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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 27, 2009

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  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 27, 2008 (the last business day of the registrants most recently completed second fiscal quarter) was approximately $107,502,000 (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 2, 2009, was 10,497,409.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 4, 2009 (the Proxy Statement) and to be filed within 120 days after the registrants fiscal year ended
June 27, 2009 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                                                                                                    |  | 11  
|1B.      |  | Unresolved Staff Comments                                                                                       |  | 17  
|2.       |  | Properties                                                                                                      |  | 17  
|3.       |  | Legal Proceedings                                                                                               |  | 18  
|4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 18  
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |     
|         |  |                                                                                                                
|5.       |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
Securities |  | 19  
|6.       |  | Selected Financial Data                                                                                         |  | 21  
|7.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 23  
|7A.      |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 55  
|8.       |  | Financial Statements and Supplementary Data                                                                     |  | 55  
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 55  
|9A.      |  | Controls and Procedures                                                                                         |  | 55  
|9B.      |  | Other Information                                                                                               |  | 58  
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |     
|         |  |                                                                                                                
|10.      |  | Directors and Executive Officers and Corporate Governance                                                       |  | 59  
|11.      |  | Executive Compensation                                                                                          |  | 59  
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 59  
|13.      |  | Certain Relationships and Related Transactions and Director Independence                                        |  | 59  
|14.      |  | Principal Accountant Fees and Services                                                                          |  | 59  
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |     
|         |  |                                                                                                                
|15.      |  | Exhibits and Financial Statement Schedules                                                                      |  | 60  



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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, potential risks and uncertainties include, among others,
unemployment rates impacting our current customers or potential customer base; changes in general economic conditions; the implementation and results of the Companys ongoing strategic initiatives; the Companys ability to compete with new
or existing competitors; dependence on senior management and other key personnel; the litigation with the Department of Justice relating to alleged violations of the American with Disabilities Act; the high concentration of ownership of the
Companys stock among its three largest stockholders; and risks and uncertainties arising in connection with Knowledge Learning Corporations unsolicited proposal to acquire the Company, which while unanimously rejected by the
Companys Board of Directors, the Companys Board of Directors remains open to considering strategic transactions that fully and fairly recognize the Companys value and are in the best interest of stockholders. In addition, the
Companys results may be affected by general factors, such as political developments and policy, interest and inflation rates, accounting standards and requirements, 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. Nobel Learning Communities provides high-quality
private education, with small schools and class sizes 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 8, 2009, the Company operated 183
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 School®, Discovery Isle Child Development Center, Enchanted Care Learning Center, Camelback Desert Schools, The Honor Roll School®, Camp Zone®, Paladin Academy®, Rocking Horse Child Care Centers®, Southern Highlands Preparatory School, Montessori Corner, HighPointe Childrens Academy 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 Program and Delivery Model

NLCI delivers
research-based, standards-driven curricula in all its schools. The content is closely monitored by our Education Department to ensure that changes to national and state standards are reflected in our own national K-12 standards. Our Education
Department continually evaluates programs and practices related to early childhood development so that the curriculum reflects the latest and best research-based content for preschoolers. The framework for delivery of this content embraces
student-centered learning. Classroom learning is often organized around guided centers, cooperative learning activities, and project-based learning.

Accreditation

NLCI seeks 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)/AdvancED and/or 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, Southern Association of Colleges and Schools and Western Association of Colleges and Schools. The company also maintains corporate accreditation through CITA/AdvancED; the corporation successfully completed the re-accreditation process in
May 2009.

National Education Advisory Board

Members of the Companys National Education Advisory Board are leaders in preschool and elementary education and periodically consult with the Nobel Learning Education Department on potential changes to the



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curriculum and curriculum delivery model. Approved recommendations are then developed, delivered, and supported by the Nobel Learning Education Department.
The members of the Advisory Board meet twice annually with the Education Department to advise and assist in all curriculum and professional development activities. The members are chosen based on their specific areas of expertise. Each member
represents a specific segment of the educational community and brings a specialized expertise to the Advisory Board.



| |  |  | Dr. Cathy Collins Block, professor in the Department of Curriculum and Instruction at Texas Christian University.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Dr. Arthur L. Costa, Emeritus Professor of Education at California State University, Sacramento.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Dr. Drew Gitomer, Senior Vice-President for Research and Development at Educational Testing Service (ETS).
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Dr. Janet Katz, retired Principal and Curriculum Coordinator, Upper Saddle River, NJ.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Dr. John N. Mangieri has served as the Chairman of the Reading Department at the University of South Carolina, as Dean of the School of Education at Texas
Christian University, and as a university president.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dr. Barbara Presseisen, retired Chief Education Officer and Vice President of Education at Nobel Learning Communities, Inc. in 1999 and serves as the Chair
Emeritus of the Advisory Board.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dr. Pam Schiller, Ph.D., National Curriculum Specialist for The Wright Group/McGraw-Hill and previous Head of the Early Childhood Department at the University
of Houston where she also directed the Lab School.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Preschool Educational Program

Links to Learning, our preschool curriculum, is an integrated series of programs for children ages six weeks to five years that engages the young
learners senses, mind and body. The components of each program build upon each other as children grow and develop, ensuring an excellent preparation for elementary school. The program draws from the collective expertise of renowned early-age
educators such as Dewey, Piaget and Vygotsky. The Links to Learning Curriculum builds new learning on past experiences, and encourages each childs interest in discovery and hands-on learning. Links to Learning was created by the Nobel Learning
Education Department, a team of highly skilled experts with extensive knowledge of early-age education. This team is guided by the National Education Advisory Board which ensures that the curriculum reflects the latest early education research.

Links to Learning divides skills into eight distinct academic areas. These areas are: Language and Literacy, Mathematics, The World and
Me, My Community and Environment, Art, Music, Wellness and Spanish.

The Links to Learning program features a strong parent communication
component. Nobel Learning believes that when parents and teachers work as partners in a childs education, the learning experience is richer and more meaningful. Parents receive a folder each month, containing an overview of the developmental
skills that the child has worked on that month. The folder contains samples of work that was completed in class, as well as a letter outlining suggested activities that can be done with the child at home. The folder also provides a preview of the
next months skills and lessons. Teachers post weekly and daily skills lists outside the classroom.

The Links to Learning Curriculum
focuses on two vital goals: developing a childs lifelong love of learning and ensuring that he/she is ready for kindergarten and elementary school. The Education Department studied the kindergarten standards in all of the states in which there
are kindergarten classes and carefully designed the preschool program to meet or to exceed pre-kindergarten expectations. Each preschool has a Links to Kindergarten section on its school website so that parents can be assured of a
successful transition to kindergarten by matching to the appropriate state standards.



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Elementary and Middle School Educational Program

Standards-Based Content

In 2007 Nobel Learning created a standards-based curriculum for all grades
kindergarten through eighth. To do so, the members of the Education Department researched the standards in 46 states and merged them into one set of national standards. This was done for eleven different content areas: language arts, writing, math,
science, social studies, technology, physical education, wellness, art, music, Spanish, and study skills. Each content area has standards with corresponding objectives of what students need to know and be able to do. Each grade level has a
comprehensive curriculum binder that takes each of the eleven content areas and divides the standards and objectives into four quarterly pacing guides. The pacing guides, then, create a synchronous curriculum for the Companys national network
of schools which provides unique collaborative learning opportunities, such as Learning Without Walls projects and Intrigue Team Projects.

Delivery
System

The content of the Nobel Learning curriculum is dictated by state standards. The delivery of that curriculum, however, is based
on student-centered, project-based learning experiences. The content delivery model includes traditional classroom instruction, as well as 21st century skills projects in Grades 1 through 8. These projects are based on the framework provided by the
Partnership for the 21st Century Skills organization. Nobel Learning is a professional development affiliate of the Partnership for 21st Century Skills (www.21stcenturyskills.com). The Partnership for 21st Century Skills is the leading advocacy
organization focused on infusing 21st century skills into education.

Nobel Learning schools deliver standards-based content in a
student-centered, customized learning environment that includes the 21st century skills of collaboration, creativity, innovation, and global awareness.

These student-centered, project-based experiences include Learning Without Walls projects. Examples of such projects include a 4th grade Global Warming Investigation, a 5th grade project on Waterways, a
6th grade project exploring mathematics through the study of systems, a 7th grade project about European countries, and an 8th grade project building leadership and entrepreneurial skills.

Assessment

It is essential to continuously monitor
students academic performance to ensure that they meet or exceed grade-level benchmarks for proficiency. All students in grades 1 through 8 participate in SAT10 testing each spring. Those test results are used to monitor student progress and
to set building-level achievement goals.

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. During the 2008/2009 school year we implemented Education Connections, an intranet site dedicated to providing training resources and support for our teachers. Education Connections includes
a teacher communication and support area, exemplary lesson plan library, grade level curriculum support and other valuable resources to support and enhance our teachers professional development, professional relationships, and satisfaction.

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



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within the education industry. Through participation in our annual National Principal Conference, seasoned administrators as well as new recruits are kept
abreast of up-to-date research, changing trends and sound pedagogical practices. In addition, our Executive Directors and many of our highest performing principals are utilized as trainers to help with professional development and curriculum
implementation in our schools.

School Operations

Standards

In order 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 Education Department guidelines, to meet local and state requirements. Members of our management team visit
schools 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 operations, 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 criteria. 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. We determine whether to monitor a particular aspect of performance based on its impact on our 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, along
with our Education Department, 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 Education Managers 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.



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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, in which case additional schools will be added to the cluster.

Many of our preschools and elementary schools allow for early
drop-off and late pick-up to accommodate busy 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.

Our schools offer athletic activities and supplemental programs, which include day field trips coordinated with our 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. 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 stand-alone 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. These 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 fills 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 locations also provide summer camp programs for preschool and school age children.

With these rich and targeted programs, the Kids Campus locations, plus one additional before and after school location acquired in the Dallas area
and operating as part of our Merryhill Schools, provide additional growth potential in existing and new markets for the Company.



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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 goal 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 six 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 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

Our primary sources for generating new
enrollments include word-of-mouth recommendations from current parents, interactive marketing including search engine marketing, direct mail campaigns, yellow page listings and public relations programs. We utilize a sophisticated paid search engine
marketing program that is customized to generate and track new leads for each individual market and product type. We also market to our own database of parent inquiries through ongoing direct mail and e-mail communications.

Marketing efforts towards continuous improvement of customer acquisition and retention are directed by a central marketing team. Working in conjunction
with school operations management and the education team, marketing formulates consistent brand positioning and communication strategies that can be customized to each local area and type of school. The efforts of central marketing are supplemented
by community-based activities conducted by our local Executive Directors and Principals.

Our annual marketing calendar is synchronized to
the typical customer demand cycle for enrollment. Although marketing campaigns and demand take place throughout the year, we direct the most marketing resources towards our preschool enrollments in late summer and early winter and towards our K+
schools during fall and winter.

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 newsletters, enhanced school specific websites, updated in-school and in-classroom communication materials and parent
satisfaction surveys.

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.



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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 training programs designed to strengthen Principals and Executive Directors sales, marketing 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.

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. At the end of Fiscal 2009, this process resulted in the closure of six schools.

New School Development

During Fiscal 2009, the
Company opened four new preschools. During the first quarter of Fiscal 2010, the Company opened three additional preschools and has one preschool 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 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.

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
extending our platform through high school, on-line K-12 schools, on-line course delivery, enrichment programs, summer camps, technology based before and after schools programs, and concepts with a focus on international students.



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The Company seeks to identify acquisition opportunities at appropriate prices that will allow the
acquisition to create stockholder value over time through the acquisitions creation of new growth opportunities, scalability or synergy with our existing school portfolio and/or geographic markets.

At the end of Fiscal 2006, the Company made its first acquisition in over three years. The Honor Roll School® acquisition allowed the Company to enter a new geographic market by purchasing an already successful preK-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. During Fiscal 2009 the Company further enhanced the value of The Honor Roll School acquisition and The Honor Roll brand by acquiring a nearby preschool which was
quickly re-branded as The Honor Roll Preschool. The Honor Roll Preschool is now a feeder school which sends students to The Honor Roll School.

During Fiscal 2007, the Company entered a new geographic market with the acquisition of the six Discovery Isle preschools in San Diego, California. In this case, the acquisition provided the Company the opportunity to expand the Discovery
Isle preschool brand through the development or acquisition of additional preschools and 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 further enhanced the value of the Discovery Isle acquisition and the Discovery Isle brand by acquiring two additional
schools in the southern California market previously branded as Teddy Bear Treehouse Schools, which were quickly re-branded as Discovery Isle schools. Also during Fiscal 2008 the Company acquired four Learning Ladder preschools, three of which were
rebranded under the Companys existing Chesterbrook Academy brand, and the fourth of which was closed shortly after completing the acquisition.

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 and 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.

During the fourth quarter of Fiscal 2009 the Company acquired three Montessori schools in central New Jersey collectively referred to
as Montessori Corner, the addition of these schools added one elementary school and two preschools to the three Montessori method schools already in the Companys portfolio of schools. Also during the fourth quarter of Fiscal 2009
the Company acquired the Highpointe Childrens Academy (Highpointe). The addition of Highpointe added a preschool and an elementary school and expanded the Companys existing market coverage in the Dallas, Texas market. During
the third quarter of Fiscal 2009 the Company acquired Country Tyme Preschool, which expanded the Companys existing market coverage in the Southeastern Pennsylvania market. During the first quarter of Fiscal 2009, the Company acquired Southern
Highlands Preparatory Schools (SHPS) which included a preschool and elementary school and expanded the Companys existing market coverage in the Las Vegas, Nevada market. SHPS has become a destination middle school for many of our
elementary school students from one of our Merryhill elementary schools in that market. Additionally, during the first quarter of Fiscal 2009 the Company acquired Ivy Kids Learning Center School (Ivy Kids) which has subsequently been
rebranded under the Companys existing The Honor Roll School ® brand. The Ivy Kids acquisition expanded the
Companys existing market coverage in the Houston, Texas market by adding one preschool to a market in which the Company currently operates.



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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 (3)           |  | 2008                |  |                              |  | 2           |  |                     |  | Phoenix, AZ       |  | N                 
|Ivy Kids Early Learning Center         |  | 2009                |  | 1                             |  |            |  |                     |  | Missouri City, TX |  | E                 
|Southern Highlands Preparatory Schools |  | 2009                |  | 1                             |  | 1           |  |                     |  | Las Vegas, NV     |  | E                 
|Country Tyme                           |  | 2009                |  | 1                             |  |            |  |                     |  | Limerick, PA      |  | E                 
|HighPointe Childrens Academy           |  | 2009                |  |                               |  | 1           |  |                     |  | Dallas, TX        |  | E                 
|Montessori Corner                      |  | 2009                |  | 2                             |  | 1           |  |                     |  | Princeton, NJ     |  | N                 



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

|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | During the fourth quarter of Fiscal 2009, the Company closed one Camelback Desert School. The results of this school are included in Net income (loss) from discontinued operations
in the periods presented in this Form 10K.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the first quarter of 2010, the Company acquired the Laurel Springs School
(Laurel Springs), an online and distance learning school (www.laurelsprings.com). Laurel Springs educational program spans the entire K-12 market and has a fully accredited curriculum that includes Honors AP Courses, a Gifted and
Talented program, a chapter of the National Honors Society and a strong college preparatory program. Laurel Springs student body includes elite athletes, entertainers, and home schooled students from all 50 states and from 40 foreign
countries. Laurel Springs extends the Companys educational programs through high school and provides a fully integrated K-12 platform.

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 charter schools, state run virtual schools, virtual private schools and voucher programs. Our strategy is to provide parents a high 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,



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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, private virtual schools, public virtual 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 in the U.S. and that currently compete beyond a regional level are privately held Knowledge Learning Corp., Bright Horizons Family Solutions, Inc.
and Mini-Skools, Challenger Schools and ABC Learning through its Learning Care Group subsidiary. 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 location, professionally developed educational programs, qualified and trained school administrators,
well-equipped facilities, relationships with local employers, 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 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



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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 8, 2009, 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

All periodic and current reports, registration statements, code of conduct and other material that
the Company is required to file with the Securities and Exchange Commission (SEC), including the Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) of the Securities and Exchange Act of 1934 (the 1934 Act Reports), are available through the Companys investor relations page at www.nobellearningcommunities.com. Such documents are
available as soon as reasonably practicable after electronic filing of the material with the SEC. The Companys Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual
Report on Form 10-K.

The public may also read and copy any materials filed by the Company 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 at www.SEC.gov, which contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC.

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 unsolicited proposals by Knowledge Learning Corporation to acquire the outstanding shares of the Company, which were rejected unanimously by the Companys Board of Directors, have created uncertainty that
could adversely affect the ability of the Company to execute its strategic plan and lead to the use of additional management resources.

During Fiscal 2009, the Company received unsolicited expressions of interest from Knowledge Learning Corporation to pursue an acquisition of the Company. As part of its evaluation of the proposals, the Company



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engaged and consulted with financial and legal advisors to decide whether pursuing the possible transaction would be in the best interest of the
Companys stockholders. Additionally, the Companys Board of Directors also authorized a committee consisting solely of independent directors to evaluate the proposals. Subsequently, the Company announced that its Board of Directors, in
consultation with its financial and legal advisors, unanimously rejected Knowledge Learning Corporations proposal to acquire the Company. The Companys Board of Directors remains open to considering strategic transactions which fully and
fairly recognize the Companys value and are in the best interest of stockholders.

Prospective sellers whose schools the Company may
acquire may perceive the possibility that the Board will continue to receive, and potentially approve, proposals for strategic transactions as a negative factor in determining whether to sell their school to the Company. As a result, the Company may
face additional challenges in entering into and consummating key acquisitions. In addition, management resources may be diverted away from operational issues and towards assessment and response to strategic transaction proposals; this diversion of
resources may slow our progress in achieving certain operational and corporate development goals.

Unemployment rates of current or potential customers
may adversely impact the Company.

The Company believes that more than a majority of the Companys customers are dual income
households and the Company is dependent on this demographic characteristic (a target demographic characteristic of the Company) to support annual comparable school revenue growth and sustainability. Demand for our product is directly related to
certain economic factors, including the unemployment rate, personal disposable income, birth rate and pricing. As unemployment rates rise, birth rates slow and/or income decelerates or reverses, there is a risk that demand for our services may drop.
Such a decrease in demand may have a direct adverse impact on school enrollment and revenue growth.

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 and rising unemployment 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 general economy and budget constraints have caused some public school systems to study moving to a
four day school week, year round school calendar or shorter school year. To the extent that there are any material changes to the traditional school year schedule, it may impact our business. There is uncertainty 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 state and local economic pressures due to the general economy, many public school systems are changing their policy relating to providing
transportation for children within the school district who attend private school. While we have few schools whose students receive transportation through public school systems, there may be some impact on students in some of our schools, should the
public school systems change their transportation policies. Finally, in reaction to the recession and budget cuts, many public school systems are re-evaluating policies and programs such as class size, subjects offered, transportation and athletic
programs. While we do not yet know the impact of decisions made by numerous local school systems, it is possible that changes in public school programs or policies could impact our schools and enrollments. It is unclear whether any potential impact
will be positive or negative to our business.



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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. Based on current economic events and the related restraint in the capital markets, financing resources may be
inadequate to support new school openings or acquisitions, we may be required to seek additional capital to 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 under the current condition of the capital markets. If we are unable to
secure needed additional capital, our growth efforts would be curtailed.

The Companys inability to maintain compliance with financial covenants
as required defined by the Amended and Restated Credit Agreement dated June 6, 2008 among the Company and its lenders (the 2008 Credit Agreement)

The Company is required to meet or exceed certain financial covenants as defined by the 2008 Credit Agreement. As the Companys revenue and net income are subject to general economic conditions as described
above, there may be risks in meeting or exceeding these covenants. The potential risks of not meeting these covenants could include the inability to borrow under the 2008 Credit Agreement, the requirement to repay outstanding borrowings under the
2008 Credit Agreement, a charge from the lenders to amend the 2008 Credit Agreement or to waive the non-compliance, and an increased interest costs, certain of which would have a material adverse effect on the Company.

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, any future changes to federal and state changes to the minimum wage laws may reduce the
qualified applicant pool or increase our wage costs.

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.

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.



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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 that 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.

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.

The impact of the litigation with the U.S. Department of Justice concerning alleged
violations of the Americans with Disabilities Act of 1990 on our results of operations or cash flows in future periods

The United
States Department of Justice (Disability Rights Section of the Civil Rights Division) (DOJ) filed a lawsuit on April 29, 2009 in the U.S. District Court for the Eastern District of Pennsylvania against the Company alleging that the
Company violated Title III of the Americans with Disabilities Act of 1990 (ADA) by excluding children with disabilities from its schools and programs. The complaint seeks an unspecified amount in compensatory damages and civil penalties,
as well as declaratory and injunctive relief.

The Company is committed to complying with and believes it has complied with the ADA in
providing access to children with disabilities. The Company believes that the DOJs allegations are without merit, and intends to defend against these allegations vigorously.

The Company is not able at this time to estimate the range of loss, if any, arising out this matter since its outcome is uncertain. Although it does not
expect that the resolution of the matter will have a material adverse effect on its financial condition, results of operations or cash flows, there can be no assurances in this regard.

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, government subsidized 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



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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, some of which receive government subsidies, as well as elementary schools, some of which are able to offer lower pricing than the Company. In addition, the Company is currently studying the impact, if any, of the rapid
expansion of virtual, or on-line, schools on demand for the Companys elementary and middle school products. 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.

Government Regulations Affecting School Operations

The Companys schools or other school and child-care based centers and programs 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 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.

We have several 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. There is a risk that such determinations may be made in the future with respect to the same or different schools, and that as a result, our enrollment in such schools will suffer.

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.



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

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.

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. We have not had any schools temporarily close due to the recent
H1N1 virus, but cannot be certain that this will not occur in the future. Should there be a case or a number of cases of the H1N1 virus occurring in our schools, we cannot predict the impact to our business or the effect on enrollment at 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.

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 1, 2009, four shareholders and their affiliates controlled approximately 70% 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 to accomplish this.

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



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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 addition, 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 the DGCL may have the effect of deterring certain potential acquisitions of Nobel Learning Communities. 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 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.



|ITEM1B. | UNRESOLVED STAFF COMMENTS.
|------- | --------------------------

None.



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

At September 8,
2009, we operated 183 schools on 6 owned and 177 leased properties in 15 states and the District of Columbia. Our schools are geographically distributed as follows:



|                     |  |                 
|-------------------- |  | ----------------
|Location             |  | Number ofSchools
|Arizona              |  | 1               
|California           |  | 37              
|District of Columbia |  | 1               
|Florida              |  | 7               
|Illinois             |  | 20              
|Maryland             |  | 1               
|Nevada               |  | 9               
|New Jersey           |  | 10              
|North Carolina       |  | 17              
|Oregon               |  | 3               
|Ohio                 |  | 9               
|Pennsylvania         |  | 24              
|South Carolina       |  | 2               
|Texas                |  | 17              
|Virginia             |  | 19              
|Washington           |  | 6               
|                     |  |                 
|Total                |  | 183             
|                     |  |                 



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##### Table of Contents

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.
|------ | ------------------

The United States Department of Justice (Disability Rights Section of the Civil Rights Division) (DOJ) filed a lawsuit on April 29, 2009 in the U.S. District Court for the Eastern District of Pennsylvania against the
Company alleging that the Company violated Title III of the Americans with Disabilities Act of 1990 (ADA) by excluding children with disabilities from its schools and programs. The complaint seeks an unspecified amount in compensatory
damages and civil penalties, as well as declaratory and injunctive relief.

The Company is committed to complying with and believes it has
complied with the ADA in providing access to children with disabilities. The Company believes that the DOJs allegations are without merit, and intends to defend against these allegations vigorously.

The Company is not able at this time to estimate the range of loss, if any, arising out this matter since its outcome is uncertain. Although it does not
expect that the resolution of the matter will have a material adverse effect on its financial condition, results of operations or cash flows, there can be no assurances in this regard.

Additionally, the Company is 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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##### Table of Contents

PART II



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

Recent Sales of Unregistered Securities

In November
2008, we issued an aggregate of 17,584 shares of restricted common stock to our non-employee directors.

Between September 2008 and May
2009, we issued 40,767 shares of our common stock to 5 individuals in connection with the exercise of common stock options that we previously granted to such individuals.

