173,000     |                                     |             |        | 10.19 |                                     |        |  |   |    
|Cancelled                                     |  | 50,400                   |        |  | (50,400     | )                                   |             |        | 8.47  |                                     |        |  |   |    
|Exercised                                     |  |                         |        |  | (6,800      | )                                   |             |        | 7.04  |                                     |        |  |   |    
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 30, 2007                      |  | 1,016,202                |        |  | 860,482     |                                     |             | $      | 7.71  |                                     | 608,299 |  | $ | 6.91
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                             |  | (167,000                 | )      |  | 167,000     |                                     |             |        | 14.70 |                                     |        |  |   |    
|Cancelled                                     |  | 20,667                   |        |  | (20,667     | )                                   |             |        | 11.79 |                                     |        |  |   |    
|Exercised                                     |  |                         |        |  | (28,567     | )                                   |             |        | 7.61  |                                     |        |  |   |    
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 28, 2008, prior to RSA grants |  | 869,869                  |        |  | 978,248     |                                     |             | $      | 8.82  |                                     | 686,893 |  | $ | 7.26
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|RSAs Granted at market                        |  | (16,632                  | )      |  |            |                                     |             |        |      |                                     |        |  |   |    
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 28, 2008, net of RSA grants   |  | 853,237                  |        |  | 978,248     |                                     |             | $      | 8.82  |                                     | 686,893 |  | $ | 7.26
|                                              |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     

The aggregate intrinsic value for options outstanding and options exercisable at June 28,
2008 was approximately $5,065,000 and $4,572,000, respectively. The aggregate intrinsic value for options exercised during Fiscal 2008 and Fiscal 2007 was $209,000 and $51,000, respectively. The weighted average remaining contractual term for
options outstanding and options exercisable at June 28, 2008 were approximately 6.7 years and 5.9 years, respectively. The total fair value of options vested during Fiscal 2008 and Fiscal 2007 was $416,000 and $688,000, respectively. The
weighted average fair value of stock options granted during Fiscal 2008 and Fiscal 2007 was $4.47 and $4.39, respectively. The total number of options not yet vested as of June 28, 2008 was 278,022 shares with a weighted average exercise price
of $12.59.

17. Income Taxes:

The
Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48) on July 1, 2007. Previously, the Company had accounted for
tax contingencies in accordance with Statement of Financial Standards No. 5, Accounting for Contingencies. As required by FIN No. 48, which clarifies FAS No. 109, Accounting for Income Taxes, the Company recognizes the
financial statement benefit of a tax position only after determining that the relevant tax authority would more likely not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized
in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN No. 48 to all tax
positions for which the statute of limitations remained open. As a result



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



of the implementation of FIN No. 48, the Company recognized approximately a $44,000 increase in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the July 1, 2007 accumulated deficit balance. There have been no material differences in this liability since the beginning of the fiscal year. Additionally, upon the implementation of FIN No. 48, the
Company reduced its state net operating loss carry-forwards and the corresponding valuation allowance by $1,392,000.

The amount of
unrecognized tax benefits at June 28, 2008 includes $44,000 of unrecognized tax benefits which if ultimately recognized would reduce the Companys annual effective tax rate.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various U.S. states jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax
authorities for the years before Fiscal 2003.

The Company is currently under examination by the Internal Revenue Service of its U.S.
income tax return for Fiscal 2006. The Company expects this examination to be concluded and settled within the next twelve months. The Company does not have any unrecognized tax benefits related to the period being examined.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses for all periods
presented. Upon adoption of FIN No. 48, the Company recognized $21,000 in interest and penalties.

The provision for income taxes
attributable to income before income taxes consisted of the following (dollars in thousands):



|                       |  |                      |       |      |   |       |  |   |      
|---------------------- |  | -------------------- | ----- | ---- | - | ----- |  | - | -----
|                       |  | For the Fiscal Years
|                       |  | 2008                 |       | 2007 |   | 2006 
|Current tax provision  |  |                      |       |      |   |       |  |   |      
|Federal                |  | $                    | 3,766 |      | $ | 3,447 |  | $ | 2,310
|State                  |  |                      | 499   |      |   | 506   |  |   | 339  
|                       |  |                      |       |      |   |       |  |   |      
|Total                  |  |                      | 4,265 |      |   | 3,953 |  |   | 2,649
|Deferred tax provision |  |                      |       |      |   |       |  |   |      
|Federal                |  |                      | 270   |      |   | 968   |  |   | 554  
|State                  |  |                      | 36    |      |   | 143   |  |   | 82   
|                       |  |                      |       |      |   |       |  |   |      
|Total                  |  |                      | 306   |      |   | 1,111 |  |   | 636  
|                       |  |                      |       |      |   |       |  |   |      
|Income tax expense     |  | $                    | 4,571 |      | $ | 5,064 |  | $ | 3,285
|                       |  |                      |       |      |   |       |  |   |      

