<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K


              [x] Annual Report Pursuant to Section 13 or 15(d) of
              The Securities Exchange Act of 1934  [Fee Required]

                    For the fiscal year ended June 30, 1998

                                       or

           [ ] Transition Report Pursuant to Section 13 or 15(d) of
           The Securities Exchange Act of 1934 [No Fee Required]

                         Commission File Number 1-1003

                         NOBEL EDUCATION DYNAMICS, INC.
             (Exact name of registrant as specified in its charter)
 
                  DELAWARE                                      22-2465204
         (State or other jurisdiction                          (IRS Employer
       of incorporation or organization                      Identification No.)
 
           ROSE TREE CORPORATE CENTER II
        1400 N. PROVIDENCE ROAD, SUITE 3055
                    MEDIA, PA                                      19063
      (Address of principal executive offices)                  (Zip Code)
 
Registrant's telephone number, including area code:          (610) 891-8200

Securities Registered Pursuant to Section 12(b) of the Act:

         Title of each class         Name of each exchange on which registered
               NONE                                   NONE

Securities Registered Pursuant to Section 12(g) of the Act:

                            COMMON STOCK, PAR VALUE
                                $.001 PER SHARE
                             (Title of each class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.      Yes      x        No_____
                                           -----------           

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

As of September 16, 1998, 6,121,365 shares of common stock were outstanding.

The aggregate market value of the shares of common stock owned by non-affiliates
of the Registrant as of September 16, 1998 was approximately $33,061,000 (based
upon the closing sale price of these shares as reported by Nasdaq). Calculation
of the number of shares held by non-affiliates is based on the assumption that
the affiliates of the Company include the directors, executive officers and
stockholders who have filed a Schedule 13D or 13G with the Company which
reflects ownership of at least 10% of the outstanding common stock or have the
right to designate a member of the board of directors, and no other persons.
The information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is an affiliate or that any
person whose holdings are included is not an affiliate and any such admission is
hereby disclaimed.  The information provided is included solely for record
keeping purposes of the Securities and Exchange Commission.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1998 (the "Proxy Statement") and to be
filed within 120 days after the registrant's fiscal year ended June 30, 1998 are
incorporated by reference in Part III.
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
Item
No.                                                                       Page
                                    PART I
<S>                                                                        <C>
1. Business...........................................................       1
   Executive Officers of the Company..................................      10
2. Properties.........................................................      12
3. Legal Proceedings..................................................      12
4. Submission of Matters to a Vote of Security Holders................      13


                                    PART II

5. Market for Registrant's Common Equity
   and Related Stockholder Matters....................................      14
6. Selected Financial Data............................................      16
7. Management's Discussion and Analysis
   of Financial Condition and Results of Operations...................      17
8. Financial Statements and Supplementary Data........................      23
9. Changes in and Disagreements with Accountants
   on Accounting and Financial Disclosure.............................      23

                                   PART III

10. Directors and Executive Officers of the Registrant.................     24
11. Executive Compensation.............................................     24
12. Security Ownership of Certain Owners and Management................     24
13. Certain Relationships and Related Transactions.....................     24

                                    PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...     25
</TABLE>
<PAGE>
 
                                    PART I

"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     The Company's Fiscal 1999 outlook and all other statements in this report
other than historical facts are forward-looking statements that involve risks
and uncertainties and are subject to change at any time.  The Company derives
its forward-looking statements from its operating budgets and forecasts, which
are based upon detailed assumptions about many important factors such as market
demand, market conditions and competitive activities.  While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting the impact of certain factors, especially
those affecting the acceptance of the Company's newly developed schools and
performance of recently acquired businesses, which could cause actual results to
differ materially from predicted results.

ITEM 1.  BUSINESS.

GENERAL

     Nobel Education Dynamics, Inc.'s business mission is to be the leader in
the United States in providing affordable private education from preschool
through eighth grade for the children of middle-income working families. The
Company has been identified as a market leader "Education Management
Organization" (EMO) for preschool through eighth grade. (EMO is a term used in
the investment community to describe companies which manage education businesses
for profit in multiple sites.) The Company's operations include preschools,
elementary schools and middle schools, and several child care centers,
throughout the United States, all operating as part of the "Nobel Learning
Communities." To attain its objectives, Nobel builds on its experience and
expertise both in education and preschool/child care. As an "education company,"
the Company's strategy is to offer practical solutions to a segment of the
education problem in the United States.

     Nobel operates nationwide, with 138 schools and centers in 13 states as of
September 19, 1998. In California, Nobel operates the Merryhill Schools, which
is a private school system of 28 preschools, elementary schools and middle
schools.  Nationwide, Nobel operates preschools, schools and centers under
various names in Pennsylvania, New Jersey, Virginia, Florida, Maryland, North
Carolina, South Carolina, Illinois, Nevada, Oregon, Washington and Indiana.
School names include Chesterbrook Academy, Evergreen Academy and Another
Generation.  Nobel also owns a 20% interest in an elementary school in Florida.

     Management is pursuing a three-pronged strategy to take advantage of the
significant growth opportunities in the private education market:

     . internal growth at existing schools, including expansions of campus
  facilities

     . new school development in both existing and new markets

     . strategic acquisitions

     To facilitate this strategy, Nobel is applying the strengths of its
curriculum-based programs to distinguish itself from its competition.  The
strategy also entails geographical clustering of Nobel's preschools to (i)
increase market awareness, (ii) provide a lower risk method for expansion into

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<PAGE>
 
elementary and middle schools by providing a feeder population and (iii) gain
operating efficiencies in both management and costs.

     Nobel targets its schools and preschools to meet the needs of middle-income
working parents. Most of Nobel's schools, preschools and child care centers are
open from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up.  In
most locations, programs are available for children starting at six weeks of
age.  For basically the same price as standard child care, parents can leave
children of various ages at a Nobel school knowing they will receive a quality
education during the greater part of the day and be engaged in well-supervised
activities the remainder.

     To complement its programs, the Company also operates (i) before and after
school programs and (ii) summer camps (both sports and educational) at its
various school facilities.  Nobel also seeks to add other services and products
which will add ancillary income and improve overall operating margins.

     The Company's financial strength has improved dramatically since 1992, when
there was a change in management.  Strategies of new management have included a
change of the Company's focus to education from child care, strengthening of the
Company's financial condition, divestiture of centers in mature markets and,
after the Company's financial stabilization, expansion into growth areas.  With
the implementation of these new strategies, the equity of the Company has
increased from a negative net worth of $3.8 million on December 31, 1991 to
positive net worth of $33 million as of June 30, 1998.

     The Company's corporate office is located at Rose Tree Corporate Center II,
1400 North Providence Road, Suite 3055, Media, PA  19063. Its telephone number
is (610) 891-8200; its world wide web address is www.nobeleducation.com or
www.educating.com.

EDUCATIONAL PHILOSOPHY AND IMPLEMENTATION

     The educational philosophy of the Nobel Learning Communities is based on a
sound research foundation, innovative instructional techniques and quality
practice, and proprietary curricula developed by experienced educational
personnel.  Nobel's programs stress the development of the whole child and are
based on concepts of integrated and age-appropriate learning.  The curricula
recognize that each child develops according to his or her own abilities and
timetable, but also seek to prepare every student for achievement in accordance
with national content standards and goals. Every child's educational needs are
considered upon entrance into a Nobel school, and progress is regularly
monitored in terms of both the curriculum's objectives and the learner's
cognitive, social, emotional, and physical skill development.  The result is the
opportunity for every Nobel student to develop a strong foundation in academic
learning, positive self-esteem, and emotional and physical well-being.

     Since 1995, the Company has adapted the Merryhill curriculum for
implementation in its other schools through the conversion of most of its child-
care centers on the East Coast and in the Mid-West.  In implementing the
conversions, Nobel conducted staff training sessions to prepare teachers to
present the curriculum-based program in the pre-school as well as at  elementary
grade levels. The schools instituted instructional techniques and assessment
practices and adopted particular content materials in the various subject areas.
Also, at conversion, the schools' computer technology was upgraded.

                                       2
<PAGE>
 
     Under the direction of Nobel's Vice President - Education, the Company
circulates regular "curriculum updates," a publication to assist staff in
planning their daily and weekly programs with current and effective
instructional practices and materials.  The Company has also established multi-
media products for a "Learning Lending Library" collection.  The library, which
is managed out of the Company's corporate office, is available to all Nobel
schools for student and teacher development and parent interest.  Many of these
resources support the Company's curriculum.

     In 1996, the Company launched its National Education Advisory Board.  Under
the direction of the Vice President - Education, the Board includes five
nationally-known educators each of whom advises Nobel on his or her particular
area of expertise:  Dr. Zalman Usiskin of the University of Chicago
(Mathematics); Dr. Cathy Collins Block of Texas Christian University (Reading
and Language Arts);  Dr. John N. Mangieri of the Institute for Effective
Management (Educational Administration);  Dr. Arthur L. Costa of the University
of California at Sacramento (Curriculum and Teacher Development); and Dr. Drew
H. Gitomer of Educational Testing Service (Testing and Evaluation).  The 
Advisory Board helps oversee curriculum development in the Company's schools,
advise on the most renowned teaching methods, and assist in finding the best
instructional materials and practices to help students learn effectively and
efficiently. Advisory Board members are also available to work on special
projects and services that enhance the Company's school programs.

     The Company maintains that small class sizes are a basic ingredient of
quality education. Nobel's educational philosophy is based on personalized
instruction that leads to a student's active involvement in learning and
understanding. The program for the Company's schools is a strong skills-based,
comprehensive curriculum that is implemented in ways that attract the learner's
curiosity, enhance students' various learning styles, and employ processes that
contribute to lifelong achievement. Academic areas addressed include reading
readiness and reading, spelling, writing, handwriting, mathematics, science,
social studies, visual and graphic arts, music, physical education and health,
and foreign language. Computer literacy and study skills are interrelated into
the program, as appropriate, in all content areas. The schools employ state-of-
the-art technologies, such as interactive CD-ROMs coordinated with classroom
content and networking capacity. Most schools in the Nobel Learning Communities
introduce a second language between the ages of two and three and continue that
instruction into the pre-K, kindergarten and school age programs.

     The Company offers sports activities and supplemental programs, which
include day field trips coordinated with the curriculum to such places as zoos,
libraries, museums and theaters, and, at the middle schools, overnight trips to
such places as Yosemite, California and Washington, D.C. Schools also arrange
classroom presentations by parents and other volunteers, as well as organize
youngsters as presenters to community groups and organizations. To enhance
better the child's physical, social, emotional and intellectual growth, schools
are encouraged to provide fee-based experiences specifically tailored to
particular families' interest in such ancillary activities as dance, gymnastics,
and music lessons.

     The Company's programs are implemented by experienced principals and
directors and their faculties. They foster open communication, teamwork and the
attention to detail required to provide a superior service. School principals
and directors work closely with regional and corporate management, particularly
in the regular assessment of program quality. In 1996, the groundwork was laid
for a Company-wide Quality Assurance Program and, early in 1997, a Director of
Quality Assurance was appointed to assess systematically each Nobel school and
to provide a procedure for

                                       3
<PAGE>
 
internal accreditation. Nobel's Quality Assurance Program sets standards
consistent with the external, national accreditation systems in which the
Company participates with such organizations as the National Association for the
Education of Young Children (NAEYC), the National Independent Private School
Association (NIPSA), and the Commission for International and Trans-Regional
Accreditation (CITA). The Program also provides a formal means to recognize and
reward Nobel Learning Communities educators for their outstanding performance
and achievement. Similarly, the Program also furnishes guidance for the
continued training and staff development of teaching personnel, using both
internal trainers and external consultants.

     Nobel has begun development of Nobel Learning Advantage, which will consist
of comprehensive tutorial and diagnostic programs. The tutoring programs of
Nobel Learning Advantage will include adaptive, transitional and enrichment
components within two major content areas: reading and mathematics. Each program
will have a diagnostic and an instructional component that can be delivered in
three grade ranges (K - 2, 3 - 5, and 6 - 8). The Company expects to complete
development of the diagnostic and instructional materials in reading in all
three ranges in 1998 and to implement pilot tryouts in select schools. The
development of the diagnostic and instructional materials in mathematics is
expected to be completed in early 1999 in all three grade ranges. Nobel plans to
implement further piloting and development of full tutoring services and
marketing in 1999.

     As part of Nobel Learning Advantage, commencing in September 1998, Nobel
began to offer an assessment designed to respond to the personal needs of
children three to six years old in Nobel schools. As the initial step, a trained
Nobel certified diagnostician administers the Kaufman Survey of Early Academic
and Language Skills (K-SEALS). This test measures skill development in five key
areas critical to academic success. The diagnostician then reviews and
interprets the test results with both the child's parent and teacher.
Recommendations are made to personalize the child's learning program throughout
the school year.

     The Company also entered another segment of the education industry - the
education of learning-challenged children.  This entry began in August 1998 with
Nobel's acquisition through an 80%-owned joint venture of three Florida schools
for learning-challenged children from Developmental Resource Center, Inc. (DRC).
Nobel's joint venture partner is DRC's former owner, Dr. Deborah Levy, who
joined Nobel as chief education officer for this business - Nobel Learning
Solutions.  The mission of Nobel Learning Solutions will be to improve the
learning process and achievement levels of children having such learning
challenges as ADD, ADHD, dyslexia and the developmentally delayed.  The Company
intends to develop separate schools for these children within the Nobel school
clusters across the United States.

     As of September 19, 1998, the aggregate licensed capacity at the Company's
138 schools and centers was approximately 22,500 children.

OPERATIONS / SCHOOL SYSTEMS

     In order to maintain uniform standards, each school and center shares
consistent educational goals and operating procedures.  To respond to local
demands, principals are encouraged to tailor curriculums, within Nobel's
standards, to meet regional needs.  Management visits all schools and centers on
a regular basis to review program and facility quality.

                                       4
<PAGE>
 
     Each school and center is staffed with a principal or director, teachers
and teaching assistants. Principals and directors are supervised by executive
directors, who report to either the Vice President - Eastern Operations or the
Vice President - Western Operations. The principal or director is critical to
the success of the school and is provided with ongoing training. Principals and
directors have responsibility for: (i) maintaining the quality of educational
services delivered at their schools, (ii) recommending pricing strategy based
upon school location and local area demographics, (iii) personnel management,
(iv) sales and marketing strategy for their locations and (v) fiscal management.

     Principals and directors submit financial reports to the Company's
corporate office and to appropriate district and regional managers each week.
These reports include data on current enrollment, labor costs and cash receipts.
Corporate office personnel then review each report and prepare weekly combined
reports by district, region and for the Company in total. Weekly or monthly
tuition rates and utilization rates are continually monitored. Each school and
center is measured on a monthly basis versus its individual business plan. Nobel
is in the process of evaluating several state-of-the-art computer systems which
would assist the principals in operating schools and provide management with
enhanced operational information.

     The Company generally hires experienced individuals and attempts to promote
from within. Employment applicants are reviewed with background checks made to
verify accurate employment history and establish background, reputation and
character. After hiring, the faculty is reviewed and evaluated annually both
through formal evaluation and market surveys. All principals and directors are
eligible for incentive compensation based on the profitability of their schools.

MARKETING AND CUSTOMERS

     The Company's management believes that Nobel has a unique position in the
marketplace and has implemented a marketing strategy to capitalize on this
position. Nobel strives to differentiate itself from child care providers.  In
contrast with mere custodial child care, Nobel's programs stress educational
development through proven curriculum programs, beginning at the preschool level
and continuing through upper grades.

     The Company generates the majority of new enrollments from its reputation
in the community and word-of-mouth recommendations of parents. Further, the
Company is geographically clustering its preschools to increase local market
awareness and to provide a feeder population for Nobel elementary and middle
schools. The Company also markets its services through display ads, listings in
local print and radio media and through distribution of promotional materials in
residential areas. Marketing campaigns are conducted throughout the year, 
primarily at the local level by the Company's school directors and principals.
In addition, the various regional offices conduct marketing programs, such as
mass mailings and media advertising.

NEW CENTER AND SCHOOL DEVELOPMENT; ACQUISITIONS

     Management expects a significant portion of Nobel's growth for the next few
years to continue to be through the opening of new schools and preschools and
strategic acquisitions of existing schools and preschools.

                                       5
<PAGE>
 
     New school development offers an attractive growth opportunity for Nobel to
expand into both new and existing markets.  Proposed development sites are
presented to the Company through a network of developers across the United
States.  After site selection, the Company engages a developer or contractor to
build a facility to the Company's specifications.  Nobel currently works with
several developers who purchase the land, build the facility and enter into a
long-term lease with Nobel for the premises.  Alternatively, Nobel purchases
land itself, constructs the building with its own or borrowed funds and then
seeks to enter into a sale and lease back transaction with an investor.

     In 1997 and fiscal 1998, Nobel opened 14 new schools and preschools.  The
Company plans to open approximately eight to 12 new schools and preschools in
fiscal 1999 and 12 to 15 new schools and preschools in fiscal 2000.  The
Company's development plans are dependent on the continued availability of such
developer and financing arrangements.

     Typically, new schools are single-story stand alone structures located near
residential neighborhoods on acreage appropriate to the nature of the school.
The Company carefully evaluates all proposed development sites and makes a
selection based on a variety of criteria, including: the number and age of
children living in proximity to the site; family income data; incidence of two-
wage earner and single parent families; traffic patterns; wage and fixed cost
structure; competition; price elasticity; family educational data; local
licensing requirements; and real estate costs.