The foregoing securities were sold by us in reliance upon the exemption from registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

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 closing sales prices for our common
stock as reported by Nasdaq for each quarter during the period from July 1, 2007 through June 27, 2009.



|                                             |  |      |       |     |   |      
|-------------------------------------------- |  | ---- | ----- | --- | - | -----
|                                             |  | High |       | Low
|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
|                                             |  |     
|Fiscal 2009 (June 29, 2008 to June 27, 2009) |  |      |       |     |   |      
|First Quarter                                |  | $    | 16.00 |     | $ | 12.17
|Second Quarter                               |  |      | 15.76 |     |   | 12.55
|Third Quarter                                |  |      | 13.86 |     |   | 11.37
|Fourth Quarter                               |  |      | 12.50 |     |   | 10.73

Holders

At September 4, 2009, there were approximately 275 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.



19



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##### Table of Contents

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 July 3, 2004 through June 27, 2009 as calculated by Morningstar, Inc. The graph assumes that the value of the investment in the Common Stock and each
index was $100 at July 3, 2004 and that all dividends paid by the companies included in the indexes were reinvested.

LOGO

ASSUMES $100 INVESTED ON JULY 3, 2004

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING JUNE 27, 2009



|                                   |  |              |  |              |  |              |  |               |  |               |  |              
|---------------------------------- |  | ------------ |  | ------------ |  | ------------ |  | ------------- |  | ------------- |  | -------------
|Total Return Index for:            |  | July 3, 2004 |  | July 2, 2005 |  | July 1, 2006 |  | June 30, 2007 |  | June 28, 2008 |  | June 27, 2009
|Nobel Learning Communities, Inc.   |  | 100.00       |  | 127.35       |  | 147.03       |  | 211.00        |  | 201.45        |  | 164.83       
|Nasdaq Stock Market (US Companies) |  | 100.00       |  | 100.46       |  | 108.75       |  | 132.43        |  | 116.49        |  | 91.62        
|Peer Group                         |  | 100.00       |  | 84.29        |  | 54.74        |  | 49.33         |  | 45.96         |  | 34.78        



20



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##### Table of Contents

|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 income (loss) from discontinued operations, net of income taxes.



|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                  |  | For the Fiscal Year Ended |        
|                                                                  |  | June 27, 2009             |         |   | June 28, 2008 |   |         | June 30, 2007 |  |   | July 1, 2006 |   |  | July 2, 2005 |        
|Operating Data:                                                   |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Revenue                                                           |  | $                         | 220,103 |   |               | $ | 204,201 |               |  | $ | 180,823      |   |  | $            | 159,898 |   |  | $ | 155,106 |  
|Cost of services                                                  |  |                           | 191,119 |   |               |   | 173,550 |               |  |   | 153,459      |   |  |              | 136,893 |   |  |   | 133,682 |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                                      |  |                           | 28,984  |   |               |   | 30,651  |               |  |   | 27,364       |   |  |              | 23,005  |   |  |   | 21,424  |  
|Goodwill and other asset impairments (a)                          |  |                           |        |   |               |   |        |               |  |   |             |   |  |              |        |   |  |   | 86      |  
|General and administrative expenses (b)                           |  |                           | 18,726  |   |               |   | 18,516  |               |  |   | 16,993       |   |  |              | 13,523  |   |  |   | 14,548  |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Operating income                                                  |  |                           | 10,258  |   |               |   | 12,135  |               |  |   | 10,371       |   |  |              | 9,482   |   |  |   | 6,790   |  
|Interest expense (c)                                              |  |                           | 981     |   |               |   | 475     |               |  |   | 1,385        |   |  |              | 1,469   |   |  |   | 2,692   |  
|Other income, net (d)                                             |  |                           | (78     | ) |               |   | (326    | )             |  |   | (3,871       | ) |  |              | (350    | ) |  |   | (184    | )
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Income from continuing operations before income taxes             |  |                           | 9,355   |   |               |   | 11,986  |               |  |   | 12,857       |   |  |              | 8,363   |   |  |   | 4,282   |  
|Income tax expense                                                |  |                           | 3,622   |   |               |   | 4,621   |               |  |   | 5,021        |   |  |              | 3,269   |   |  |   | 1,604   |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Income from continuing operations                                 |  |                           | 5,733   |   |               |   | 7,365   |               |  |   | 7,836        |   |  |              | 5,094   |   |  |   | 2,678   |  
|Income (loss) from discontinued operations, net of income tax (e) |  |                           | (1,169  | ) |               |   | 313     |               |  |   | (471         | ) |  |              | (615    | ) |  |   | (162    | )
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Net income                                                        |  |                           | 4,564   |   |               |   | 7,678   |               |  |   | 7,365        |   |  |              | 4,479   |   |  |   | 2,516   |  
|Preferred stock dividends                                         |  |                           |        |   |               |   |        |               |  |   | 325          |   |  |              | 487     |   |  |   | 642     |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Net income available to common stockholders                       |  | $                         | 4,564   |   |               | $ | 7,678   |               |  | $ | 7,040        |   |  | $            | 3,992   |   |  | $ | 1,874   |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Basic income per share:                                           |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Income from continuing operations                                 |  | $                         | 0.55    |   |               | $ | 0.71    |               |  | $ | 0.85         |   |  | $            | 0.62    |   |  | $ | 0.29    |  
|Discontinued operations                                           |  |                           | (0.11   | ) |               |   | 0.03    |               |  |   | (0.06        | ) |  |              | (0.08   | ) |  |   | (0.02   | )
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Income per share (may not sum due to rounding)                    |  | $                         | 0.44    |   |               | $ | 0.74    |               |  | $ | 0.79         |   |  | $            | 0.54    |   |  | $ | 0.27    |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Diluted income per share:                                         |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Income from continuing operations                                 |  | $                         | 0.54    |   |               | $ | 0.69    |               |  | $ | 0.75         |   |  | $            | 0.51    |   |  | $ | 0.26    |  
|Discontinued operations                                           |  |                           | (0.11   | ) |               |   | 0.03    |               |  |   | (0.05        | ) |  |              | (0.06   | ) |  |   | (0.02   | )
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Net income per share (may not sum due to rounding)                |  | $                         | 0.43    |   |               | $ | 0.72    |               |  | $ | 0.70         |   |  | $            | 0.44    |   |  | $ | 0.26    |  
|                                                                  |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Weighted average common shares outstanding (in thousands):        |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Basic                                                             |  |                           | 10,456  |   |               |   | 10,382  |               |  |   | 8,957        |   |  |              | 7,473   |   |  |   | 7,064   |  
|Diluted                                                           |  |                           | 10,701  |   |               |   | 10,630  |               |  |   | 10,580       |   |  |              | 10,080  |   |  |   | 9,719   |  
|Number of weeks included in fiscal year                           |  |                           | 52      |   |               |   | 52      |               |  |   | 52           |   |  |              | 52      |   |  |   | 52      |  
|Balance Sheet Data:                                               |  |                           |         |   |               |   |         |               |  |   |              |   |  |              |         |   |  |   |         |  
|Cash and cash equivalents                                         |  | $                         | 786     |   |               | $ | 1,064   |               |  | $ | 3,814        |   |  | $            | 9,837   |   |  | $ | 2,925   |  
|Goodwill and intangible assets, net                               |  |                           | 78,198  |   |               |   | 72,303  |               |  |   | 51,681       |   |  |              | 39,902  |   |  |   | 36,937  |  
|Total assets                                                      |  |                           | 119,559 |   |               |   | 113,148 |               |  |   | 88,244       |   |  |              | 86,419  |   |  |   | 78,344  |  
|Deferred revenue                                                  |  |                           | 14,526  |   |               |   | 15,003  |               |  |   | 12,835       |   |  |              | 11,885  |   |  |   | 10,457  |  
|Short term debt and current portion of long term debt             |  |                           |        |   |               |   |        |               |  |   |             |   |  |              | 2,180   |   |  |   | 2,281   |  
|Long term debt                                                    |  |                           | 13,525  |   |               |   | 12,500  |               |  |   |             |   |  |              | 11,000  |   |  |   | 13,180  |  
|Stockholders equity                                              |  |                           | 68,886  |   |               |   | 62,914  |               |  |   | 54,218       |   |  |              | 46,280  |   |  |   | 37,390  |  



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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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | During Fiscal 2007, general and administrative expense included a charge of $341,000 for accelerated depreciation as a result of a change in the 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 a third party note receivable.

|(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 payments 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):
|--- | ---------------------------------------------------------------------



|                                                                     |  |        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                     |  | Fiscal |       
|                                                                     |  | 2009   |        |   | 2008 |   |        | 2007 |  |   | 2006   |   |  | 2005 |       
|Revenues                                                             |  | $      | 1,761  |   |      | $ | 2,057  |      |  | $ | 6,149  |   |  | $    | 8,431  |   |  | $ | 9,483  |  
|Cost of services                                                     |  |        | (2,242 | ) |      |   | (1,730 | )    |  |   | (5,141 | ) |  |      | (9,232 | ) |  |   | (8,835 | )
|Rent and other                                                       |  |        | (1,112 | ) |      |   | (611   | )    |  |   | (1,665 | ) |  |      | (436   | ) |  |   | (626   | )
|Closed school lease reserves                                         |  |        | (340   | ) |      |   | (245   | )    |  |   | (2,027 | ) |  |      | 228    |   |  |   | (277   | )
|Gain from sale of schools                                            |  |        |       |   |      |   |       |      |  |   | 1,900  |   |  |      |       |   |  |   |       |  
|Gain from settlement of sublease                                     |  |        |       |   |      |   | 1,028  |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | (1,933 | ) |      |   | 499    |      |  |   | (784   | ) |  |      | (1,009 | ) |  |   | (255   | )
|Income tax (expense) benefit                                         |  |        | 764    |   |      |   | (186   | )    |  |   | 313    |   |  |      | 394    |   |  |   | 93     |  
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from discontinued operations                           |  | $      | (1,169 | ) |      | $ | 313    |      |  | $ | (471   | ) |  | $    | (615   | ) |  | $ | (162   | )
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  

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.

During Fiscal 2007, the Company completed the sale of seven schools resulting in a 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.



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|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 impact of unemployment rates on our current or potential customers;
| | - |  | -----------------------------------------------------------------------



| |  |  | changing economic conditions, as demand for the Companys products is a lagging indicator of the economy;
| | - |  | ---------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | the impact on our business and management stability related to continued interest of Knowledge Learning Corporation and other third parties, notwithstanding the
rejection by the Companys Board of Directors, as the Companys Board of Directors will remain open to considering strategic transactions which fully and fairly recognize the Companys value and are in the best interest of
stockholders;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact on certain potential sellers of schools to the Company and their possible reluctance to do so with the uncertainty of a potential transaction related to
the Knowledge Learning Corporation proposal which, while rejected, does not prevent Knowledge Learning Corporation from showing continued interest;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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| |  |  | 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the impact of the litigation with the U.S. Department of Justice concerning alleged violation of the Americans with Disabilities Act of 1990 on our results of
operations or cash flows in future periods;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the Companys ability to maintain effective controls over financial reporting.
| | - |  | ------------------------------------------------------------------------------

Readers are cautioned that these risks may not be exhaustive. The Company operates in a continually changing business and regulatory environment and new
risks and requirements emerge from time to time. Readers should not rely upon forward-looking statements except as statements of managements present intentions and expectations that may or may not occur. Readers should read these cautionary
statements as being applicable to all forward-looking statements wherever they appear. The Company assumes no obligation to update or revise the forward-looking statements or to update the reasons why actual results could differ from those projected
in the forward-looking statements.

During the first quarter of Fiscal 2009, the Companys Board of Directors received an unsolicited
expression of interest from Knowledge Learning Corporation to pursue an acquisition of the Company for $17.00 per share in cash. The Company informed Knowledge Learning Corporation that its Board of Directors would evaluate this proposal carefully
and promptly in consultation with financial and legal advisors in order to decide whether pursuing the possible transaction would be in the best interest of all of the Companys stockholders. Subsequently, during the first quarter of Fiscal
2009, the Companys Board of Directors authorized a committee consisting solely of independent directors to evaluate the previously-announced expression of interest from Knowledge Learning Corporation to pursue an acquisition of the Company.
The Company also announced that J.P.Morgan Securities Inc. had been engaged as financial advisor in connection with the evaluation process.

During the third quarter of Fiscal 2009, the Company received another letter from Knowledge Learning Corporation proposing to acquire the Company for $13.50 per share which superseded Knowledge Learning Corporations initial expression
of interest to pursue an acquisition of the Company for $17.00 per share in cash. Subsequently, during the third quarter of Fiscal 2009, the Company announced that its Board of Directors, in consultation with its financial and legal advisors,
unanimously determined to reject Knowledge Learning Corporations proposal to acquire the Company. The Company confirmed that its Board of Directors will remain open to considering strategic transactions which fully and fairly recognize the
Companys value and are in the best interest of stockholders.

Introduction

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



24



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##### Table of Contents

Fiscal Year End

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

Reclassifications

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

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

Results of Operations

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



| | i. | Comparable Schoolsconsists of an identical set of schools open for each of the entire periods being reported, sometimes referred to as same schools. By
definition, Comparable Schools are always the same number of identical schools in each comparable period. Comparing results of the performance of these schools provides an apples-to-apples comparison of results between periods. Results
are measured by revenue, operating expense and gross profit performance for this identical group of schools for the current period versus the prior period. Management seeks to grow revenue and increase gross margin in this category through annual
tuition rate increases, enrollment growth and expense management. Information related to Comparable Schools is included in each relevant section below and summarized in the gross profit section below. When presenting Comparable School results there
may be schools included within Comparable School results that were subsequently classified as closed or discontinued operations. In each case, the results of activities from these schools are presented as discontinued operations in the
Companys current Form 10K or as closed schools in the Results of Operations for all periods presented herein.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | Core Schoolsconsists of schools reported as Comparable Schools for each specific period presented. By definition, the population of Core Schools is schools open and
comparable versus the prior period at a fixed point in time. We measure Core Schools performance as a percentage of revenue to develop period over period trends to understand the contribution provided by our efforts to grow the Core School
base. The table presented in the gross profit section below shows this information. When presenting Core School results there may be schools included within Core School results that were subsequently classified as discontinued operations. In each
case, the results of activities from these schools are presented as discontinued operations in the Companys current Form 10K for all periods presented herein.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

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

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



| | iv. | Acquired Schoolsconsists of purchased schools previously operated by independent third parties.
| | --- | ------------------------------------------------------------------------------------------------

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

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

Results of OperationsFiscal 2009 compared to Fiscal 2008

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

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



|                                             |  |        |   |  |      |  
|-------------------------------------------- |  | ------ | - |  | ---- | -
|                                             |  | Fiscal |  
|                                             |  | 2009   |   |  | 2008 |  
|Number of schools at the beginning of period |  | 173    |   |  | 151  |  
|New                                          |  | 4      |   |  | 5    |  
|Acquired                                     |  | 9      |   |  | 20   |  
|Closed                                       |  | (6     | ) |  | (3   | )
|                                             |  |        |   |  |      |  
|Number of schools at the end of the period   |  | 180    |   |  | 173  |  
|                                             |  |        |   |  |      |  



26



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##### Table of Contents

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

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



|         |  |             |  |            |  |            |  |            |  |      
|-------- |  | ----------- |  | ---------- |  | ---------- |  | ---------- |  | -----
|         |  | Fiscal 2009
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 2           |  |           |  | 2          |  |           |  | 4    
|Acquired |  | 3           |  |           |  | 1          |  | 5          |  | 9    
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 5           |  |           |  | 3          |  | 5          |  | 13   
|         |  |             |  |            |  |            |  |            |  |      
|         | 
|         |  | Fiscal 2008
|         |  | 1stQuarter  |  | 2ndQuarter |  | 3rdQuarter |  | 4thQuarter |  | Total
|New      |  | 4           |  |           |  |           |  | 1          |  | 5    
|Acquired |  | 6           |  |           |  | 12         |  | 2          |  | 20   
|         |  |             |  |            |  |            |  |            |  |      
|         |  | 10          |  |           |  | 12         |  | 3          |  | 25   
|         |  |             |  |            |  |            |  |            |  |      

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



|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   
|----------------------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | - | ------------------------- | - |  | ----- | --
|                                    |  | Fiscal2009 |         | Percent ofRevenues |       |   | Fiscal2008 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  |   | PercentIncrease(decrease) |  
|Revenues                            |  | $          | 220,103 |                    | 100.0 | % |            | $ | 204,201            |  | 100.0 | %                    |  | $ | 15,902                    |   |  | 7.8   | % 
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   
|Personnel costs                     |  |            | 105,562 |                    | 48.0  |   |            |   | 97,762             |  | 47.9  |                      |  |   | 7,800                     |   |  | 8.0   |   
|School operating costs              |  |            | 29,405  |                    | 13.4  |   |            |   | 26,769             |  | 13.1  |                      |  |   | 2,636                     |   |  | 9.8   |   
|Rent and other                      |  |            | 56,152  |                    | 25.5  |   |            |   | 49,019             |  | 24.0  |                      |  |   | 7,133                     |   |  | 14.6  |   
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   
|Cost of services                    |  |            | 191,119 |                    | 86.8  |   |            |   | 173,550            |  | 85.0  |                      |  |   | 17,569                    |   |  | 10.1  |   
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   
|Gross profit                        |  |            | 28,984  |                    | 13.2  |   |            |   | 30,651             |  | 15.0  |                      |  |   | (1,667                    | ) |  | (5.4  | ) 
|General and administrative expenses |  |            | 18,726  |                    | 8.5   |   |            |   | 18,516             |  | 9.1   |                      |  |   | 210                       |   |  | 1.1   |   
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   
|Operating income                    |  | $          | 10,258  |                    | 4.7   | % |            | $ | 12,135             |  | 5.9   | %                    |  | $ | (1,877                    | ) |  | (15.5 | )%
|                                    |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |       |   



27



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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                                   |  | 2009   |  | 2008
|Comparable                                        |  | 144    |  | 144 
|                                                  |  |        |  |     
|Core                                              |  | 144    |  | 135 
|New                                               |  | 9      |  | 8   
|Acquired                                          |  | 27     |  | 24  
|                                                  |  |        |  |     
|Total                                             |  | 180    |  | 167 
|                                                  |  |        |  |     
|Schools closed subsequent to reported fiscal year |  |       |  | 6   
|                                                  |  |        |  |     
|Schools operated during reported fiscal year      |  | 180    |  | 173 
|                                                  |  |        |  |     

Revenue

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



|                                                        |  |        |         |                     |   |         |  |   |         |   |  |       |   
|------------------------------------------------------- |  | ------ | ------- | ------------------- | - | ------- |  | - | ------- | - |  | ----- | --
|                                                        |  | Fiscal |         | Increase (decrease) |  
|                                                        |  | 2009   |         | 2008                |   | Dollar  |  |   | Percent |  
|Total Company revenue                                   |  | $      | 220,103 |                     | $ | 204,201 |  | $ | 15,902  |   |  | 7.8   | % 
|                                                        |  |        |         |                     |   |         |  |   |         |   |  |       |   
|Comparable Schools                                      |  | $      | 185,103 |                     | $ | 187,445 |  | $ | (2,342  | ) |  | (1.2  | )%
|                                                        |  |        |         |                    
|Schools acquired, opened or closed after June 30, 2007: |  |        |         |                     |   |         |  |   |         |   |  |       |   
|Acquired                                                |  |        | 26,894  |                     |   | 9,670   |  |   | 17,224  |   |  | 178.1 |   
|New                                                     |  |        | 5,959   |                     |   | 2,525   |  |   | 3,434   |   |  | 136.0 |   
|Closed                                                  |  |        | 1,963   |                     |   | 4,366   |  |   | (2,403  | ) |  | (55.0 | ) 
|Other                                                   |  |        | 184     |                     |   | 195     |  |   | (11     | ) |  | (5.6  | ) 
|                                                        |  |        |         |                     |   |         |  |   |         |   |  |       |   
|                                                        |  | $      | 220,103 |                     | $ | 204,201 |  | $ | 15,902  |   |  | 7.8   | % 
|                                                        |  |        |         |                     |   |         |  |   |         |   |  |       |   

Comparable school revenue decreases were primarily driven by overall decreases in enrollment
partially offset by average tuition increases between 3.0% and 4.0%. As a percentage, Comparable School revenue growth fell below that of tuition rate increases, due in large part to current economic activity affecting unemployment rates which has
contributed towards an overall reduction in enrollment in certain geographic areas in which the Company operates.



28



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##### Table of Contents

Revenue trends

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



|                         |  |             |         |                       |       |   |             |   |                       |  |       |  
|------------------------ |  | ----------- | ------- | --------------------- | ----- | - | ----------- | - | --------------------- |  | ----- | -
|                         |  | Fiscal 2009 |         | Percent ofRevenue (1) |       |   | Fiscal 2008 |   | Percent ofRevenue (1) | 
|Core Schools             |  | $           | 185,103 |                       | 84.1  | % |             | $ | 172,356               |  | 84.4  | %
|New Schools              |  |             | 5,959   |                       | 2.7   | % |             |   | 7,035                 |  | 3.4   | %
|Acquired Schools         |  |             | 26,894  |                       | 12.2  | % |             |   | 20,249                |  | 9.9   | %
|Closed schools and other |  |             | 2,147   |                       | 1.0   | % |             |   | 4,561                 |  | 2.2   | %
|                         |  |             |         |                       |       |   |             |   |                       |  |       |  
|                         |  | $           | 220,103 |                       | 100.0 | % |             | $ | 204,201               |  | 100.0 | %
|                         |  |             |         |                       |       |   |             |   |                       |  |       |  



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

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

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

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This
category of costs is partially variable and primarily affected by incentive compensation, health care benefit and participant rate increases, staffing ratio requirements and changes in enrollment. The category tends to be variable on a step function
basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools, personnel costs tend to be higher as a percentage of revenue as a base level of personnel and associated costs are
established in the early years of a schools life and which are expected to leverage as enrollments increase. It is important to note that preschool staffing ratios are mandated by state requirements which can result in very low teacher to
student ratios when class sizes are not optimal. This is not the case in K+ schools where no such requirements exist.



29



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##### Table of Contents

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



|                                                        |  |        |         |                     |   |        |  |   |         |   |  |       |   
|------------------------------------------------------- |  | ------ | ------- | ------------------- | - | ------ |  | - | ------- | - |  | ----- | --
|                                                        |  | Fiscal |         | Increase (decrease) |  
|                                                        |  | 2009   |         | 2008                |   | Dollar |  |   | Percent |  
|Total Company                                           |  | $      | 105,562 |                     | $ | 97,762 |  | $ | 7,800   |   |  | 8.0   | % 
|                                                        |  |        |         |                     |   |        |  |   |         |   |  |       |   
|Comparable Schools                                      |  | $      | 87,382  |                     | $ | 88,363 |  | $ | (981    | ) |  | (1.1  | )%
|                                                        |  |        |         |                    
|Schools acquired, opened or closed after June 30, 2007: |  |        |         |                     |   |        |  |   |         |   |  |       |   
|Acquired                                                |  |        | 13,220  |                     |   | 1,546  |  |   | 11,674  |   |  | 755.1 |   
|New                                                     |  |        | 3,319   |                     |   | 4,890  |  |   | (1,571  | ) |  | (32.1 | ) 
|Closed                                                  |  |        | 1,641   |                     |   | 2,963  |  |   | (1,322  | ) |  | (44.6 | ) 
|                                                        |  |        |         |                     |   |        |  |   |         |   |  |       |   
|                                                        |  | $      | 105,562 |                     | $ | 97,762 |  | $ | 7,800   |   |  | 8.0   | % 
|                                                        |  |        |         |                     |   |        |  |   |         |   |  |       |   

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



|                                                                                                         |  |                       |   |  |        |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                         |  | Percentage of Revenue |  
|                                                                                                         |  | Fiscal                |   |  | Fiscal |  
|                                                                                                         |  | 2009                  |   |  | 2008   |  
|Total Company                                                                                            |  | 48.0                  | % |  | 47.9   | %
|                                                                                                         |  |                       |   |  |        |  
|Comparable Schools                                                                                       |  | 47.2                  | % |  | 47.1   | %
|Schools acquired or opened subsequent to June 30, 2007 for Fiscal 2009 and July 1, 2006 for Fiscal 2008: |  |                       |   |  |        |  
|Core Schools                                                                                             |  | 47.2                  | % |  | 47.1   | %
|Acquired Schools                                                                                         |  | 49.2                  | % |  | 48.0   | %
|New Schools                                                                                              |  | 55.7                  | % |  | 55.4   | %

Increases in personnel costs as a percentage of revenue at Comparable Schools are reflective of
wage rate and staffing increases coinciding with overall enrollment declines at these schools due in large part to current economic activity affecting unemployment rates which has contributed towards an overall reduction in enrollment in certain
geographic areas in which the Company operates.