Reconciliation between the statutory federal income tax rate and the effective income tax rates on
income before income taxes is as follows (dollars in thousands):



|                                           |  |                      |       |      |   |       |  |   |      
|------------------------------------------ |  | -------------------- | ----- | ---- | - | ----- |  | - | -----
|                                           |  | For the Fiscal Years
|                                           |  | 2008                 |       | 2007 |   | 2006 
|U.S. federal statutory rate                |  | $                    | 4,036 |      | $ | 4,415 |  | $ | 2,857
|State taxes, net of federal tax benefit    |  |                      | 535   |      |   | 649   |  |   | 421  
|Goodwill and other non deductible expenses |  |                      |      |      |   |      |  |   | 7    
|                                           |  |                      |       |      |   |       |  |   |      
|                                           |  | $                    | 4,571 |      | $ | 5,064 |  | $ | 3,285
|                                           |  |                      |       |      |   |       |  |   |      



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Deferred income taxes reflect the impact of temporary differences between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carry- forwards that give rise to a significant portion of deferred tax assets and (liabilities) are as follows (dollars in thousands):



|                                               |  |                                   |     |   |               |   |        |         |  |   |           |   |  |   |        |  
|---------------------------------------------- |  | --------------------------------- | --- | - | ------------- | - | ------ | ------- |  | - | --------- | - |  | - | ------ | -
|                                               |  | For the Fiscal Years Ending       |    
|                                               |  | June 28, 2008                     |     |   | June 30, 2007 |  
|                                               |  | Deferred tax assets (liabilities) |    
|                                               |  | Current                           |     |   | Long Term     |   |        | Current |  |   | Long Term |  
|Goodwill amortization and impairments          |  | $                                 |    |   |               | $ | (5,213 | )       |  | $ |          |   |  | $ | (4,094 | )
|Fixed asset depreciation and impairments       |  |                                   |    |   |               |   | 3,497  |         |  |   |          |   |  |   | 2,978  |  
|Closed school lease reserves                   |  |                                   |    |   |               |   | 308    |         |  |   |          |   |  |   | 855    |  
|Stock option and deferred compensation expense |  |                                   |    |   |               |   | 1,165  |         |  |   |          |   |  |   | 624    |  
|State net operating losses                     |  |                                   |    |   |               |   | 224    |         |  |   |          |   |  |   | 1,786  |  
|Deferred rent expense                          |  |                                   |    |   |               |   | 500    |         |  |   |          |   |  |   |       |  
|Gain on settlement of contract                 |  |                                   |    |   |               |   | (440   | )       |  |   |          |   |  |   |       |  
|Prepayments, accruals and reserves             |  |                                   | 237 |   |               |   | (33    | )       |  |   | (35       | ) |  |   |       |  
|                                               |  |                                   |     |   |               |   |        |         |  |   |           |   |  |   |        |  
|                                               |  |                                   | 237 |   |               |   | 8      |         |  |   | (35       | ) |  |   | 2,149  |  
|Valuation Allowance                            |  |                                   | (16 | ) |               |   | (182   | )       |  |   |          |   |  |   | (1,761 | )
|                                               |  |                                   |     |   |               |   |        |         |  |   |           |   |  |   |        |  
|Net deferred tax asset (liability)             |  | $                                 | 221 |   |               | $ | (174   | )       |  | $ | (35       | ) |  | $ | 388    |  
|                                               |  |                                   |     |   |               |   |        |         |  |   |           |   |  |   |        |  

Certain of the Companys subsidiaries have state net operating loss carry-forwards ranging
from approximately $55,000 to $1,038,000 as of June 28, 2008, which can be carried forward from five to 20 years depending on the state and will expire between 2008 and 2022, if not utilized. During Fiscal 2008, the Company utilized
approximately $147,000 of state net operating losses to offset taxable income. A valuation allowance was established against remaining loss carry-forwards due to the uncertainty of their realization as well as a lack of earnings history of certain
of the Companys subsidiaries in those states. The Company has utilized all previously generated federal net operating loss carry-forwards.