     The Company plans to continue to expand the number of grade levels offered
by its existing schools. Upon conversion, current preschools and child care
centers initially offer grade levels through kindergarten or first grade, with
further expansion planned. The Company also is expanding the grades offered by
its other schools. In some locations, this expansion requires the construction
of additions to current facilities or development of a replacement facility.

     Acquisition activity in 1997 and 1998 to date consisted of the following:

     .  In January 1997, the acquisition of six preschools in Florida.

     .  In March 1997, the acquisition of two elementary and one preschool
        located in San Jose, California.

     .  In September 1997, the acquisition of two preschools and one elementary
        school in Las Vegas, Nevada.

     .  In March 1998, the acquisitions of one elementary school located in each
        of Lake Oswego, Oregon; Seattle, Washington and North Lauderdale,
        Florida.

     .  In August 1998, the acquisition through an 80% joint venture entity of
        schools located in southern Florida which educate children with learning
        disabilities (discussed above).

     At the closing of the January 1997 Florida acquisition, Nobel also
purchased a 20% interest in a new elementary school in Florida, and Nobel
entered into a joint venture agreement with the sellers to develop five
additional elementary schools in Florida in which Nobel will have an 80%
interest.

                                       6
<PAGE>
 
INDUSTRY AND COMPETITION

     Annual spending in education is estimated to exceed $630 billion annually
in the United States or approximately 10% of gross domestic product. Estimates
of spending in education for preprimary grades (preschools and child care) are
$30 billion while estimates of spending for kindergarten through eighth grade
("K -8") are $200 billion. Spending is projected to continue to grow through a
combination of increasing per pupil expenditures and increasing school
enrollments.

     It is estimated there are 90,000 schools in the $30 billion preschool/child
care segment with $25 billion spent in the private sector, of which $10 billion
is spent in the for-profit segment. Likewise, it is estimated there are 85,000
schools in the $200 billion K - 8 segment with an estimated $15 billion spent in
the private sector, of which $650 million is spent in the for-profit segment.

     The public school market is estimated to be 110,000 schools in total, of
which 76,000 are elementary, 23,000 are secondary and 11,000 are combined
schools. The private school market is estimated to be 26,000 schools, of which
15,500 are elementary, 2,500 are secondary and 8,000 are combined. Of the 26,000
schools in the private school market, an estimated 20,500 are religiously
affiliated and 5,500 are secular. Of the 5,500 secular schools, less than 1,000
are for-profit schools.

     Between 1985 and 1995, it is estimated that the public school K - 8 grade
enrollment increased 19.8% from 27.03 million students to 32.38 million students
while the private school K - 8 grade enrollments  increased 5.6% from 4.19
million students to 4.43 million students over the same time period.  The U.S.
Department of Education projects public school and private school K - 8
enrollment growth between 1996 and 2006 to slow to 2%, a 700,000 enrollment
increase in public schools and a 100,000 enrollment increase in private schools,
respectively.  While this increase may not seem large, there is significant
concern that the nation's already overcrowded schools are ill-prepared to handle
it.  It is estimated that in excess of 4,000 new K - 8 schools must be built to
relieve current overcrowding and handle the growth.  Also, this growth will vary
significantly in different regions of the United States.  States such as
California, Florida, Washington and Oregon are projected to experience high
growth.  These states are targeted in the Company's expansion plans.

     During the 1996 elections, education was the politically "hot issue" in
national and state contests. The broad public debate has shifted from whether
our existing K - 12 system has failed in terms of performance to which reform
movements promise the best and quickest improvements.

     Taxpayers have experienced high costs in education expenditures without
positive results. According to a 1995 Gallup poll, 71% of Americans give the
nation's schools a grade of C, D or F generally and 54% give their own schools a
low grade as well.  Quality is low; yet, the average annual cost of educating a
Kindergarten through 12/th/ grade student in the United States has risen to over
$6,000 in 1995.  Dismal student achievement, a growing minority gap in school
completion rates and student misbehavior causing unsafe school environments are
three commonly mentioned quality measurements that are lacking. Also, corporate
America has become increasingly frustrated by insufficiently equipped students
produced by the nation's public school systems.

     Education reform movements in the United States are posing alternatives to
the public schools. These include charter schools, private management of public
schools, vouchers, home schooling and private schools. The Company's strategy is
to provide parents a quality alternative through Nobel's 

                                       7
<PAGE>
 
privately owned and operated schools utilizing a proven curriculum in a safe and
challenging environment.

     For school age children, the Company competes with other for-profit private
schools, with non-profit schools and, in a sense, with public school systems.
The Company anticipates 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.  Currently, the only for-profit
competitor of which Nobel is aware that competes beyond a regional level is
Children's World, a subsidiary of Aramark Corporation.  The Company believes
that the structure of the large for-profit child care companies may make it
difficult for them to implement and develop programs which are based upon
curriculum-intensive goals, which would require significant cultural changes.

     The preschool/child care market is a $30 billion highly fragmented
industry, with diverse competition from both public and private sectors.
Approximately eight million children are enrolled in 90,000 centers/schools, of
which less than nine percent are managed by for-profit chains. Revenues of the
20 largest child care/preschool providers represent less than five percent of
total segment revenues. Also seeking enrollments of pre-school age children are
in-home individual child care providers and corporations that provide child care
for their employees.

     Only one out of seven early care/education programs is rated good or
excellent by the Carnegie Corporation report; four out of five programs fail
quality standards. The Company believes that persons in its target market --
parents seeking curriculum-based programs for their children -- seek services
not provided by child care providers without a curriculum base. Nobel believes
these parents desire to give their child the best educational advantage
available, since, as educators have found, the learning process should start
earlier, preferably somewhere between the ages of two and three. The Company
offers a national curriculum based program with excellent standards.

     The demand for quality preschools is increasing.  More than 60% of mothers
with children under six years of age are in the workplace.  Both single parents
and dual income families are on the rise. From 1980 to 1990, the percentage of
dual income families rose from 50% to 60%.  From 1970 to 1992, the percentage of
married mothers who worked full time increased 16% to 37%.  Combined,
approximately 80% of U.S. families are either dual income or single parent
households.

     While price is an important factor in competition in both the school age
and preschool markets, the Company believes that other competitive factors also
are important, including: professionally developed educational programs, well
equipped facilities, trained teachers and a broad range of ancillary services,
including transportation and infant care. Particularly in the preschool market,
many of these services are not offered by the Company's competition.

REGULATION

     Schools and preschools are subject to a variety of state and local
regulations and licensing requirements. These regulations and licensing
requirements vary greatly from jurisdiction to jurisdiction. Governmental
agencies generally review the safety, fitness and adequacy of the buildings and
equipment, the ratio of staff personnel to enrolled children, the dietary
program, the daily curriculum, compliance with health standards and the
qualifications of the Company's personnel.

                                       8
<PAGE>
 
INSURANCE

     The Company currently maintains comprehensive general liability, workers'
compensation, automobile liability, property, excess umbrella liability and
student accident insurance.  The policies provide for a variety of coverage and
are subject to various 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.  Since 1994, the Company has been able
to increase significantly the sublimit applicable to such coverage.  There can
be no assurance that in future years the Company will not again become subject
to lower limits.

SERVICE MARKS

     The Company has registered various service marks, including Chesterbrook
Academy(R), Merryhill Country School(R) and The Rocking Horse Child Care
Center(R), in the United States Patent and Trademark Office.  The Company
believes that certain of its service marks have substantial value in its
marketing in the respective areas in which its schools operate.

SEASONALITY

     Nobel's elementary and middle schools historically have lower operating
revenues in the summer due to lower summer enrollments.  Summer revenues of
preschools tend to remain more stable or, in some cases, increase.  The Company
is seeking to improve summer results through camps and other programs.

EMPLOYEES

     On September 19, 1998, the Company employed approximately 5,200 persons,
approximately 1,700 of which were employed on a part-time basis.  Management
believes that its relationship with its employees is satisfactory.

                                       9
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY

     The executive officers of the Company are as follows:  

  Name                   Age         Position
-----------------------------------------------------------------------------
A. J. Clegg               59         Chairman of the Board of Directors,
                                     President and Chief Executive Officer;
                                     Director

John R. Frock             55         Executive Vice President - Corporate
                                     Development; Assistant Secretary; Director 

B. Robin Eglin            42         Executive Vice President - Real Estate
                                     Development

William E. Bailey         39         Vice President and Chief Financial Officer

Yvonne DeAngelo           40         Vice President - Administration and
                                     Finance; Secretary

Emily Louviere            54         Vice President - Western Operations

Barbara Z. Presseisen     62         Vice President - Education

Barbara Sell              48         Vice President - Eastern Operations

Barry S. Swirsky          42         General Counsel


     The following description contains certain information concerning the
foregoing persons:

A.J. Clegg. Mr. Clegg was named Chairman of the Board and Chief Executive
Officer of the Company on May 29, 1992.  Since 1989, Mr. Clegg has also served
on the Advisory Board of Drexel University and, in 1996, was named as a member
of the Board of Trustees of Drexel University. From June 1990 to December 1997
(but involving immaterial amounts of time since 1994), Mr. Clegg also served as
the Chairman and CEO of JBS Investment Banking, Ltd., which provides investment
management and consulting services to businesses and formerly provided services
to the Company through an Administrative Services Agreement.  In 1979, he formed
Empery Corporation, an operator of businesses in the cable television and
printing industries, and held the offices of Chairman, President and CEO during
his tenure (1979-1993).  In addition, Mr. Clegg served as Chairman and CEO of
TVC, Inc. (1983-1993), a distributor of cable television components; and Design
Mark Industries (1988-1993), a manufacturer of electronic senswitches.  Mr.
Clegg has also served on the board of directors of Ferguson International
Holdings, PLC, a United Kingdom company, from March 1990 to April 1991; and was
Chairman and CEO of Globe Ticket and Label Company from December 1984 to
February 1991.

John R. Frock.  Mr. Frock was named Executive Vice President - Corporate
Development on August 1, 1994.  Mr. Frock was elected to the Board of Directors
of the Company on May 29, 1992. In March 1992, Mr. Frock became the President
and Chief Operating Officer of JBS Investment Banking, Ltd., which provided
investment management and consulting services to businesses (which

                                       10
<PAGE>
 
included Nobel). During the past five years, Mr. Frock also served as the
Chairman and Chief Executive Officer of Avant Garde Enterprises, Ltd.; President
and Chief Operating Officer of SBF Communications Graphics, a business forms
printer located in Philadelphia, Pennsylvania; President of Globe Ticket and
Label Company; and President of the Graphics Group of Empery Corporation.

B. Robin Eglin.  Mr. Eglin joined the Company as Vice President - Real Estate
Development in April 1995 and was named Executive Vice President in September
1998.  Mr. Eglin was formerly Vice President of Carefree Learning Centers, Inc.
and Keystone Real Estate Development Company, Inc., wholly-owned for-profit
subsidiaries of Pennsylvania Blue Shield, where he was in charge of all real
estate, finance and accounting activities.  Mr. Eglin joined Carefree in 1989.

William E. Bailey.  Mr. Bailey joined the Company as Vice President and Chief
Financial Officer in January 1998.  Prior to joining the Company, Mr. Bailey was
Vice President / Controller for KinderCare Learning Centers, Inc. (a national
child care company) from 1993 to 1997, Corporate Controller from 1991 to 1993,
and Director of Planning and Analysis from June 1989 to October 1991.

Yvonne DeAngelo.  Ms. DeAngelo was appointed Vice President - Finance and
Administration in December 1995.  She had served as Controller since March 1989.
Ms. DeAngelo has also served as Secretary since May 1992.  Before joining Nobel
Education Dynamics, Inc., she served as Senior Auditor for Coopers and Lybrand
from 1986 to 1989.

Emily Louviere.  Ms. Louviere joined the Company as Vice President - Western
Operations in November 1997.  Ms. Louviere has over fourteen years of experience
in the education industry, including managing multi-site educational operations,
both preschool and elementary schools. Immediately prior to joining Nobel, from
November 1996 to November 1997, Ms. Louviere served as Regional Vice President
of Operations of Children's World.  From October 1982 to March 1995, Ms.
Louviere held various positions, including District Manager, Region Manager and
Western Divisional Vice President at KinderCare, where she managed up to 400
schools with over $185 million in aggregate revenue.

Barbara Z. Presseisen.  Dr. Presseisen was named Vice President - Education in
June 1996. Dr. Presseisen served in several positions over 24 years at Research
for Better Schools, one of the ten regional educational laboratories sponsored
by the U.S. Department of Education, located in Philadelphia, Pennsylvania.  In
her most recent capacity, Director of National Networking, she worked with
several major school districts on staff development and program improvement, as
well as coordinated training and conferences on curriculum and student
achievement with other laboratories and a number of professional associations
and universities. Dr. Presseisen has authored a number of books and research
reports, and has been an invited lecturer at many national and regional
programs.  Most recently, prior to joining Nobel, Dr. Presseisen consulted on
educational design and product development for the Walt Disney Company from
December 1995 to June 1996.

Barbara Sell.  Ms. Sell joined the Company in March 1997 as Vice President -
Eastern Operations. Ms. Sell has 23 years of experience in the early childhood
education field. Seventeen years of her career have been spent in operational
management, accomplishing such goals as development and operation of a corporate
child care division and managing an international child care division. Prior to
joining Nobel, Ms. Sell was employed by KinderCare Learning Centers, with whom
she was

                                       11
<PAGE>
 
employed from 1979 through April 1996. Ms. Sell joined KinderCare in 1979 and
held various positions, including District Manager, Region Manager and Vice
President of Operations for over 300 schools.

Barry S. Swirsky.  Mr. Swirsky has been the General Counsel of the Company since
September 1995 (serving as an officer since September 1997).  Mr. Swirsky was
previously engaged in private legal practice advising corporations and other
business entities, primarily in corporate and securities matters.  Mr. Swirsky
commenced his legal career as an associate with Reavis & McGrath in New York,
New York (since merged with Fulbright & Jaworski) (1981 to 1984), then was an
associate with Dechert Price & Rhoads in Philadelphia, Pennsylvania (1984 to
1992), and then counsel to Bray Berry Martin & Reardon and a shareholder of
Berry & Martin, P.C in Philadelphia, Pennsylvania (1992 to 1995).  Mr. Swirsky
received his J.D. from Harvard Law School in 1981.

ITEM 2.  PROPERTIES.

     At June 30, 1998, the Company operated 132 schools, preschools and child
care centers (hereafter, "schools") in 13 states. At September 18, 1998, the
number of schools totaled 138, located in 13 states.

     The Company's schools generally are located in suburban settings.  At
September 18, 1998, the Company's schools are geographically located as follows:
37 in California, 19 in North Carolina, 17 in Pennsylvania, 13 in Virginia, 9
each in Indiana and New Jersey, 7 in Illinois, 6 in Florida, 5 in Nevada, 3 in
Washington, 2 each in South Carolina and Oregon and 1 in Maryland.

     The Company owns the land and buildings for eight of the schools it
operates. All such properties are subject to mortgages on the real property. In
addition, one school is run by a majority-owned subsidiary and operated jointly
with a sponsoring employer. This subsidiary leases the buildings from a third
party and operates them under a ground lease from the employer. The remaining
schools are leased under long-term leases which are typically triple-net leases
requiring the Company to pay all applicable real estate taxes, utility expenses
and insurance costs. These leases usually contain inflation related rent
escalators.

     The Company owns the land and building of three properties in Florida and
Maine, two of which are leased.  The Company also from time to time purchases
undeveloped land for future development.  At June 30, 1998, the Company owned
one such property in North Carolina and one property in Northern Virginia.

     The Company leases 13,837 square feet of space for its corporate offices in
Media, Pennsylvania.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company is engaged in legal actions arising in the ordinary course of
its business. The Company believes that the ultimate outcome of all such matters
above will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The significance of these 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.

                                       12
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

  None.

                                       13
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

  The Company's common stock trades on The Nasdaq Stock Market under the symbol
NEDI. "The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic
securities market comprised of competing market makers whose trading is
supported by a communications network linking them to quotation dissemination,
trade reporting, and order execution systems.  This market also provides
specialized automation services for screen-based negotiations of transactions,
on-line comparison of transactions, and a range of information services tailored
to the needs of the securities industry, investors and issuers.  The Nasdaq
Stock Market consists of two distinct market tiers:  the Nasdaq National
Market/(R)/ (on which the Company's common stock trades) and the Nasdaq SmallCap
Market/SM/.  The Nasdaq Stock market is operated by The Nasdaq Stock Market,
Inc., a wholly-owned subsidiary of the National Association of Securities
Dealers, Inc.

  The table below sets forth the quarterly high and low sales prices for the
Company's common stock as reported by Nasdaq for each quarter during the period
from January 1, 1996 through June 30, 1998 and for the first quarter to date in
Fiscal 1999.

<TABLE>
<CAPTION>
                                               High      Low       
  <S>                                         <C>      <C>       
  1996                                                           
                                                                 
  First Quarter.............................  $17 5/8  $13 5/8    
  Second Quarter............................   18 1/4   13 3/4   
  Third Quarter.............................   15 1/4    9 1/4   
  Fourth Quarter............................   14        9 1/2   
                                               
  1997                                                           
                                                                 
  First Quarter.............................   12 5/8    7 7/8   
  Second Quarter............................   10 3/8    7 1/2   
  Third Quarter.............................    9 3/4    8 1/4   
  Fourth Quarter............................    9 7/16   4 1/2   
                                                                 
  Fiscal 1998                                                    
                                                                 
  First Quarter.............................    9 3/8    4 7/8   
  Second Quarter............................    9 3/8    7 7/8   
                                                                 
  Fiscal 1999                                                    
                                                                 
  First Quarter (as of September 17, 1998)..    9 3/4    5 7/8    
</TABLE>

HOLDERS

  At September 7, 1998, there were approximately 580 holders of record of shares
of common stock.