Personnel costs as a percentage of revenue at New Schools increased thirty basis points as
one of the New Schools which operated during Fiscal 2008 was a land banked school where the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed, hence the school
was able to ramp up quickly due to a more mature market resulting in a more optimal student to teacher ratio and another of the schools included in the Fiscal 2008 period was an already operating corporate contract school taken over by the Company
from a previous operator with an existing student base and a more optimal student to teacher ratio than most new schools. The remaining schools included in both fiscal periods were opened in newer path-of-progress markets which
management expects to continue to develop incremental enrollments.

Personnel costs as a percentage of revenue for Acquired Schools were
negatively impacted by the results of a Camelback Desert School (CDS) that was acquired during the fourth quarter of Fiscal 2008. For Fiscal 2009, this one school had a 140 basis point impact to personnel costs as a percentage of revenue for
Acquired Schools, the school had no impact on this percentage for Fiscal 2008 as it was opened late in the fourth quarter of that fiscal year.



30



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##### Table of Contents

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 percentage of revenue as a base level of costs are incurred in the early period of a schools life and are expected to be
leveraged as enrollments increase.

For Fiscal 2009, school operating costs increased $2,636,000 or 9.8% to $29,405,000 from $26,769,000
for Fiscal 2008. This increase was primarily driven by an increase in school operating costs from new and acquired schools offset by decreased costs in Comparable and Closed Schools.



|                                                        |  |        |        |                     |   |        |  |   |         |   |  |       |   
|------------------------------------------------------- |  | ------ | ------ | ------------------- | - | ------ |  | - | ------- | - |  | ----- | --
|                                                        |  | Fiscal |        | Increase (decrease) |  
|                                                        |  | 2009   |        | 2008                |   | Dollar |  |   | Percent |  
|Total Company                                           |  | $      | 29,405 |                     | $ | 26,769 |  | $ | 2,636   |   |  | 9.8   | % 
|                                                        |  |        |        |                     |   |        |  |   |         |   |  |       |   
|Comparable Schools                                      |  | $      | 24,228 |                     | $ | 24,260 |  | $ | (32     | ) |  | (0.1  | )%
|Schools acquired, opened or closed after June 30, 2007: |  |        |        |                     |   |        |  |   |         |   |  |       |   
|Acquired                                                |  |        | 3,556  |                     |   | 1,113  |  |   | 2,443   |   |  | 219.5 |   
|New                                                     |  |        | 1,000  |                     |   | 451    |  |   | 549     |   |  | 121.7 |   
|Closed                                                  |  |        | 608    |                     |   | 915    |  |   | (307    | ) |  | (33.6 | ) 
|Other                                                   |  |        | 13     |                     |   | 30     |  |   | (17     | ) |  | (56.7 | ) 
|                                                        |  |        |        |                     |   |        |  |   |         |   |  |       |   
|                                                        |  | $      | 29,405 |                     | $ | 26,769 |  | $ | 2,636   |   |  | 9.8   | % 
|                                                        |  |        |        |                     |   |        |  |   |         |   |  |       |   

School operating costs increased to 13.4% of revenue for Fiscal 2009 as compared to 13.1% for
Fiscal 2008. This increase of 30 basis points consisted of the following:



|                                                                                                         |  |                       |   |  |        |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                         |  | Percentage of Revenue |  
|                                                                                                         |  | Fiscal                |   |  | Fiscal |  
|                                                                                                         |  | 2009                  |   |  | 2008   |  
|Total Company                                                                                            |  | 13.4                  | % |  | 13.1   | %
|                                                                                                         |  |                       |   |  |        |  
|Comparable Schools                                                                                       |  | 13.1                  | % |  | 12.9   | %
|Schools acquired or opened subsequent to June 30, 2007 for Fiscal 2009 and July 1, 2006 for Fiscal 2008: |  |                       |   |  |        |  
|Core Schools                                                                                             |  | 13.1                  | % |  | 13.2   | %
|Acquired Schools                                                                                         |  | 13.2                  | % |  | 11.2   | %
|New Schools                                                                                              |  | 16.8                  | % |  | 12.5   | %

Increases in school operating costs as a percentage of revenue at Comparable Schools are
reflective of overall flat costs at these schools coinciding with overall enrollment declines due in large part to current economic activity affecting unemployment rates, which has contributed towards an overall reduction in enrollment in certain
geographic areas in which the Company operates. Costs for facility repairs and maintenance as well as food costs increased approximately 50 basis points during Fiscal 2009 as compared to Fiscal 2008 due in large part to vendor price increases for
these products and services. These increases were partially offset by decreased spending during Fiscal 2009 as compared to Fiscal 2008 in recruiting, marketing and other controllable expenses.

School operating costs as a percentage of revenue at New Schools increased 430 basis points as one of the New Schools which operated during Fiscal 2008
was a land banked school where the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed, hence the school was able to ramp up quickly due to a more mature market,
and another of the schools included in the Fiscal 2008 period was an already operating corporate contract school taken over by the Company from a



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previous operator and already had an existing revenue stream. The remaining schools included in both fiscal periods were opened in newer
path-of-progress markets which management expects to continue to develop incremental enrollments and are more typical of New Schools.

School operating costs as a percentage of revenue for Acquired schools were negatively impacted by the results of a Camelback Desert School (CDS) that was acquired during the fourth quarter of Fiscal 2008. For Fiscal 2009, this one school
had a 50 basis point impact to school operating costs as a percentage of revenue for Acquired Schools, the school had a 20 basis point impact on this percentage for Fiscal 2008 as it was opened late in the fourth quarter of that fiscal year.

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 insurance, 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. In the case of New Schools, management
expects these costs to be leveraged as enrollments ramp up.

For Fiscal 2009, rent and other costs increased $7,133,000 or 14.6% to
$56,152,000 from $49,019,000 for Fiscal 2008. This increase was primarily driven by an increase in rent and other costs from acquired, new and closed schools. During Fiscal 2009 closed school costs included $777,000 of depreciation expense due to a
change in estimate for the remaining usable life of fixed assets that resided in six schools that were closed during the fiscal year.



|                                                        |  |        |        |          |   |        |  |         |       |  |       |  
|------------------------------------------------------- |  | ------ | ------ | -------- | - | ------ |  | ------- | ----- |  | ----- | -
|                                                        |  | Fiscal |        | Increase |  
|                                                        |  | 2009   |        | 2008     |   | Dollar |  | Percent |      
|Total Company                                           |  | $      | 56,152 |          | $ | 49,019 |  | $       | 7,133 |  | 14.6  | %
|                                                        |  |        |        |          |   |        |  |         |       |  |       |  
|Comparable Schools                                      |  | $      | 43,676 |          | $ | 43,638 |  | $       | 38    |  | 0.1   | %
|Schools acquired, opened or closed after June 30, 2007: |  |        |        |          |   |        |  |         |       |  |       |  
|Acquired                                                |  |        | 7,150  |          |   | 2,028  |  |         | 5,122 |  | 252.6 |  
|New                                                     |  |        | 3,237  |          |   | 1,673  |  |         | 1,564 |  | 93.5  |  
|Closed                                                  |  |        | 2,089  |          |   | 1,680  |  |         | 409   |  | 24.3  |  
|                                                        |  |        |        |          |   |        |  |         |       |  |       |  
|                                                        |  | $      | 56,152 |          | $ | 49,019 |  | $       | 7,133 |  | 14.6  | %
|                                                        |  |        |        |          |   |        |  |         |       |  |       |  

Rent and other costs increased to 25.5% of revenue for Fiscal 2009 as compared to 24.0% for Fiscal
2008. This increase of 150 basis points consisted of the following:



|                                                                                                         |  |                       |   |  |        |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                         |  | Percentage of Revenue |  
|                                                                                                         |  | Fiscal                |   |  | Fiscal |  
|                                                                                                         |  | 2009                  |   |  | 2008   |  
|Total Company                                                                                            |  | 25.5                  | % |  | 24.0   | %
|                                                                                                         |  |                       |   |  |        |  
|Comparable Schools                                                                                       |  | 23.6                  | % |  | 23.3   | %
|Schools acquired or opened subsequent to June 30, 2007 for Fiscal 2009 and July 1, 2006 for Fiscal 2008: |  |                       |   |  |        |  
|Core Schools                                                                                             |  | 23.6                  | % |  | 22.9   | %
|Acquired Schools                                                                                         |  | 26.6                  | % |  | 25.6   | %
|New Schools                                                                                              |  | 54.3                  | % |  | 37.8   | %
|Closed Schools                                                                                           |  | 106.4                 | % |  | 38.5   | %



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Increases in rent and other costs as a percentage of revenue at Comparable Schools are reflective of
overall flat costs at these schools coinciding with overall enrollment declines due in large part to current economic activity. Rents and property taxes increased $822,000 or approximately 270 basis points during Fiscal 2009 as compared to Fiscal
2008 which was consistent with contractual rent and property tax escalations from prior years. Depreciation expense increased $560,000 or 70 basis points as a percentage of revenue due to continued capital investments to maintain and improve school
facilities and ongoing investments in curriculum and technology. These increases were partially offset by reduced spending in marketing and school vehicles and reductions in insurance premiums and workers compensation and property damage claims
retained by the Company.

School operating costs as a percentage of revenue at New Schools increased 1,650 basis points as the one of New
Schools which operated during Fiscal 2008 was a land banked school where the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed, hence the school was able to
ramp up quickly due to a more mature market, and another of the schools included in the Fiscal 2008 period was an already operating corporate contract school taken over by the Company from a previous operator with no rent cost. The remaining schools
included in both fiscal periods were opened in newer path-of-progress markets which management expects to continue to develop incremental enrollments and are more typical of New Schools.

During Fiscal 2009, the Company recorded charges for accelerated depreciation of $789,000 as a result of changes in accounting estimates regarding the
remaining useful lives of assets residing at schools that were closed and that were classified as continuing operations for the periods presented. These changes in estimates had a 470 basis point impact as a percentage of revenue for Closed Schools
rent and other costs.

Gross profit

As a result of the factors mentioned above, gross profit for Fiscal 2009 decreased $1,667,000 or 5.4% to $28,984,000 from $30,651,000 for Fiscal 2008. Gross profit was 13.2% of revenue for Fiscal 2009 and 15.0% of revenue for Fiscal 2008.
The change in gross profit for Fiscal 2009 as compared to the same period in the prior year is as follows (dollars in thousands):



|                       |  |            |         |                    |       |        |            |   |                    |  |       |                     |  |   |        |   |  |      |   
|---------------------- |  | ---------- | ------- | ------------------ | ----- | ------ | ---------- | - | ------------------ |  | ----- | ------------------- |  | - | ------ | - |  | ---- | --
|                       |  | Fiscal2009 |         | Percent ofRevenues |       |        | Fiscal2008 |   | Percent ofRevenues |  |       | Increase (decrease) | 
|                       |  |            |         |                    |       | Dollar |            |   | Percent            | 
|Revenues               |  | $          | 220,103 |                    | 100.0 | %      |            | $ | 204,201            |  | 100.0 | %                   |  | $ | 15,902 |   |  | 7.8  | % 
|                       |  |            |         |                    |       |        |            |   |                    |  |       |                     |  |   |        |   |  |      |   
|Personnel costs        |  |            | 105,562 |                    | 48.0  |        |            |   | 97,762             |  | 47.9  |                     |  |   | 7,800  |   |  | 8.0  |   
|School operating costs |  |            | 29,405  |                    | 13.4  |        |            |   | 26,769             |  | 13.1  |                     |  |   | 2,636  |   |  | 9.8  |   
|Rent and other         |  |            | 56,152  |                    | 25.5  |        |            |   | 49,019             |  | 24.0  |                     |  |   | 7,133  |   |  | 14.6 |   
|                       |  |            |         |                    |       |        |            |   |                    |  |       |                     |  |   |        |   |  |      |   
|Cost of services       |  |            | 191,119 |                    | 86.8  |        |            |   | 173,550            |  | 85.0  |                     |  |   | 17,569 |   |  | 10.1 |   
|                       |  |            |         |                    |       |        |            |   |                    |  |       |                     |  |   |        |   |  |      |   
|Gross profit           |  | $          | 28,984  |                    | 13.2  | %      |            | $ | 30,651             |  | 15.0  | %                   |  | $ | (1,667 | ) |  | (5.4 | )%
|                       |  |            |         |                    |       |        |            |   |                    |  |       |                     |  |   |        |   |  |      |   

The table below shows the change in gross profit for Fiscal 2009 as compared to the same period in
the prior year for Comparable Schools:



|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |      |   
|---------------------- |  | ---------- | ------- | ------------------ | ----- | - | ---------- | - | ------------------ |  | ----- | -------------------- |  | - | ------------------------- | - |  | ---- | --
|                       |  | Fiscal2009 |         | Percent ofRevenues |       |   | Fiscal2008 |   | Percent ofRevenues |  |       | ChangeAmountIncrease |  |   | PercentIncrease(decrease) |  
|Revenues               |  | $          | 185,103 |                    | 100.0 | % |            | $ | 187,445            |  | 100.0 | %                    |  | $ | (2,342                    | ) |  | (1.2 | )%
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |      |   
|Personnel costs        |  |            | 87,382  |                    | 47.2  |   |            |   | 88,363             |  | 47.1  |                      |  |   | (981                      | ) |  | (1.1 | ) 
|School operating costs |  |            | 24,228  |                    | 13.1  |   |            |   | 24,260             |  | 12.9  |                      |  |   | (32                       | ) |  | (0.1 | ) 
|Rent and other         |  |            | 43,676  |                    | 23.6  |   |            |   | 43,638             |  | 23.3  |                      |  |   | 38                        |   |  | 0.1  |   
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |      |   
|Cost of services       |  |            | 155,286 |                    | 83.9  |   |            |   | 156,261            |  | 83.4  |                      |  |   | (975                      | ) |  | (0.6 | ) 
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |      |   
|Gross profit           |  |            | 29,817  |                    | 16.1  | % |            |   | 31,184             |  | 16.6  | %                    |  |   | (1,367                    | ) |  | (4.4 | )%
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |   |                           |   |  |      |   



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



|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|---------------------- |  | ---------- | ------- | - | -------------------- | ------ | -- | ---------- | - | ------- | -------------------- |  | ----- | ------------------ |  | - | ------------------------- | - |  | ----- | --
|                       |  | Fiscal2009 |         |   | Percentage ofRevenue |        |    | Fiscal2008 |   |         | Percentage ofRevenue |  |       | Increase(Decrease) |  |   | PercentIncrease(Decrease) |  
|Core Schools           |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Number of schools      |  |            | 144     |   |                      |        |    |            |   | 135     |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 185,103 |   |                      | 100.0  | %  |            | $ | 172,356 |                      |  | 100.0 | %                  |  | $ | 12,747                    |   |  | 7.4   | % 
|Personnel Cost         |  |            | 87,382  |   |                      | 47.2   |    |            |   | 81,191  |                      |  | 47.1  |                    |  |   | 6,191                     |   |  | 7.6   |   
|School Operating Cost  |  |            | 24,228  |   |                      | 13.1   |    |            |   | 22,687  |                      |  | 13.2  |                    |  |   | 1,541                     |   |  | 6.8   |   
|Rent and Other         |  |            | 43,676  |   |                      | 23.6   |    |            |   | 39,506  |                      |  | 22.9  |                    |  |   | 4,170                     |   |  | 10.6  |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Profit           |  | $          | 29,817  |   |                      | 16.1   | %  |            | $ | 28,972  |                      |  | 16.8  | %                  |  | $ | 845                       |   |  | 2.9   | % 
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|                       |  |            |         |   |                      |       
|New Schools            |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Number of schools      |  |            | 9       |   |                      |        |    |            |   | 8       |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 5,959   |   |                      | 100.0  | %  |            | $ | 7,035   |                      |  | 100.0 | %                  |  | $ | (1,076                    | ) |  | (15.3 | )%
|Personnel Costs        |  |            | 3,319   |   |                      | 55.7   |    |            |   | 3,899   |                      |  | 55.4  |                    |  |   | (580                      | ) |  | (14.9 | ) 
|School Operating Costs |  |            | 1,000   |   |                      | 16.8   |    |            |   | 876     |                      |  | 12.5  |                    |  |   | 124                       |   |  | 14.2  |   
|Rent and Other         |  |            | 3,237   |   |                      | 54.3   |    |            |   | 2,658   |                      |  | 37.8  |                    |  |   | 579                       |   |  | 21.8  |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Loss             |  | $          | (1,597  | ) |                      | (26.8  | )% |            | $ | (398    | )                    |  | (5.7  | )%                 |  | $ | (1,199                    | ) |  | 301.3 | % 
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|                       |  |            |         |   |                      |       
|Acquired Schools       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Number of schools      |  |            | 27      |   |                      |        |    |            |   | 24      |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 26,894  |   |                      | 100.0  | %  |            | $ | 20,249  |                      |  | 100.0 | %                  |  | $ | 6,645                     |   |  | 32.8  | % 
|Personnel Costs        |  |            | 13,220  |   |                      | 49.2   |    |            |   | 9,710   |                      |  | 48.0  |                    |  |   | 3,510                     |   |  | 36.1  |   
|School Operating Costs |  |            | 3,556   |   |                      | 13.2   |    |            |   | 2,262   |                      |  | 11.2  |                    |  |   | 1,294                     |   |  | 57.2  |   
|Rent and Other         |  |            | 7,150   |   |                      | 26.6   |    |            |   | 5,175   |                      |  | 25.6  |                    |  |   | 1,975                     |   |  | 38.2  |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Profit           |  | $          | 2,968   |   |                      | 11.0   | %  |            | $ | 3,102   |                      |  | 15.3  | %                  |  | $ | (134                      | ) |  | (4.3  | )%
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|                       |  |            |         |   |                      |       
|Closed Schools         |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Number of schools      |  |            | 5       |   |                      |        |    |            |   | 7       |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 1,963   |   |                      | 100.0  | %  |            | $ | 4,366   |                      |  | 100.0 | %                  |  | $ | (2,403                    | ) |  | -55.0 | % 
|Personnel Costs        |  |            | 1,641   |   |                      | 83.5   |    |            |   | 2,962   |                      |  | 67.8  |                    |  |   | (1,321                    | ) |  | (44.6 | ) 
|School Operating Costs |  |            | 608     |   |                      | 31.0   |    |            |   | 913     |                      |  | 20.9  |                    |  |   | (305                      | ) |  | (33.4 | ) 
|Rent and Other         |  |            | 2,089   |   |                      | 106.4  |    |            |   | 1,680   |                      |  | 38.5  |                    |  |   | 409                       |   |  | 24.3  |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Loss             |  | $          | (2,374  | ) |                      | (120.9 | )% |            | $ | (1,189  | )                    |  | (27.2 | )%                 |  | $ | (1,185                    | ) |  | 99.7  | % 
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|                       |  |            |         |   |                      |       
|Other                  |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 184     |   |                      | 100.0  | %  |            | $ | 195     |                      |  | 100.0 | %                  |  | $ | (11                       | ) |  | (5.6  | )%
|Personnel Costs        |  |            |        |   |                      |       |    |            |   |        |                      |  |      |                    |  |   |                          |   |  |      |   
|School Operating Costs |  |            | 13      |   |                      | 6.5    |    |            |   | 31      |                      |  | 15.9  |                    |  |   | (18                       | ) |  | (58.1 | ) 
|Rent and Other         |  |            |        |   |                      |       |    |            |   |        |                      |  |      |                    |  |   |                          |   |  |      |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Profit           |  | $          | 172     |   |                      | 93.5   | %  |            | $ | 164     |                      |  | 84.1  | %                  |  | $ | 8                         |   |  | 4.9   | % 
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|                       |  |            |         |   |                      |       
|Total                  |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Revenue                |  | $          | 220,103 |   |                      | 100.0  | %  |            | $ | 204,201 |                      |  | 100.0 | %                  |  | $ | 15,902                    |   |  | 7.8   | % 
|Personnel Costs        |  |            | 105,562 |   |                      | 48.0   |    |            |   | 97,762  |                      |  | 47.9  |                    |  |   | 7,800                     |   |  | 8.0   |   
|School Operating Costs |  |            | 29,405  |   |                      | 13.4   |    |            |   | 26,769  |                      |  | 13.1  |                    |  |   | 2,636                     |   |  | 9.8   |   
|Rent and Other         |  |            | 56,152  |   |                      | 25.5   |    |            |   | 49,019  |                      |  | 24.0  |                    |  |   | 7,133                     |   |  | 14.6  |   
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   
|Gross Profit           |  | $          | 28,984  |   |                      | 13.2   | %  |            | $ | 30,651  |                      |  | 15.0  | %                  |  | $ | (1,667                    | ) |  | (5.4  | )%
|                       |  |            |         |   |                      |        |    |            |   |         |                      |  |       |                    |  |   |                           |   |  |       |   

Gross profit for Core Schools decreased as a percentage of revenue, to 16.1% during Fiscal 2009 as
compared to 16.8% for Core Schools as they were reported in the prior fiscal year.

Gross loss as a percentage of revenue from New Schools
worsened to (26.8%) during Fiscal 2009 as compared to (5.7%) during Fiscal 2008. New Schools for the Fiscal 2009 period include nine schools as



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compared to eight schools for the Fiscal 2008 period. One of the new schools included in the Fiscal 2008 period was a land banked school where
the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed (hence able to ramp up quickly due to a more mature market). Another of the schools included in the Fiscal 2008 period
was an already operating corporate contract school taken over by the Company from a previous operator with no rent costs and which was immediately accretive. The remaining schools included in both fiscal periods were opened in newer
path-of-progress markets which management expects to continue to develop incremental enrollments and are more typical of New Schools.

Gross profit from Acquired Schools during Fiscal 2009 was negatively impacted primarily by the results of one Camelback Desert School (CDS) with gross losses of $259,000. This loss had a negative 125 basis point impact on gross profit
percentages for continuing operations for Fiscal 2009. As previously described by the Company, CDS was acquired for the strong demographic characteristics of the Phoenix, Arizona market. The Company believes that under its management the school may
perform more in line with current, well-operated schools financial performance as best practices are adopted at this school and the requisite time passes for local market acceptance which may be extended due to local market conditions. The
Company has an early lease termination option to protect itself without continuing liability in the case that it is not able to obtain the desired financial performance after a certain period of time.

General and administrative expenses

During
Fiscal 2009, general and administrative expenses increased $210,000, or 1.1%, to $18,726,000 from $18,516,000 for Fiscal 2008. Fiscal 2009 general and administrative expenses decreased to 8.5% of revenue as compared to 9.1% for Fiscal 2008.

The overall increase in general and administrative expenses included consulting and professional fees of $368,000 related to the
evaluation of whether a sale of the Company was in the best interest of its shareholders, increased legal fees of $286,000 incurred as a result of a lawsuit filed against the Company by the United States Department of Justice and increased
amortization expense from acquisitions of $688,000. These increases were offset by a decrease of approximately $945,000 due to lower performance-based incentive compensation (based on targets as determined by the Compensation Committee and approved
by the Board of Directors) and the effects of an adjustment of $266,000 that corrected the Companys accounting for its deferred compensation plan.

Operating Income

As a result of the factors mentioned above, operating income decreased $1,877,000 or 15.5% to
$10,258,000 for Fiscal 2009 from $12,135,000 for Fiscal 2008. Operating income decreased in Fiscal 2009 to 4.7% of revenue from 5.9% in Fiscal 2008.

Interest expense

Interest expense increased $506,000 or 106.5% to $981,000 for Fiscal 2009 from $475,000 for Fiscal
2008. This increase corresponded with an increase of average debt outstanding of $14,700,000 during Fiscal 2009 as compared to $5,400,000 during Fiscal 2008. During Fiscal 2009, average debt outstanding increased primarily due to the Companys
use of debt to finance acquisitions, most substantially, the Enchanted Care acquisition with a purchase price and acquisition costs of over $14 million and which closed during the third quarter of Fiscal 2008.