18.
Employee Benefit Plans:

The Company has a 401(k) Plan in which eligible employees may elect to enroll after six months of service on
scheduled enrollment dates. The Company matches 25% of an employees contribution to the Plan, up to 6% of the employees salary. The Companys matching contributions under the Plan were $389,000, $328,000 and $324,000 for Fiscal
2008, Fiscal 2007 and Fiscal 2006, respectively.

During Fiscal 2007, the Company initiated a deferred compensation plan that permits
certain management and highly compensated employees to defer up to 100% of their compensation and for identified individuals to receive a contribution from the Company. contributions are made at the discretion of the Compensation Committee of the
Companys Board of Directors. At June 28, 2008 and June 30, 2007, the Company has included $915,000 and $243,000 in Other long term liabilities to reflect its liability under the plan, respectively. During Fiscal 2008 and
Fiscal 2007, the Company has recognized $302,000 and $204,000 of general and administrative expense reflecting employer contributions into the plan, respectively. The Company has established a rabbi trust fund to finance the obligations under the
plan with corporate owned whole life insurance contracts on certain individuals who are participants in the plan. As of June 28, 2008 and June 30, 2007, the Company has included in Deposits and other assets $902,000 and
$127,000, which represents the cash surrender value of these policies, respectively.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



19. Fair Value of Financial Instruments:

Fair value estimates, methods and assumptions are set forth below for the Companys financial instruments at June 28, 2008 and June 30,
2007.

Cash and cash equivalents, receivables and current liabilities: Fair value approximates the carrying value of cash and cash
equivalents, receivables and current liabilities as reflected in the consolidated balance sheets at June 28, 2008 and June 30, 2007 because of the short-term maturity of these instruments.

Long-term debt: The carrying values for the Companys long-term debt of $12,500,000 and $0 at June 28, 2008 and June 30, 2007
respectively, approximated market value based on current rates that management believes could be obtained for similar debt.

20. Commitments and
Contingencies:

The Company is engaged in legal actions arising in the ordinary course of its business. The Company currently believes
that the ultimate outcome of all such pending matters will not have a material adverse effect on the Companys consolidated financial position. The significance of these pending matters on the Companys future operating results and cash
flows depends on the level of future results of operations and cash flows as well as on the timing and amounts, if any, of the ultimate outcome.

The Company carries fire and other casualty insurance on its schools and liability insurance in amounts which management believes is adequate for its operations. As is the case with other entities in the education and preschool industry,
the Company cannot effectively insure itself against certain risks inherent in its operations. Some forms of child abuse have insurance sublimits per claim in the general liability coverage.

21. Related Party Transactions:

In September 2004,
the Company entered into a License Agreement with NetSuite, Inc. for the license of an online business application known as NetSuite for approximately $600,000. One of the Companys directors, Mr. Fink, also served as a director of
NetSuite, Inc. at the time of the license agreement and continued as a NetSuite director through April 2007. The Company paid $601,000, $54,000 for licenses and services to NetSuite during Fiscal 2007 and Fiscal 2006, respectively.

22. Segment Information:

In accordance with SFAS
131, Disclosures about Segments of an Enterprise and Related Information, the private pay schools are disclosed as a segment. The Company primarily manages the same type of business in its private pay schools. The Company also performs
back office services for one charter school. In accordance with SFAS 131, the Company discloses the charter school as separate segment information in the other category.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The table below presents information about the reported operating income of the Company for Fiscal
2008, Fiscal 2007 and Fiscal 2006 (dollars in thousands):