                                       14
<PAGE>
 
DIVIDEND POLICY

  The Company has never paid a dividend on its common stock and does not expect
to do so in the foreseeable future.  Although the payment of dividends is at the
discretion of the Board of Directors, the Company intends to retain its earnings
in order to finance its ongoing operations and to develop and expand its
business.  The Company's credit facility with its lenders prohibits the Company
from paying dividends on its common stock or making other cash distributions
without the lenders' consent.  Further, the Company's financing documents
relating to its private placement of its $10,000,000 Subordinated Note with
Allied Capital Corporation prohibit the Company from paying cash dividends on
its common stock without Allied's approval, and the Company's financing
documents relating to its private placement of the Series C Convertible
Preferred Stock to Edison Venture Fund II, L.P. prohibit the Company from paying
cash dividends on its common stock, unless the dividend is permitted under the
Company's bank agreement and the amount of the dividend is less than or equal to
50% of operating income less income tax.

                                       15
<PAGE>
 
ITEM 6.

                            SELECTED FINANCIAL DATA
                     (in thousands except per share data)

The following table sets forth selected historical financial data of the
Company. This data should be read in conjunction with the Company's Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
 
                                                SIX MONTHS ENDED                   FOR THE YEAR ENDED  DECEMBER 31,
                                                                        --------------------------------------------------------
OPERATING DATA                                   JUNE 30, 1998            1997          1996          1995      1994      1993
--------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                     <C>             <C>         <C>       <C>       <C>
Revenue                                              $ 48,995           $80,980           $58,909   $44,154   $34,372   $32,594
School operating expenses                              42,142            69,858            48,871    35,762    28,032    26,514
--------------------------------------------------------------------------------------------------------------------------------
School operating profit                                 6,853            11,122            10,038     8,392     6,340     6,080
New school development                                    501               400               207       146       129        29
General and administrative  expenses                    3,391             5,973             4,190     3,396     2,696     2,555
Restructuring expense                                       -             2,960                 -         -         -         -
Litigation expense                                          -                 -                 -       500       200         -
--------------------------------------------------------------------------------------------------------------------------------
Operating income                                        2,961             1,789             5,641     4,350     3,315     3,496
Interest expense                                        1,044             2,047             2,004     1,840     1,223     1,718
Other (income) expense                                   (102)             (158)             (482)     (126)      107       (39)
Minority interest                                          35                86                94        86        83        88
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                       1,984              (186)            4,025     2,550     1,902     1,729
Income tax (benefit) expense                              833               250             1,562    (1,356)     (438)       21
--------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item                    1,151              (436)            2,463     3,906     2,340     1,708
Extraordinary item                                          -               449                 -        62         -         -
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                       1,151              (885)            2,463     3,844     2,340     1,708
Preferred dividends                                        51               102               109       184       199       107
--------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders          $  1,100           $  (987)          $ 2,354   $ 3,660   $ 2,141   $ 1,601
================================================================================================================================
EBITDA
     (earnings before interest, taxes,
     depreciation and amortization expense)          $  5,118           $ 5,099           $ 8,240   $ 5,902   $ 4,188   $ 4,591
--------------------------------------------------------------------------------------------------------------------------------

BASIC EARNINGS PER SHARE (POST SPLIT):
Net income (loss) before extraordinary item          $   0.18           $ (0.09)            $0.42   $  0.79     $0.57     $0.41
Extraordinary item                                          -             (0.07)                -     (0.01)        -         -
Net income (loss)                                    $   0.18           $ (0.16)            $0.42   $  0.78     $0.57     $0.41
 
DILUTIVE EARNINGS PER SHARE (POST SPLIT):
Net income (loss) before extraordinary item          $   0.15           $ (0.09)            $0.34   $  0.64     $0.46     $0.38
Extraordinary item                                          -             (0.07)                -     (0.01)        -         -
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                    $   0.15           $ (0.16)            $0.34   $  0.63     $0.46     $0.38
================================================================================================================================ 

BALANCE SHEET DATA:
Working Capital (deficit)                            $(10,221)          $(7,946)          $(1,351)  $  (831)  $(4,197)  $(3,114)
Cost in excess of net assets acquired                  41,753            37,439            25,601    17,274     8,888     8,923
Total assets                                           73,623            74,398            56,833    44,937    23,234    22,613
Short-term debt and
Current portion of long-term debt                       2,031             2,793             3,448     1,371     1,768       905
Long-term debt                                         26,477            28,470            14,226    20,272     7,846    12,545
Stockholders' equity (deficit)                         32,736            31,636            32,323    16,121     8,298     3,732
</TABLE>

                                       16
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS

RESULTS OF OPERATIONS

Six months ended June 30, 1998 ("1998 period") compared to the six months ended
June 30, 1997 ("1997 period")

  On December 19, 1997, the Company changed its fiscal year end to the end of
June.  Accordingly, the Company's transition period, which ended June 30, 1998,
includes the six months from January 1 to June 30, 1998.  To facilitate a
discussion of the Company's operating performance for the 1998 period, the
corresponding period in 1997 is presented.

  During the twelve months subsequent to June 30, 1997, the Company acquired the
assets or stock of companies owning eight schools.  These acquisitions included:
two preschools and one elementary school in Las Vegas, Nevada; two elementary
and one preschool located in Seattle, Washington; one elementary school in
Portland, Oregon and one elementary school in North Lauderdale, Florida.  In
addition, the Company opened 12 new schools, of which six were preschools and
six were elementary schools.  The Company also closed nine schools whose leases
expired.

  Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the 1998 and 1997 periods into three
categories: Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands).

<TABLE>
<CAPTION>
                                   SIX MONTHS      % OF     SIX MONTHS     % OF     1998-1997
                                 JUNE 30, 1998   REVENUE   JUNE 30,1997  REVENUE   VARIANCE ($)
================================================================================================
<S>                              <C>             <C>       <C>           <C>       <C>
BASELINE SCHOOLS (1)
Revenues                               $41,113     100.0%       $28,517    100.0%   $   12,596
Operating Profit                       $ 7,534      18.3%       $ 5,491     19.3%   $    2,043
------------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED
WITHIN THE YEAR (2)
Revenue                                  3,263     100.0%         7,491    100.0%       (4,228)
Operating Profit                           460      14.1%         1,551     20.7%      ( 1,091)
------------------------------------------------------------------------------------------------
NEW SCHOOL
DEVELOPMENT (3)
Revenues                                 4,619     100.0%         3,656    100.0%          963
Operating Profit (Loss)                   (396)    (8.6)%           261      7.1%         (657)
------------------------------------------------------------------------------------------------
Total Revenues                         $48,995     100.0%       $39,664    100.0%   $    9,331
================================================================================================
School Operating Profit
Before Amortization
of Goodwill                              7,598      15.5%         7,303     18.4%          295
================================================================================================
Less Amortization of Goodwill              745       1.5%           517      1.3%          228
School Operating Profit                $ 6,853      14.0%       $ 6,786     17.1%   $       67
================================================================================================
</TABLE>

(1)  Baseline Schools is defined as all schools, except schools included for the
     year in Schools Acquired Within the Year or New School Development (see
     footnotes (2) and (3). (Schools which were acquired in 1997 are included in
     "Baseline Schools" for 1998 period results and "Schools Acquired Within the
     Year" for 1997period results. Schools which were first opened in 1996 are
     included in "Baseline Schools" for 1998 period results and "New
     Development" for 1997 period results.)

(2)  Schools Acquired Within the Year is defined as (i) schools acquired during
     the 12 months ended June 30, 1997 for 1997 period results and (ii) schools
     acquired during the 12 months ended June 30, 1998 for 1998 period results.

(3)  New School Development is defined as schools which have not been opened for
     two full fiscal years (i.e., schools opened between July 1, 1995 and June
     30, 1997 for 1997 period results and schools opened between July 1, 1996
     and June 30, 1998 for 1998 period results).

  Revenues in the Baseline Schools increased $12,596,000 or 44.2% from the 1997
to the 1998 period. The increase is a result of the combination of several
factors, including (1) an increase in revenues of $9,440,000 related to
acquisitions completed in fiscal 1997, (2) a $2,803,000 increase related to New
Schools opened in fiscal 1996, and (3) an increase of revenues of $353,000 in
all other schools. Operating profit of the Baseline Schools increased $2,043,000
as a result of (1) a $1,994,000 increase in operating profit related to the
schools acquired in fiscal 1997, (2) a $213,000 increase related to the
operating profit of the fiscal 1996 New Schools offset by (3) a $164,000
decrease related to the decrease in all other schools.

  The Company acquired eight schools during the 12 months ended June 30, 1998
with total revenues and school operating profits of $3,263,000 and $460,000
respectively for the 1998 period. The Company acquired thirteen schools during
the 12 months ended June 30, 1997 with total revenues of $7,491,000 and
operating profit of $1,551,000 during the 1997 period. The operating profit
margins of schools included in the 1998 period was 14.1% or 6.6% below the
schools included in the 1997 period. One of the eight schools included in the
1998 period was a new school that opened subsequent to the acquisition. The
start-up losses associated with opening new schools contributed to this decline
in operating margin.

  Revenues related to the New Schools opened during the period between July 1,
1996 and June 30, 1998 totaled $4,619,000 in the 1998 period or an increase of
$963,000 or 26.3% compared to the schools opened during the period between July
1, 1995 and June 30, 1997 in the 1997 period.  During the 12 months ended June
30, 1998, the Company opened 12 schools, five of which were elementary schools,
and during the 12 months ended June 30, 1997, the Company opened eight schools,
three of which were elementary schools.  Operating losses totaled $396,000 in
the 1998 period compared to operating income of $261,000 in the 1997 period.
The increase in the losses is a result of the mix in the type of schools opened
and the timing of the openings.  Elementary and middle schools take longer to
become profitable compared to preschools.  Elementary schools typically take 24
to 36 months to become profitable compared to 18 to 24 months in a preschool.

  Overall, in the 1998 period, the Company's total revenues increased $9,331,000
or 23.5% and school operating profits increased $67,000, compared to the 1997
period.  Meanwhile, school profit margins (after goodwill) decreased from 17.1%
in 1996 to 14.0% in the 1997 period as explained above.

  New school development costs increased $403,000 in the 1998 period primarily
because of the increase in the number of schools opened.  During the 1998
period, the Company opened four elementary and one preschool as compared to two
preschools in the 1997 period.  Elementary schools typically have higher start-
up costs than preschools.  start-up costs average $225,000 for an elementary
school and $125,000 for a preschool.  start-up and development costs include
personnel, marketing and supplies.

  General and administrative expenses increased $574,000 or 20.4% to $3,391,000
in the 1998 period. The increase is attributable to the increase in the
Company's infrastructure to support its revenue growth. 

                                       17
<PAGE>
 
During 1997 and 1998, the Company added a Vice President of Marketing, a Human
Resources Manager, a Vice President of Eastern Operations, a Vice President of
Western Operations, a Summer Camp Manager, a Training Manager, several Executive
Directors and other support staff. As a percentage of revenue, general and
administrative expenses decreased from 7.1% of revenues in the 1997 period to
6.9% of revenues in the 1998 period. Management is continuing to build the
foundation needed for growth of the Company and anticipates maintaining the
current level of such general and administrative expenses as a percent of
revenues.

  As a result of the factors mentioned above, operating income decreased
$910,000 or 23.5% to $2,961,000 for the 1998 period as compared to the 1997
period.

  EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization), totaled $5,118,000 for the 1998 period which was $434,000 or 8.2%
below the 1997 period.  As a percentage of revenue, EBITDA for the 1998 period
equaled 10.4% versus  13.3% for the 1997 period.  EBITDA is not a measure of
performance under generally accepted accounting principals, however the Company
and the investment community consider it an important indicator.

  Interest expense increased by $200,000 or 23.4% for the 1998 period compared
to the 1997 period. The increase in interest expense is a result of increased
borrowings under the Company's senior debt facility and subordinated debt issued
in connection with the Company's acquisitions.

  The provision for income taxes of $833,000 for the 1998 period was in excess
of amounts computed by applying statutory federal income tax rates to income
before income taxes due primarily to non-deductible goodwill incurred with
acquisitions for stock and state income taxes. For acquisitions of stock of a
company, purchase accounting applies for accounting purposes; but, for tax
purposes, the Company inherits the historic basis of the purchased company in
its assets, without any goodwill.

  The fiscal year ended December 31, 1997 ("1997") compared to the fiscal year
ended December 31, 1996 ("1996")

  As of December 31, 1996, the Company operated 107 elementary schools,
preschools and child care centers (sometimes collectively referred to herein as
"schools"). At December 31, 1997, the Company operated 129 schools and owned a
20% interest in one elementary school.

  During 1997, the Company acquired the assets or stock of companies owning 17
schools.  These acquisitions include: six preschools in Florida and a 20%
interest in an elementary school; two preschools and one elementary school in
Las Vegas, Nevada and two elementary and three preschools located in San Jose,
California.  Also considered for the purposes hereof as being acquired in 1997
are one elementary school in Southern California and a preschool and elementary
school in Seattle, Washington acquired at the end of December 1996.  In
addition, the Company opened 12 new schools in 1997 of which eight were
preschools and four were elementary schools (two of which were replacement
schools).  During 1997, the Company closed seven schools whose leases expired.

  Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for the years ended 1997 and 1996 into three
categories:  Baseline Schools, Schools Acquired Within the Year and New School
Development (dollars in thousands).

<TABLE>
<CAPTION>
                             12 MONTHS       % OF          12 MONTHS        % OF           1997-1996
                                1997       REVENUE            1996        REVENUE         VARIANCE ($)
=========================================================================================================
<S>                          <C>           <C>             <C>            <C>             <C>
BASELINE SCHOOLS (1)
Revenues                       $59,567        100.0%        $49,977        100.0%          $    9,590                             
Operating Profit               $10,176         17.1%        $ 9,312         18.6%          $      864                             
---------------------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED                                                                                                                  
WITHIN THE YEAR (2)                                                                                                               
Revenue                         14,232        100.0%          3,437        100.0%              10,795                             
Operating Profit                 2,345         16.5%            775         22.6%               1,570                             
---------------------------------------------------------------------------------------------------------
NEW SCHOOL                                                                                                                        
DEVELOPMENT (3)                                                                                                                   
Revenues                         7,181        100.0%          5,495        100.0%               1,686                             
Operating Profit (Loss)           (410)       (5.7)%            586         10.7%                (996)                            
--------------------------------------------------------------------------------------------------------- 
Total Revenues                 $80,980        100.0%        $58,909        100.0%          $   22,071   
=========================================================================================================                          
School Operating Profit                                                                                                           
Before Amortization                                                                                                               
of Goodwill                     12,111         15.0%         10,673         18.1%               1,438   
=========================================================================================================                          
Less Amortization                                                                                                                 
of Goodwill                       (989)         1.2%           (635)         1.1%                (354)                             
School Operating Profit        $11,122         13.7%        $10,038         17.0%          $    1,084                              
=========================================================================================================
</TABLE> 

 
(1)  Baseline Schools is defined as all schools, except schools included for the
     year in Schools Acquired Within the Year or New School Development (see
     footnotes (2) and (3). (Schools which were acquired in 1996 are included in
     "Baseline Schools" for 1997 results and "Schools Acquired Within the Year"
     for 1996 results. Schools which were first opened in 1995 are included in
     "Baseline Schools" for 1997 results and "New Development" for 1996
     results.)

(2)  Schools Acquired Within the Year is defined as (i) schools acquired in 1996
     for 1996 results and (ii) schools acquired in 1997 for 1997 results.

(3)  New School Development is defined as schools which have not been opened for
     two full fiscal years (i.e., schools opened in 1995 or 1996 for 1996
     results and schools opened in 1996 or 1997 for 1997 results.)

  Revenues in the Baseline Schools increased $9,590,000 or 19.2% from 1996 to
1997.  The increase is a result of the combination of several factors, including
(1) an increase in revenues of $6,173,000 related to acquisitions completed in
1996, (2) a $4,636,000 increase related to New Schools opened in 1995, (3) an
increase of revenues of $643,000 in schools other than Merryhill and South
Carolina, offset by (4) a decrease in Merryhill enrollment resulting in a
$1,003,000 decrease in revenues and (5) a decrease of $859,000 related to the
revenues of six schools closed in South Carolina in 1996.  Operating profit of
the Baseline Schools increased $864,000 or 9.3% as a result of (1) a $1,383,000
increase in operating profit related to the schools acquired in 1996, (2) a
$850,000 increase related to the operating profit of the 1995 New Schools offset
by (3) a $949,000 decrease related to the decrease in the Merryhill schools and
by (4) a $420,000 decrease in the remaining schools.

  The Company experienced both a decline in enrollment and operating profit of
the Merryhill Schools located in California. The Company believes that the
decrease is primarily due to the effect of the California public school
initiative to decrease student/teacher class size ratios in Kindergarten to
third grade classes and a weak summer program. The public school initiative
affected Merryhill in several ways: (1) teacher turnover increased, (2)
enrollment decreased and (3) with efforts to attract replacement teachers and
retain existing teachers, average teacher salary increased. In addition to the
effect of the initiative, rent expense in some of the Merryhill Schools is
increasing because of recently built replacement schools, which expanded
capacity. The Company has taken several steps to improve the situation. In the
fourth quarter of 1997, the Company hired a Vice President of Western Operations
and a Summer Camp Manager. The Company restructured operations management by
adding experienced Executive Directors and other management personnel and
reducing responsibility of each Executive Director to a maximum of ten schools.