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##### Table of Contents

Income tax expense

Income tax expense from continuing operations for Fiscal 2009 was $3,622,000 as compared to $4,621,000 for Fiscal 2008. The Companys effective tax rate for Fiscal 2009 and Fiscal 2008 was 38.5%. 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.

At June 27, 2009 and June 28, 2008 the Company had net deferred tax assets totaling $301,000 and $47,000, 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 2009 decreased $248,000 to $78,000 from $326,000 for
Fiscal 2009.

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.

Discontinued operations

In accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations for schools that are no longer operating under the Companys management have been reflected in the consolidated financial
statements and notes as discontinued operations for all periods presented. The operating results for discontinued operations in the statements of operations for all periods presented, net of tax, are as follows (dollars in thousands):



|                                                                     |  |        |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | -
|                                                                     |  | Fiscal |       
|                                                                     |  | 2009   |        |   | 2008 |  
|Revenues                                                             |  | $      | 1,761  |   |      | $ | 2,057  |  
|Cost of services                                                     |  |        | (2,242 | ) |      |   | (1,730 | )
|Rent and other                                                       |  |        | (1,112 | ) |      |   | (611   | )
|Closed school lease reserves                                         |  |        | (340   | ) |      |   | (245   | )
|Gain from sale of schools                                            |  |        |       |   |      |   |       |  
|Gain from settlement of sublease                                     |  |        |       |   |      |   | 1,028  |  
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | (1,933 | ) |      |   | 499    |  
|Income tax (expense) benefit                                         |  |        | 764    |   |      |   | (186   | )
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations, net of income taxes      |  | $      | (1,169 | ) |      | $ | 313    |  
|                                                                     |  |        |        |   |      |   |        |  

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. 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.



36



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##### Table of Contents

Net Income

As a result of the above factors, the Companys net income was $4,564,000 for Fiscal 2009 as compared to $7,678,000 for Fiscal 2008.

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 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 were 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.

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  |  
|                                             |  |        |   |  |      |  

As a result of certain school closures during Fiscal 2009 the Company has conformed amounts
reported for Fiscal 2008 and Fiscal 2007 to the period ended June 27, 2009. Operating results include three preschools and one elementary school closed during Fiscal 2009, two preschools closed during the Fiscal 2008 and two preschools closed
during Fiscal 2007. Results from one elementary school closed during Fiscal 2009, one preschool closed during Fiscal 2008 and six preschools that were closed and sold during Fiscal 2007 are included in the Companys income (loss) from
discontinued operations.

The table below identifies 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    
|         |  |             |  |            |  |            |  |            |  |      



37



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##### Table of Contents

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 |         | PercentofRevenues |       |   | Fiscal2007 |   | PercentofRevenues |  |       | ChangeAmountIncrease |  | PercentIncrease(decrease) |       
|Revenues                            |  | $          | 204,201 |                   | 100.0 | % |            | $ | 180,823           |  | 100.0 | %                    |  | $                         | 23,378 |  | 12.9 | %
|                                    |  |            |         |                   |       |   |            |   |                   |  |       |                      |  |                           |        |  |      |  
|Personnel costs                     |  |            | 97,762  |                   | 47.9  |   |            |   | 85,782            |  | 47.4  |                      |  |                           | 11,980 |  | 14.0 |  
|School operating costs              |  |            | 26,769  |                   | 13.1  |   |            |   | 24,399            |  | 13.5  |                      |  |                           | 2,370  |  | 9.7  |  
|Rent and other                      |  |            | 49,019  |                   | 24.0  |   |            |   | 43,278            |  | 23.9  |                      |  |                           | 5,741  |  | 13.3 |  
|                                    |  |            |         |                   |       |   |            |   |                   |  |       |                      |  |                           |        |  |      |  
|Cost of services                    |  |            | 173,550 |                   | 85.0  |   |            |   | 153,459           |  | 84.9  |                      |  |                           | 20,091 |  | 13.1 |  
|                                    |  |            |         |                   |       |   |            |   |                   |  |       |                      |  |                           |        |  |      |  
|Gross profit                        |  |            | 30,651  |                   | 15.0  |   |            |   | 27,364            |  | 15.1  |                      |  |                           | 3,287  |  | 12.0 |  
|General and administrative expenses |  |            | 18,516  |                   | 9.1   |   |            |   | 16,993            |  | 9.4   |                      |  |                           | 1,523  |  | 9.0  |  
|                                    |  |            |         |                   |       |   |            |   |                   |  |       |                      |  |                           |        |  |      |  
|Operating income                    |  | $          | 12,135  |                   | 5.9   | % |            | $ | 10,371            |  | 5.7   | %                    |  | $                         | 1,764  |  | 17.0 | %
|                                    |  |            |         |                   |       |   |            |   |                   |  |       |                      |  |                           |        |  |      |  

The table below shows the number of schools included in each of the four growth categories for
each section where they are respectively discussed below. Note that when presenting Comparable School results, as is the case in regard to Fiscal 2008 and Fiscal 2007, there may be schools included within Comparable School results that were
subsequently classified as closed or discontinued operations during Fiscal 2008 or 2009. In this case, the results of activities from these schools are presented as discontinued operations in the Companys current Form 10K or as closed schools
in the Results of Operations  Fiscal 2008 compared to Fiscal 2007 and they have been removed from Comparable School results as Comparable School results were reported in the Fiscal 2008 Form 10K.



|                                                  |  |        |  |     
|------------------------------------------------- |  | ------ |  | ----
|                                                  |  | Fiscal
|School Category                                   |  | 2008   |  | 2007
|Comparable                                        |  | 135    |  | 135 
|Core                                              |  | 135    |  | 132 
|New                                               |  | 8      |  | 4   
|Acquired                                          |  | 24     |  | 8   
|                                                  |  |        |  |     
|Total                                             |  | 167    |  | 144 
|                                                  |  |        |  |     
|Schools closed subsequent to reported fiscal year |  | 6      |  | 7   
|                                                  |  |        |  |     
|Schools operated during reported fiscal year      |  | 173    |  | 151 
|                                                  |  |        |  |     

Revenue

Revenue for Fiscal 2008 increased $23,378,000 or 12.9% to $204,201,000 from $180,823,000 from Fiscal 2007. This increase was primarily driven by revenues from schools opened or acquired subsequent to the end of Fiscal
2006 of $13,926,000 and an increase in revenues from Comparable schools of $7,073,000 or 4.3% for Fiscal 2008 as compared to Fiscal 2007.



|                                                       |  |        |         |                     |   |         |  |   |         |   |  |       |  
|------------------------------------------------------ |  | ------ | ------- | ------------------- | - | ------- |  | - | ------- | - |  | ----- | -
|                                                       |  | Fiscal |         | Increase (decrease) |  
|                                                       |  | 2008   |         | 2007                |   | Dollar  |  |   | Percent |  
|Total Company revenue                                  |  | $      | 204,201 |                     | $ | 180,823 |  | $ | 23,378  |   |  | 12.9  | %
|                                                       |  |        |         |                     |   |         |  |   |         |   |  |       |  
|Comparable Schools                                     |  | $      | 172,356 |                     | $ | 165,283 |  | $ | 7,073   |   |  | 4.3   | %
|Schools acquired, opened or closed after July 1, 2006: |  |        |         |                     |   |         |  |   |         |   |  |       |  
|Acquired                                               |  |        | 20,249  |                     |   | 6,323   |  |   | 13,926  |   |  | 220.2 |  
|New                                                    |  |        | 7,035   |                     |   | 2,713   |  |   | 4,322   |   |  | 159.3 |  
|Closed                                                 |  |        | 4,366   |                     |   | 5,135   |  |   | (769    | ) |  | (15.0 | )
|Other                                                  |  |        | 195     |                     |   | 1,369   |  |   | (1,174  | ) |  | (85.8 | )
|                                                       |  |        |         |                     |   |         |  |   |         |   |  |       |  
|                                                       |  | $      | 204,201 |                     | $ | 180,823 |  | $ | 23,378  |   |  | 12.9  | %
|                                                       |  |        |         |                     |   |         |  |   |         |   |  |       |  



38



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##### Table of Contents

Revenue increases from Comparable Schools were primarily the results of average tuition increases of
approximately 3.8% and an increase in average enrollments.

Other, non-school revenues decreased by $1,174,000 during Fiscal 2008 as
compared to Fiscal 2007. This decrease was the result of a reduction in back office management services contracts and sublease terminations with third parties.

Revenue trends

In comparing Fiscal 2008 to Fiscal 2007, revenue growth continued to be generated by each of the four
growth initiative categories. The revenue results of each of the four revenue growth categories for Fiscal 2008 (schools acquired, opened or closed subsequent to July 1, 2006) and Fiscal 2007 (schools acquired, opened or closed subsequent to
July 2, 2005) are as follows:



|                         |  |             |         |                       |       |   |             |   |                       |  |       |  
|------------------------ |  | ----------- | ------- | --------------------- | ----- | - | ----------- | - | --------------------- |  | ----- | -
|                         |  | Fiscal 2008 |         | Percent ofRevenue (1) |       |   | Fiscal 2007 |   | Percent ofRevenue (1) | 
|Core Schools             |  | $           | 172,356 |                       | 84.4  | % |             | $ | 157,764               |  | 87.2  | %
|New Schools              |  |             | 7,035   |                       | 3.4   |   |             |   | 4,503                 |  | 2.5   |  
|Acquired Schools         |  |             | 20,249  |                       | 9.9   |   |             |   | 12,051                |  | 6.7   |  
|Closed schools and other |  |             | 4,561   |                       | 2.2   |   |             |   | 6,505                 |  | 3.6   |  
|                         |  |             |         |                       |       |   |             |   |                       |  |       |  
|                         |  | $           | 204,201 |                       | 100.0 | % |             | $ | 180,823               |  | 100.0 | %
|                         |  |             |         |                       |       |   |             |   |                       |  |       |  

| | 
| | 

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

New
School revenue increased as a percentage of total revenue to 3.4% from Fiscal 2008 as compared to 2.5% from Fiscal 2007. This increase was the result of eight New Schools operating during Fiscal 2008 compared to four New Schools operating during
Fiscal 2007.

Acquired School revenue increased as a percentage of total revenue to 9.9% for Fiscal 2008 as compared to 6.7% for Fiscal
2007. Thirteen of the Acquired Schools from Fiscal 2008 were acquired subsequent to the second quarter of the fiscal year, whereas all schools included in Acquired Schools for Fiscal 2007 were acquired prior to or during the first quarter of Fiscal
2007.

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This category of costs is partially variable and primarily affected by incentive compensation, health care benefit and participant rate increases,
staffing ratio requirements and changes in enrollment. The category tends to be variable on a step function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools,
personnel costs tend to be higher as a percentage of revenue as a base level of personnel and associated costs are established in the early years of a schools life and which are expected to leverage as enrollments increase. It is important to
note that preschool staffing ratios are mandated by state requirements which can result in very low teacher to student ratios when class sizes are not optimal. This is not the case in K+ schools where no such requirements exist.



39



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##### Table of Contents

For Fiscal 2008, personnel costs increased $11,980,000 or 14.0% to $97,762,000 from $85,782,000 for
Fiscal 2007. This increase was primarily driven by an increase in personnel costs from schools acquired or newly opened subsequent to July 1, 2006 of $9,301,000 and an increase in personnel costs from Comparable Schools of $3,079,000.



|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|------------------------------------------------------ |  | ------ | ------ | ------------------- | - | ------ |  | - | ------- | - |  | ----- | -
|                                                       |  | Fiscal |        | Increase (decrease) |  
|                                                       |  | 2008   |        | 2007                |   | Dollar |  |   | Percent |  
|Total Company                                          |  | $      | 97,762 |                     | $ | 85,782 |  | $ | 11,980  |   |  | 14.0  | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|Comparable Schools                                     |  | $      | 81,191 |                     | $ | 78,112 |  | $ | 3,079   |   |  | 3.9   | %
|                                                       |  |        |        |                    
|Schools acquired, opened or closed after July 1, 2006: |  |        |        |                     |   |        |  |   |         |   |  |       |  
|Acquired                                               |  |        | 9,710  |                     |   | 2,723  |  |   | 6,987   |   |  | 256.6 |  
|New                                                    |  |        | 3,898  |                     |   | 1,584  |  |   | 2,314   |   |  | 146.1 |  
|Closed                                                 |  |        | 2,963  |                     |   | 3,363  |  |   | (400    | ) |  | (11.9 | )
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|                                                       |  | $      | 97,762 |                     | $ | 85,782 |  | $ | 11,980  |   |  | 14.0  | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  

Personnel costs increased to 47.9% of revenue for Fiscal 2008 as compared to 47.4% for Fiscal
2007. This increase of 50 basis points consisted of the following:



|                                                                                                        |  |                       |   |  |        |  
|------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                        |  | Percentage of Revenue |  
|                                                                                                        |  | Fiscal                |   |  | Fiscal |  
|                                                                                                        |  | 2008                  |   |  | 2007   |  
|Total Company                                                                                           |  | 47.9                  | % |  | 47.4   | %
|                                                                                                        |  |                       |   |  |        |  
|Comparable Schools                                                                                      |  | 47.1                  | % |  | 47.2   | %
|Schools acquired or opened subsequent to July 1, 2006 for Fiscal 2008 and July 2, 2005 for Fiscal 2007: |  |                       |   |  |        |  
|Core Schools                                                                                            |  | 47.1                  | % |  | 47.2   | %
|Acquired Schools                                                                                        |  | 48.0                  | % |  | 46.8   | %
|New Schools                                                                                             |  | 55.4                  | % |  | 50.1   | %

Comparable Schools personnel costs as a percentage of revenue decreased ten basis points as
a result of an increase in wage rates and benefit costs was offset by an efficient utilization of payroll hours and personnel.

Personnel
costs as a percentage of revenue at New Schools increased 530 basis points as the eight New Schools which operated during Fiscal 2008 included one land banked school where the Company held the rights to the land for a period of time
prior to development so that the market would be more fully developed (hence able to ramp up quickly due to a more mature market) and one school included in the Fiscal 2008 period was an already operating corporate contract school taken over by the
Company from a previous operator and already had an existing revenue stream. Fiscal 2008 also included the operations of six additional schools which were newly opened in less developed markets. Three of the four new schools operated during Fiscal
2007 were either land banked schools or an already operating contract school.

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 percentage of revenue as a base level of costs are incurred in the
early period of a schools life and are expected to be leveraged as enrollments increase.



40



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##### Table of Contents

For Fiscal 2008, school operating costs increased $2,370,000 or 9.7% to $26,769,000 from $24,399,000 for
Fiscal 2007. This increase was primarily driven by an increase in school operating costs from new and acquired schools offset by decreased costs in Comparable and Closed Schools.



|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|------------------------------------------------------ |  | ------ | ------ | ------------------- | - | ------ |  | - | ------- | - |  | ----- | -
|                                                       |  | Fiscal |        | Increase (decrease) |  
|                                                       |  | 2008   |        | 2007                |   | Dollar |  |   | Percent |  
|Total Company                                          |  | $      | 26,769 |                     | $ | 24,399 |  | $ | 2,370   |   |  | 9.7   | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|Comparable Schools                                     |  | $      | 22,687 |                     | $ | 22,266 |  | $ | 421     |   |  | 1.9   | %
|Schools acquired, opened or closed after July 1, 2006: |  |        |        |                     |   |        |  |   |         |   |  |       |  
|Acquired                                               |  |        | 2,262  |                     |   | 563    |  |   | 1,699   |   |  | 301.8 |  
|New                                                    |  |        | 876    |                     |   | 314    |  |   | 562     |   |  | 179.0 |  
|Closed                                                 |  |        | 914    |                     |   | 1,123  |  |   | (209    | ) |  | (18.6 | )
|Other                                                  |  |        | 30     |                     |   | 133    |  |   | (103    | ) |  | (77.4 | )
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  
|                                                       |  | $      | 26,769 |                     | $ | 24,399 |  | $ | 2,370   |   |  | 9.7   | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |       |  

School operating costs decreased to 13.1% of revenue for Fiscal 2008 as compared to 13.5% for
Fiscal 2007. This decrease of 40 basis points consisted of the following:



|                                                                                                        |  |                       |   |  |        |  
|------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                        |  | Percentage of Revenue |  
|                                                                                                        |  | Fiscal                |   |  | Fiscal |  
|                                                                                                        |  | 2008                  |   |  | 2007   |  
|Total Company                                                                                           |  | 13.1                  | % |  | 13.5   | %
|                                                                                                        |  |                       |   |  |        |  
|Comparable Schools                                                                                      |  | 13.2                  | % |  | 13.5   | %
|Schools acquired or opened subsequent to July 1, 2006 for Fiscal 2008 and July 2, 2005 for Fiscal 2007: |  |                       |   |  |        |  
|Core Schools                                                                                            |  | 13.2                  | % |  | 13.5   | %
|Acquired Schools                                                                                        |  | 11.2                  | % |  | 11.3   | %
|New Schools                                                                                             |  | 12.5                  | % |  | 10.5   | %

School operating costs as a percentage of revenue from Comparable Schools operated by the Company
during the entire year for Fiscal 2008 and Fiscal 2007 decreased forty basis points. This decrease was the result of a forty basis point reduction in program costs and bad debt expense partially offset by increased food and facility maintenance
costs.

School operating costs as a percentage of revenue at New Schools increased 200 basis points as the eight New Schools which operated
during Fiscal 2008 included one land banked school where the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed (hence able to ramp up quickly due to a more
mature market) and one school included in the Fiscal 2008 period was an already operating corporate contract school taken over by the Company from a previous operator. Fiscal 2008 also included the operations of six additional schools which were
newly opened in less developed markets. Three of the four new schools operated during Fiscal 2007 were either land banked schools or an already operating contract school.

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 insurance, 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. In the case of New Schools, management expects these costs to be leveraged as enrollments ramp up.



41



---

##### Table of Contents

For Fiscal 2008, rent and other costs increased $5,741,000 or 13.3% to $49,019,000 from $43,278,000 for
Fiscal 2007. This increase was primarily driven by an increase in rent and other costs from acquired, new and closed schools partially offset by a decrease in rents and depreciation of equipment related to a property subleased through the Company.
During Fiscal 2007, the lease rights to this property were transferred by the Company to the subtenant and the Company no longer has any obligations for that property.



|                                                       |  |        |        |                     |   |        |  |   |         |   |  |        |  
|------------------------------------------------------ |  | ------ | ------ | ------------------- | - | ------ |  | - | ------- | - |  | ------ | -
|                                                       |  | Fiscal |        | Increase (decrease) |  
|                                                       |  | 2008   |        | 2007                |   | Dollar |  |   | Percent |  
|Total Company                                          |  | $      | 49,019 |                     | $ | 43,278 |  | $ | 5,741   |   |  | 13.3   | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |        |  
|Comparable Schools                                     |  | $      | 39,506 |                     | $ | 38,491 |  | $ | 1,015   |   |  | 2.6    | %
|Schools acquired, opened or closed after July 1, 2006: |  |        |        |                     |   |        |  |   |         |   |  |        |  
|Acquired                                               |  |        | 5,175  |                     |   | 1,715  |  |   | 3,460   |   |  | 201.7  |  
|New                                                    |  |        | 2,658  |                     |   | 864    |  |   | 1,794   |   |  | 207.6  |  
|Closed                                                 |  |        | 1,680  |                     |   | 1,635  |  |   | 45      |   |  | 2.8    |  
|Other                                                  |  |        |       |                     |   | 573    |  |   | (573    | ) |  | (100.0 | )
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |        |  
|                                                       |  | $      | 49,019 |                     | $ | 43,278 |  | $ | 5,741   |   |  | 13.3   | %
|                                                       |  |        |        |                     |   |        |  |   |         |   |  |        |  

Rent and other costs increased to 24.0% of revenue for Fiscal 2008 as compared to 23.9% for Fiscal
2007. This increase of 150 basis points consisted of the following:



|                                                                                                        |  |                       |   |  |        |  
|------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ------ | -
|                                                                                                        |  | Percentage of Revenue |  
|                                                                                                        |  | Fiscal                |   |  | Fiscal |  
|                                                                                                        |  | 2008                  |   |  | 2007   |  
|Total Company                                                                                           |  | 24.0                  | % |  | 23.9   | %
|                                                                                                        |  |                       |   |  |        |  
|Comparable Schools                                                                                      |  | 22.9                  | % |  | 23.2   | %
|Schools acquired or opened subsequent to July 1, 2006 for Fiscal 2008 and July 2, 2005 for Fiscal 2007: |  |                       |   |  |        |  
|Core Schools                                                                                            |  | 22.9                  | % |  | 23.6   | %
|Acquired Schools                                                                                        |  | 25.6                  | % |  | 22.3   | %
|New Schools                                                                                             |  | 37.8                  | % |  | 27.1   | %

Rent and other costs as a percentage of revenue from Comparable Schools operated by the Company
during the entire year for Fiscal 2008 and Fiscal 2007 decreased thirty basis points. Reductions in insurance premiums and workers compensation and property damage claims retained by the Company, vehicle lease and marketing costs as a percentage of
Comparable School revenue was partially offset by increased rent and property taxes of approximately forty-six basis points.

Rent and
other costs as a percentage of revenue at New Schools increased 200 basis points as the eight New Schools which operated during Fiscal 2008 included one land banked school where the Company held the rights to the land for a period of
time prior to development so that the market would be more fully developed (hence able to ramp up quickly due to a more mature market) and one school included in the Fiscal 2008 period was an already operating corporate contract school taken over by
the Company from a previous operator with no rent costs. Fiscal 2008 also included the operations of six additional schools which were newly opened in less developed markets. Three of the four new schools operated during Fiscal 2007 were either land
banked schools or an already operating contract school.