|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|---------------------------------------- |  | -------------- | ------- | ----- | - | --------- |  | ----- | ----- |  | - | -------
|                                         |  | PrivateSchools |         | Other |   | Corporate |  | Total
|Fiscal 2008                              |  |                |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $              | 206,020 |       | $ | 194       |  | $     |      |  | $ | 206,214
|Gross profit                             |  |                | 30,372  |       |   | 165       |  |       |      |  |   | 30,537 
|Depreciation and amortization:           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $              | 6,031   |       |   |          |  | $     | 1,280 |  | $ | 7,311  
|Discontinued operations                  |  |                | 9       |       |   |          |  |       |      |  |   | 9      
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $              | 6,040   |       | $ |          |  | $     | 1,280 |  | $ | 7,320  
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  | $              | 65,317  |       | $ |          |  | $     |      |  | $ | 65,317 
|Segment assets                           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $              | 109,280 |       | $ |          |  | $     | 3,837 |  | $ | 113,117
|Discontinued operations                  |  |                | 29      |       |   | 2         |  |       |      |  |   | 31     
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $              | 109,309 |       | $ | 2         |  | $     | 3,837 |  | $ | 113,148
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $              | 6,648   |       | $ |          |  | $     | 1,474 |  | $ | 8,122  
|                                         |  |                |         |      
|Fiscal 2007                              |  |                |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $              | 181,447 |       | $ | 1,370     |  | $     |      |  | $ | 182,817
|Gross profit                             |  |                | 26,806  |       |   | 686       |  |       |      |  |   | 27,492 
|Depreciation and amortization:           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $              | 5,086   |       | $ | 193       |  | $     | 1,640 |  | $ | 6,919  
|Discontinued operations                  |  |                | 16      |       |   |          |  |       |      |  |   | 16     
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $              | 5,102   |       | $ | 193       |  | $     | 1,640 |  | $ | 6,935  
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  | $              | 47,499  |       | $ |          |  | $     |      |  | $ | 47,499 
|Segment assets                           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $              | 85,228  |       | $ |          |  | $     | 3,079 |  | $ | 88,307 
|Discontinued operations                  |  |                | 4       |       |   | 3         |  |       |      |  |   | 7      
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $              | 85,232  |       | $ | 3         |  | $     | 3,079 |  | $ | 88,314 
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $              | 6,525   |       | $ |          |  | $     | 987   |  | $ | 7,512  
|                                         |  |                |         |      
|Fiscal 2006                              |  |                |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $              | 159,630 |       | $ | 2,127     |  | $     |      |  | $ | 161,757
|Gross profit                             |  |                | 22,135  |       |   | 912       |  |       |      |  |   | 23,047 
|Depreciation and amortization:           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $              | 4,271   |       | $ | 463       |  | $     | 805   |  | $ | 5,539  
|Discontinued operations                  |  |                | 269     |       |   |          |  |       |      |  |   | 269    
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $              | 4,540   |       | $ | 463       |  | $     | 805   |  | $ | 5,808  
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  | $              | 38,374  |       | $ |          |  | $     |      |  | $ | 38,374 
|Segment assets                           |  |                |         |       |   |           |  |       |       |  |   |        
|Continuing operationsnon-capital assets |  | $              | 81,557  |       | $ |          |  | $     | 2,947 |  | $ | 84,504 
|Discontinued operationscapital assets   |  |                | 1,915   |       |   |          |  |       |      |  |   | 1,915  
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $              | 83,472  |       | $ |          |  | $     | 2,947 |  | $ | 86,419 
|                                         |  |                |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $              | 3,395   |       | $ |          |  | $     | 1,994 |  | $ | 5,389  



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



23. Quarterly Results of Operations (unaudited):

The following table shows certain unaudited financial information for the Company for the interim periods indicated. The unaudited financial information
has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the
Companys financial position. Quarterly results may vary from year to year depending on the timing and amount of revenues and costs associated with new school development and acquisitions. (dollars in thousands, except per share data):