  In 1997, the Company acquired seventeen schools with total revenues and school
operating profits of $14,232,000 and $2,345,000, respectively.  

                                       18
<PAGE>
 
This is an increase in acquisition activity totaling $10,795,000 in revenues and
$1,570,000 in operating profit compared to schools acquired in 1996. In 1996,
the Company acquired seven schools with revenue of $3,437,000 and operating
profit of $775,000. The operating profit margins of schools acquired decreased
6.1% from 22.6% in 1996 to 16.5% in 1997. The decrease in the margins of the
schools acquired is related primarily to the lack of summer programs at some of
these elementary schools. The elementary schools acquired in 1997 did not
typically have strong summer programs. The Company initiated summer programs,
but it takes time for enrollment to build.

  Revenues related to the New Schools built in 1996 and 1997 totaled $7,181,000
in 1997 or an increase of $1,686,000 or 30.7% compared to 1995 and 1996. In
1997, the Company built 12 schools and in 1996 the Company built seven schools.
Operating loss totaled $410,000 in 1997 compared to operating income of $586,000
in 1996. The increase in the loss is a result of the mix in the type of schools
opened and the timing of the openings. Elementary and middle schools take longer
to become profitable compared to preschools. In 1997, the Company opened four
elementary/middle schools as compared to three in 1996. Elementary schools
typically take 24 to 36 months to become profitable compared to 18 to 24 months
in a preschool.

  Overall, in 1997 the Company's total revenues increased $22,071,000 or 37.5%
and school operating profits increased $1,084,000 compared to 1996. Meanwhile,
school operating profit margins (after goodwill) decreased from 17.0% in 1996 to
13.7% in 1997 as explained above.

  New School development costs nearly doubled, increasing $193,000 or 93% to
$401,000 in 1997, primarily because of the increase in the number of schools
opened. The Company opened eight preschools and four elementary/middle schools
for a total of twelve schools as compared to four preschools and three
elementary/middle schools for a total of seven in 1996.  Additionally,
elementary/middle schools typically have higher start-up costs than preschools.
start-up costs average $225,000 for an elementary school and $125,000 for a
preschool.  start-up and development costs include personnel, marketing and
supplies.

  General and administrative expenses increased $1,783,000 or 42.6% to
$5,973,000 in 1997. The increase is attributable to the increase in the
Company's infrastructure to support its revenue growth. In 1997, the Company
added a Chief Financial Officer, a Vice President of Marketing, a Human
Resources Manager, a Vice President of Eastern Operations, a Vice President of
Western Operations, a Summer Camp Manager, a Training Manager, several Executive
Directors and other support staff. In addition, the Company selected and
launched an Education Advisory board to oversee and assist in curriculum
development. As a percentage of revenue, general and administrative expenses
increased only slightly from 7.1% of revenues in 1996 to 7.4% of revenues in
1997. Management is continuing to build the foundation needed for growth of the
Company and anticipates maintaining the current level of such general and
administrative expenses as a percent of revenues.

  In 1997, the Company recorded a restructuring charge totaling $2,960,000
related to a combination of factors. Of the $2,960,000, $2,000,000 was related
to the write-off of the goodwill recorded in connection with the acquisition of
the nine schools located in Indianapolis, $789,000 was related to the write down
of the book value and an accrual for lease obligations of several non-performing
schools held for sale or that are scheduled to close when their leases expire,
and $171,000 is related to the restructuring of management that took place in
1997 and early 1998. The schools in Indianapolis are currently for sale.

  As a result of the factors mentioned above, operating income decreased
$3,852,000 or 68% to $1,789,000 in 1997 compared to the same period in 1996.
Adjusted operating income, defined as operating income before the restructuring
charge, totaled $4,749,000 in 1997, which represents a decrease of $892,000 or
15.8% compared to the prior year.

  In 1997 EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization), totaled $5,099,000 which was $3,140,000 or 38%
below the prior year. As a percentage of revenue, EBITDA for 1997 equaled 6.3%
versus 14.0% for 1996. Adjusted EBITDA (defined as EBITDA before the
restructuring charge) equaled $8,059,000 which was $180,000 or 2% below
$8,239,000 for 1996. As a percentage of revenues, adjusted EBITDA equaled 10.0%
for 1997 as compared to 13.9% for the prior year. The decrease as a percentage
of revenues is a result of lower operating margins and higher general and
administrative expense. EBITDA is not a measure of performance under generally
accepted accounting principles, however the Company and the investment community
consider it an important indicator.

  Interest expense increased slightly by $42,000 or 2.1% for 1997 compared to
1996. While the principal amount of indebtedness outstanding under the Company's
senior loan facilities increased in the fourth quarter, this increase was offset
by a decrease in the interest rate, as a result of amendments to the loan
documents governing the Company's principal debt facilities.  Debt increased as
a result of the acquisition of the Las Vegas schools and new school development
which occurred during 1997.  Cash raised through the private placement of common
stock was used in the first half of 1997 to complete the acquisitions of Another
Generation and Rainbow Bridge schools.

  Other income decreased $324,000 or 67% for 1997 totaling $158,000 compared to
1996 of $483,000.  The decrease is primarily related to the decrease in interest
income.  During 1996, the Company raised $11,600,000 of net proceeds through a
private issuance of common stock.  The Company earned interest on these funds
during the second half of 1996.  The cash was used for acquisitions and the
building of new schools during the later part of 1996 and early 1997.

  The provision for income taxes totaled $250,000 for 1997. The Company was in a
pretax loss position. However, the Company recorded income taxes, primarily
relating to non-deductible goodwill amortization and state and local taxes. (In
the acquisition of the stock of a company, purchase accounting applies for
accounting purposes; but, for tax purposes, the Company inherits the historic
basis of the purchased company in its assets, without any good will.) The
adjusted income tax provision (income tax before the restructuring charge)
equaled $1,165,000 which represents a 42% tax rate. This represented a decrease
of $397,000 or 25% compared to $1,562,000 for 1996. The tax rate in 1996 was
39%.

  In 1997, the Company recorded a $449,000 extraordinary expense.  In December
1997, the Company refinanced its principal debt facility which combined the Term
Loans with scheduled principal payments and the existing Revolving Line of
Credit into Revolving Credit and Term Facilities which extends principal payment
to begin in the year 2001.  The change in the terms enables the Company to use
cash from operations and the unused portion of the line for growth through
acquisitions and New School development.  Because the new loan facility terms
vary significantly from the existing credit facility, the Company was required
to write off the deferred financing costs which were being amortized over the
term of the original loan.

  In the fourth quarter of 1997, the Company adopted FAS No. 128 "Earnings Per
Share" which changed the earnings per share calculation.  The 

                                       19
<PAGE>
 
Company restated the prior year calculation as required. Basic Earnings Per
Share before the Extraordinary Item equaled ($0.09) for 1997 as compared to
$0.42 for 1996, which resulted in a $0.51 decrease per share. Basic Earnings
(Loss) per Share equaled ($0.16) for 1997 as compared to $0.42 for 1996 or a
$0.58 decline. Adjusted Basic Earnings per Share (before the restructuring
charge and extraordinary item) equaled $0.25 for 1997 as compared to $0.42 for
1996 which represents a $0.17 decrease. Dilutive Earnings (Loss) per Share
before the Extraordinary Item equaled ($0.09) for 1997 as compared to $0.34 for
1996, or a $0.43 decrease. Adjusted Dilutive Earnings per Share equaled $0.22 in
1997 as compared to $0.34 in 1996 or a $0.12 per share decrease.

  The fiscal year ended December 31, 1996 ("1996") compared to December 31, 1995
("1995") 

  As of December 31, 1995 the Company operated 101 schools. At December 31, 
1996, the Company operated 107 schools.

  During 1996, the Company acquired the assets or stock of companies owning
seven schools. These acquisitions included: five preschools in Virginia and two
preschools in North Carolina. (In late December 1996, the Company also acquired
two schools located in Seattle, Washington and one school in Coto de Caza,
California; however, for purposes hereof, these are treated as being acquired in
1997.) In addition, during 1996, the Company opened seven new schools, two of
which were replacement schools. Leases of six non-core schools located in South
Carolina expired and were not renewed, as planned in the 1992 restructuring of
the Company.

  Following is a chart which breaks down revenues, school operating profit and
school operating profit margins for 1996 and 1995 into three categories,
Baseline Schools, Schools Acquired Within the Year and New School Development
(dollars in thousands).

<TABLE>
<CAPTION>
                                  12 MONTHS      % OF     12 MONTHS     % OF     1996-1995
                                 ENDED  1996   REVENUE   ENDED 1995   REVENUE   VARIANCE ($)
=============================================================================================
<S>                              <C>           <C>       <C>          <C>       <C>
BASELINE SCHOOLS (1)
Revenues                             $49,977     100.0%     $32,383     100.0%   $   17,594
Operating Profit                     $ 9,312      18.6%     $ 7,010      21.6%        2,302
---------------------------------------------------------------------------------------------
SCHOOLS ACQUIRED
WITHIN THE YEAR (2)
Revenue                                3,437     100.0%       7,102     100.0%       (3,665)
Operating Profit                         775      22.6%         855      12.1%          (80)
---------------------------------------------------------------------------------------------
NEW SCHOOL DEVELOPMENT (3)
Revenues                               5,495     100.0%       4,672     100.0%          823
Operating Profit                         586      10.7%         859      18.4%         (273)
---------------------------------------------------------------------------------------------
Total Revenues                       $58,909     100.0%     $44,157     100.0%   $   14,752
=============================================================================================
School Operating Profit
Before Amortization
of Goodwill                           10,673      18.1%       8,724      19.8%        1,949
=============================================================================================
Less Amortization of Goodwill           (635)    (1.1)%        (332)    (0.8)%         (303)
School Operating Profit              $10,038      17.0%     $ 8,392      19.0%   $    1,646
=============================================================================================
</TABLE> 

(1)  Baseline Schools is defined as all schools, except schools included for the
     year in Schools Acquired Within the Year or New School Development (see
     footnotes (2) and (3). (Schools which were acquired in 1995 are included in
     "Baseline Schools" for 1996 results and "Schools Acquired Within the Year"
     for 1995 results. Schools which were first opened in 1994 are included in
     "Baseline Schools" for 1996 results and "New Development" for 1995
     results.)

(2)  Schools Acquired Within the Year is defined as (i) schools acquired in 1995
     for 1995 results and (ii) schools acquired in 1996 for 1996 results.

(3)  New School Development is defined as schools which have not been opened for
     two full fiscal years (i.e., schools opened in 1995 or 1996, for 1996
     results and (ii) schools opened in 1994 or 1995, for 1995 results).

  Revenues of the Baseline Schools increased $17,594,000 or 54.3% from 1995 to
1996.  The increase is a result of several factors including (1) revenues
related to the 1995 acquisition totaling $14,400,000, (2) revenues related to
the 1994 New Schools totaling $3,142,000 and (3) a slight increase in the
remaining schools of $52,000.  The increase in the remaining schools was the
result of a combination of the divestiture of six South Carolina schools in 1996
and one Florida school in 1995 creating a $712,000 revenue decrease offset by a
$725,000 increase in the remaining schools which was a result of enrollment and
tuition increases.  The operating profit of the Baseline Schools increased
$2,302,000 or 32.8% for the year ended December 31, 1996 compared to 1995.  The
increase is a result of (1) $1,635,000 related to the acquisitions which
occurred in 1995, (2) $707,000 is related to the operating profit of the New
Schools opened in 1994 and (3) offset by a slight decrease of $40,000 which was
related to the remaining schools.  The decrease in the remaining schools
operating profit is a result of an increase in personnel costs.

  The operating profit margin of the Baseline Schools decreased 3.0% from 21.6%
for 1995 to 18.6% for 1996.  The decrease in the operating margins is the result
of losses associated with the 1995 acquisition of certain schools in the
Indianapolis area, and lower margins of schools acquired in the 1995 acquisition
of Educo, Inc.  The lower margins in the acquisitions is a result primarily of
lower than expected summer performance in the Educo schools and a slower than
anticipated turnaround of the Indianapolis schools.

  In 1996, the Company acquired seven schools with total revenues of $3,437,000
and operating profit of $775,000 for 1996.  Five of the seven schools (the
Virginia acquisition) were acquired in February 1996 and two of the schools
located in North Carolina were acquired in November of 1996.  In 1995, the
Company acquired 25 schools with revenues of $7,102,000 and operating profit of
$855,000 for 1995.  The Company acquired six Pennsylvania schools in March 1995
and acquired the ten Educo schools and nine Indianapolis schools in September
1995.  The operating margin of the schools acquired in 1996 equaled 22.6% as
compared to the operating margins of the schools acquired in 1995 which equaled
12.1%. The 1995 acquisitions include the Indianapolis area schools which
operated at a loss and the Educo schools which operated at a 12% operating
margin.  When making acquisitions, the Company takes steps to increase operating
margins of Acquired Schools over a 12 to 36 month period as it implements cost
controls, systems and marketing strategies.

  In 1996 and 1995, the Company opened 14 new schools with revenues of
$5,495,000 and operating profit of $586,000 for 1996. In 1994 and 1995, the
Company opened 11 new schools with revenues of $4,672,000 and operating profit
of $859,000 for 1995. The operating margins in 1996 of the schools opened in
1996 and 1995 equaled 10.7%. The operating margins in 1995 of the schools opened
in 1995 and 1994 schools equaled 18.4%. The variance in the margins is a result
of the mix and timing of schools opened. In 1996, the Company opened three
elementary/middle schools and four preschools. In 1995 the Company opened seven
preschools, and in 1994 the Company opened four preschools. Generally, the
Company experiences smaller losses in opening preschools as compared to
elementary/middle schools and is able to reach profitability in the preschool in
six to nine months as compared to elementary/middle schools which can take 12 to
36 months to become profitable.

  Overall, in 1996 the Company's total revenues increased $14,752,000 and
operating profits increased $1,646,000, compared to 1995.  Meanwhile, school
operating profit margins decreased from 19.0% in 1995 to 17.0% in 1996, as
explained above.

                                       20
<PAGE>
 
  General and administrative expenses increased $794,000 or 23% to $4,190,000
for 1996; however, as a percentage of revenue, general and administrative
expenses decreased from 7.7% of revenues in 1995 to 7.1% of revenues in 1996.
The Company enjoyed efficiencies from its growth through acquisitions.
Management is continuing to build the foundation needed for growth of the
Company and anticipates maintaining the current level of such general and
administrative expenses as a percent of revenues.

  Operating income increased $1,291,000 or 29% to $5,641,000 for 1996.  The
increase is a result primarily of the increase in school operating profit.  In
1995, the Company recorded $500,000 in litigation expense related to a claim by
former officers of the Company which was settled.  As a percent of revenue,
operating income decreased slightly from 9.8% for 1995 to 9.6% for 1996, which
is a result of the decrease in school operating profit margins described above.

  Another key measure of the Company's cash generating ability is its EBITDA
(earnings before interest, taxes, depreciation and amortization expenses).
EBITDA increased to $8,239,000 in 1996 from $5,902,000 in 1995 which was a 40%
increase.  EBITDA is not a measure of performance, under generally accepted
accounting principles, however the Company and the investment community consider
it an important indicator.

  Interest expense increased $165,000 or 9% to $2,004,000 for 1996, which was
due to increased debt relating to the acquisitions and new school development.

  Other income increased $357,000 or more than 250% to $483,000, which was due
to interest income earned on the proceeds of the private placement of
approximately $11,600,000 in March 1996.

  Income tax expense increased $2,917,000 to $1,562,000 for 1996. The increase
in taxes was due to the Company being fully taxed in 1996 as compared to
recording a tax benefit in 1995 of $2,105,000. This credit was based upon the
adoption of SFAS 109 "Accounting for Income Taxes" in 1992 and the subsequent
reduction of the Company's valuation allowance due to its more recent historical
profitable operating performance and its projections for the future.
Consequently, 1996 was the first year the Company was fully taxable. The Company
anticipates this trend to continue.

  Net income decreased $1,381,000 or 36% to $2,463,000 for 1996 as a result of
the Company reversing the valuation allowance in 1995 and recording taxes in
1996 at a 38.8% rate as described above. If pretax net income in 1995 were taxed
at an effective rate of 38.8%, on a pro forma basis, net income would have
increased $964,000 or 64%.

LIQUIDITY AND CAPITAL RESOURCES

  Management is continuing to pursue a three-pronged growth strategy for the
Company, which includes (1) internal growth of existing schools through the
expansion of certain facilities, (2) new school development in both existing and
new markets and (3) strategic acquisitions. The Company's principal sources of
liquidity are (1) cash flow generated from operations, (2) future borrowings
under the Company's $25,000,000 revolving line of credit, (3) the use of site
developers to build schools and lease them to the Company, and (4) issuance of
subordinated indebtedness or shares of common stock to sellers in acquisition
transactions.

  The Company anticipates that its existing available principal credit
facilities, cash generated from operations, and continued support of site
developers to build and lease schools will be sufficient to satisfy working
capital needs, capital expenditures and renovations and the building of new
schools in the near term future.

  The Company continues to look for quality acquisition candidates.  The Company
identifies growth markets through both extensive demographic studies and an
analysis of the existing educational systems in the area.  The Company seeks to
grow through a cluster approach whereby several preschools feed into an
elementary school.  In order for the Company to continue its acquisition
strategy, the Company will seek additional funds through debt or equity
financing.