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Gross profit

As a result of the factors mentioned above, gross profit for Fiscal 2008 increased $3,287,000 or 12.0% to $30,651,000 from $27,364,000 for Fiscal 2008. Gross profit was 15.0% of revenue for Fiscal 2008 and 15.1% 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(decrease) |       
|Revenues               |  | $          | 204,201 |                    | 100.0 | % |            | $ | 180,823            |  | 100.0 | %                    |  | $                         | 23,378 |  | 12.9 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                           |        |  |      |  
|Personnel costs        |  |            | 97,762  |                    | 47.9  |   |            |   | 85,782             |  | 47.4  |                      |  |                           | 11,980 |  | 14.0 |  
|School operating costs |  |            | 26,769  |                    | 13.1  |   |            |   | 24,399             |  | 13.5  |                      |  |                           | 2,370  |  | 9.7  |  
|Rent and other         |  |            | 49,019  |                    | 24.0  |   |            |   | 43,278             |  | 23.9  |                      |  |                           | 5,741  |  | 13.3 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                           |        |  |      |  
|Cost of services       |  |            | 173,550 |                    | 85.0  |   |            |   | 153,459            |  | 84.9  |                      |  |                           | 20,091 |  | 13.1 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                           |        |  |      |  
|Gross profit           |  | $          | 30,651  |                    | 15.0  | % |            | $ | 27,364             |  | 15.1  | %                    |  | $                         | 3,287  |  | 12.0 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                           |        |  |      |  

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               |  | $          | 172,356 |                    | 100.0 | % |            | $ | 165,283            |  | 100.0 | %                    |  | $               | 7,073 |  | 4.3 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Personnel costs        |  |            | 81,191  |                    | 47.1  |   |            |   | 78,112             |  | 47.3  |                      |  |                 | 3,079 |  | 3.9 |  
|School operating costs |  |            | 22,687  |                    | 13.2  |   |            |   | 22,266             |  | 13.5  |                      |  |                 | 421   |  | 1.9 |  
|Rent and other         |  |            | 39,506  |                    | 22.9  |   |            |   | 38,491             |  | 23.3  |                      |  |                 | 1,015 |  | 2.6 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Cost of services       |  |            | 143,384 |                    | 83.2  |   |            |   | 138,869            |  | 84.0  |                      |  |                 | 4,515 |  | 3.3 |  
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  
|Gross profit           |  | $          | 28,972  |                    | 16.8  | % |            | $ | 26,414             |  | 16.0  | %                    |  | $               | 2,558 |  | 9.7 | %
|                       |  |            |         |                    |       |   |            |   |                    |  |       |                      |  |                 |       |  |     |  



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



|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|---------------------- |  | ---------- | ------- | - | -------------------- | ----- | -- | ---------- | - | ------- | -------------------- |  | ----- | ------------------ |  | - | --------------------------- | - |  | ------ | --
|                       |  | Fiscal2008 |         |   | Percentageof Revenue |       |    | Fiscal2007 |   |         | Percentageof Revenue |  |       | Increase(Decrease) |  |   | PercentIncrease  (Decrease) |  
|Core Schools           |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Number of schools      |  |            | 135     |   |                      |       |    |            |   | 132     |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 172,356 |   |                      | 100.0 | %  |            | $ | 157,764 |                      |  | 100.0 | %                  |  | $ | 14,592                      |   |  | 9.2    | % 
|Personnel Cost         |  |            | 81,191  |   |                      | 47.1  |    |            |   | 74,515  |                      |  | 47.2  |                    |  |   | 6,676                       |   |  | 9.0    |   
|School Operating Cost  |  |            | 22,687  |   |                      | 13.2  |    |            |   | 21,327  |                      |  | 13.5  |                    |  |   | 1,360                       |   |  | 6.4    |   
|Rent and Other         |  |            | 39,506  |   |                      | 22.9  |    |            |   | 37,161  |                      |  | 23.6  |                    |  |   | 2,345                       |   |  | 6.3    |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Profit           |  | $          | 28,972  |   |                      | 16.8  | %  |            | $ | 24,761  |                      |  | 15.7  | %                  |  | $ | 4,211                       |   |  | 17.0   | % 
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|                       |  |            |         |   |                      |      
|New Schools            |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Number of schools      |  |            | 8       |   |                      |       |    |            |   | 4       |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 7,035   |   |                      | 100.0 | %  |            | $ | 4,503   |                      |  | 100.0 | %                  |  | $ | 2,532                       |   |  | 56.2   | % 
|Personnel Costs        |  |            | 3,899   |   |                      | 55.4  |    |            |   | 2,258   |                      |  | 50.1  |                    |  |   | 1,641                       |   |  | 72.7   |   
|School Operating Costs |  |            | 876     |   |                      | 12.5  |    |            |   | 473     |                      |  | 10.5  |                    |  |   | 403                         |   |  | 85.2   |   
|Rent and Other         |  |            | 2,658   |   |                      | 37.8  |    |            |   | 1,220   |                      |  | 27.1  |                    |  |   | 1,438                       |   |  | 117.9  |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Profit (Loss)    |  | $          | (398    | ) |                      | (5.7  | )% |            | $ | 552     |                      |  | 12.3  | %                  |  | $ | (950                        | ) |  | (172.1 | )%
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|                       |  |            |         |   |                      |      
|Acquired Schools       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Number of schools      |  |            | 24      |   |                      |       |    |            |   | 8       |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 20,249  |   |                      | 100.0 | %  |            | $ | 12,051  |                      |  | 100.0 | %                  |  | $ | 8,198                       |   |  | 68.0   | % 
|Personnel Costs        |  |            | 9,710   |   |                      | 48.0  |    |            |   | 5,644   |                      |  | 46.8  |                    |  |   | 4,066                       |   |  | 72.0   |   
|School Operating Costs |  |            | 2,262   |   |                      | 11.2  |    |            |   | 1,364   |                      |  | 11.3  |                    |  |   | 898                         |   |  | 65.8   |   
|Rent and Other         |  |            | 5,175   |   |                      | 25.6  |    |            |   | 2,689   |                      |  | 22.3  |                    |  |   | 2,486                       |   |  | 92.5   |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Profit           |  | $          | 3,102   |   |                      | 15.3  | %  |            | $ | 2,354   |                      |  | 19.5  | %                  |  | $ | 748                         |   |  | (31.8  | )%
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|                       |  |            |         |   |                      |      
|Closed Schools         |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Number of schools      |  |            | 7       |   |                      |       |    |            |   | 7       |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 4,366   |   |                      | 100.0 | %  |            | $ | 5,133   |                      |  | 100.0 | %                  |  | $ | (767                        | ) |  | (14.9  | )%
|Personnel Costs        |  |            | 2,962   |   |                      | 67.8  |    |            |   | 3,365   |                      |  | 65.6  |                    |  |   | (403                        | ) |  | (11.9  | ) 
|School Operating Costs |  |            | 913     |   |                      | 20.9  |    |            |   | 1,122   |                      |  | 21.9  |                    |  |   | (209                        | ) |  | (18.5  | ) 
|Rent and Other         |  |            | 1,680   |   |                      | 38.5  |    |            |   | 1,635   |                      |  | 31.9  |                    |  |   | 45                          |   |  | 2.8    |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Loss             |  | $          | (1,189  | ) |                      | (27.3 | )% |            | $ | (989    | )                    |  | (19.3 | )%                 |  | $ | (200                        | ) |  | 20.2   | % 
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|                       |  |            |         |   |                      |      
|Other                  |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 195     |   |                      | 100.0 | %  |            | $ | 1,372   |                      |  | 100.0 | %                  |  | $ | (1,177                      | ) |  | (85.8  | )%
|Personnel Costs        |  |            |        |   |                      |      |    |            |   |        |                      |  |      |                    |  |   |                            |   |  | n.a.   |   
|School Operating Costs |  |            | 31      |   |                      | 15.9  |    |            |   | 113     |                      |  | 8.2   |                    |  |   | (82                         | ) |  | (71.8  | ) 
|Rent and Other         |  |            |        |   |                      |      |    |            |   | 573     |                      |  | 41.8  |                    |  |   | (573                        | ) |  | n.a.   |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Profit           |  | $          | 164     |   |                      | 84.1  | %  |            | $ | 686     |                      |  | 50.0  | %                  |  | $ | (522                        | ) |  | (76.2  | )%
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|                       |  |            |         |   |                      |      
|Total                  |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Revenue                |  | $          | 204,201 |   |                      | 100.0 | %  |            | $ | 180,823 |                      |  | 100.0 | %                  |  | $ | 23,378                      |   |  | 12.9   | % 
|Personnel Costs        |  |            | 97,762  |   |                      | 47.9  |    |            |   | 85,782  |                      |  | 47.4  |                    |  |   | 11,980                      |   |  | 14.0   |   
|School Operating Costs |  |            | 26,769  |   |                      | 13.1  |    |            |   | 24,399  |                      |  | 13.5  |                    |  |   | 2,370                       |   |  | 9.7    |   
|Rent and Other         |  |            | 49,019  |   |                      | 24.0  |    |            |   | 43,278  |                      |  | 23.9  |                    |  |   | 5,741                       |   |  | 13.3   |   
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   
|Gross Profit           |  | $          | 30,651  |   |                      | 15.0  | %  |            | $ | 27,364  |                      |  | 15.1  | %                  |  | $ | 3,287                       |   |  | 12.0   | % 
|                       |  |            |         |   |                      |       |    |            |   |         |                      |  |       |                    |  |   |                             |   |  |        |   



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##### Table of Contents

Gross profit for Core Schools increased as a percentage of revenue, to 16.8% during Fiscal 2008 as
compared to 15.7% 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 which operated during Fiscal 2008 included one land banked school where the Company held the rights to the land
for a period of time prior to development so that the market would be more fully developed (hence able to ramp up quickly due to a more mature market) and another of the schools included in the Fiscal 2008 period was an already operating corporate
contract school taken over by the Company from a previous operator with no rent costs and which was immediately accretive. However Fiscal 2008 also included the operations of six additional schools which were newly opened in less developed markets
whereas three of the four new schools operated during Fiscal 2007 were either land banked schools or an already operating contract school.

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 24 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.

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 9.1% of revenue for Fiscal 2008 from 9.4% of revenue for Fiscal 2007.

The overall increase in general and administrative expenses was driven by several 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 $1,764,000 or 17.0% to $12,135,000 for Fiscal 2008 from $10,371,000 for Fiscal
2007. Operating income increased in Fiscal 2008 to 5.9% of revenue from 5.7% in Fiscal 2007.



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##### Table of Contents

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 resulted in a charge to Fiscal 2007
basic and diluted earnings per share of $0.04 and $0.03, respectively.

Income tax expense

Income tax expense from continuing operations for Fiscal 2008 was $4,621,000 as compared to $5,021,000 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.

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 a $2,500,000 subordinated note receivable the Company had previously fully reserved that was due May 2005. In addition to the $2,500,000 note receivable, the
Company had acquired a $1,000,000 debt obligation of the same entity for $200,000. The entity paid the Company $3,510,000 resulting in the recognition of $3,300,000 of other income and an increase in basic and diluted earnings per share of $00.22
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 payments 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.

Discontinued operations

In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the results of operations for schools that are no longer operating under the Companys management have been reflected in the consolidated financial statements and notes as discontinued
operations for all periods presented.



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##### Table of Contents

The operating results for discontinued operations in the statements of operations for all periods presented, net of tax, are as follows (dollars in
thousands):



|                                                                     |  |        |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | -
|                                                                     |  | Fiscal |       
|                                                                     |  | 2008   |        |   | 2007 |  
|Revenues                                                             |  | $      | 2,057  |   |      | $ | 6,149  |  
|Cost of services                                                     |  |        | (1,730 | ) |      |   | (5,141 | )
|Rent and other                                                       |  |        | (611   | ) |      |   | (1,665 | )
|Closed school lease reserves                                         |  |        | (245   | ) |      |   | (2,027 | )
|Gain from sale of schools                                            |  |        |       |   |      |   | 1,900  |  
|Gain from settlement of sublease                                     |  |        | 1,028  |   |      |   |       |  
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | 499    |   |      |   | (784   | )
|Income tax (expense) benefit                                         |  |        | (186   | ) |      |   | 313    |  
|                                                                     |  |        |        |   |      |   |        |  
|Income (loss) from discontinued operations, net of income taxes      |  | $      | 313    |   |      | $ | (471   | )
|                                                                     |  |        |        |   |      |   |        |  

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. 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.

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 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. During Fiscal 2007, the Company completed the sale each
of these schools and received net proceeds of approximately $4,020,000, resulting in a gain before tax of $1,900,000. The sale of these schools resulted in an increase to Fiscal 2007 basic and diluted earnings per share of $0.13 and $0.11,
respectively.

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 was 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 had been incurred to consummate this transaction.

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.

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. 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 2009, the Company also used $7,196,000 for the acquisition of nine
school businesses. Under the 2008 Credit Agreement,



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##### Table of Contents

at June 27, 2009, there was $13,525,000 outstanding and at September 4, 2009, there was $26,825,000 outstanding. In addition, there was $2,615,000
outstanding for letters of credit as of June 27, 2009 and September 4, 2009, respectively. The total unused and available portion of the 2008 Credit Agreement, after allowance for the letters of credit, at June 27, 2009 was
$58,860,000 and at September 4, 2009 was $45,560,000.

Cash provided by operating activities for Fiscal 2009, 2008 and 2007 was
$12,787,000, $14,333,000 and $19,004,000, respectively. The $1,546,000 decrease in Fiscal 2009 as compared to Fiscal 2008 was primarily due to a decrease in net income of $3,114,000 and a decrease in cash from working capital items of $2,704,000
which were partially offset by an increase from adjustments to net income of $4,272,000. The increase in adjustments to net income included an increase in depreciation and amortization expense of $2,767,000 during Fiscal 2009 as compared to Fiscal
2008 and a gain from a sublease settlement which is due to the Company as a long-term note receivable during Fiscal 2008 for $1,028,000 net of unamortized interest income.

Cash used in investing activities for Fiscal 2009, 2008 and 2007 was $14,646,000, $29,353,000 and $11,233,000, respectively. The $14,707,000 decrease in
Fiscal 2009 as compared to Fiscal 2008 was primarily due to a decrease of cash used for acquisitions of $13,865,000 as the Company completed five acquisitions adding nine schools totaling $7,196,000 during Fiscal 2009 as compared to five
acquisitions adding twenty schools, totaling $21,061,000 during Fiscal 2008. The purchase of capital assets decreased $672,000 to $7,450,000 during Fiscal 2009 as compared to $8,122,000 during Fiscal 2008 as the Company opened four new schools
during Fiscal 2009 as compared to five new schools during Fiscal 2008, the Company also made an investment of $170,000 to its Spanish curriculum during Fiscal 2008.

Cash provided by financing activities for Fiscal 2009 was $1,581,000 compared to cash provided by financing activities in Fiscal 2008 of $12,270,000 and cash used in financing activities in Fiscal 2007 of $13,794,000.
Cash provided in Fiscal 2009 was primarily due to the net proceeds from borrowing activities of $1,025,000 during Fiscal 2009 compared to net proceeds of borrowings of $12,500,000 during Fiscal 2008.

As a result of the above cash flow activity, total cash and cash equivalents decreased by $278,000 from $1,064,000 at June 28, 2008 to $786,000 at
June 27, 2009.

Revolving Credit Agreement

At the beginning of Fiscal 2008, 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
of the Revolving Credit Commitment (as amended, the 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 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 either LIBOR or bank base rate indexed borrowings. The 2008 Credit Agreement has a five-year term that ends on June 5, 2013. As of
June 27, 2009 outstanding borrowings equaled $13,525,000 and outstanding letters of credit were $2,615,000 respectively.



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The Companys obligation under its 2008 Credit Agreement, as well as under the Prior Credit
Agreement, bear 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 27, 2009 is both (1) a
selected LIBOR rate plus a debt to defined EBITDA-indexed rate or (2) the defined base rate plus a debt to defined EBITDA-indexed 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 2008 Credit Agreement bearing interest based on selected LIBOR rate plus a debt to defined EBITDA-indexed rate. The range of EBITDA-indexed rates applicable for each of the agreements Fiscal 2009
and Fiscal 2008 was as follows:



|                                                             |  |                                |  |                            
|------------------------------------------------------------ |  | ------------------------------ |  | ---------------------------
|                                                             |  | October 26, 2006 -June 5, 2008 |  | June 6, 2008 -June 27, 2009
|LIBOR rate plus debt to defined EBITDA-indexed rate          |  | 1.00% - 2.00%                  |  | 1.15% - 2.40%              
|Base rate plus debt to defined EBITDA-indexed rate           |  | 0.00% - 0.50%                  |  | 0.15% - 0.90%              
|Letter of Credit fees LIBOR plus defined-EBITDA-indexed rate |  | 1.00% - 2.00%                  |  | 1.15% - 2.40%              

The Companys obligations under the 2008 Credit 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 all real and personal property owned by the Company.

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

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 27, 2009, letter of credit commitments totaled $2,615,000.

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 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.



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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 27, 2009 (dollars in thousands): 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 27, 2009 (dollars in thousands):



|                                                          |  |       |         |                 |      |        |      |   |        |  |      |        |            |   |        |  |   |        |  |   |        
|--------------------------------------------------------- |  | ----- | ------- | --------------- | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---------- | - | ------ |  | - | ------ |  | - | -------
|                                                          |  | Total |         | For Fiscal Year
|                                                          |  |       | 2010    |                 | 2011 |        | 2012 |   | 2013   |  | 2014 |        | Thereafter
|Long term debt obligations including contractual interest |  | $     | 15,349  |                 | $    | 456    |      | $ | 456    |  | $    | 456    |            | $ | 13,981 |  | $ |       |  | $ |       
|Letters of credit                                         |  |       | 2,615   |                 |      | 2,615  |      |   |       |  |      |       |            |   |       |  |   |        |  |   |       
|Operating leases                                          |  |       | 337,790 |                 |      | 40,150 |      |   | 38,287 |  |      | 34,624 |            |   | 31,471 |  |   | 28,698 |  |   | 164,560
|                                                          |  |       |         |                 |      |        |      |   |        |  |      |        |            |   |        |  |   |        |  |   |        
|Total                                                     |  | $     | 355,754 |                 | $    | 43,221 |      | $ | 38,743 |  | $    | 35,080 |            | $ | 45,452 |  | $ | 28,698 |  | $ | 164,560
|                                                          |  |       |         |                 |      |        |      |   |        |  |      |        |            |   |        |  |   |        |  |   |        

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 includes 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 2010 and 2017. 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 leases included in continuing operations was
$37,376,000, $32,254,000 and $28,298,000 for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.

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 rent increases based on
changes in consumer price indexes or other formulas, which are not reflected in the above schedule.

At June 27, 2009, there were nine
leased properties included in discontinued operations, six of these properties were sub-leased, three of which remain vacant. The obligations of the leases that are subject to a sublease are substantially covered by the subtenant. If such parties
under the sublease agreements default, the Company has the obligation to pay rent under the terms of these leases. The operating lease commitments reflected above do not reflect sublease amounts due to the Company of $8,390,000. 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 or unsuccessful 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 the respective property. Additionally, one of the vacant schools included in discontinued operations that was closed during the fourth quarter
of the Fiscal 2009. The school has been closed and will remain closed contingent upon the landlord remediating the property to a usable condition. Based upon the provisions of the lease to this property, the Company has notified the propertys
owner of issues in regard to the physical condition of the property and has terminated rent payments to the landlord. If and when the landlord makes the repairs as required by the lease provisions, the Company may reopen the property. As the
resolution of the Companys actions with the landlord is not currently known, the Company has not included a liability for future lease payments it may or may not be subject to in regard to this property. As of June 27, 2009 the future
lease payments under the original terms of the lease total $1,113,000.

In addition to the lease obligations noted above, the Company also
has made guarantees for ten leases that were assigned to a third party during or before Fiscal 2000 and four properties during Fiscal 2007 (the



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Guaranteed Properties). In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), the Company has assessed its exposure regarding the assignment of the Guaranteed
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 27, 2009 is $498,000.

Capital Expenditures

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, the Companys Revolving Credit Agreement or asset sales. Renovations and equipment purchases are capital
expenditures incurred for 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 2009, this limitation was $13,000,000.

Capital expenditures were as
follows (dollars in thousands):



|                                    |  |        |       |      |   |       |  |   |      
|----------------------------------- |  | ------ | ----- | ---- | - | ----- |  | - | -----
|                                    |  | Fiscal
|                                    |  | 2009   |       | 2008 |   | 2007 
|New school development              |  | $      | 2,789 |      | $ | 1,716 |  | $ | 1,054
|Renovations and equipment purchases |  |        | 3,815 |      |   | 4,932 |  |   | 5,471
|Corporate and information systems   |  |        | 846   |      |   | 1,474 |  |   | 987  
|                                    |  |        |       |      |   |       |  |   |      
|                                    |  | $      | 7,450 |      | $ | 8,122 |  | $ | 7,512
|                                    |  |        |       |      |   |       |  |   |      

During Fiscal 2009, the Company opened four new preschools, acquired six preschools and three
elementary schools, and added three new preschools which opened during the first quarter of Fiscal 2010. During Fiscal 2008, the Company opened five new preschools and acquired eighteen preschools and two elementary schools. During Fiscal 2007, the
Company opened three new preschools and acquired six preschools.

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 2009, the Financial Accounting Standards Board (FASB) issued SFAS 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162 (SFAS No. 168). The FASB Accounting Standards Codification (Codification) is intended to become the source
of the authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritiative. SFAS 168 will become effective for financial statements issued for interim and annual periods ending after September 15, 2009. The
adoption of this standard is not anticipated to have a material impact on the Company.



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In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). The
objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective on a
prospective basis for interim or annual financial periods ending after June 15, 2009. The Company adopted this pronouncement effective June 27, 2009. The required disclosures upon adoption of this statement can be found in Note 25.

In April 2009, the FASB issued Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP No. 157-4). FSP No. FAS 157-4 provides guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and activity for the asset or liability have significantly decreased. FSP No. 157-4 also includes guidance on identifying circumstances that indicate a transaction is not
orderly. FSP No. 154-4 is effective for interim and annual reports ending after June 15, 2009. The adoption of FSP No. 157-4 has not had a material impact on the Companys financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP
No. 107-1 and APB 28-1). FSP No. 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments to require disclosure about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. FSP No. FAS 107-1 and APB 28-1 also amends APB Opinion No. 28 Interim Financial Reporting to require disclosures in summarized financial information at
interim periods. The adoption of FSP No. FAS 107-1 and APB 28-1 has not had a material impact on the Companys financial statements.

In June 2008, the FASB issued 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 fiscal years and interim periods beginning after December 15, 2008 and will be applicable to the Company during the first quarter
of Fiscal 2010. After the effective date of FSP EITF 03-6-1, all prior-period earnings per share data presented must be adjusted retrospectively. The Company does not anticipate the adoption of this FSP to have a material impact on its 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. The Company has adopted this standard during Fiscal 2009, and the required tabular disclosures can be found at Note 11.

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 fiscal years beginning on or after December 15, 2008 with early adoption prohibited. SFAS 141(R) will be applicable to the Company during the first quarter of
Fiscal



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2010. The Company is evaluating the effect the implementation of 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 re-characterized 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 fiscal years beginning on or after December 15, 2008, with early adoption prohibited. SFAS 160 will be applicable to the Company during the first
quarter of Fiscal 2010. The Company does not anticipate the adoption of this standard to have a material impact on its 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 immaterial 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 critical to the preparation of the Companys consolidated
financial statements due to the estimation process and judgment involved in their application.

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 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.

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.

There were no impairment charges recorded during Fiscal 2009, Fiscal 2008 or Fiscal 2007.



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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 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 2009, Fiscal 2008 and Fiscal 2007, 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.

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.

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
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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.

Interest Rates

The Companys exposure to market risk for changes in interest rates relates primarily to debt obligations. The Company has interest
rate exposure as a result of the 2008 Credit Agreement. The 2008 Credit Agreement and the Prior Credit Agreement were subject to variable prime base rate pricing. Accordingly, a 1.0% change in the LIBOR rate and the prime rate would have resulted in
interest expense changing by approximately $48,000 and $32,000 during Fiscal 2009 and Fiscal 2008, respectively. As of June 27, 2009, under the 2008 Credit Agreement the Company had outstanding $13,525,000 in borrowings and $2,615,000 in letter
of credit commitments.

Interest Rate Swap Agreement

The Company does not enter into derivative transactions for trading purposes. The Company uses derivative financial instruments to manage its exposure to fluctuations in interest rates. The instruments involve, to
varying degrees, market risk, as the instruments are subject to rate and price fluctuations and elements of credit risk in the event the counterparty should default. At June 27, 2009 and 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% through June 6, 2010 and 2.74% through April 28, 2010 and the counterparty agreed
to make payments based on the designated LIBOR rate. The market value of the interest rate swap agreements was a long-term net liability balance of $246,000 at June 27, 2009 and a long-term net asset balance of $13,000 at June 28, 2008.
The Company utilized the shortcut method in accounting for its hedged transactions utilizing interest rate swaps. Unrealized net losses of $160,000 and unrealized net gains of $9,000 and are included as a component of Accumulated Other Comprehensive
Loss for Fiscal 2009 and Fiscal 2008, respectively.



|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-30 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



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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 quarter.

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 27, 2009. 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.

Based on this assessment management believes that, as of June 27, 2009, 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 27, 2009 and their report dated September 8, 2009
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 27, 2009, 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 27, 2009, 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 27, 2009 and June 28, 2008 and the related consolidated
statements of operations, stockholders equity and comprehensive income and cash flows for the fiscal years (52 weeks) ended June 27, 2009, June 28, 2008 and June 30, 2007, and our report dated September 8, 2009,
expressed an unqualified opinion.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

September 8, 2009



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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-2 
|Consolidated Statements of Operations                                           |  | F-3 
|Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) |  | F-4 
|Consolidated Statements of Cash Flows                                           |  | F-5 
|Notes to Consolidated Financial Statements                                      |  | F-6 
|                                                                                | 
|(2)    Financial Statement Schedules.                                           |  |     
|                                                                                | 
|Report of Independent Registered Public Accounting Firm                         |  | 57  
|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.



|               |  |                                                                                                                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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 August 27, 2008. (Filed as Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
March 28, 2009 and incorporated herein by reference.)                       
|               | 
|3.4            |  | 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.)                         