|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|------------------------------------------------------ |  | ------------- | ------ | - | -------------- | - | ------ | ------------- |  | -------------- | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - | ---- | - | ------ |  | - | ------ |  | - | ------
|Quarterly Results                                     
|Adjusted for Discontinued Operations                  
|                                                       |  | First Quarter |        |   | Second Quarter |   |        | Third Quarter |  | Fourth Quarter
|                                                       |  | 2008          |        |   | 2007           |   |        | 2008          |  |                | 2007   |   |  | 2008 |        |   | 2007 |   | 2008   |   | 2007
|Revenues                                               |  | $             | 44,633 |   |                | $ | 39,108 |               |  | $              | 51,207 |   |  | $    | 45,556 |   |      | $ | 53,328 |   |      | $ | 49,218 |  | $ | 57,046 |  | $ | 48,935
|Gross profit                                           |  |               | 4,114  |   |                |   | 3,190  |               |  |                | 7,865  |   |  |      | 7,230  |   |      |   | 8,987  |   |      |   | 8,436  |  |   | 9,571  |  |   | 8,636 
|Income (loss) from continuing operations, net of tax   |  |               | (230   | ) |                |   | (416   | )             |  |                | 2,193  |   |  |      | 3,587  |   |      |   | 2,565  |   |      |   | 2,032  |  |   | 2,773  |  |   | 2,718 
|Income (loss) from discontinued operations, net of tax |  |               | (60    | ) |                |   | (254   | )             |  |                | (67    | ) |  |      | (1,398 | ) |      |   | (58    | ) |      |   | 463    |  |   | 562    |  |   | 633   
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Net income (loss)                                      |  | $             | (290   | ) |                | $ | (670   | )             |  | $              | 2,126  |   |  | $    | 2,189  |   |      | $ | 2,507  |   |      | $ | 2,495  |  | $ | 3,335  |  | $ | 3,351 
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Basic income (loss) per share                          |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Continuing operations                                  |  | $             | (0.02  | ) |                | $ | (0.07  | )             |  | $              | 0.21   |   |  | $    | 0.42   |   |      | $ | 0.25   |   |      | $ | 0.22   |  | $ | 0.27   |  | $ | 0.26  
|Discontinued operations, net of tax                    |  |               | (0.01  | ) |                |   | (0.03  | )             |  |                | (0.01  | ) |  |      | (0.17  | ) |      |   | (0.01  | ) |      |   | 0.05   |  |   | 0.05   |  |   | 0.06  
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Net income (loss)                                      |  | $             | (0.03  | ) |                | $ | (0.10  | )             |  | $              | 0.20   |   |  | $    | 0.25   |   |      | $ | 0.24   |   |      | $ | 0.26   |  | $ | 0.32   |  | $ | 0.32  
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Diluted income (loss) per share:                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Continuing operations                                  |  | $             | (0.02  | ) |                | $ | (0.07  | )             |  | $              | 0.21   |   |  | $    | 0.34   |   |      | $ | 0.24   |   |      | $ | 0.19   |  | $ | 0.26   |  | $ | 0.25  
|Discontinued operations                                |  |               | (0.01  | ) |                |   | (0.03  | )             |  |                | (0.01  | ) |  |      | (0.13  | ) |      |   | (0.01  | ) |      |   | 0.04   |  |   | 0.05   |  |   | 0.06  
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       
|Net income (loss)                                      |  | $             | (0.03  | ) |                | $ | (0.10  | )             |  | $              | 0.20   |   |  | $    | 0.21   |   |      | $ | 0.24   |   |      | $ | 0.23   |  | $ | 0.31   |  | $ | 0.31  
|                                                       |  |               |        |   |                |   |        |               |  |                |        |   |  |      |        |   |      |   |        |   |      |   |        |  |   |        |  |   |       

24. Subsequent Events:

On July 20, 2008, the Companys Board of Directors adopted a limited duration Shareholder Rights Plan designed to protect the Companys shareholders in the event of an attempt to acquire control of the
Company on terms which do not secure fair value for all of the Companys shareholders. The Board has adopted a limited duration Plan that expires in four years, rather than the more common ten-year term. The four-year term was selected to
provide the Company with an opportunity to maximize long-term shareholder value by enabling management of the Company to execute on its growth strategy, while protecting shareholders from a creeping acquisition or other tactics to gain control of
the Company without offering all shareholders an adequate price. In addition, the Plan is not intended to prevent a takeover. Instead, it is intended to encourage anyone seeking to acquire the Company to negotiate with the Companys Board of
Directors prior to attempting a takeover in order to ensure that any takeover reflects an adequate price and that the interests of the Companys shareholders and other constituencies are protected.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Terms of the Plan provide for a dividend distribution of one right (each a Right and
collectively, the Rights) for each share of common stock of the Company to holders of record at the close of business on July 31, 2008. The Rights will become exercisable only in the event, with certain exceptions, an acquiring
party acquires 20% or more of the Companys common stock then outstanding or, as of the date of this Press Release, any existing holder of more than 20% of the Companys common stock acquires any additional shares. Each Right will entitle
the holder to buy one one-hundredth of a share of a new series of preferred stock at a price of $45.00. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either the Companys stock or shares
in an acquiring entity at half of market value. The Company will generally be entitled to redeem the Rights at $0.01 per right at any time until the tenth day following the acquisition of 20% of its common stock, subject to extension by
a majority of the Directors. The Rights will expire on July 19, 2012.

During the first quarter of Fiscal 2009, the Company completed
the acquisition of the assets of Southern Highlands Preparatory Schools (Southern Highlands), the acquisition expands the Companys existing market coverage in Las Vegas, Nevada market in which the Company currently operates.
Southern Highlands opened its doors in the fall of 2003. A private, non-sectarian preparatory school, Southern Highlands Preparatory School provides programs for preschool students through grade 8. The purchase price for Southern Highlands was
$1,550,000 plus transaction costs.

Also, during the first quarter of Fiscal 2009, the Company completed the acquisition of the assets of
Ivy Kids Learning Center School (Ivy Kids); the acquisition expands the Companys existing market coverage in the Houston, Texas market adding one preschool to a market in which the Company currently operates. The purchase price for
Ivy Kids was $715,000 plus transaction costs.



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