  In 1997, the Company amended its credit agreement three times, the most
significant of which occurred in December with the execution of the Seventh
Amendment and Modification to the Loan and Security Agreement. These amendments:
(1) increased the Company's borrowing capacity to $25,000,000, (2) changed the
prior fixed interest rates (applicable to term loans) to variable rates, (3)
provided that all revolving debt will convert to a term loan in January 2001,
(4) extended terms for an additional five years for the prior term loan and six
years for the prior revolving line of credit and (5) increased the number of
permitted new school construction projects.  Two facilities are established
under the Seventh Amendment: a $3,000,000 facility (Revolving and Term Facility
A) and a $22,000,000 facility (Revolving and Term Facility B).  Amounts
outstanding under term loans at the time of the restructuring were treated as
initial outstanding balances under the new Revolving and Term Facilities.  Under
the new arrangements, no principal payments are required until January 1, 2001.
Commencing on January 1, 2001, the Company must pay outstanding principal
balance of the Revolving and Term Facilities in 60 equal monthly installments.
The Company may elect to convert to a term loan portions of the Revolving and
Term Facility B in increments of $2,500,000.  Such term loans would be payable
over sixty months.

  By postponing the dates of required principal payments under the Company's
loans, the Seventh Amendment significantly improved the Company's cash flow
requirements under these loans.  The restructuring allows the Company greater
flexibility in managing its cash flow and allows greater ability to use
available funds to grow the Company.

  At June 30, 1998 and December 31, 1997, the principal amounts outstanding
under the Revolving and Term Facility B were $19,426,000 and $21,576,000, and no
amounts were outstanding under the Revolving and Term Facility A.

  In July 1998, the Company issued a $10,000,000 senior subordinated note to
Allied Capital Corporation ("Note").  The net proceeds were used to reduce the
Company's Revolving and Term Facility A outstanding balance. The Note bears
interest at 10%.  The Note matures in two installments of principal:  $5,000,000
in 2004 and $5,000,000 in 2005. In connection with the financing transaction,
the Company also issued to Allied Capital Corporation warrants to acquire
531,255 shares of the Company's common stock at $8.5625 per share.  The Company
recorded a debt discount and allocated $900,000 of the proceeds of the
transaction to the value of the warrants.  This debt discount is being amortized
to interest expense over the term of the Note.

  Total cash and cash equivalents decreased $2,197,000 from $2,605,000 at
December 31, 1997 to $408,000 at June 30, 1998. The net decrease was due
primarily to (1) cash used for acquisitions totaling approximately $3,457,000,
(2) approximately $3,498,000 used for the building of New Schools and
acquisition of land parcels and (3) repayment of long term debt of $14,474,000.
These decreases were offset by (1) cash flow from operations of $3,299,000, (2)
proceeds from the sale of property totaling 

                                       21
<PAGE>
 
$6,948,000 and (3) proceeds from borrowings under the principal credit facility
of $12,526,000.

  The working capital deficit increased $2,275,000 from $7,946,000 at December
31, 1997 to $10,221,000 at June 30, 1998. The increase is primarily the result
of the decrease in cash and cash equivalents of $2,197,000 as discussed above.

CAPITAL EXPENDITURES

  The Company is continuously maintaining and upgrading the property and
equipment of each school. During the six months ended June 30, 1998, the Company
spent $4,952,000 on capital expenditures, which included $3,498,000 for new
school development and $1,454,000 on upgrading existing facilities. During 1997,
the Company spent approximately $15,221,000 on capital expenditures, which
included $11,137,000 on new school development and $4,184,000 on upgrading
existing facilities.

  During the six months ended June 30, 1998 and 1997, the Company received
$6,948,000 and $7,451,000, respectively, from sale and leaseback transactions of
new schools.

TRENDS

  During the twelve months ended December 31, 1997, the Company experienced a
decrease in enrollment at its Merryhill schools, located in California, coupled
with a weaker summer program in several elementary schools.  As discussed
herein, the Company believes that this decrease is primarily due to the effect
of California public schools' initiative to decrease student/teacher class size
ratios in Kindergarten to third grade classes.  This initiative affected
Merryhill in several ways: (1) teacher turnover increased, (2) enrollment
decreased, and (3) with efforts to attract replacement teachers and retain
existing teachers, average teacher salaries increased.  In addition to the
effect of the public school initiative, rent expense in some of the Merryhill
schools increased because of recently built replacement schools, which expanded
capacity.  Fall enrollment for the 1997-1998 school year were down from the
previous year.  This negatively affected the Company's near term earnings.

  In an effort to improve the performance in Merryhill schools and improve the
summer programs, as well as Company-wide performance, the Company has taken
several key steps.  The structure of operations management has changed, with the
Executive Director position replacing the Regional Manager and District Manager
positions.  The number of schools reporting to each Executive Director has been
reduced so that each manager can spend more time in the schools.  In addition,
the Company has hired a Vice President of Western Operations.  The Company is
also searching for a President and Chief Operating Officer.  In the near term,
additional overhead from this management structure will have a negative impact
on earnings; however, over the long term, the Company believes this strategy
will prove warranted.

  The Company plans to respond to the growing need for improved quality
education. In 1996 and 1997, the Company built new elementary and middle
schools, which incur higher initial losses in the first year as compared to
newly constructed preschools. The Company opened four newly constructed
elementary schools in 1998, and plans to continue to development elementary
schools in 1999.

INFLATION

  The Company has not been significantly affected by inflation.

INSURANCE

  Companies involved in the education and care of children 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.  Since 1995, the Company has been able to increase significantly the
sublimit applicable to such coverage.  The Company believes it has adequate
insurance coverage at this time.  There can be no assurance that in future years
the Company will not again become subject to lower limits.

YEAR 2000 COMPLIANCE

  Management has implemented measures to ensure that the Company's information
systems and applications will recognize and process information pertaining to
the Year 2000. The measures being conducted utilize both internal and external
resources and are directed at risk assessments, remediation, acquisition of new
systems and applications, and testing of the systems and application for Year
2000 compliance.

  The Company believes that the only computer systems that are critical to its
operations are certain accounting and payroll software. The Company licenses
such software from two outside vendors.  Both of these vendors have publicized
reports giving assurances that the software used by the Company is Year 2000
compliant.  The Company will be testing the software to assure compliance and
will complete the testing by March 1999. The Company has completed an inventory
of all hardware, primarily personal computers and corporate network equipment.
All non-compliant hardware will be replaced by March 1999.

  Concurrent with the Company's Year 2000 compliance efforts, the Company is
upgrading its management information system to link the schools to the home
office as well as to other schools. This process includes purchasing new and
replacing old equipment and software to improve management efficiencies as well
as ensure Year 2000 compliance.  Management anticipates that the process will be
complete by December 1999 and projects spending between $1,500,000 and
$2,000,000 on this project.

  Although the Company could be affected by the systems of other companies with
which it does business, management does not believe that the Company's business
will be materially adversely affected by the failure of third parties to be Year
2000 compliant.  Because of the geographical distribution of the Company's
schools, the Company is not dependent on any one or a small group of vendors and
the needs of the Company's customers for its services should not be adversely
affected by Year 2000 issues.

  Management expects that the Company will be Year 2000 compliant by the end of
1999. A failure to meet this deadline should not disrupt the Company's delivery
of its services to customers.  However, a failure of the Company's system could
indirectly significantly impact operations, as for example, by an inability to
pay employees and vendors in a timely manner.

RECENTLY ISSUED ACCOUNTING STANDARDS

  In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information".  This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.  It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company believes it is a one segment company.

                                       22
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
  None.

                                       23
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

  The information required by this Item with respect to the directors of the
Company is incorporated herein by reference to the information set forth in the
Proxy Statement.  The information required by this Item with respect to
executive officers of the Company is furnished in a separate item captioned
"Executive Officers of the Company" and included in Part I of this Annual Report
on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION.

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

                                       24
<PAGE>
 
                                    PART IV

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

(A) DOCUMENTS FILED AS A PART OF THIS REPORT:

<TABLE> 
<CAPTION> 
                                                                    Page
                                                                    ----
  <S>                                                               <C> 
  (1)  Financial Statements.
 
       Report of Independent Accountants............................. F-1
       Consolidated Balance Sheets................................... F-2
       Consolidated Statements of Income............................. F-3
       Consolidated Statements of Stockholders' Equity............... F-4
       Consolidated Statements of Cash Flows......................... F-5
       Supplemental Schedules for Consolidated Statements of Cash
       Flow.......................................................... F-6
       Notes to Consolidated Financial Statements.................... F-7

  (2)  Financial Statement Schedules.
</TABLE> 

       Financial Statement 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)  REPORTS ON FORM 8-K.

     None.

  (C)  EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K.

Exhibit
Number    Description of Exhibit

3.1       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 September 30, 1997, and incorporated herein by
          reference.)

3.2       Registrant's Certificate of Designation, Preferences and Rights of
          Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
          Registrant's Current Report on Form 8-K filed on June 14, 1993 and
          incorporated herein by reference.)

3.3       Registrant's Certificate of Designation, Preferences and Rights of
          Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
          Registrant's Quarterly Report on Form 10-Q with respect to the quarter
          ended June 30, 1994 and incorporated herein by reference.)

3.4       Registrant's Certificate of Designation, Preferences and Rights of
          Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the
          Registrant's Current Report on Form 8-K filed on September 11, 1995,
          date of earliest event reported August 25, 1995, and incorporated
          herein by reference.)

                                       25
<PAGE>
 
3.5    Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to the
       Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
       1996, and incorporated herein by reference.)

4.1    Loan and Security Agreement dated August 30, 1995 (the "Loan and Security
       Agreement") among the Registrant, certain subsidiaries of the Registrant
       and Summit Bank (formerly First Valley Bank). (Filed as Exhibit 4F to the
       Registrant's Current Report on Form 8-K filed on September 11, 1995, date
       of earliest event reported August 25, 1995, and incorporated herein by
       reference.)

4.2    Second Amendment and Modification dated April 4, 1996 and Third Amendment
       and Modification dated July 2, 1996 to the Loan and Security Agreement.
       (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
       for the quarter ended June 30, 1996, and incorporated herein by
       reference.)

4.3    Fourth Amendment and Modification dated November 1, 1996 to Loan and
       Security Agreement.  (Filed as Exhibit 4.2 to the Registrant's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 1996, and
       incorporated herein by reference.)

4.4    Fifth Amendment and Modification dated March 20, 1997 to Loan and
       Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual
       Report on Form 10-K for the fiscal year ended December 31, 1997, and
       incorporated herein by reference.)

4.5    Sixth Amendment and Modification dated May 5, 1997 to Loan and Security
       Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report on
       Form 10-Q for the quarter ended March 31, 1997, and incorporated herein
       by reference.)

4.6    Seventh Amendment and Modification dated December 22, 1997 to Loan and
       Security Agreement.  (Filed as Exhibit 4.6 to the Registrant's Annual
       Report on Form 10-K for the fiscal year ended December 31, 1997, and
       incorporated herein by reference.)

4.7    Eighth Amendment and Modification dated April __, 1998 to Loan and
       Security Agreement.

4.8    Ninth Amendment and Modification dated as of June 30, 1998 to Loan and
       Security Agreement.

4.9    Revolving and Term Facility Note A dated December 22, 1997 in the
       principal sum of $22,000,000 payable to the order of Summit Bank. (Filed
       as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the
       fiscal year ended December 31, 1997, and incorporated herein by
       reference.)

4.10   Revolving and Term Facility Note B dated December 22, 1997 in the
       principal sum of $3,000,000 payable to the order of Summit Bank. (Filed
       as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the
       fiscal year ended December 31, 1997, and incorporated herein by
       reference.)

4.11   Investment Agreement dated as of June 30, 1998 between Registrant and its
       subsidiaries and Allied Capital Corporation

4.12   Senior Subordinated Note dated as of June 30, 1998 in the principal
       amount of $10,000,000 payable to the order of Allied Capital Corporation.

       The Registrant has omitted certain instruments defining the rights of
       holders of long-term debt in cases where the indebtedness evidenced by
       such instruments does not exceed

                                       26
<PAGE>
 
       10% of the Registrant's total assets. The Registrant agrees to furnish a
       copy of each of such instruments to the Securities and Exchange
       Commission upon request.

10.1   1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
       (Filed as Exhibit 10(1) to the Registrant's Registration Statement on
       Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
       (the "Form S-1") and incorporated herein by reference.)

10.2   1988 Stock Option and Stock Grant Plan of the Registrant.  (Filed as
       Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated March
       31, 1988 and incorporated herein by reference.)

10.3   1995 Stock Incentive Plan of the Registrant, as amended.

10.4   Form of Stock Option Agreement, for stock option grants under 1995 Stock
       Incentive Plan.

10.5   Stock and Warrant Purchase Agreement between the Registrant and various
       investors, dated April 14, 1992.  (Filed as Exhibit 10(r) to the
       Registrant's Annual Report on Form 10-K for the year ended December 31,
       1991 and incorporated herein by reference.)

10.6   Registration Rights Agreement dated May 28, 1992 among the Registrant,
       JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd.
       (Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K
       dated June 11, 1992, date of earliest event reported May 28, 1992, and
       incorporated herein by reference.)

10.7   Stock Purchase Agreement dated May 28, 1992 between Registrant and a
       limited number of accredited investors at $0.50 per share totaling
       3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
       Registrant's Current Report on Form 8-K dated June 11, 1992, date of
       earliest event reported May 28, 1992, and incorporated herein by
       reference.)

10.8   Series 1 Warrants for shares of Common Stock issued to Edison Venture
       Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(ad)
       to the Registrant's Quarterly Report on Form 10-Q with respect to the
       quarter ended June 30, 1994 and incorporated herein by reference.)

10.9   Registration Rights Agreement between Registrant and Edison Venture Fund
       II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit 4(af) to
       the Registrant's Quarterly Report on Form 10-Q with respect to the
       quarter ended June 30, 1994 and incorporated herein by reference.)

10.10  Amendment dated February 23, 1996 to Registration Rights Agreement
       between Registrant and Edison Venture Fund II, L.P. and  Edison Venture
       Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 1995 and incorporated
       herein by reference.)

10.11  Investment Agreement dated as of August 30, 1995 by and among the
       Registrant, certain subsidiaries of the Registrant and Allied Capital
       Corporation and its affiliated funds. (Filed as Exhibit 4A to the
       Registrant's Current Report on Form 8-K dated September 11, 1995, date of
       earliest event reported August 25, 1995, and incorporated herein by
       reference.)

10.12  Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
       Capital Corporation to purchase up to 92,172.25 shares (subject to
       adjustment) of the Common 

                                       27
<PAGE>
 
       Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's Current
       Report on Form 8-K dated September 11, 1995, date of earliest event
       reported August 25, 1995, and incorporated herein by reference.)

Exhibit 10.12 is one in a series of four Common Stock Purchase Warrants issued
pursuant to the Investment Agreement dated as of August 30, 1995 that are
identical except for the Warrant No., the original holder thereof and the number
of shares of Common Stock of the Registrant for which the Warrant may be
exercised, which are as follows:

<TABLE>
<CAPTION>
                                                       Number of Shares
                                                       of Common Stock
       Warrant No.  Holder                             (subject to adjustment)
       -----------  ------                             -----------------------
       <S>          <C>                                <C>
       2            Allied Capital Corporation II      142,932.25
       3            Allied Investment Corporation      92,713
       4            Allied Investment Corporation II   50,219.5
</TABLE>

10.13  Common Stock Purchase Warrant dated as of June 30, 1998 entitling Allied
       Capital Corporation to purchase up to 531,255 shares (subject to
       adjustment) of the Common Stock of the Registrant.

10.14  First Amended and Restated Registration Rights Agreement dated as of June
       30, 1998 by and between the Registrant and Allied Capital Corporation.

10.15  Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement and
       Summary Plan Description, Issued February, 1997, as amended on June 11,
       1998.

10.16  Employment Agreement dated June 4, 1996 between Registrant and Barbara Z.
       Presseisen.  (Filed as Exhibit 10.21 to the Registrant's Annual Report on
       Form 10-K for the year ended December 31, 1996 and incorporated herein by
       reference.)

10.17  Noncompete Agreement dated as of March 11, 1997 between John R. Frock and
       the Registrant.  (Filed as Exhibit 10.22 to the Registrant's Annual
       Report on Form 10-K for the year ended December 31, 1996 and incorporated
       herein by reference.)

10.18  Contingent Severance Agreement dated as of March 11, 1997 between John R.
       Frock and the Registrant.  (Filed as Exhibit 10.23 to the Registrant's
       Annual Report on Form 10-K for the year ended December 31, 1996 and
       incorporated herein by reference.)

21     List of subsidiaries of the Registrant.

23     Consent of Coopers & Lybrand L.L.P.

27     Financial Data Schedule

Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and
Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish
supplementally a copy of any omitted schedules or attachments to the Commission
upon request.

  (D) FINANCIAL STATEMENT SCHEDULES.

  None.

                                       28
<PAGE>
 
                          QUALIFICATION BY REFERENCE

     Information contained in this Annual Report on Form 10-K as to a contract
or other document referred to or evidencing a transaction referred to is
necessarily not complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to this Annual Report or
incorporated herein by reference, all such information being qualified in its
entirety by such reference.

                                       29
<PAGE>
 
                                  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 25, 1998            NOBEL EDUCATION DYNAMICS, INC.