60



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                              
|10.1           |  | 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.)                                                                                                                                                                          
|               | 
|10.2           |  | 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.)                                                                                                                            
|               | 
|10.3           |  | 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.)                                                                                                                                
|               | 
|10.4*          |  | 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.)                                                                                             
|               | 
|10.5*          |  | 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.)                                                                                                    
|               | 
|10.6           |  | 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.)                                                                         
|               | 
|10.7           |  | 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.)                                                  
|               | 
|10.8           |  | 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.)
|               | 
|10.9*          |  | 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.)                                                                                                                                                  
|               | 
|10.10          |  | 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.)                                                                                                                                                                                 
|               | 
|10.11          |  | 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.)                                                                                                                    
|               | 
|10.12          |  | 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.)                                                                                          
|               | 
|10.13          |  | 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.)                                                                                                       



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|               |  |                                                                                                                                                                                                                                                                      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                               
|10.14          |  | 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.)
|               | 
|10.15          |  | Amendment and Restated Employment Agreement between the Registrant and George Bernstein, dated as of April 6, 2007 (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.)             
|               | 
|10.16          |  | 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.)  
|               | 
|10.17          |  | Second Amended and Restated Employment Agreement between the Registrant and George Bernstein, dated as of October 22, 2008 (Filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K, filed on October 23, 2008 and incorporated herein by reference.)   
|               | 
|10.18          |  | 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.)                                    
|               | 
|10.19          |  | 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.)                                        
|               | 
|10.20          |  | 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.)                                  
|               | 
|10.21          |  | 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.)                                 
|               | 
|10.22          |  | 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.)                                    
|               | 
|10.23          |  | 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.)                                         
|               | 
|10.24          |  | 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.)                      
|               | 
|10.25          |  | 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.)                                                               
|               | 
|10.26          |  | Employment Agreement dated August 19, 2008 between the Registrant and Dr. Susan W. Race. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed September 17,
2008, and incorporated herein by reference).                                     
|               | 
|10.27          |  | Severance Agreement dated September 15, 2008 between the Registrant and Dr. Susan W. Race. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed
September 24, 2008, and incorporated herein by reference).                                   
|               | 
|10.28          |  | First Amendment to Severance Agreement dated as of September 19, 2008 between the Registrant and Thomas Frank. (Filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K,
filed October 23, 2008, and incorporated herein by reference).                 



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.29          |  | First Amendment to Severance Agreement dated as of September 19, 2008 between the Registrant and Patricia B. Miller. (Filed as Exhibit 10.3 to the Registrants Current Report on Form
8-K, filed October 23, 2008, and incorporated herein by reference).                                                                                                                                                                                                                                                                                     
|               | 
|10.30          |  | First Amendment to Severance Agreement dated as of September 19, 2008 between the Registrant and Jeanne Marie Welsko. (Filed as Exhibit 10.4 to the Registrants Current Report on Form
8-K, filed October 23, 2008, and incorporated herein by reference).                                                                                                                                                                                                                                                                                    
|               | 
|10.31          |  | First Amendment to Severance Agreement dated as of September 19, 2008 between the Registrant and G. Lee Bohs. (Filed as Exhibit 10.5 to the Registrants Current Report on Form 8-K,
filed October 23, 2008, and incorporated herein by reference).                                                                                                                                                                                                                                                                                            
|               | 
|10.32          |  | First Amendment to Second Amendment and Restated Employment Agreement dated as of May 1, 2009 between the Registrant and Patricia B. Miller. (Filed as Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-W, filed May 1, 2009, 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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|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 4, 2009 |  |  |  | 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 4, 2009
|                                                 |  |                                                                     
|/S/    THOMAS
FRANK Thomas Frank                 |  | Chief Financial Officer (Principal Financial and
Accounting Officer) |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    THERESE KREIG
CRANE Therese Kreig Crane   |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    DAVID
BEALE David Beale                   |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    STEVEN B.
FINK Steven B. Fink             |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    PETER H.
HAVENS Peter H. Havens           |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    RICHARD J.
PINOLA Richard J. Pinola       |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    MICHAEL J.
ROSENTHAL Michael J. Rosenthal |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    RALPH
SMITH Ralph Smith                   |  | Director                                                             |  | September 4, 2009
|                                                 |  |                                                                     
|/S/    DAVID L.
WARNOCK David L. Warnock         |  | Director                                                             |  | September 4, 2009



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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 27, 2009        |  |                              |     |                  |     |            |        |   |                        |   |    
|Allowance for doubtful accounts |  | $                            | 227 |                  | 482 |            | (408   | ) |                        | $ | 301
|                                |  |                              |     |                 
|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



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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 27, 2009 and June 28, 2008, and the related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for the fiscal years (52 weeks) ended June 27,
2009, 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nobel Learning Communities,
Inc. and subsidiaries as of June 27, 2009 and June 28, 2008, and the results of their operations and their cash flows for the fiscal years (52 weeks) ended June 27, 2009, 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.

We also have 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 27, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)and our report dated September 8, 2009 expressed unqualified opinion.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

September 8, 2009



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars
in thousands, except share amounts)



|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                       |  | June 27,2009 |         |   | June 28,2008 |  
|ASSETS                                                                                                                                                                 |  |              |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                              |  | $            | 786     |   |              | $ | 1,064   |  
|Customer accounts receivable, less allowance for doubtful accounts of $301 at June 27, 2009 and $227 at June 28,
2008                                                  |  |              | 802     |   |              |   | 922     |  
|Note receivable, current portion                                                                                                                                       |  |              | 500     |   |              |   |        |  
|Deferred tax asset                                                                                                                                                     |  |              | 443     |   |              |   | 221     |  
|Prepaid rent                                                                                                                                                           |  |              | 3,336   |   |              |   | 3,086   |  
|Prepaid expenses and other current assets                                                                                                                              |  |              | 2,912   |   |              |   | 3,467   |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Current Assets                                                                                                                                                   |  |              | 8,779   |   |              |   | 8,760   |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Property and equipment, at cost                                                                                                                                        |  |              | 79,935  |   |              |   | 76,253  |  
|Accumulated depreciation and amortization                                                                                                                              |  |              | (51,185 | ) |              |   | (48,155 | )
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Property and equipment, net                                                                                                                                            |  |              | 28,750  |   |              |   | 28,098  |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Goodwill                                                                                                                                                               |  |              | 71,489  |   |              |   | 65,223  |  
|Intangible assets, net                                                                                                                                                 |  |              | 6,725   |   |              |   | 7,080   |  
|Note Receivable                                                                                                                                                        |  |              | 693     |   |              |   | 1,138   |  
|Deposits and other assets                                                                                                                                              |  |              | 3,139   |   |              |   | 2,849   |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Assets                                                                                                                                                           |  | $            | 119,575 |   |              | $ | 113,148 |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|                                                                                                                                                                       |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |              |         |   |              |   |         |  
|Accounts payable and other current liabilities                                                                                                                         |  | $            | 19,386  |   |              | $ | 18,606  |  
|Income taxes payable                                                                                                                                                   |  |              | 438     |   |              |   | 1,271   |  
|Current portion of lease obligations                                                                                                                                   |  |              | 274     |   |              |   | 265     |  
|Deferred revenue                                                                                                                                                       |  |              | 14,526  |   |              |   | 15,003  |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Current Liabilities                                                                                                                                              |  |              | 34,624  |   |              |   | 35,145  |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Long-term obligations                                                                                                                                                  |  |              | 13,525  |   |              |   | 12,500  |  
|Long-term portion of lease obligations                                                                                                                                 |  |              | 686     |   |              |   | 800     |  
|Deferred tax liability                                                                                                                                                 |  |              | 142     |   |              |   | 174     |  
|Other long term liabilities                                                                                                                                            |  |              | 1,712   |   |              |   | 1,615   |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Liabilities                                                                                                                                                      |  |              | 50,689  |   |              |   | 50,234  |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|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; 10,497,409 and 10,394,177 shares issued and outstanding at June 27, 2009
and June 28, 2008, respectively |  |              | 10      |   |              |   | 10      |  
|Additional paid-in capital                                                                                                                                             |  |              | 59,297  |   |              |   | 57,729  |  
|Retained earnings                                                                                                                                                      |  |              | 9,729   |   |              |   | 5,165   |  
|Accumulated other comprehensive (loss) income                                                                                                                          |  |              | (151    | ) |              |   | 9       |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Stockholders Equity                                                                                                                                             |  |              | 68,886  |   |              |   | 62,914  |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                                             |  | $            | 119,575 |   |              | $ | 113,148 |  
|                                                                                                                                                                       |  |              |         |   |              |   |         |  

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



F-2



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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 27,2009              |         |   | June 28,2008 |   |         | June 30,2007 | 
|Revenues, net                                                                                                         |  | $                         | 220,103 |   |              | $ | 204,201 |              |  | $ | 180,823 |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Cost of services:                                                                                                     |  |                           |         |   |              |   |         |              |  |   |         |  
|Personnel costs                                                                                                       |  |                           | 105,562 |   |              |   | 97,762  |              |  |   | 85,782  |  
|School operating costs                                                                                                |  |                           | 29,405  |   |              |   | 26,769  |              |  |   | 24,399  |  
|Rent and other                                                                                                        |  |                           | 56,152  |   |              |   | 49,019  |              |  |   | 43,278  |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Total Cost of Services                                                                                                |  |                           | 191,119 |   |              |   | 173,550 |              |  |   | 153,459 |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Gross profit                                                                                                          |  |                           | 28,984  |   |              |   | 30,651  |              |  |   | 27,364  |  
|General and administrative expenses                                                                                   |  |                           | 18,726  |   |              |   | 18,516  |              |  |   | 16,993  |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Operating income                                                                                                      |  |                           | 10,258  |   |              |   | 12,135  |              |  |   | 10,371  |  
|Interest expense                                                                                                      |  |                           | 981     |   |              |   | 475     |              |  |   | 1,385   |  
|Other (income), net                                                                                                   |  |                           | (78     | ) |              |   | (326    | )            |  |   | (3,871  | )
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Income from continuing operations before income taxes                                                                 |  |                           | 9,355   |   |              |   | 11,986  |              |  |   | 12,857  |  
|Income tax expense                                                                                                    |  |                           | 3,622   |   |              |   | 4,621   |              |  |   | 5,021   |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Income from continuing operations                                                                                     |  |                           | 5,733   |   |              |   | 7,365   |              |  |   | 7,836   |  
|Income (loss) from discontinued operations, net of income tax benefit (expense) of $764, ($186) and $313 respectively |  |                           | (1,169  | ) |              |   | 313     |              |  |   | (471    | )
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Net income                                                                                                            |  |                           | 4,564   |   |              |   | 7,678   |              |  |   | 7,365   |  
|Preferred stock dividends                                                                                             |  |                           |        |   |              |   |        |              |  |   | 325     |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Net income available to common stockholders                                                                           |  | $                         | 4,564   |   |              | $ | 7,678   |              |  | $ | 7,040   |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Basic income per share:                                                                                               |  |                           |         |   |              |   |         |              |  |   |         |  
|Income from continuing operations                                                                                     |  | $                         | 0.55    |   |              | $ | 0.71    |              |  | $ | 0.85    |  
|Income (loss) from discontinued operations                                                                            |  |                           | (0.11   | ) |              |   | 0.03    |              |  |   | (0.06   | )
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Net income per common share                                                                                           |  | $                         | 0.44    |   |              | $ | 0.74    |              |  | $ | 0.79    |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Diluted income per share:                                                                                             |  |                           |         |   |              |   |         |              |  |   |         |  
|Income from continuing operations                                                                                     |  | $                         | 0.54    |   |              | $ | 0.69    |              |  | $ | 0.75    |  
|Income (loss) from discontinued operations                                                                            |  |                           | (0.11   | ) |              |   | 0.03    |              |  |   | (0.05   | )
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Net income per common share *                                                                                         |  | $                         | 0.43    |   |              | $ | 0.72    |              |  | $ | 0.70    |  
|                                                                                                                      |  |                           |         |   |              |   |         |              |  |   |         |  
|Weighted average common stock outstanding (in thousands):                                                             |  |                           |         |   |              |   |         |              |  |   |         |  
|Basic                                                                                                                 |  |                           | 10,456  |   |              |   | 10,382  |              |  |   | 8,957   |  
|Diluted                                                                                                               |  |                           | 10,701  |   |              |   | 10,630  |              |  |   | 10,580  |  



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

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



F-3



---

##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity and Comprehensive Income

For the Fiscal Years Ended June 27, 2009, June 28, 2008 and June 30, 2007

(Dollars in thousands except share data)



|                                                              |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  
|------------------------------------------------------------- |  | --------------- | - |  | ------------ | -- | ------------- | ------ | ------------------------ | ------ | ------------------------------------- | -- |  | ------------------------------------------ | - |  | ----- | ------ |  | - | ------ | - |  | - | ---- | - |  | - | ------ | -
|                                                              |  | Preferred Stock |   |  | Common Stock |    | TreasuryStock |        | AdditionalPaid-InCapital |        | RetainedEarnings/(AccumulatedDeficit) |    |  | AccumulatedOtherComprehensiveIncome
(loss) |   |  | Total |       
|                                                              |  | Shares          |   |  | Amount       |    |               | Shares |                          | Amount |                                       |    |  |                                            |  
|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 Interpertation 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 |  
|Comprehensive income:                                         |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  
|Net income                                                    |  |                |   |  |              |   |               |        |                         |        |                                       |   |  |                                            |  |  |       |       |  |   | 4,564  |   |  |   |     |   |  |   | 4,564  |  
|Change in fair value of swap contract, net of tax             |  |                |   |  |              |   |               |        |                         |        |                                       |   |  |                                            |  |  |       |       |  |   |       |   |  |   | (160 | ) |  |   | (160   | )
|                                                              |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  
|Total comprehensive income                                    |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   | 4,404  |  
|                                                              |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  
|Stock based compensation                                      |  |                |   |  |              |   |               |        |                         |        |                                       |   |  |                                            |  |  |       | 1,012  |  |   |       |   |  |   |     |   |  |   | 1,012  |  
|Stock award shares issued                                     |  |                |   |  |              |   |               |        | 41,632                   |        |                                       |   |  |                                            |  |  |       | 96     |  |   |       |   |  |   |     |   |  |   | 96     |  
|Stock options exercised and related tax benefits              |  |                |   |  |              |   |               |        | 61,600                   |        |                                       |   |  |                                            |  |  |       | 460    |  |   |       |   |  |   |     |   |  |   | 460    |  
|                                                              |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  
|June 27, 2009                                                 |  | 1,063,830       |   |  | $            | 1  |               |        | 10,497,409               |        | $                                     | 10 |  | $                                          |  |  | $     | 59,297 |  | $ | 9,729  |   |  | $ | (151 | ) |  | $ | 68,886 |  
|                                                              |  |                 |   |  |              |    |               |        |                          |        |                                       |    |  |                                            |   |  |       |        |  |   |        |   |  |   |      |   |  |   |        |  

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



F-4



---

##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)



|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                                                                  |  | For the Fiscal Year Ended |        
|                                                                                  |  | June 27, 2009             |         |   | June 28, 2008 |   |         | June 30, 2007 | 
|Cash Flows from Operating Activities:                                             |  |                           |         |   |               |   |         |               |  |   |         |  
|Net income                                                                        |  | $                         | 4,564   |   |               | $ | 7,678   |               |  | $ | 7,365   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |               |   |         |               |  |   |         |  
|Depreciation and amortization                                                     |  |                           | 10,087  |   |               |   | 7,320   |               |  |   | 6,935   |  
|Reserve for lease costs for closed schools                                        |  |                           | 382     |   |               |   | (245    | )             |  |   | 2,028   |  
|Provision for losses on accounts receivable                                       |  |                           | 482     |   |               |   | 312     |               |  |   | 588     |  
|Stock based compensation                                                          |  |                           | 1,012   |   |               |   | 717     |               |  |   | 675     |  
|(Benefit) provision for deferred taxes                                            |  |                           | (254    | ) |               |   | 306     |               |  |   | 2,012   |  
|Gain on recovery of notes receivable                                              |  |                           |        |   |               |   |        |               |  |   | (3,287  | )
|Gain on sale of assets                                                            |  |                           |        |   |               |   |        |               |  |   | (2,190  | )
|Gain from sublease settlement                                                     |  |                           |        |   |               |   | (1,028  | )             |  |   |        |  
|Other                                                                             |  |                           | (55     | ) |               |   |        |               |  |   | (50     | )
|Changes in assets and liabilities, net of acquired amounts                        |  |                           |         |   |               |   |         |               |  |   |         |  
|Customer accounts receivable                                                      |  |                           | (331    | ) |               |   | (243    | )             |  |   | 653     |  
|Prepaid expenses and other current assets                                         |  |                           | 498     |   |               |   | (557    | )             |  |   | (250    | )
|Other assets and liabilities                                                      |  |                           | (464    | ) |               |   | (1,603  | )             |  |   | 45      |  
|Deferred revenue                                                                  |  |                           | (1,723  | ) |               |   | 1,163   |               |  |   | 849     |  
|Accounts payable and current liabilities                                          |  |                           | (1,411  | ) |               |   | 513     |               |  |   | 3,631   |  
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Net Cash Provided by Operating Activities                                         |  |                           | 12,787  |   |               |   | 14,333  |               |  |   | 19,004  |  
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Cash Flows Used in Investing Activities:                                          |  |                           |         |   |               |   |         |               |  |   |         |  
|Purchase of fixed assets, net of acquired amounts                                 |  |                           | (7,450  | ) |               |   | (8,122  | )             |  |   | (7,512  | )
|Proceeds from sale of property and equipment                                      |  |                           |        |   |               |   |        |               |  |   | 4,985   |  
|Purchase of note receivable                                                       |  |                           |        |   |               |   |        |               |  |   | (200    | )
|Proceeds from repayment of notes receivable                                       |  |                           |        |   |               |   |        |               |  |   | 3,510   |  
|Acquisitions                                                                      |  |                           | (7,196  | ) |               |   | (21,061 | )             |  |   | (12,016 | )
|Investment in product rights and trade names                                      |  |                           |        |   |               |   | (170    | )             |  |   |        |  
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Net Cash Used in Investing Activities                                             |  |                           | (14,646 | ) |               |   | (29,353 | )             |  |   | (11,233 | )
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Cash Flows from Financing Activities:                                             |  |                           |         |   |               |   |         |               |  |   |         |  
|Borrowings of long term debt                                                      |  |                           | 78,400  |   |               |   | 76,200  |               |  |   | 40,715  |  
|Repayment of long term debt                                                       |  |                           | (77,375 | ) |               |   | (63,700 | )             |  |   | (53,895 | )
|Proceeds from exercise of stock options and warrants                              |  |                           | 363     |   |               |   | 213     |               |  |   | 48      |  
|Tax benefits from exercise of stock options                                       |  |                           | 193     |   |               |   | 123     |               |  |   |        |  
|Payment of debt issuance costs                                                    |  |                           |        |   |               |   | (566    | )             |  |   | (381    | )
|Dividends paid to preferred stockholders                                          |  |                           |        |   |               |   |        |               |  |   | (281    | )
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Net Cash Provided by (Used in) Financing Activities                               |  |                           | 1,581   |   |               |   | 12,270  |               |  |   | (13,794 | )
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                           | (278    | ) |               |   | (2,750  | )             |  |   | (6,023  | )
|Cash and cash equivalents at beginning of year                                    |  |                           | 1,064   |   |               |   | 3,814   |               |  |   | 9,837   |  
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Cash and cash equivalents at end of year                                          |  | $                         | 786     |   |               | $ | 1,064   |               |  | $ | 3,814   |  
|                                                                                  |  |                           |         |   |               |   |         |               |  |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                           |         |   |               |   |         |               |  |   |         |  
|Interest paid                                                                     |  | $                         | 786     |   |               | $ | 317     |               |  | $ | 774     |  
|Income taxes paid                                                                 |  |                           | 3,691   |   |               |   | 5,577   |               |  |   | 1,052   |  
|Non-cash investing and financing activities:                                      |  |                           |         |   |               |   |         |               |  |   |         |  
|Issuance of preferred stock for dividend payments                                 |  | $                         |        |   |               | $ |        |               |  | $ | 174     |  
|Paid in kind preferred stock dividends                                            |  |                           |        |   |               |   |        |               |  |   | 44      |  

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. Nobel Learning Communities provides high-quality private education, with small schools and class sizes 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.

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 and estimates of future obligations related to closed facilities, valuations of liabilities for workers compensation claim liabilities retained by the Company and realization
of our deferred tax assets.

Principles of Consolidation and Basis of Presentation:

Fiscal Period. The fiscal years ended June 27, 2009 (Fiscal 2009), June 28, 2008 (Fiscal 2008) and June 30, 2007
(Fiscal 2007) each include 52 weeks.

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

Reclassifications. As a result of certain school closures during Fiscal 2009 the Company has conformed amounts reported for
Fiscal years 2008 and 2007 in its Annual Report on Form 10-K to the period ended June 27, 2009.

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 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.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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 determining the collectability 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 the estimated 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 derecognized 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 or Disposal 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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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.

There were no impairment charges
recorded during Fiscal 2009, Fiscal 2008 or Fiscal 2007.

Discontinued Operations:

In accordance with SFAS 144, the results of operations for schools that are no longer operating under the Companys management and were not part of
the operations of a cluster of schools that continue to operate have been reflected in the consolidated financial statements and notes as discontinued operations for the periods presented.

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 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 2009, Fiscal 2008 and Fiscal 2007, 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 during Fiscal 2009, Fiscal 2008 and Fiscal 2007 were
$4,018,000, $4,138,000 and $3,882,000, respectively. As of June 27, 2009 and June 28, 2008, prepaid advertising expense totaled $508,000 and $575,000, 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. 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 27, 2009 and June 28, 2008, $686,000 and $813,000 in unamortized financing costs were carried on the Companys balance sheet, respectively.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Stock Compensation:

The Company records estimated compensation costs for all share-based payments 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 for stock options, the value of the options is estimated using a Block Scholes option pricing formula and amortizes the calculated expense over the options requisite
service period, generally, the vesting period. Stock compensation is estimated only for grants expected to vest, which is total estimated value less estimated forfeitures.

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.

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.

New Accounting Pronouncements:

In
June 2009, the Financial Accounting Standards Board (FASB) issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162 (SFAS No. 168). The FASB Accounting Standards Codification (Codification) is intended to become the source of the authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritiative. SFAS 168 will become effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard is not anticipated to have a material impact on the Company.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165).
The objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective on a
prospective basis for interim or annual financial periods ending after June 15, 2009. The Company adopted this pronouncement effective June 27, 2009. The required disclosures upon adoption of this statement can be found in Note 25.

In April 2009, the FASB issued Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP No. 157-4). FSP No. FAS 157-4 provides guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and activity for the asset or liability have significantly decreased. FSP No. 157-4 also includes guidance on identifying circumstances that indicate a transaction is not
orderly. FSP No. 154-4 is effective for interim and annual reports ending after June 15, 2009. The adoption of FSP No. 157-4 has not had a material impact on the Companys financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP
No. 107-1 and APB 28-1). FSP No. 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments to require disclosure about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. FSP No. FAS 107-1 and APB 28-1 also amends APB Opinion No. 28 Interim Financial Reporting to require disclosures in summarized financial information at
interim periods. The adoption of FSP No. FAS 107-1 and APB 28-1 has not had a material impact on the Companys financial statements.

In June 2008, the FASB issued 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 fiscal years and interim periods beginning after December 15, 2008 and will be applicable to the Company during the first quarter
of Fiscal 2010. After the effective date of FSP EITF 03-6-1, all prior-period earnings per share data presented must be adjusted retrospectively. The Company does not anticipate the adoption of this FSP to have a material impact on its 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. The Company has adopted this standard during Fiscal 2009, and the required tabular disclosures can be found at Note 11.

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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



valuation allowances and acquired income tax uncertainties after the measurement period to impact income tax expense. SFAS 141(R) is effective for fiscal
years beginning on or after December 15, 2008 with early adoption prohibited. SFAS 141(R) will be applicable to the Company during the first quarter of Fiscal 2010. The Company is evaluating the effect the implementation of 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 re-characterized 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 fiscal years beginning on or after December 15, 2008, with early adoption prohibited. SFAS 160
will be applicable to the Company during the first quarter of Fiscal 2010. The Company does not anticipate the adoption of this standard to have a material impact on its financial statements.

2. Earnings Per Share:

Earnings per share is based
on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of basic earnings per share, weighted average number of shares outstanding is used as the denominator. In the calculation of
diluted earnings per share, shares outstanding are adjusted to assume the exercise of options if such shares are dilutive. Earnings per share is computed as follows (dollars and average common stock outstanding in thousands):



|                                                                                                           |  |                           |        |               |   |               |  |   |       
|---------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ------------- | - | ------------- |  | - | ------
|                                                                                                           |  | For the Fiscal Year Ended
|                                                                                                           |  | June 27, 2009             |        | June 28, 2008 |   | June 30, 2007
|Basic income per share:                                                                                    |  |                           |        |               |   |               |  |   |       
|                                                                                                           |  |                           |       
|Net income                                                                                                 |  | $                         | 4,564  |               | $ | 7,678         |  | $ | 7,365 
|Less preferred dividends                                                                                   |  |                           |       |               |   |              |  |   | 325   
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Net income available to common shareholders                                                                |  | $                         | 4,564  |               | $ | 7,678         |  | $ | 7,040 
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Weighted average common shares outstanding                                                                 |  |                           | 10,456 |               |   | 10,382        |  |   | 8,957 
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Basic income per share                                                                                     |  | $                         | 0.44   |               | $ | 0.74          |  | $ | 0.79  
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Diluted income per share:                                                                                  |  |                           |        |               |   |               |  |   |       
|                                                                                                           |  |                           |       
|Net income                                                                                                 |  | $                         | 4,564  |               | $ | 7,678         |  | $ | 7,365 
|Weighted average common shares outstanding                                                                 |  |                           | 10,456 |               |   | 10,382        |  |   | 8,957 
|Dilutive effect of options, warrants and convertible preferred stock                                       |  |                           | 245    |               |   | 248           |  |   | 1,624 
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Weighted average common stock and dilutive securities outstanding                                          |  |                           | 10,701 |               |   | 10,630        |  |   | 10,580
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Diluted income per share                                                                                   |  |                           | 0.43   |               |   | 0.72          |  | $ | 0.70  
|                                                                                                           |  |                           |        |               |   |               |  |   |       
|Anti-dilutive Stock options issued and outstanding with exercise prices in excess of average market price. |  |                           | 372    |               |   | 156           |  |   | 52    

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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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 as if converted in the
Companys diluted share base, the conversion will have no future impact on fully diluted per share calculations.

3. Acquisitions:

During Fiscal 2009, Fiscal 2008 and Fiscal 2007 the Company completed five, five and one acquisition, respectively. Each of these acquisitions is
consistent with the Companys growth strategy in the private pay education market and includes both expansion in existing markets and entrance into new markets. The eleven acquisitions completed during the last three fiscal years are summarized
as follows:



| |  |  | During the fourth quarter of Fiscal 2009 the Company completed the acquisition of the assets of three Montessori schools in central New Jersey collectively referred
to as Montessori Corner, the addition of these schools added one elementary school and two preschools to the three Montessori method schools already in the Companys portfolio of schools.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Also during the fourth quarter of Fiscal 2009 the Company completed the acquisition of the assets of Highpointe Childrens Academy (Highpointe).
These schools will be rebranded under the Companys existing Merryhill brand. The addition of Highpointe added a preschool and an elementary school and expanded the Companys existing market coverage in the Dallas, Texas
market.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of Fiscal 2009, the Company completed the acquisition of the assets of Country Tyme Preschool (Country Tyme). The acquisition
expands the Companys existing market coverage in the Southeastern Pennsylvania market in which the Company currently operates. Country Tyme provides programs for preschool students through kindergarten.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 the Las Vegas, Nevada market in which the Company currently operates. Southern Highlands provides programs for preschool students through grade 8.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the first quarter of Fiscal 2009, the Company completed the acquisition of the assets of the Ivy Kids Learning Center School (Ivy Kids). This
school has been rebranded under the Companys existing The Honor Roll brand. 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the fourth quarter of Fiscal 2008, the Company completed the acquisition of the assets of two Camelback Desert Schools, which offer preschool and 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 fourth quarter of Fiscal 2009, the Company closed one of Camelback Desert School. The results of
this school are included in Net income (loss) from discontinued operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 has been rebranded under the Companys existing Merryhill brand. These schools expand the Companys existing market coverage in the Dallas, Texas market.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 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 market.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of the
purchase price, allocation of estimated fair value of the assets acquired, and acquisition costs is 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 2009 Acquisitions:                                   |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Montessori Corners                                          |  |                                         | 2,658  |                                                                |           | (676   | )                            |  |                                          | 2,883  |                                    |   | 88    |  | 20  |  |   | 238   |  | 7 |  |   | 125  
|Highpointe                                                  |  |                                         | 1,093  |                                                                |           | (5     | )                            |  |                                          | 703    |                                    |   |      |  | n/a |  |   | 249   |  | 7 |  |   | 146  
|Country Tyme                                                |  |                                         | 1,354  |                                                                |           | 47     |                              |  |                                          | 1,041  |                                    |   |      |  | n/a |  |   | 216   |  | 4 |  |   | 50   
|Southern Highlands                                          |  |                                         | 1,256  |                                                                |           | (502   | )                            |  |                                          | 1,106  |                                    |   | 94    |  | 20  |  |   | 255   |  | 7 |  |   | 303  
|Ivy Kids                                                    |  |                                         | 745    |                                                                |           | 35     |                              |  |                                          | 400    |                                    |   |      |  | n/a |  |   | 120   |  | 4 |  |   | 190  
|Purchase accounting adjustments to prior year acquisitions: |  |                                         | 90     |                                                                |           | (43    | )                            |  |                                          | 133    |                                    |   |      |  |     |  |   |      |  |   |  |   |     
|                                                            |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|Total Fiscal 2009 acquisitions                              |  | $                                       | 7,196  |                                                                | $         | (1,144 | )                            |  | $                                        | 6,266  |                                    | $ | 182   |  |     |  | $ | 1,078 |  |   |  | $ | 814  
|                                                            |  |                                         |        |                                                                |           |        |                              |  |                                          |        |                                    |   |       |  |     |  |   |       |  |   |  |   |      
|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  

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



|                                     |  |        |         |      |   |         |  |   |        
|------------------------------------ |  | ------ | ------- | ---- | - | ------- |  | - | -------
|                                     |  | Fiscal
|                                     |  | 2009   |         | 2008 |   | 2007   
|Revenues                             |  | $      | 226,444 |      | $ | 228,592 |  | $ | 205,689
|Net Income                           |  |        | 4,860   |      |   | 7,779   |  |   | 7,601  
|Net Income available to shareholders |  |        | 4,860   |      |   | 7,779   |  |   | 7,276  
|Earnings per sharebasic             |  | $      | 0.46    |      | $ | 0.75    |  | $ | 0.81   
|Earnings per shareassuming dilution |  | $      | 0.45    |      | $ | 0.73    |  | $ | 0.75   



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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 Principles, 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.

To date, we have not identified material unrecorded pre-acquisition
contingencies. 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.

4. Goodwill and Other Intangible Assets:

Intangible assets include trade names, student rosters, a franchise agreement and other identifiable intangibles from acquisitions. At June 27, 2009
and June 28, 2008, the Companys goodwill and intangible assets were as follows (dollars in thousands):



|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |       |  |   |       
|---------------------------- |  | -------------------------------------------- | ------------------- | ------------- | ----------------------- | ------------- | ---------- | ----- | ------------------- | - | ----------------------- |  | ---------- | ------ |  | - | ----- |  | - | ------
|                             |  | WeightedAverageAmortizationPeriod (inmonths) |                     | June 27, 2009 |                         | June 28, 2008
|                             |  |                                              | GrossCarryingAmount |               | AccumulatedAmortization |               | NetBalance |       | GrossCarryingAmount |   | AccumulatedAmortization |  | NetBalance
|Goodwill                     |  | n.a.                                         |                     | $             | 71,489                  |               | $          |      |                     | $ | 71,489                  |  | $          | 65,223 |  | $ |      |  | $ | 65,223
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |       |  |   |       
|Amortized intangible assets: |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |       |  |   |       
|Franchise agreement          |  | 130                                          |                     |               | 580                     |               |            | 192   |                     |   | 388                     |  |            | 580    |  |   | 124   |  |   | 456   
|Trade Names                  |  | 240                                          |                     |               | 2,928                   |               |            | 362   |                     |   | 2,566                   |  |            | 2,761  |  |   | 205   |  |   | 2,556 
|Student Rosters              |  | 68                                           |                     |               | 6,149                   |               |            | 2,378 |                     |   | 3,771                   |  |            | 5,112  |  |   | 1,044 |  |   | 4,068 
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |       |  |   |       
|Total Intangible Assets      |  |                                              |                     | $             | 9,657                   |               | $          | 2,932 |                     | $ | 6,725                   |  | $          | 8,453  |  | $ | 1,373 |  | $ | 7,080 
|                             |  |                                              |                     |               |                         |               |            |       |                     |   |                         |  |            |        |  |   |       |  |   |       

At June 27, 2009, goodwill totaled $71,489,000, an increase of $6,266,000 from June 28,
2008. This increase was primarily the result of five acquisitions completed during Fiscal 2009. Amortization expense related to intangible assets was $1,617,000, $930,000 and $518,000 for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
Projected amortization expense for the intangible assets above for Fiscal 2010, Fiscal 2011, Fiscal 2012, Fiscal 2013 and Fiscal 2014 is $1,858,000, $1,171,000, $732,000, $568,000 and $320,000, 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 $20,000 and $350,000 at
June 27, 2009 and June 28, 2008, respectively. The Companys funds were invested in money market accounts which are not federally insured. 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.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



6. Note Receivable:

During the fourth quarter of Fiscal 2008, the Company settled a contract dispute with a former sub-lessee with a note in the face amount of $1,250,000 to be paid to the Company over five years. The Company has imputed
an interest rate of 4.25% in determining the present value of this receivable, this rate is consistent with other published discounts for liabilities the payee has with other creditors. The unaccreted discount related to this note totaled $112,000
at issue and will be recognized as income from discontinued operations during the collection period of the note. At June 27, 2009, the unaccreted discount related to the note was $57,000. During Fiscal 2009 and Fiscal 2008 interest income of
$52,000 and $5,000 was recognized as income from discontinued operations, respectively.

7. Property and Equipment:

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



|                         |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       
|------------------------ |  | ------------- | ------ | ----------------------- | - | ------------- |  | ---- | ------ | ----------------------- | - | ------------- |  | - | ------ |  | - | ------
|                         |  | June 27, 2009 |        | June 28, 2008          
|                         |  | Cost          |        | AccumulatedDepreciation |   | Net BookValue |  | Cost |        | AccumulatedDepreciation |   | Net BookValue
|Land                     |  | $             | 1,518  |                         | $ |              |  | $    | 1,518  |                         | $ | 1,518         |  | $ |       |  | $ | 1,518 
|Buildings                |  |               | 5,856  |                         |   | 2,890         |  |      | 2,966  |                         |   | 5,838         |  |   | 2,598  |  |   | 3,240 
|Leasehold improvements   |  |               | 32,492 |                         |   | 19,321        |  |      | 13,171 |                         |   | 30,301        |  |   | 17,039 |  |   | 13,262
|Furniture and equipment  |  |               | 37,945 |                         |   | 28,974        |  |      | 8,971  |                         |   | 37,591        |  |   | 28,518 |  |   | 9,073 
|Construction in progress |  |               | 2,124  |                         |   |              |  |      | 2,124  |                         |   | 1,005         |  |   |       |  |   | 1,005 
|                         |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       
|                         |  | $             | 79,935 |                         | $ | 51,185        |  | $    | 28,750 |                         | $ | 76,253        |  | $ | 48,155 |  | $ | 28,098
|                         |  |               |        |                         |   |               |  |      |        |                         |   |               |  |   |        |  |   |       

Depreciation expense from continuing operations was $8,050,000, $6,381,000 and $6,296,000, for
Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.

8. Change in Accounting Estimate:

During Fiscal 2009, the Company recorded charges for accelerated depreciation and amortization of $1,145,000 as a result of changes in accounting
estimates regarding the remaining useful lives of assets residing at schools that were closed during the fiscal year and the retirement and replacement of the Companys website. These changes in estimates resulted in an after-tax charge to
basic and diluted income per share of $0.07 for Fiscal 2009. These charges are further detailed as follows:



|                                                                                            |  |             |      
|------------------------------------------------------------------------------------------- |  | ----------- | -----
|                                                                                            |  | Fiscal 2009
|Accelerated depreciation and amortization included in Operating Income:                     |  |             |      
|Accelerated DepreciationRent and other                                                     |  | $           | 789  
|Accelerated amortization of intangiblesgeneral and administrative expenses                 |  |             | 70   
|Company websitegeneral and administrative expenses                                         |  |             | 51   
|                                                                                            |  |             |      
|Total accelerated depreciation and amortization included in Operating Income                |  |             | 910  
|Accelerated depreciation and amortization included loss from discontinued operations:       |  |             |      
|Accelerated Depreciation                                                                    |  |             | 235  
|                                                                                            |  |             |      
|Total accelerated depreciation and amortization expense for changes in accounting estimates |  | $           | 1,145
|                                                                                            |  |             |      



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



During 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 an after-tax 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 27, 2009 |        | June 28, 2008
|Accounts payable                  |  | $             | 6,459  |               | $ | 6,601 
|Accrued payroll and related items |  |               | 5,862  |               |   | 6,648 
|Accrued property taxes            |  |               | 1,321  |               |   | 1,083 
|Accrued rent                      |  |               | 1,462  |               |   | 1,073 
|Other accrued expenses            |  |               | 4,282  |               |   | 3,201 
|                                  |  |               |        |               |   |       
|                                  |  | $             | 19,386 |               | $ | 18,606
|                                  |  |               |        |               |   |       

10. Debt:

At the beginning of Fiscal 2008, 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
of the Revolving Credit Commitment (as amended, the 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 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 either LIBOR or bank base rate indexed borrowings. The 2008 Credit Agreement has a five-year term that ends on June 5, 2013. As of
June 27, 2009 and June 28, 2008, outstanding borrowings equaled $13,525,000 and $12,500,000, respectively, and outstanding letters of credit as of June 27, 2009 and June 28, 2008 were $2,615,000 and $2,437,000, respectively.

The Companys obligations under the 2008 Credit 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 all real and personal property owned by the Company.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The Companys obligation under its 2008 Credit Agreement, as well as under the Prior Credit
Agreement, bear 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 27, 2009 is both (1) a
selected LIBOR rate plus a debt to defined EBITDA-indexed rate or (2) the defined base rate plus a debt to defined EBITDA-indexed 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 2008 Credit Agreement bearing interest of selected LIBOR rate plus a debt to defined EBITDA-indexed rate. The range of EBITDA-indexed rates applicable for each of the agreements during Fiscal 2009
and Fiscal 2008 was as follows:



|                                                             |  |                                |  |                            
|------------------------------------------------------------ |  | ------------------------------ |  | ---------------------------
|                                                             |  | October 26, 2006 -June 5, 2008 |  | June 6, 2008 -June 27, 2009
|LIBOR rate plus debt to defined EBITDA-indexed rate          |  | 1.00%  2.00%                  |  | 1.15%  2.40%              
|Base rate plus debt to defined EBITDA-indexed rate           |  | 0.00%  0.50%                  |  | 0.15%  0.90%              
|Letter of Credit fees LIBOR plus defined-EBITDA-indexed rate |  | 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, acquire businesses, declare or pay dividends, grant liens, incur additional indebtedness, make capital expenditures, govern the use of proceeds from disposition of assets or equity related transactions
and requires repayment in certain change of control events. In addition, the 2008 Credit Agreement provides that the Company must meet or exceed amounts for defined EBITDA and fixed charge coverage ratios and must not exceed certain leverage ratios.
The Companys loan covenants under its 2008 Credit Agreement limit the amount of senior debt borrowings that are permitted. At June 27, 2009 the Company was in compliance with all financial covenants.

11. Derivative Financial Instruments and Comprehensive Income:

Cash Flow Hedges:

The Company does not enter into derivative transactions for trading purposes. The Company uses derivative
financial instruments to manage its exposure to fluctuations in interest rates. The instruments involve, to varying degrees, market risk, as the instruments are subject to rate and price fluctuations and elements of credit risk in the event the
counterparty should default. At June 27, 2009 and 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% through June 6, 2010 and 2.74% through April 28, 2010 and the counterparty agreed to make payments based on the designated LIBOR rate. The Company utilized the shortcut method in accounting for its hedged transactions
utilizing interest rate swaps. Unrealized net losses of $160,000 and unrealized net gains of $9,000 are included as a component of Other Comprehensive Loss for Fiscal 2009 and Fiscal 2008, respectively.

Derivatives designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) were as follows:



|                        |  |                             |  |               |     |                        |                        |            |   |   
|----------------------- |  | --------------------------- |  | ------------- | --- | ---------------------- | ---------------------- | ---------- | - | --
|                        |  | June 27, 2009               |  | June 28, 2008
|                        |  | Balance Sheet Location      |  | Fair Value    |     | Balance Sheet Location |                        | Fair Value
|Interest rate contracts |  | Other long term liabilities |  | $             | 246 |                        | Other long term assets |            | $ | 13

The Company did not have any derivatives not designated as hedging instruments under SFAS
No. 133 at June 27, 2009 or June 28, 2008.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



These financial instruments are the Companys only component of Other Comprehensive income
relative to the periods presented. Comprehensive income during Fiscal 2009 and Fiscal 2008 were as follows (dollars in thousands):



|                                      |  |        |       |   |      |   |      
|------------------------------------- |  | ------ | ----- | - | ---- | - | -----
|                                      |  | Fiscal
|                                      |  | 2009   |       |   | 2008
|Net Income                            |  | $      | 4,564 |   |      | $ | 7,678
|Other Comprehensive net income (loss) |  |        | (160  | ) |      |   | 9    
|                                      |  |        |       |   |      |   |      
|Total comprehensive income            |  | $      | 4,404 |   |      | $ | 7,687
|                                      |  |        |       |   |      |   |      

If the Company were to settle the underlying LIBOR based debt instruments, any unrealized gains or
losses reported in accumulated Other Comprehensive Income would be reclassified into earnings during the period in which the underlying instruments were settled.

12. Other Income, net:

Other income included the following items:



|                                   |  |        |     |   |      |   |      |      |  |   |        |  
|---------------------------------- |  | ------ | --- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                   |  | Fiscal |    
|                                   |  | 2009   |     |   | 2008 |   |      | 2007 | 
|Interest income                    |  | $      | (69 | ) |      | $ | (38  | )    |  | $ | (288   | )
|Recovery of Notes Receivable       |  |        |    |   |      |   |     |      |  |   | (3,287 | )
|Gain from sale of assets           |  |        |    |   |      |   |     |      |  |   | (310   | )
|Settlement of outstanding contract |  |        |    |   |      |   | (300 | )    |  |   |       |  
|Other                              |  |        | (9  | ) |      |   | 12   |      |  |   | 14     |  
|                                   |  |        |     |   |      |   |      |      |  |   |        |  
|                                   |  | $      | (78 | ) |      | $ | (326 | )    |  | $ | (3,871 | )
|                                   |  |        |     |   |      |   |      |      |  |   |        |  

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 fully reserved that was due May
2005. In addition to the $2,500,000 note receivable, the Company had acquired a $1,000,000 debt obligation of the same entity for $200,000. The entity paid the Company $3,510,000 resulting 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 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 payments 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.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



13. 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 27,
2009 (dollars in thousands):



|                    |  |                             |       |                                 |   |                                                       |  |                               |        |  |   |         |  |   |       |  |   |        
|------------------- |  | --------------------------- | ----- | ------------------------------- | - | ----------------------------------------------------- |  | ----------------------------- | ------ |  | - | ------- |  | - | ----- |  | - | -------
|                    |  | Operating Lease Commitments |       | Total OperatingLeaseCommitments |   | Closed LocationCash SubleaseAmounts Dueto the Company |  | Net OperatingLeaseCommitments
|                    |  | Continuing Operations       |       | DiscontinuedOperations          |   |                                                       | 
|Fiscal Year         |  | Vehicle andOther Leases     |       | School RealEstate Leases        |   | Closed LocationReal Estatea Leases                    |  |                               |       
|2010                |  |                             | 919   |                                 |   | 38,695                                                |  |                               | 2,458  |  |   | 42,072  |  |   | 1,800 |  |   | 40,272 
|2011                |  |                             | 699   |                                 |   | 37,203                                                |  |                               | 2,234  |  |   | 40,136  |  |   | 1,737 |  |   | 38,399 
|2012                |  |                             | 539   |                                 |   | 33,738                                                |  |                               | 1,906  |  |   | 36,183  |  |   | 1,559 |  |   | 34,624 
|2013                |  |                             | 210   |                                 |   | 30,907                                                |  |                               | 1,718  |  |   | 32,835  |  |   | 1,364 |  |   | 31,471 
|2014                |  |                             | 160   |                                 |   | 28,184                                                |  |                               | 1,242  |  |   | 29,586  |  |   | 888   |  |   | 28,698 
|2015 and thereafter |  |                             | 39    |                                 |   | 162,690                                               |  |                               | 2,636  |  |   | 165,365 |  |   | 805   |  |   | 164,560
|                    |  |                             |       |                                 |   |                                                       |  |                               |        |  |   |         |  |   |       |  |   |        
|Total               |  | $                           | 2,566 |                                 | $ | 331,417                                               |  | $                             | 12,194 |  | $ | 346,177 |  | $ | 8,153 |  | $ | 338,024
|                    |  |                             |       |                                 |   |                                                       |  |                               |        |  |   |         |  |   |       |  |   |        

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 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 2010 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 during or
before Fiscal 2000 and four properties during Fiscal 2007 (the Guaranteed Properties). In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), the Company has assessed its exposure regarding the assignment of the Guaranteed 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 27, 2009 is $498,000.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



14. Costs Associated with Exit Activities:

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 at the cease-use date rather than at the date of a commitment to an exit or disposal plan. The reserves for closed schools are 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 through 2017. At June 27, 2009 and
June 28, 2008 the lease reserve for closed schools was $960,000 and $1,065,000, respectively. The following table summarizes activity recorded to the lease reserves (dollars in thousands):



|                                     |  |                           |       |   |               |   |        |  
|------------------------------------ |  | ------------------------- | ----- | - | ------------- | - | ------ | -
|                                     |  | For the Fiscal Year Ended |      
|                                     |  | June 27, 2009             |       |   | June 28, 2008 |  
|Lease reserve at beginning of period |  | $                         | 1,065 |   |               | $ | 2,193  |  
|Payments against reserve             |  |                           | (487  | ) |               |   | (1,547 | )
|Lease reserve from acquisition       |  |                           |      |   |               |   | 174    |  
|Adjustments to reserve:              |  |                           |       |   |               |   |        |  
|Discontinued Operations              |  |                           | 340   |   |               |   | 245    |  
|Continuing Operations                |  |                           | 42    |   |               |   |       |  
|                                     |  |                           |       |   |               |   |        |  
|Lease reserve at end of period       |  | $                         | 960   |   |               | $ | 1,065  |  
|                                     |  |                           |       |   |               |   |        |  

15. Discontinued Operations:

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations for schools that are no longer operating under the Companys management
have been reflected in the consolidated financial statements and notes as discontinued operations for all periods presented. The operating results for discontinued operations in the statements of operations for all periods presented, net of tax, are
as follows (dollars in thousands):



|                                                                     |  |        |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Fiscal |       
|                                                                     |  | 2009   |        |   | 2008 |   |        | 2007 | 
|Revenues                                                             |  | $      | 1,761  |   |      | $ | 2,057  |      |  | $ | 6,149  |  
|Cost of services                                                     |  |        | (3,354 | ) |      |   | (2,341 | )    |  |   | (6,806 | )
|Closed school lease reserves                                         |  |        | (340   | ) |      |   | (245   | )    |  |   | (2,027 | )
|Gain from sale of schools                                            |  |        |       |   |      |   |       |      |  |   | 1,900  |  
|Gain from settlement of sublease                                     |  |        |       |   |      |   | 1,028  |      |  |   |       |  
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |  
|Income (loss) from discontinued operations before income tax benefit |  |        | (1,933 | ) |      |   | 499    |      |  |   | (784   | )
|Income tax (expense) benefit                                         |  |        | 764    |   |      |   | (186   | )    |  |   | 313    |  
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |  
|Income (loss) from discontinued operations                           |  | $      | (1,169 | ) |      | $ | 313    |      |  | $ | (471   | )
|                                                                     |  |        |        |   |      |   |        |      |  |   |        |  

Fiscal 2009 discontinued operations include, among other items, the results of a school which was
closed during the fourth quarter of the fiscal year. The school has been closed and will remain closed contingent upon the landlord remediating the property to a usable condition. Based upon the provisions of the lease to this property, the Company
has notified the propertys owner of issues in regard to the physical condition of the property and has terminated rent payments to the landlord. If and when the landlord makes the repairs as required by the lease provisions, the Company may
reopen the property. As the resolution of the Companys actions with



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



the landlord is not currently known, the Company has not recorded a liability for future lease payments it may or may not be subject to in regard to this
property. As of June 27, 2009 the future lease payments under the original terms of the lease total $1,113,000, as it is not currently known whether or not the property will be remediated to a usable condition, and the possibility that if the
school is returned to a usable condition, it may be reopened, the Company has not accrued any future lease obligations for this property at June 27, 2009.