                                    By: /s/ A. J. Clegg 
                                       ----------------------------------
                                       A. J. Clegg
                                       Chairman of the Board, President
                                       and 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

                          Chairman of the Board,          September 25, 1998
/s/ A. J. Clegg
-----------------------
A. J. Clegg               President and Chief
                          Executive Officer and Director


/s/ William Bailey        Vice President,                 September 25, 1998
-----------------------
William Bailey            Chief Financial Officer
                          (Principal Financial Officer)


/s/ Yvonne DeAngelo       Vice President - Finance        September 25, 1998
-----------------------
Yvonne DeAngelo           and Administration
                          (Principal Accounting Officer)

   
/s/ Edward H. Chambers    Director                        September 25, 1998
-----------------------
Edward H. Chambers 


/s/ John R. Frock         Executive Vice President        September 25, 1998
-----------------------
John R. Frock             and Director


/s/ Morgan R. Jones       Director                        September 25, 1998
-----------------------
Morgan R. Jones

                                       30
<PAGE>
 
                          Director                   September 25, 1998
_______________________
Peter H. Havens


/s/ John H. Martinson     Director                   September 25, 1998
-----------------------
John H. Martinson


/s/ Eugene G. Monaco      Director                   September 25, 1998
-----------------------
Eugene G. Monaco


                          Director                   September 25, 1998
-----------------------
Robert Zobel

                                       31
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and the Board of Directors of Nobel Education Dynamics,
Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the consolidated financial position of
Nobel Education Dynamics, Inc. and its subsidiaries at June 30, 1998 and
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the six months ended June 30, 1998 and each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.


PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
August 7, 1998,
except for Note 17 as to which the date is August 17, 1998

                                      F-1
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                            (Dollars in thousands)

<TABLE> 
<CAPTION> 
ASSETS                                                                       JUNE 30, 1998     DECEMBER 31, 1997   DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>                 <C>    
Cash and cash equivalents                                                         $    408             $  2,605            $  5,252
Accounts receivable, less allowance for doubtful accounts
         of $133 in 1998 and 1997 and $103 in 1996                                   1,130                1,091                 779
Prepaid rent                                                                         1,276                1,046                 734
Prepaid insurance and other                                                            738                  952                 622
Deferred taxes                                                                          --                   --                 891
-----------------------------------------------------------------------------------------------------------------------------------
         Total Current Assets                                                        3,552                5,694               8,278
-----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost                                                     31,601               33,030              26,166 
Accumulated depreciation                                                            (9,226)              (7,856)             (6,843)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    22,375               25,174              19,323 
Property and equipment held for sale                                                 1,371                1,495               1,111 
Note receivable                                                                         --                   --                 425 
Cost in excess of net assets acquired                                               41,753               37,439              25,601 
Deposits and other assets                                                            3,541                3,288               1,978 
Deferred taxes                                                                       1,031                1,308                 117
----------------------------------------------------------------------------------------------------------------------------------- 
Total Assets                                                                      $ 73,623             $ 74,398            $ 56,833
=================================================================================================================================== 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                               
-----------------------------------------------------------------------------------------------------------------------------------
Current portion of long-term obligations                                          $  2,031             $  2,793            $  3,448 
Accounts payable and other current liabilities                                       8,147                7,981               4,465 
Unearned income                                                                      3,595                2,866               1,716
-----------------------------------------------------------------------------------------------------------------------------------
         Total Current Liabilities                                                  13,773               13,640               9,629
-----------------------------------------------------------------------------------------------------------------------------------
Long-term obligations                                                               20,311               22,497              10,808 
Long-term subordinated debt                                                          6,166                5,973               3,418 
Capital lease obligations                                                              162                  208                 290 
Deferred gain on sale/leaseback                                                         35                   39                  47 
Minority interest in consolidated subsidiary                                           440                  405                 318 
Total Liabilities                                                                   40,887               42,762              24,510
Commitments and Contingencies (Notes 3, 6, 9, and 16) Stockholders' Equity:                                                       
         Preferred stock, $.001 par value; 10,000,000 shares authorized, issued                                                   
         and outstanding 4,593,542 in 1998 and in 1997 and 4,697,542 in 1996                                                      
         $5,530 aggregate liquidation preference at June 30, 1998 and                                                             
         December 31, 1997 and $5,634 in 1996                                            5                    5                   5 
Common stock, $.001 par value, 20,000,000 shares authorized, issued                                                                 
         and outstanding 6,121,365 in 1998 and in 1997 and 5,831,055 in 1996             6                    6                   6 
Treasury Stock, cost; 36,810 shares                                                   (375)                (375)                 -- 
Additional paid-in capital                                                          38,340               38,340              37,665 
Accumulated deficit                                                                 (5,240)              (6,340)             (5,353)
-----------------------------------------------------------------------------------------------------------------------------------
         Total Stockholders' Equity                                                 32,736               31,636              32,323 
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                                        $ 73,623             $ 74,398            $ 56,833
===================================================================================================================================
</TABLE> 

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

                                      F-2
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                 (Dollars in thousands except per share data)


<TABLE> 
<CAPTION>                                         
                                                  For the Six Months              For the Year Ended December 31,    
                                                                             ----------------------------------------------
                                                  Ended June 30, 1998            1997              1996             1995 
--------------------------------------------------------------------------------------------------------------------------- 
<S>                                               <C>                        <C>               <C>              <C> 
Revenues                                              $ 48,995               $ 80,980          $ 58,909         $ 44,154
--------------------------------------------------------------------------------------------------------------------------- 
Operating expenses:
         Personnel costs                                23,368                 38,557            26,777           19,664
         Center operating costs                          7,023                 11,932             8,755            6,640
         Insurance, taxes, rent and other                9,661                 16,131            11,128            7,946
         Depreciation and amortization                   2,090                  3,238             2,211            1,512
--------------------------------------------------------------------------------------------------------------------------- 
                                                        42,142                 69,858            48,871           35,762
--------------------------------------------------------------------------------------------------------------------------- 
School operating profit                                  6,853                 11,122            10,038            8,392
--------------------------------------------------------------------------------------------------------------------------- 
New school development                                     501                    400               207              146
General and administrative expenses                      3,391                  5,973             4,190            3,396
Litigation claim                                            --                     --                --              500
Restructuring expense                                       --                  2,960                --               --
--------------------------------------------------------------------------------------------------------------------------- 
Operating income                                         2,961                  1,789             5,641            4,350
--------------------------------------------------------------------------------------------------------------------------- 
Interest expense                                         1,044                  2,047             2,004            1,840
Other (income) expense                                    (102)                  (158)             (482)            (126)
Minority interest in income of
         consolidated subsidiary                            35                     86                94               86
--------------------------------------------------------------------------------------------------------------------------- 
Income (loss) before income taxes                        1,984                   (186)            4,025            2,550
Income tax (benefit) expense                               833                    250             1,562           (1,356)
--------------------------------------------------------------------------------------------------------------------------- 
Net income (loss) before extraordinary item              1,151                   (436)            2,463            3,906
--------------------------------------------------------------------------------------------------------------------------- 
Extraordinary loss on early extinguishment of
         debt, (net of income tax benefit of $330
         and $27 in 1997 and 1995, respectively)            --                    449                --               62
--------------------------------------------------------------------------------------------------------------------------- 
Net income (loss)                                        1,151                   (885)            2,463            3,844
Preferred stock dividends                                   51                    102               109              184
--------------------------------------------------------------------------------------------------------------------------- 
Net income (loss) available
 to common stockholders                            $     1,100              $    (987)         $  2,354         $  3,660
===========================================================================================================================
Basic earnings (loss) per share
Net income (loss) before extraordinary item        $      0.18              $   (0.09)        $    0.42         $   0.79
Extraordinary item                                          --                  (0.07)               --            (0.01)
--------------------------------------------------------------------------------------------------------------------------- 
Net income (loss)                                  $      0.18              $   (0.16)        $    0.42         $   0.78
===========================================================================================================================
Dilutive earnings (loss) per share
Net income (loss) before extraordinary item        $      0.15              $   (0.09)        $    0.34         $   0.64
Extraordinary item                                          --                  (0.07)               --            (0.01)
--------------------------------------------------------------------------------------------------------------------------- 
Net income (loss)                                  $      0.15              $   (0.16)        $    0.34         $   0.63
===========================================================================================================================
</TABLE> 

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

                                      F-3
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
  FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR THE YEARS ENDED DECEMBER 31,
                             1997, 1996 AND 1995 

                   (Dollars in thousands except share data)

<TABLE> 
<CAPTION> 
                                                                                                                     TREASURY AND
                                                                                                      ADDITIONAL        COMMON   
                                                 PREFERRED STOCK             COMMON STOCK              PAID-IN          STOCK   
                                               --------------------     ---------------------
                                              SHARES         AMOUNT       SHARES         AMOUNT          CAPITAL         ISSUABLE  
------------------------------------------------------------------------------------------------------------------------------------

<S>                                           <C>            <C>        <C>            <C>          <C>              <C> 
Balance as of January 1, 1995                 4,984,320      $   5      15,445,063     $   15     $      19,645        $     --
                                                                                                                                  
Stock options exercised                              --         --         150,000         --               113              --
Warrants exercised                                   --         --         100,000         --                50              --
Common shares issuable                               --         --              --         --                --           2,000
Issuance of preferred stock                   1,063,830          1              --         --             1,999              --
Conversion of preferred stock                  (543,000)                   638,568          1                (1)             --
One-for-four reverse stock split                     --         --     (12,238,537)       (12)               12              --
Preferred dividends                                  --         --              --         --                --              --
Net income                                                                                 
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995                             5,505,150      $   6       4,095,094     $    4      $     21,818        $  2,000
====================================================================================================================================
 Stock options and warrants                                                                                                        
   exercised and                                     --         --          63,750         --               500              -- 
   related tax benefit                                                                                                            
 Common shares issuable                              --         --         312,500          1             1,999          (2,000)   
                                                                                            
 Common shares issued                                --         --         122,270         --             1,740              --
Private placement of                                                                                                              
         common stock, net of                                                                                                     
         transaction costs                           --         --       1,000,000          1            11,607              --
Conversion of preferred stock                  (807,608)        (1)        237,441         --                 1              --
Preferred dividends                                  --         --             --          --                --              --
Net income                                           --         --             --          --                --              --
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996                             4,697,542      $   5      5,831,055     $     6      $     37,665              --
====================================================================================================================================
Stock options and warrants                                                                                                          
         exercised and                               --         --        256,750          --               682              --
         related tax benefit                                                                                                       
Conversion of preferred stock                  (104,000)        --         33,560          --                --              --
Other                                                --         --                         --                (7)             --
Treasury stock                                                                                                                     
                                                                                           
Preferred dividends                                  --         --             --          --                --              --
Net loss                                             --         --             --          --                --              --
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997                             4,593,542      $   5      6,121,365     $     6     $      38,340           $(375)
====================================================================================================================================
Preferred dividends                                  --         --             --          --                --              --  
Net income                                           --         --             --          --                --              --  
------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998                                 4,593,542      $   5      6,121,365     $     6      $     38,340           $(375)
====================================================================================================================================

<CAPTION> 

                                                            ACCUMULATED                                                        
                                                              DEFICIT                TOTAL
---------------------------------------------------------------------------------------------------
<S>                                                         <C>                      <C> 
Balance as of January 1, 1995                               $  (11,367)              $  8,298 
                                                       
Stock options exercised                                             --                    113  
Warrants exercised                                                  --                     50  
Common shares issuable                                              --                  2,000    
Issuance of preferred stock                                         --                  2,000    
Conversion of preferred stock                                       --                     --   
One-for-four reverse stock split                                    --                     --   
Preferred dividends                                               (184)                  (184)
Net income                                                       3,844                  3,844  
---------------------------------------------------------------------------------------------------
December 31, 1995                                           $   (7,707)              $ 16,121
===================================================================================================             
Stock options and warrants                             
  exercised and                                                     --                    500
  related tax benefit                                               --                     --
Common shares issuable                                              --                     --  
Common shares issued                                                --                  1,740
Private placement of                                   
         common stock, net of                          
         transaction costs                                          --                 11,608
Conversion of preferred stock                                       --                     --    
Preferred dividends                                               (109)                  (109)    
Net income                                                       2,463                  2,463  
---------------------------------------------------------------------------------------------------             
December 31, 1996                                           $   (5,353)              $ 32,323
===================================================================================================                          
Stock options and warrants                             
         exercised and                                              --                    682
         related tax benefit                           
Conversion of preferred stock                                       --                     --  
Other                                                               --                      7
Treasury stock                                                      --                   (375)
Preferred dividends                                               (102)                  (102) 
Net loss                                                          (885)                  (885)
---------------------------------------------------------------------------------------------------                          
December 31, 1997                                           $   (6,340)              $ 31,636
===================================================================================================                          
Preferred dividends                                                (51)                   (51)
Net income                                                        1,151                 1,151 
---------------------------------------------------------------------------------------------------
June 30, 1998                                               $    (5,240)             $ 32,736
===================================================================================================             
</TABLE> 

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

                                      F-4
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flow

                            (Dollars in thousands)

<TABLE> 
<CAPTION> 
                                                             For the Six Months             For the Year Ended December 31,
                                                                                        ---------------------------------------
                                                            Ended June 30, 1998               1997        1996           1995       
-------------------------------------------------------------------------------------------------------------------------------     
<S>                                                         <C>                         <C>           <C>            <C>            
Cash Flows from Operating Activities:                                                                                               
    Net Income (Loss)                                                 $   1,151         $     (885)   $  2,463       $  3,844       
-------------------------------------------------------------------------------------------------------------------------------     
Adjustment to Reconcile Net Income                                                                                                  
    to Net Cash Provided by Operating Activities:                                                                                   
    Depreciation and amortization                                         1,964              3,230       2,202          1,586       
    Provision for losses on accounts receivable                              96                345          87             97       
    Provision for restructuring                                               0              2,960           0              0       
    Provision for deferred taxes                                            277               (300)      1,207              0       
    Minority interest in income                                              35                 86          94             86       
    Early extinguishment of debt                                              0                779           0             89       
    Reversal of tax valuation allowance                                       0                  0           0         (1,481)      
Changes in Assets and Liabilities Net of Acquisitions:                                                                              
    Accounts receivable                                                    (134)              (612)       (139)          (128)      
    Prepaid assets                                                          (17)              (641)        (74)          (188)      
    Other assets and liabilities                                          1,088               (228)       (243)          (176)      
    Unearned income                                                        (562)               213        (133)            46   
    Accounts payable and accrued expenses                                  (599)             2,400        (689)           262   
-------------------------------------------------------------------------------------------------------------------------------
    Total Adjustments                                                     2,148              8,232       2,312            193   
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities                                 3,299              7,347       4,775          4,037   
-------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:                                                                                            
    Capital expenditures                                                 (4,952)           (15,221)    (12,776)        (2,052)  
    Proceeds from sale of property and equipment                          6,948              7,451       8,636            251   
    Payment for acquisitions net of cash acquired                        (3,457)           (10,145)     (4,968)        (9,101)  
    Payment of earn out related to acquisition                           (1,500)                 0           0              0   
    Other                                                                     0                  0           0           (146)  
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities                                    (2,961)           (17,915)     (9,108)       (11,048)  
-------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
    Proceeds from term loan and revolving line of credit                 12,526             18,641       6,000          7,500     
    Proceeds from subordinated debt                                           0                  0           0          6,000     
    Proceeds from real estate mortgage                                        0                  0           0          3,567     
    Proceeds from other debt                                                  0                  0       1,500          3,672     
    Transaction costs related to issuance of debt and stock                   0                  0           0         (1,091)    
    Proceeds from issuance of common stock                                    0                  0      11,608            163     
    Repayment of long term debt                                         (14,474)            (9,682)     (7,023)       (11,699)    
    Repayment of subordinated debt                                         (497)            (1,164)     (6,334)             0     
    Repayment of capital lease obligation                                   (39)               (71)        (50)           (56)    
    Proceeds from issuance of preferred stock                                 0                  0           0          2,000     
    Dividends paid to preferred stockholders                                (51)              (102)       (108)          (184)    
    Proceeds from exercise of stock options                                   0                299         277              0     
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities                                (2,535)             7,921       5,870          9,872     
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                     (2,197)            (2,647)      1,537          2,861     
Cash and cash equivalents at beginning of year                            2,605              5,252       3,715            854     
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                              $     408         $    2,605    $  5,252       $  3,715
===============================================================================================================================
</TABLE> 

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

                                      F-5
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES

                          SUPPLEMENTAL SCHEDULES FOR

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in thousands)

<TABLE> 
<CAPTION> 
                                          For the Six Months             For the Year Ended December 31,
                                                                 ------------------------------------------------
                                         Ended June 30, 1998              1997              1996         1995
-----------------------------------------------------------------------------------------------------------------
                                         <S>                           <C>                <C>         <C>     
Supplemental Disclosures of Cash
  Flow Information
Cash paid during year for:
  Interest                                          $    992           $  2,005           $  1,973    $  1,824
  Income taxes                                           157                728                434         137

Noncash financing and investing activities
Tax benefit related to exercise of
stock options and warrants                                --                 --                224          --

Acquisitions
     Fair value of tangible assets acquired            1,432              2,404                841       6,848
         Cost in excess of net assets acquired         4,876             14,844              8,979       8,727
         Cash acquired                                    --                 --               (573)        (30)

         Liabilities assumed                          (1,291)            (1,352)              (685)       (934)
         Notes issued                                 (1,560)            (5,751)            (1,854)     (3,310)   
         Escrow held                                      --                 --                 --        (200)
         Common shares issued                             --                 --             (1,740)     (2,000)
-----------------------------------------------------------------------------------------------------------------
         Total cash paid for acquisitions           $  3,457           $ 10,145           $  4,968    $  9,101
=================================================================================================================
</TABLE> 

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

                                      F-6
<PAGE>
 
                NOBEL EDUCATION DYNAMICS, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY BACKGROUND:

     Nobel Education Dynamics, Inc. (the "Company") was founded in 1982 and
     commenced operations in 1984. The Company operates private pre-schools,
     elementary schools and middle schools located in California, the Mid-
     Atlantic states, North Carolina, South Carolina, Virginia, Illinois,
     Indiana, Washington, Florida, Oregon and Nevada.

     PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries and majority-owned subsidiary. All
     significant intercompany balances and transactions have been eliminated.
     The preparation of financial statements in conformity with generally
     accepted accounting principals requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities,
     disclosure of contingent assets and liabilities at 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.

     RECOGNITION OF REVENUES:

     Revenue is recognized as the services are performed.

     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 the risk by maintaining
     deposits in high quality financial institutions.

     PROPERTY AND EQUIPMENT:

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

     Buildings                     40 years

     Leasehold improvements        The shorter of the leasehold
                                   period or useful life

     Furniture and equipment       3 to 10 years

     Maintenance, repairs and minor renewals are expensed as incurred. Upon
     retirement or other disposition of buildings and furniture and equipment,
     the cost of the items, and the related accumulated depreciation are removed
     from the accounts and any gain or loss is included in operations.

     COST IN EXCESS OF NET ASSETS ACQUIRED:

     The Company's policy is to amortize cost in excess of net assets acquired
     related to acquisitions over 30 years for preschools and 40 years for
     elementary schools. Management has evaluated the life cycles of similar
     schools and determined that these lives are consistent with a historical
     range for private elementary education. In evaluating potential
     acquisitions of child care centers, management considers not only the
     current child care operations but also the outlook for these centers as
     elementary schools. The excess of purchase price over net assets acquired
     is amortized on a straight-line basis.

     Amortization expense amounted to $591,000, $1,005,000, $651,000, and
     $342,000 for the six months ended June 30, 1998 and the years ended
     December 31, 1997, 1996, and 1995, respectively. Accumulated amortization
     at June 30, 1998, December 31, 1997 and 1996 was $3,745,691, $3,170,262 and
     $2,289,599, respectively.

     The Company reviews its long-lived assets for impairment on an exception
     basis whenever events or changes in circumstances indicate that the
     carrying amount of the assets may not be recoverable through future cash
     flows in accordance with FAS 121, "Accounting for the Impairment of Long-
     Lived Assets and for Long-Lived Assets to be Disposed of". If it is
     determined that an impairment loss has occurred based on expected future
     cash flows, then the loss is recognized in the income statement and certain
     disclosures regarding the impairment are made in the financial statements.

     INCOME TAXES:

     The Company accounts for income taxes using the asset and liability method,
     in accordance with FAS 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.

     REVERSE STOCK SPLIT:

     On September 22, 1995, the stockholders approved a one-for-four reverse
     stock split of the Company's common stock. The Company effected the reverse
     split on September 28, 1995. For every four shares of common stock, each
     stockholder received one share of common stock. All historical share and
     per share amounts reflect the reverse stock split (except for the
     consolidated statement of stockholders' equity).

     EARNINGS PER SHARE:

     In February 1997, the Financial Accounting Standards Board issued Statement
     No. 128, "Earnings Per Share", which established new standards for
     computations for earnings per share. The Company adopted the new standard
     effective December 31, 1997 and restated the prior years calculation
     accordingly. The restatement did not result in a material change from
     amounts previously reported.

     Earnings per share are based on the weighted average number of shares
     outstanding and common stock equivalents during the period. In the
     calculation of dilutive earnings per share, shares outstanding are adjusted
     to assume conversion of the Company's non-dividend bearing convertible
     preferred stock if they are dilutive. In the calculation of basic earnings
     per share, weighted average number of shares outstanding are used as the
     denominator.

                                      F-7
<PAGE>
 
     Earnings per share are computed as follows (dollars in thousands except per
     share data):

<TABLE>
<CAPTION>
                                           FOR THE SIX MONTHS ENDED     FOR THE YEAR ENDED DECEMBER 31,
                                                      JUNE 30, 1998       1997         1996         1995     
     ----------------------------------------------------------------------------------------------------  
     <S>                                      <C>                   <C>           <C>         <C>                
     Basic (loss) earnings per share:                                                                      
          Net (loss) income                   $    1,151            $     (885)   $    2,463  $    3,844   
          Less preferred                                                                                   
          stock dividends                             51                   102           109         184   
     ----------------------------------------------------------------------------------------------------  
          Net income available                                                                             
          for common stock                         1,100                  (987)        2,354       3,660   
          Average common                                                                                   
          stock outstanding                    6,121,365             6,052,625     5,545,605   4,688,355   
          Basic earnings (loss)                                                                            
          per share                           $     0.18            $    (0.16)   $     0.42  $     0.78   
     Diluted earnings (loss) per share:                                                                    
          Net (loss) income available                                                                      
          for common stock and                                                                             
          dilutive securities                 $    1,151            $     (987)   $    2,463  $    3,844   
          Average common                                                                                   
          stock outstanding                    6,121,365             6,052,625     5,545,605   4,688,355   
          Additional common                                                                                
          shares resulting from                                                                            
          dilutive securities:                                                                             
          Options, warrants                                                                                
          and convertible                                                                                  
          preferred stock                      1,395,686                  N/A      1,717,178   1,440,786   
     ----------------------------------------------------------------------------------------------------  
          Average common                                                                                   
          stock and dilutive                                                                               
          securities outstanding               7,517,051             6,052,625     7,262,783   6,129,141   
          Diluted earnings                                                                                 
          (loss) per share                    $     0.15            $    (0.16)   $     0.34  $     0.63    
</TABLE>

     CONCENTRATIONS OF CREDIT RISK

     The Company provides its services to the parents and guardians of the
     children attending the schools. The Company does not extend credit for an
     extended period of time, nor does it require collateral. 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.

     RECLASSIFICATIONS
     Certain prior year amounts have been reclassified in the current year for
     comparative purposes.

(2)  CHANGE IN FISCAL YEAR

     In the last quarter of 1997, the Company changed its fiscal year end to the
     end of June. Accordingly, the Company's transition period, which ended June
     30, 1998 includes the six months from January 1 to June 30, 1998. There
     were 52 weeks in each of fiscal 1997, 1996 and 1995 and 26 weeks in fiscal
     1998.

     The following unaudited results of operations for the six months ending
     June 30, 1997 are presented for comparative purposes and include all
     adjustments which are, in the opinion of management, necessary for a fair
     presentation of the results for that period (dollars in thousands, except
     per share data).

<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED JUNE 30, 1997   
                                                                           (unaudited)            
     -------------------------------------------------------------------------------------------- 
     <S>                                                         <C>                              
     Revenues                                                                           $39,664   
     Operating expenses                                                                  32,878   
     -------------------------------------------------------------------------------------------- 
     School operating profit                                                              6,786   
     New school development                                                                  98   
     General and administrative expenses                                                $ 2,817   
     -------------------------------------------------------------------------------------------- 
     Operating income                                                                     3,871   
     -------------------------------------------------------------------------------------------- 
     Interest expense                                                                       854   
     Other income                                                                            (5)  
     Minority interest in earnings of consolidated subsidiary                                49   
     -------------------------------------------------------------------------------------------- 
     Income before income taxes                                                           2,973   
     Income tax expense                                                                   1,249   
     -------------------------------------------------------------------------------------------- 
     Net income                                                                           1,724   
     -------------------------------------------------------------------------------------------- 
     Preferred stock dividends                                                               51   
     -------------------------------------------------------------------------------------------- 
     Net income available to common stockholders                                        $ 1,673   
     ============================================================================================  
     Basic earnings per share                                                             $0.28   
     ============================================================================================  
     Dilutive earnings per share                                                          $0.23   
     ============================================================================================  
</TABLE> 

(3)  ACQUISITIONS:

     During the six months ended June 30, 1998 and the years ended December 31,
     1997 and 1996, the Company completed various acquisitions, all of which are
     accounted for using the purchase method, which are described below. The
     results of operations for all acquisitions are included in the Consolidated
     Statement of Income from the date of acquisition.

     1998 ACQUISITIONS

     In March and May 1998, the Company completed the acquisition of four
     elementary schools and one preschool. The Company acquired the assets of
     Touchstone Elementary School in Lake Oswego, Oregon, which has a capacity
     for 150 students. The Company acquired the stock of Lake Forest Park
     Montessori School, Inc., owner of Lake Forest Park Montessori School, in
     Seattle, Washington, which has a capacity of 250 students. The Company
     acquired the assets of the Western School, located in North Lauderdale,
     Florida, which has a capacity for 350 children. Lastly, the Company
     acquired the Brighton Schools in Seattle, Washington. The Brighton Schools
     consist of an elementary school and a preschool with a combined capacity of
     319 students. The aggregate purchase price for the four acquisitions
     equaled $3,457,000 in cash, $1,560,000 in subordinated notes payable over
     five years and approximately $1,291,000 in assumed liabilities.

     1997 ACQUISITIONS:

     ACQUISITION OF ANOTHER GENERATION ENTERPRISES INC.

     In January 1997, the Company purchased Another Generation Enterprises Inc.
     and certain related corporations, which owned six preschools located in
     Broward County and Palm Beach County, Florida with a capacity of 1,200
     children. The aggregate purchase price for the stock totaled $4,543,000,
     with $3,643,000 in cash, $750,000 in notes and approximately $150,000 in
     assumed liabilities.

     Also in January 1997, the Company purchased a 19.99% interest in the
     Sagemont School located in Weston, Florida from the principal owners of
     Another Generation Enterprises Inc. The Sagemont

                                      F-8
<PAGE>
 
     School is an elementary school with a capacity of 340 students which opened
     in the Fall of 1996. The Company also formed a joint venture with such
     persons to develop five additional elementary schools in Florida, each of
     which the Company will own 80%.

     ACQUISITION OF RAINBOW BRIDGE SCHOOLS

     In April 1997, the Company acquired the Rainbow Bridge schools located in
     San Jose, California. Rainbow Bridge schools include two private elementary
     and middle schools and three preschools, with combined licensed capacity of
     950. The purchase price of the acquisitions totaled $7,508,000, $5,140,000
     paid in cash and $2,368,000 paid in notes (including amounts paid on an
     "earn out" based on achievement of certain earnings targets).

     ACQUISITION OF LAS VEGAS SCHOOLS

     In September 1997, the Company purchased three schools located in Las
     Vegas, Nevada, formerly operating as Hillpointe Elementary School and
     Warren Walker Preschools, with current combined licensed capacity of 670.
     The Hillpointe Elementary School is a new school which opened in September
     1997. The purchase price of the acquisition totaled approximately
     $3,800,000, $2,300,000 paid in cash, $700,000 paid in notes and $800,000 in
     assumed liabilities.

     1996 ACQUISITIONS:

     ACQUISITION OF VIRGINIA PRESCHOOLS:

     Pursuant to an acquisition agreement in February 1996, the Company acquired
     all the assets of four Virginia corporations, each of which operates a
     preschool in Virginia. The purchase price consisted of (i) $3,200,000 in
     cash, (ii) a five-year note in the principal amount of $337,000 bearing
     interest at the rate of 7% per annum and (iii) a cash earn-out payment of
     $25,000 paid in October 1996. The Company also entered into a five year 
     non-compete agreement that requires monthly payments of $1,667 through
     February 2001. Also in February 1996, the Company acquired the assets of a
     fifth Virginia preschool for 96,192 shares of the Company's common stock
     (valued at $1,500,000 for financial statement purposes), and a cash earn-
     out payment of $12,500 paid in October 1996.

     ACQUISITION OF MACGREGOR CREATIVE SCHOOLS, OAK RIDGE PRIVATE SCHOOL AND
     EVERGREEN ACADEMY:

     In November 1996, the Company acquired the assets of MacGregor Creative
     Schools located in Cary, North Carolina. MacGregor Creative Schools
     consisted of two preschools with aggregate capacity of 408 children. In
     December 1996, the Company acquired the assets of Oak Ridge Private School,
     an elementary school located in Coto de Caza, California. Oak Ridge Private
     School has potential licensed capacity of 198 children. In December 1996,
     the Company acquired the stock of Montessori House, Inc., which owned
     Evergreen Academy located in Seattle, Washington. Evergreen Academy
     consists of one elementary/middle school and one preschool with aggregate
     licensed capacity of 400 children. A portion of the purchase price for this
     transaction was paid on January 2, 1997. The purchase prices of these three
     transactions totaled approximately $2,560,000 in cash, $780,000 in
     subordinated notes, $240,000 in stock (26,078 shares) and approximately
     $300,000 in assumed liabilities.

     UNAUDITED PRO FORMA INFORMATION:

     The operating results of all acquisitions are included in the Company's
     consolidated results of operations from the date of acquisition. The
     following pro forma financial information assumes the acquisitions which
     closed during 1998, 1997 and 1996 all occurred at the beginning of 1996.
     These results have been prepared for comparative purposes only and do not
     purport to be indicative of what would have occurred had the acquisitions
     been made at the beginning of 1996, or of the results which may occur in
     the future. Further, the information gathered from some acquired companies
     are estimates since some acquirees did not maintain information on a period
     comparable with the Company's fiscal year-end (dollars in thousands).

<TABLE>
<CAPTION>
                                   FOR THE SIX MONTHS ENDED JUNE 30,   FOR THE YEAR ENDED DECEMBER 31,
                                                               1998             1997             1996
                                                        (UNAUDITED)                  (UNAUDITED)
     ----------------------------------------------------------------------------------------------------
     <S>                                       <C>                     <C>               <C>
     Revenues                                  $50,747                       $90,283           $81,700
     Net income
     before extraordinary item                   1,279                           252             3,242
     Earning per share
     Basic                                     $  0.21                       $  0.04           $  0.58
     Diluted                                   $  0.17                       $  0.03           $  0.44
</TABLE> 

(4)  CASH EQUIVALENTS:

     The Company has an agreement with its primary bank that allows the bank to
     act as the Company's principal in making daily investments with available
     funds in excess of a selected minimum account balance. This investment
     amounted to $2,364,000, $6,000,000 and $3,040,000 at June 30, 1998,
     December 31, 1997 and 1996, respectively. The Company's funds were invested
     in money market accounts which exceed federally insured limits. The Company
     believes it is not exposed to any significant credit risk on cash and cash
     equivalents as such deposits are maintained in high quality financial
     institutions.

(5)  PROPERTY AND EQUIPMENT:

     The balances of major property and equipment classes, excluding property
     and equipment held for sale, were as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                      JUNE 30, 1998   DECEMBER 31, 1997   DECEMBER 31, 1996  
     ----------------------------------------------------------------------------------------
     <S>                              <C>             <C>                 <C>                
     Land                                   $ 3,147             $ 3,461             $ 4,105  
     Buildings                                6,154               6,685               8,936  
     Assets under capital                                                                    
     lease obligations                          913                 913                 913  
     Leasehold improvements                   5,947               5,358               4,477  
     Furniture and equipment                 12,573              10,593               7,723  
     Construction in progress                 2,867               6,020                  12  
     ----------------------------------------------------------------------------------------
                                             31,601              33,030              26,166                      
     Accumulated depreciation                (9,226)             (7,856)             (6,843) 
     ----------------------------------------------------------------------------------------
                                            $22,375             $25,174             $19,323  
     ======================================================================================== 
</TABLE>

     Depreciation expense was $1,325,000, $2,096,000, $1,560,000, and $1,150,000
     for the six months ended June 30, 1998 and for the years 1997, 1996 and
     1995, respectively. Amortization of capital leases included in depreciation
     expense amounted to $7,320 in the six months ended June 30, 1998, and
     $14,640 in each of the years 1997, 1996, and 1995. Accumulated amortization
     of capital leases

                                      F-9
<PAGE>
 
     amounted to $468,000, $461,000, and $446,000 as of June 30, 1998, December
     31, 1997, and 1996, respectively.

(6)  RESTRUCTURING AND PROPERTY AND EQUIPMENT HELD FOR SALE

     In the fourth quarter of 1997 the Company approved a restructuring plan
     which included (1) reorganization of the geographic school districts, (2)
     reorganization of the structure of operations management, (3) the decision
     to close several schools and to write down the book value of the assets of
     schools which are non-performing, (4) placing non-performing schools for
     sale and (5) hiring of a Chief Operating Officer (President). In an effort
     to improve Company performance, the Company restructured its existing
     operations management. The Executive Director position replaced both the
     Regional Manager and the District Manager positions. The number of schools
     for which each manager is responsible has been reduced so that each can
     spend more time in the schools.

     In conjunction with the restructuring, the Company recorded a $2,960,000
     charge in December 1997. The restructuring charge included (1) a $2,000,000
     write down of the cost in excess of net assets acquired related to schools
     located in Indianapolis, (2) $789,000 related to the closing of non-
     performing schools, and (3) $171,000 related to the costs associated with
     the restructuring of the management team.

     The write down of fixed assets and cost in excess of net assets acquired
     was determined based on the estimated selling prices of these assets based
     on prior experience from comparable situations and information provided by
     outside brokers.

     Non cash charges included in the $2,960,000 charge were $2,269,019. During
     the six months ended June 30, 1998, cash payments related to the closing of
     non-performing schools and cost associated with the restructuring of the
     management team were $144,897 and $129,837, respectively.