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. 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 (see Note 6).

16. Stockholders Equity:

Preferred Stock:

In 1995, the Company issued 1,063,830 shares of the Companys non-voting 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 27, 2009, June 28, 2008 and June 30, 2007, 1,063,830 shares of Series D Convertible Preferred Stock were outstanding.

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, during Fiscal 2007, the Company issued 17,302 shares of paid in kind dividends and $79,000 of cash dividends.

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 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, during Fiscal 2007, the Company issued 19,143 shares of paid in kind dividends and $202,000 of cash dividends.

17. Stock Based Compensation.

As of June 27,
2009, approximately 1,154,000 stock options were issued and outstanding and 34,000 shares of restricted stock had been granted. As of June 27, 2009, the total number of shares of common stock still available for issuance under the
Companys stock compensation plans was 598,000.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



2004 Omnibus Incentive Equity Compensation Plan:

On October 6, 2004, the stockholders approved the 2004 Omnibus Incentive Equity Compensation Plan (the 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 stock option
grants to date under the Plan have been non-qualified stock options which vest over three years (except that stock 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 in Fiscal 2008, 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 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 RSAs included 17,000 shares that were granted to the Companys non-employee Board of Directors during the second quarter of Fiscal 2008 and vested during the second quarter of Fiscal 2009.
An additional 17,000 awards were granted during the second quarter of Fiscal 2009 and are scheduled to vest during the second quarter of Fiscal 2010.

Through June 27, 2009, approximately 901,000 non-qualified stock options and 34,000 restricted stock awards had been issued under the Plan.

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 27, 2009, approximately 28,000 non-qualified stock options have been issued and are outstanding 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 719,000 were cancelled. At June 27, 2009, 225,000 non-qualified stock
options have been issued and are outstanding 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:



|                                          |  |         |   |  |         |   |  |         |  
|----------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                          |  | Fiscal  |  
|                                          |  | 2009    |   |  | 2008    |   |  | 2007    |  
|Expected dividend yield                   |  | 0.0     | % |  | 0.0     | % |  | 0.0     | %
|Expected stock price volatility           |  | 26.3    | % |  | 21.7    | % |  | 32.6    | %
|Risk-free interest rate                   |  | 3.6     | % |  | 4.2     | % |  | 4.6     | %
|Weighted average expected life of options |  | 6 years |   |  | 6 years |   |  | 5 years |  
|Expected rate of forfeiture               |  | 5.1     | % |  | 7.3     | % |  | 6.4     | %

Stock option 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



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



administrative expense in the statements of income for Fiscal 2009, Fiscal 2008 and Fiscal 2007 and was $1,012,000, $717,000 and $675,000, respectively. As
of June 27, 2009 there was $1,132,000 of total unrecognized stock-based compensation cost related to options granted under our plans that will be recognized over a weighted average period of 1.3 years. The Company expects to continue its
historical practice of issuing stock options and board grants, which will result in additional stock-based compensation in the future, although amounts may vary.

A summary of option activity under the Companys employee stock option plans as of June 27, 2009, June 28, 2008 and June 30, 2007 and changes during the years then ended is as follows:



|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|-------------------------------------------------------- |  | ------------------------ | ------ |  | ----------- | ----------------------------------- | ----------- | ------ | ----- | ----------------------------------- | ------- |  | - | ----
|                                                         |  | SharesAvailablefor Grant |        |  | Outstanding |                                     | Exercisable
|                                                         |  |                          | Shares |  |             | WeightedAverageGrant &ExercisePrice |             | Shares |       | WeightedAverageGrant &ExercisePrice
|Balance at July 1, 2006                                  |  | 1,139,000                |        |  | 745,000     |                                     |             | $      | 7.20  |                                     | 446,000 |  | $ | 6.42
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                                        |  | (173,000                 | )      |  | 173,000     |                                     |             |        | 10.19 |                                     |        |  |   |    
|Cancelled                                                |  | 50,000                   |        |  | (50,000     | )                                   |             |        | 8.47  |                                     |        |  |   |    
|Exercised                                                |  |                         |        |  | (7,000      | )                                   |             |        | 7.04  |                                     |        |  |   |    
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 30, 2007                                 |  | 1,016,000                |        |  | 861,000     |                                     |             | $      | 7.71  |                                     | 608,000 |  | $ | 6.91
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                                        |  | (167,000                 | )      |  | 167,000     |                                     |             |        | 14.70 |                                     |        |  |   |    
|Cancelled                                                |  | 21,000                   |        |  | (21,000     | )                                   |             |        | 11.79 |                                     |        |  |   |    
|Exercised                                                |  |                         |        |  | (29,000     | )                                   |             |        | 7.61  |                                     |        |  |   |    
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 28, 2008, not including RSAs             |  | 870,000                  |        |  | 978,000     |                                     |             | $      | 8.82  |                                     | 687,000 |  | $ | 7.26
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|RSAs Granted at market                                   |  | (17,000                  | )      |  | n.a.        |                                     |             |        | n.a.  |                                     | n.a.    |  |   | n.a.
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 28, 2008, net of RSA grants              |  | 853,000                  |        |  | 978,000     |                                     |             | $      | 8.82  |                                     | 687,000 |  | $ | 7.26
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Stock options:                                           |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Granted at market                                        |  | (239,000                 | )      |  | 239,000     |                                     |             |        | 15.26 |                                     |        |  |   |    
|Cancelled                                                |  | 1,000                    |        |  | (1,000      | )                                   |             |        | 14.73 |                                     |        |  |   |    
|Exercised                                                |  |                         |        |  | (62,000     | )                                   |             |        | 5.89  |                                     |        |  |   |    
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 27, 2009, not including RSAs             |  | 615,000                  |        |  | 1,154,000   |                                     |             | $      | 10.28 |                                     | 775,000 |  | $ | 8.17
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|RSAs Granted at market                                   |  | (17,000                  | )      |  | n.a.        |                                     |             |        | n.a.  |                                     | n.a.    |  |   | n.a.
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     
|Balance at June 27, 2009, net of restricted stock awards |  | 598,000                  |        |  | 1,154,000   |                                     |             | $      | 10.28 |                                     | 775,000 |  | $ | 8.17
|                                                         |  |                          |        |  |             |                                     |             |        |       |                                     |         |  |   |     

The aggregate intrinsic value for options outstanding and options exercisable at June 27,
2009, was approximately $2,710,000 and $2,662,000, respectively. The aggregate intrinsic value for options exercised during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was $429,000, $209,000 and $51,000, respectively. The weighted average remaining
contractual terms for options outstanding and options exercisable at June 27, 2009 were approximately 5.7 years and 5.4 years, respectively. The total fair value of options vested during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was $573,000,
$416,000 and $688,000, respectively. The weighted average fair value of stock options granted during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was $4.88, $4.47 and $4.39, respectively. The total number of options not yet vested as of June 27,
2009, was 380,000 shares with a weighted average exercise price of $14.59.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



18. 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 Accounting 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 than 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 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 an increase to the July 1, 2007 accumulated deficit balance. The Company recognized 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. 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.

At June 27, 2009, there were no remaining unrecognized tax
benefits included on the Companys balance sheet as the statutes of limitations related to the items previously recorded have expired.

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 2004.

The Company was under examination by the Internal Revenue Service of its income tax return for Fiscal 2006. This examination has been concluded and
settled during Fiscal 2009. As a result of certain school closures in Fiscal 2009 the Company has reclassified its income tax provisions between continuing operations and discontinued operations reported for Fiscal years 2008 and 2007 to conform to
the period ended June 27, 2009.

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



|                       |  |                      |       |   |      |   |       |  |   |      
|---------------------- |  | -------------------- | ----- | - | ---- | - | ----- |  | - | -----
|                       |  | For the Fiscal Years
|                       |  | 2009                 |       |   | 2008 |   | 2007 
|Current tax provision  |  |                      |       |   |      |   |       |  |   |      
|Federal                |  | $                    | 3,249 |   |      | $ | 4,002 |  | $ | 3,357
|State                  |  |                      | 449   |   |      |   | 542   |  |   | 503  
|                       |  |                      |       |   |      |   |       |  |   |      
|Total                  |  |                      | 3,698 |   |      |   | 4,544 |  |   | 3,860
|Deferred tax provision |  |                      |       |   |      |   |       |  |   |      
|Federal                |  |                      | (67   | ) |      |   | 68    |  |   | 1,010
|State                  |  |                      | (9    | ) |      |   | 9     |  |   | 151  
|                       |  |                      |       |   |      |   |       |  |   |      
|Total                  |  |                      | (76   | ) |      |   | 77    |  |   | 1,161
|                       |  |                      |       |   |      |   |       |  |   |      
|Income tax expense     |  | $                    | 3,622 |   |      | $ | 4,621 |  | $ | 5,021
|                       |  |                      |       |   |      |   |       |  |   |      



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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
|                                           |  | 2009                 |       | 2008 |   | 2007 
|U.S. federal statutory rate                |  | $                    | 3,182 |      | $ | 4,070 |  | $ | 4,366
|State taxes, net of federal tax benefit    |  |                      | 440   |      |   | 551   |  |   | 655  
|Goodwill and other non deductible expenses |  |                      |      |      |   |      |  |   |     
|                                           |  |                      |       |      |   |       |  |   |      
|                                           |  | $                    | 3,622 |      | $ | 4,621 |  | $ | 5,021
|                                           |  |                      |       |      |   |       |  |   |      

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 27, 2009                     |     |           | June 28, 2008 |       
|                                         |  | Deferred tax assets (liabilities) |    
|                                         |  | Current                           |     | Long Term |               |        | Current |  |   | Long Term |  
|Goodwill amortization and impairments    |  | $                                 |    |           | $             | (6,521 | )       |  | $ |          |   |  | $ | (5,213 | )
|Fixed asset depreciation and impairments |  |                                   |    |           |               | 3,939  |         |  |   |          |   |  |   | 3,497  |  
|Closed school lease reserves             |  |                                   |    |           |               | 264    |         |  |   |          |   |  |   | 308    |  
|Stock option and deferred compensation   |  |                                   |    |           |               | 1,430  |         |  |   |          |   |  |   | 1,165  |  
|State net operating losses               |  |                                   |    |           |               |       |         |  |   |          |   |  |   | 224    |  
|Deferred rent expense                    |  |                                   |    |           |               | 563    |         |  |   |          |   |  |   | 500    |  
|Gain on settlement of contract           |  |                                   |    |           |               | 22     |         |  |   |          |   |  |   | (440   | )
|Mark-to-Market on Swap contracts         |  |                                   |    |           |               | 99     |         |  |   |          |   |  |   |       |  
|Prepayments, accruals and reserves       |  |                                   | 443 |           |               | 62     |         |  |   | 237       |   |  |   | (33    | )
|                                         |  |                                   |     |           |               |        |         |  |   |           |   |  |   |        |  
|                                         |  |                                   | 443 |           |               | (142   | )       |  |   | 237       |   |  |   | 8      |  
|Valuation Allowance                      |  |                                   |    |           |               |       |         |  |   | (16       | ) |  |   | (182   | )
|                                         |  |                                   |     |           |               |        |         |  |   |           |   |  |   |        |  
|Net deferred tax asset (liability)       |  | $                                 | 443 |           | $             | (142   | )       |  | $ | 221       |   |  | $ | (174   | )
|                                         |  |                                   |     |           |               |        |         |  |   |           |   |  |   |        |  

As of June 27, 2009, the Company has utilized all previously generated state and federal net
operating loss carry-forwards.

19. 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 $411,000, $389,000 and $328,000 for Fiscal 2009, Fiscal 2008 and Fiscal 2007, 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. 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 27, 2009 and June 28, 2008, the Company has included in Deposits and other assets $1,021,000 and $902,000, 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)



Contributions are made at the discretion of the Compensation Committee of the Companys Board of
Directors. During Fiscal 2009, Fiscal 2008 and Fiscal 2007, the Company has recognized $201,000, $302,000 and $204,000 of general and administrative expense reflecting the prorated vesting of employer contributions into the plan, respectively. At
June 27, 2009 and June 28, 2008 the Company has included $850,000 and $915,000, respectively in Other long term liabilities to reflect its liability under the plan. The following table summarizes activity recorded to the
deferred compensation plan liability (dollars in thousands):



|                                                                 |  |   |      |  
|---------------------------------------------------------------- |  | - | ---- | -
|Deferred compensation plan liability at June 28, 2008            |  | $ | 915  |  
|Fiscal 2009 contributions and fund activity                      |  |   | 201  |  
|Adjustment to prior periods compensation expense under the plan |  |   | (266 | )
|                                                                 |  |   |      |  
|Deferred compensation plan liability at June 27, 2009            |  | $ | 850  |  
|                                                                 |  |   |      |  

The Companys contributions to the deferred compensation plan are subject to a five-year
vesting period. Prior to the second quarter of Fiscal 2009, the Company had overstated its expense in connection with the deferred compensation plan, primarily as a result of the vesting provisions of the deferred compensation plan. In accordance
with the SECs Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), the Company recorded an adjustment
of $266,000 reducing the deferred compensation plan liability and reducing general and administrative expense for Fiscal 2009. This adjustment to the Companys financial statements is immaterial both as it relates to the current period as well
as each of the periods from the inception of the deferred compensation plan. In evaluating materiality and determining the appropriateness of applying SAB 108 to this error, the Company considered materiality both qualitatively and quantitatively as
proscribed by the SECs Staff Accounting Bulletin No. 99.

20. Fair Value of Financial Instruments:

Effective June 27, 2009, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, (SFAS
No. 157) which did not have a material effect on the Companys consolidated financial statements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The SFAS No. 157 framework for measuring fair value requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on
quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach
also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. SFAS No. 157s hierarchy defines three levels of
inputs that may be used to measure fair value:

Level 1Quoted prices in active markets for identical assets and liabilities
that the reporting entity has the ability to access at the measurement date.

Level 2Inputs other than quoted prices included
within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3Unobservable inputs that reflect the entitys own assumptions about the assumptions that market participants would use in the
pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.



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Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The determination of where an asset or liability falls in the hierarchy requires significant judgment
and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter; and depending on various factors, it is
possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy,
the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of
June 27, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the
overall valuation of the Companys derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following table presents information about the Companys assets and liabilities (including derivatives that are presented net) measured at fair
value on a recurring basis as of June 27, 2009, aggregated by the level in the fair value hierarchy within with those instruments fall:



|                                 |  |                                       |   |                                           |   |      |                                       |  |   |  
|-------------------------------- |  | ------------------------------------- | - | ----------------------------------------- | - | ---- | ------------------------------------- |  | - | -
|                                 |  | Quoted Prices in ActiveMarketsLevel
1 |   | Significant OtherObservable InputsLevel 2 |   |      | Significant UnobservableInputsLevel
3
|Total derivatives, net liability |  | $                                     |  |                                           | $ | (246 | )                                     |  | $ | 

SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash, accounts receivable and accounts payable and accrued expenses approximates
their carrying value on the consolidated balance sheet.

The carrying values for the Companys long-term debt and note receivable
approximate fair value based on current rates that management believes could be obtained for similar debt.

21. 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 statements. 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 United States Department of Justice (Disability Rights Section of the Civil Rights Division) (DOJ) filed a lawsuit on April 29, 2009 in the U.S. District Court for the Eastern District of Pennsylvania against the
Company alleging that the Company violated Title III of the Americans with Disabilities Act of 1990 (ADA) by excluding children with disabilities from its schools and programs. The complaint seeks an unspecified amount in compensatory
damages and civil penalties, as well as declaratory and injunctive relief.



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The Company is not able at this time to estimate the range of loss, if any, arising out of this
matter since its outcome is uncertain. Although it does not expect that the resolution of the matter will have a material adverse effect on its financial condition, results of operations or cash flows, there can be no assurances in this regard.

The Company carries property, fire and other casualty insurance on its schools and general liability insurance in amounts which management
believes are adequate. 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 coverage have insurance
sublimits per claim in the general liability coverage.

22. 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 for
licenses and $54,000 for services to NetSuite during Fiscal 2007.

23. 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 which it receives management fees. In accordance with SFAS 131, the Company discloses these back office
management fee services 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
2009, Fiscal 2008 and Fiscal 2007 (dollars in thousands):



|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|---------------------------------------- |  | ------- | ------- | ----- | - | --------- |  | ----- | ----- |  | - | -------
|                                         |  | Private |         |       |   |           |  |      
|                                         |  | Schools |         | Other |   | Corporate |  | Total
|Fiscal 2009                              |  |         |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $       | 219,919 |       | $ | 184       |  | $     |      |  | $ | 220,103
|Gross profit                             |  |         | 28,812  |       |   | 172       |  |       |       |  | $ | 28,984 
|Depreciation and amortization:           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $       | 8,306   |       |   |           |  | $     | 1,362 |  | $ | 9,668  
|Discontinued operations                  |  |         | 419     |       |   |           |  |       |       |  |   | 419    
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $       | 8,725   |       | $ |          |  | $     | 1,362 |  | $ | 10,087 
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  |         | 71,489  |       |   |          |  |       |      |  |   | 71,489 
|Segment assets                           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $       | 113,511 |       | $ |          |  | $     | 4,170 |  | $ | 117,681
|Discontinued operations                  |  |         | 1,893   |       |   | 1         |  |       |       |  |   | 1,894  
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $       | 115,404 |       | $ | 1         |  | $     | 4,170 |  | $ | 119,575
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $       | 6,604   |       | $ |          |  | $     | 846   |  | $ | 7,450  
|                                         |  |         |         |      
|Fiscal 2008                              |  |         |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $       | 204,006 |       | $ | 195       |  | $     |      |  | $ | 204,201
|Gross profit                             |  |         | 30,487  |       |   | 164       |  |       |      |  |   | 30,651 
|Depreciation and amortization:           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $       | 5,920   |       | $ |          |  | $     | 1,280 |  | $ | 7,200  
|Discontinued operations                  |  |         | 120     |       |   |          |  |       |      |  |   | 120    
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $       | 6,040   |       | $ |          |  | $     | 1,280 |  | $ | 7,320  
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  |         | 65,223  |       |   |          |  |       |      |  |   | 65,223 
|Segment assets                           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $       | 107,180 |       | $ |          |  | $     | 3,872 |  | $ | 111,052
|Discontinued operations                  |  |         | 2,094   |       |   | 2         |  |       |      |  |   | 2,096  
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $       | 109,274 |       | $ | 2         |  | $     | 3,872 |  | $ | 113,148
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $       | 6,648   |       | $ |          |  | $     | 1,474 |  | $ | 8,122  
|                                         |  |         |         |      
|Fiscal 2007                              |  |         |         |       |   |           |  |       |       |  |   |        
|Revenues                                 |  | $       | 179,451 |       | $ | 1,372     |  | $     |      |  | $ | 180,823
|Gross profit                             |  |         | 26,679  |       |   | 685       |  |       |      |  |   | 27,364 
|Depreciation and amortization:           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operations                    |  | $       | 4,981   |       | $ | 193       |  | $     | 1,640 |  |   | 6,814  
|Discontinued operations                  |  |         | 120     |       |   |          |  |       |      |  |   | 120    
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total depreciation and amortization      |  | $       | 5,101   |       | $ | 193       |  | $     | 1,640 |  | $ | 6,934  
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Goodwill                                 |  |         | 47,499  |       |   |          |  |       |      |  |   | 47,499 
|Segment assets                           |  |         |         |       |   |           |  |       |       |  |   |        
|Continuing operationsnon-capital assets |  | $       | 83,245  |       | $ |          |  | $     | 3,008 |  | $ | 86,253 
|Discontinued operationscapital assets   |  |         | 2,058   |       |   | 3         |  |       |      |  |   | 2,061  
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Total assets                             |  | $       | 85,303  |       | $ | 3         |  | $     | 3,008 |  | $ | 88,314 
|                                         |  |         |         |       |   |           |  |       |       |  |   |        
|Capital Expenditures                     |  | $       | 6,525   |       |   |          |  | $     | 987   |  | $ | 7,512  



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##### Table of Contents

Nobel Learning Communities, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



24. 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
|                                                       |  | 2009          |        |   | 2008           |   |        | 2009          |  |   | 2008           |   |  | 2009 |        |   | 2008 |   |        | 2009 |  |   | 2008  
|Revenues                                               |  | $             | 50,903 |   |                | $ | 44,288 |               |  | $ | 55,872         |   |  | $    | 50,752 |   |      | $ | 56,918 |      |  | $ | 52,843 |   |  | $ | 56,410 |   |  | $ | 56,319
|Gross profit                                           |  |               | 4,972  |   |                |   | 4,181  |               |  |   | 8,803          |   |  |      | 7,895  |   |      |   | 8,708  |      |  |   | 9,005  |   |  |   | 6,501  |   |  |   | 9,569 
|Income (loss) from continuing operations, net of tax   |  |               | (128   | ) |                |   | (190   | )             |  |   | 2,358          |   |  |      | 2,226  |   |      |   | 2,544  |      |  |   | 2,604  |   |  |   | 959    |   |  |   | 2,725 
|Income (loss) from discontinued operations, net of tax |  |               | (230   | ) |                |   | (100   | )             |  |   | (239           | ) |  |      | (100   | ) |      |   | (207   | )    |  |   | (97    | ) |  |   | (493   | ) |  |   | 610   
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Net income (loss)                                      |  | $             | (358   | ) |                | $ | (290   | )             |  | $ | 2,119          |   |  | $    | 2,126  |   |      | $ | 2,337  |      |  | $ | 2,507  |   |  | $ | 466    |   |  | $ | 3,335 
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Basic income (loss) per share                          |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Continuing operations                                  |  | $             | (0.01  | ) |                | $ | (0.02  | )             |  | $ | 0.23           |   |  | $    | 0.21   |   |      | $ | 0.24   |      |  | $ | 0.25   |   |  | $ | 0.09   |   |  | $ | 0.27  
|Discontinued operations, net of tax                    |  |               | (0.02  | ) |                |   | (0.01  | )             |  |   | (0.02          | ) |  |      | (0.01  | ) |      |   | (0.02  | )    |  |   | (0.01  | ) |  |   | (0.05  | ) |  |   | 0.05  
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Net income (loss)                                      |  | $             | (0.03  | ) |                | $ | (0.03  | )             |  | $ | 0.21           |   |  | $    | 0.20   |   |      | $ | 0.22   |      |  | $ | 0.24   |   |  | $ | 0.04   |   |  | $ | 0.32  
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Diluted income (loss) per share:                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Continuing operations                                  |  | $             | (0.01  | ) |                | $ | (0.02  | )             |  | $ | 0.22           |   |  | $    | 0.21   |   |      | $ | 0.24   |      |  | $ | 0.24   |   |  | $ | 0.09   |   |  | $ | 0.26  
|Discontinued operations                                |  |               | (0.02  | ) |                |   | (0.01  | )             |  |   | (0.02          | ) |  |      | (0.01  | ) |      |   | (0.02  | )    |  |   |       |   |  |   | (0.05  | ) |  |   | 0.05  
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|Net income (loss)                                      |  | $             | (0.03  | ) |                | $ | (0.03  | )             |  | $ | 0.20           |   |  | $    | 0.20   |   |      | $ | 0.22   |      |  | $ | 0.24   |   |  | $ | 0.04   |   |  | $ | 0.31  
|                                                       |  |               |        |   |                |   |        |               |  |   |                |   |  |      |        |   |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       

25. Subsequent Events:

The Company has evaluated subsequent events through the filing of this Form 10K on September 8, 2009, and determined that there have not been any events that have occurred that would require adjustments
to or additional disclosures in the audited consolidated financial statements except for the following transactions:

On
September 4, 2009, the Company completed the acquisition of all the outstanding shares of the Laurel Springs School of Ojai, California (LSS). Laurel Springs is a leading college preparatory private school offering distance learning
programs and teacher services for students in grades K-12. The purchase price for the stock acquisition was approximately $12 million pending final closing adjustments.



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