     The amounts reflected in the table below for 1996 reflect certain
     properties located in the Southeast related to a prior restructuring.

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

<TABLE>
<CAPTION>
                               JUNE 30, 1998   DECEMBER 31, 1997   DECEMBER 31, 1996                              
     --------------------------------------------------------------------------------                          
     <S>                       <C>             <C>                 <C>                  
     Land                            $   219             $   219             $   512                              
     Buildings                           741                 741                 940                              
     Leasehold improvements              936                 623                   -                              
     Furniture and equipment             629               1,030                 374                              
     Accumulated depreciation         (1,154)             (1,118)               (715) 
     --------------------------------------------------------------------------------                          
                                     $ 1,371             $ 1,495             $ 1,111
     ================================================================================                           
</TABLE> 

(7)  DEBT:

     Debt consisted of the following (dollars in thousands):

<TABLE> 
<CAPTION> 
                                               JUNE 30, 1998   DECEMBER 31, 1997   DECEMBER 31, 1996               
     -------------------------------------------------------------------------------------------------
     <S>                                       <C>             <C>                 <C> 
     LONG TERM OBLIGATIONS:                                                                                        
     Revolving and Term                                                                                            
     Credit Facility                                 $19,427             $21,574             $11,770               

     1st mortgages, due in varying                                                                                 
     installments over three to                                                                                    
     twenty years with fixed interest                                                                              
     rates ranging from 11% to 12%.                      281                 301               1,002               

     Notes payable to sellers from                                                                                 
     various acquisitions, due in                                                                                  
     varying installments over three to                                                                            
     fifteen years with fixed interest                                                                             
     rates varying from 8% to 12%.                       257                 288                 644               
     Other                                               758                 484                 239   
     -------------------------------------------------------------------------------------------------            
     Total long term obligations                     $20,723             $22,647             $13,655               
     Less current portion                               (412)               (150)             (2,847) 
     -------------------------------------------------------------------------------------------------             
                                                     $20,311             $22,497             $10,808  
     =================================================================================================             
     SUBORDINATED DEBT:                                                                                            
     Subordinated debt agreements, due                                                                             
     in varying installments over five                                                                             
     to ten years with fixed interest                                                                              
     rates varying from 7% to 8%.                    $ 7,697             $ 8,534             $ 3,947
     -------------------------------------------------------------------------------------------------               
     Less current portion                             (1,531)             (2,561)               (529) 
     -------------------------------------------------------------------------------------------------             
                                                    $  6,166             $ 5,973             $ 3,418               
     =================================================================================================             
</TABLE>

     DEBT:

     On August 31, 1995, the Company completed a $23,000,000 refinancing (the
     "Refinancing") which consisted of the placement of: (1) a $7,500,000
     revolving line of credit and a $7,500,000 term loan, both financed through
     Summit Bank (the "Credit Agreement"); (2) $6,000,000 of subordinated
     debentures with Allied Capital Corporation and affiliated entities
     (collectively, "Allied"); (3) 1,063,830 shares of Series D Convertible
     Preferred Stock sold to Allied for a purchase price of $2,000,000; and (4)
     warrants sold to Allied to acquire an aggregate of 309,042 shares of the
     Company's Common Stock, subject to certain adjustments under anti-dilution
     provisions, for a purchase price of $100. The Refinancing resulted in an
     extraordinary loss of $62,000 related to the write-off of the unamortized
     loan origination fees in 1995.

     On November 1, 1996, the Company amended the Credit Agreement which
     increased the Company's revolving line of credit from $7,500,000 to
     $10,000,000 and extended the maturity dates of the loans.

                                      F-10
<PAGE>
 
     In 1997, the Company amended its credit agreement three times, the most
     significant of which occurred in December with the execution of the Seventh
     Amendment and Modification to the Credit Agreement. These amendments: (1)
     increased the Company's borrowing capacity to $25,000,000, (2) changed the
     prior fixed interest rates (applicable to term loans) to variable rates,
     (3) provided that all revolving debt will convert to a term loan in January
     2001, (4) extended terms for an additional five years for the prior term
     loan and six years for the prior revolving line of credit and (5) increased
     the number of permitted new school construction projects. Two facilities
     are established under the Seventh Amendment: a $3,000,000 facility
     (Revolving and Term Facility A) and a $22,000,000 facility (Revolving and
     Term Facility B). Amounts outstanding under term loans at the time of the
     restructuring were treated as initial outstanding balances under the new
     Revolving and Term Facilities. Under the new arrangements, no principal
     payments are required until January 1, 2001. Commencing on January 1, 2001,
     the Company must pay outstanding principal balance of the Revolving and
     Term Facilities in 60 equal monthly installments.

     Interest on the unpaid principal balance of Revolving and Term Facility A
     accrues at a variable interest rate ("Floating Rate") equal to the base
     rate of Summit Bank plus 25 basis points (subject to reduction, based on
     performance). Interest on the unpaid principal balance of Revolving and
     Term Facility B accrues at a variable interest rate equal to the Floating
     Rate or a LIBOR-based rate (at the Company's option, chosen at the
     beginning of any interest rate period). Interest rates on the outstanding
     borrowings as of June 30, 1998 ranged from 8.0% to 8.5% with an effective
     weighted average rate of 8.5%.

     The Company may elect to convert to a term loan portions of the Revolving
     and Term Facility B in increments of $2,500,000. Such term loans would be
     payable over sixty months.

     By postponing the dates of required principal payments under the Company's
     loans, the Seventh Amendment significantly improved the Company's cash flow
     requirements under these loans. The restructuring allows the Company
     greater flexibility in managing its cash flow and allows greater ability to
     use available funds to grow the Company. Because of the significant change
     in the repayment terms of the senior loan, in accordance with Emerging
     Issue Task Force Issue 96-19 "Debtors Accounting for Modification of Debt
     Instrument", the Company wrote off the financing fees related to the prior
     financing totaling $779,000 on a pretax basis. The charge was recorded as
     an extraordinary item and accordingly shown tax effected.

     At June 30, 1998 and December 31, 1997, the principal amounts outstanding
     under the Revolving and Term Facility B were $19,427,000 and $21,574,000,
     and no amounts were outstanding under the Revolving and Term Facility A.

     The Company's debt agreements contain restrictive covenants regarding the
     payment of common stock dividends and the maintenance of ratios related to
     debt to earnings before interest, taxes, depreciation and amortization.

     Maturities of long-term obligations are as follows: $1,943,000 in 1999,
     $2,000,000 in 2000, $1,978,000 in 2001, $1,792,000 in 2002, $878,000 in
     2003, and $401,000 in 2004 and thereafter. The terms of the Company's
     credit facility with Summit Bank, as amended, require principal payments
     commencing January 1, 2001. The Company borrows and repays on the
     facilities from time to time, as cash becomes available or is needed.
     Therefore, the maturities of the Revolving and Term Credit Facilities have
     not been included in the above figures.

8)   ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES:

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

<TABLE> 
<CAPTION> 
                                        JUNE 30, 1998     DECEMBER 31, 1997       DECEMBER 31, 1996  
     --------------------------------------------------------------------------------------------------
     <S>                                <C>               <C>                     <C> 
     Accounts payable                          $1,029                $1,508                  $  788                                
     Reserve for closed centers                   644                   832                     100                               
     Accrued payroll and related items          1,791                 1,673                   1,189                               
     Accrued rent                                 600                   563                     420                                
     Accrued property taxes                     1,514                 1,063                   1,065                                
     Other accrued expense                      2,569                 2,342                     903                                
     --------------------------------------------------------------------------------------------------
                                               $8,147                $7,981                  $4,465
     ==================================================================================================
</TABLE> 

(9)  LEASE OBLIGATIONS:

     Future minimum rentals, for the real properties utilized by the Company and
     its subsidiaries, by year and in the aggregate, under the Company's capital
     leases and noncancellable operating leases, excluding leases assigned,
     consisted of the following at June 30, 1998 (dollars in thousands):

     OPERATING LEASES

<TABLE> 
<CAPTION> 
                                                SCHOOLS
                                     CLOSED       TO BE    CONTINUING
                                    SCHOOLS     DIVESTED      SCHOOLS  TOTAL
     -------------------------------------------------------------------------
     <S>                          <C>         <C>       <C>         <C>
     1999                             $  253    $  591    $ 15,072  $ 15,916
     2000                                200       591      14,319    15,110
     2001                                176       590      13,940    14,706
     2002                                172       573      13,180    13,925
     2003                                132       485      12,490    13,107
     2004 and thereafter                 224     3,477      89,870    93,571
     -------------------------------------------------------------------------
     Total minimum      
     lease obligations                $1,157    $6,307    $158,871  $166,335
     =========================================================================

     CAPITAL LEASES                           
     1999                                                           $    116
     2000                                                                105
     2001                                                                 77
     2002                                                                  0
     -------------------------------------------------------------------------
     Total minimum lease obligations                                $    298
     -------------------------------------------------------------------------
     Less amount representing interest                                    48
     -------------------------------------------------------------------------
     Present value of capital lease obligations                          250
     -------------------------------------------------------------------------
     Less current portion                                                 88
     -------------------------------------------------------------------------
                                                                    $    162
     =========================================================================
</TABLE>

     Most of the above leases contain annual rental increases based on changes
     in consumer price indexes, which are not reflected in the above schedule.
     Rental expense for all operating leases was $7,103,000, $11,157,000,
     $8,113,000, and $5,829,000 for the six months ended June 30, 1998 and the
     years ended December 31, 1997, 

                                      F-11
<PAGE>
 
     1996 and 1995, respectively. These leases are typically triple-net leases
     requiring the Company to pay all applicable real estate taxes, utility
     expenses and insurance costs.

     The Company entered into agreements to assign or sublease leases for five
     centers under development and nine centers which were operating. The 14
     assigned leases have remaining terms from four years to 14 years. Under the
     agreements, the Company is contingently liable if the assignee is in
     default under the lease. Contingent future rental payments under the
     assigned leases are as follows (dollars in thousands):

               1999                       $  674
               2000                       $  657
               2001                       $  595
               2002                       $  589
               2003 and thereafter        $1,798

(10) STOCKHOLDERS' EQUITY:

     PREFERRED STOCK:

     In connection with the Refinancing (see Note 7), on August 31, 1995, the
     Company issued 1,063,830 shares of the Company's Series D Convertible
     Preferred Stock for a purchase price of $2,000,000. The Series D Preferred
     Stock is convertible to Common Stock at a conversion rate, subject to
     adjustment, of 1/4 share of Common Stock for each share of Series D
     Convertible Preferred Stock. Holders of Series D 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
     30, 1998, December 31, 1997 and 1996, 1,063,830 shares were outstanding.

     On August 22, 1994, the Company completed a private placement of an
     aggregate of 2,500,000 shares of Series C Convertible Preferred Stock and
     the Series 1 Warrants and Series 2 Warrants discussed below under "Common
     Stock Warrants" for an aggregate purchase price of $2,500,000. The Series C
     Preferred Stock is convertible into Common Stock at a conversion rate,
     subject to adjustment, of 1/4 share of Common Stock for each share of
     Series C Convertible Preferred Stock. Holders of shares of Series C
     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 C Convertible Preferred Stock are entitled to receive,
     before any distribution or payment is made upon Common Stock, $1.00 per
     share plus any unpaid dividends. At June 30, 1998, December 31, 1997 and
     1996, 2,500,000 shares were outstanding.

     On July 20, 1993, the Company completed a private placement of 2,484,320
     shares of its Series A Convertible Preferred Stock at a purchase price of
     $1.00 per share. The Series A Preferred Stock is convertible into Common
     Stock at a conversion rate, subject to adjustment, of .2940 shares of
     Common Stock for each share of Series A Preferred Stock. The Series A
     Preferred Stock is redeemable by the Company at any time after the fifth
     anniversary of its issuance at a redemption price of $1.00 per share plus
     cumulative unpaid dividends. The Preferred Stock is not redeemable at the
     option of the holders. Upon liquidation, the holders of shares of Series A
     Preferred Stock are entitled to receive, before any distribution or payment
     is made upon any Common Stock, $1.00 per share plus all accrued and unpaid
     dividends. At June 30, 1998, December 31, 1997 and 1996, 1,029,712,
     1,029,712 and 1,133,712 shares were outstanding, respectively. Each share
     of Series A Preferred Stock entitles the holder to an $.08 per share annual
     dividend.

     Each share of Series A Preferred Stock, Series C Preferred Stock and Series
     D Preferred Stock entitles the holder to a number of votes equal to the
     number of full shares of Common Stock into which such share is convertible.
     Except as otherwise required by law, holders of Preferred Stock vote
     together with the Common Stock, and not as a separate class, in the
     election of directors and on each other matter submitted to a vote of the
     stockholders.

     PRIVATE PLACEMENT OF COMMON STOCK:

     On March 5, 1996, the Company raised approximately $11,600,000 net proceeds
     through the issuance of 1,000,000 shares of common stock at $12 per share.

     COMMON STOCK WARRANTS:

     In connection with the Refinancing (see Note 7) on August 31, 1995, the
     Company issued to Allied warrants to acquire an aggregate of 309,042 shares
     of the Company's Common Stock.

     On May 28, 1997, Mr. Clegg exercised a warrant to purchase 187,500 shares
     at a purchase price of $2.00 per share. Mr. Clegg paid the exercise price
     of the warrant by delivery of 36,810 shares of Common Stock valued at
     $10.19 per share, which was the fair market value of the Common Stock on
     the date of the exercise. Accordingly, the Company recorded the shares
     acquired from Mr. Clegg as treasury stock on the balance sheet.

     1995 STOCK INCENTIVE PLAN

     On September 22, 1995, the stockholders approved the 1995 Stock Incentive
     Plan. On September 19, 1997, the stockholders approved amendments to the
     1995 Stock Incentive Plan, including an increase in the number of shares of
     common stock available for issuance under the Plan to 750,000. Under the
     Plan, common stock may be issued in connection with stock grants, incentive
     stock options and non-qualified stock options. The purpose of the Plan is
     to attract and retain quality employees. All grants to date under the Plan
     (other than a certain stock grant which was terminated) have been non-
     qualified stock options which vest over three years (except that options
     issued to directors vest in full six months following the date of grant).

     1988 STOCK OPTION AND STOCK GRANT PLAN:

     During 1988, the Company established the 1988 stock option and stock grant
     plan. This plan reserved up to an aggregate of 125,000 shares of common
     stock of the Company for issuance in connection with stock grants,
     incentive stock options and non-qualified stock options.

     1986 STOCK OPTION AND STOCK GRANT PLAN:

     During 1986, the Company established a stock option and stock grant plan,
     which was amended in 1987. The 1986 Plan, as amended, reserved up to an
     aggregate of 216,750 shares of common stock of the Company for issuance in
     connection with stock grants, incentive stock options and non-qualified
     stock options.

     The number of options granted under the 1995 Stock Incentive Plan is
     determined from time to time by the Compensation Committee of the Board of
     Directors, except for options granted to non-employee directors, which is
     determined by a formula set forth in the Plan. Incentive stock options are
     granted at market value or

                                      F-12
<PAGE>
 
     above, and non-qualified stock options are granted at a price fixed by the
     Compensation Committee at the date of grant. Options are exercisable for up
     to ten years from date of grant.

     Option activity (adjusted for the 4:1 reverse split) with respect to the
     Company's stock incentive  plans and other employee options was as follows:

     OUTSTANDING OPTIONS

                                                       WEIGHTED  AVERAGE
                             NUMBER           RANGE      EXERCISE  PRICE 
     -------------------------------------------------------------------
     Balance,                                                                  
     January 1, 1995         79,775   $  3.00  to   $ 13.00      $  4.57
     -------------------------------------------------------------------
     Granted                102,950   $11.625                    $11.625        
     Canceled                     -         -             -            -        
     Exercised              (37,500)  $  3.00  to   $  4.00      $  3.75
     -------------------------------------------------------------------
     Balance,                                                                  
     December 31, 1995      145,225   $  3.00  to   $ 13.00      $  9.78
     ===================================================================
     Granted                 60,500   $ 10.50  to   $ 15.81      $ 11.52
     Canceled               (28,175)  $11.625                    $11.625 
     Exercised              (28,750)  $  4.00  to   $  6.00      $  3.75
     -------------------------------------------------------------------
     Balance,                                                                  
     December 31, 1996      148,800   $  3.00  to   $ 15.81      $ 12.67
     ===================================================================
     Granted                183,200   $  7.88  to   $ 10.50      $  9.48
     Canceled               (54,575)  $  3.00  to   $ 13.00      $ 11.50
     Exercised              ( 6,250)  $  3.50  to   $ 13.50      $ 11.50
     -------------------------------------------------------------------
     Balance,                                                                  
     December 31, 1997      271,175   $  3.00  to   $ 16.50      $ 10.75
     ===================================================================
     Granted                156,507   $  5.06  to   $ 9.250      $  5.90
     Canceled               (13,250)  $  7.87  to   $11.625      $ 10.02
     Exercised                    0   $     -  to   $     -      $     -
     -------------------------------------------------------------------
     Balance,                                                                  
     June 30, 1998          414,432   $  3.00  to   $ 16.50      $  8.15 
     ===================================================================

     At June 30, 1998, December 31, 1997 and 1996, 417,943, 545,940 and 269,813
     shares, respectively, remained available for options or stock grants under
     the 1995 Stock Incentive Plan and 77,191 options were exercisable under
     such Plan and earlier stock option plans.

     The Company has adopted the disclosure only provisions of SFAS No. 123
     "Accounting for Stock-Based Compensation." Accordingly, no compensation
     cost has been recognized for the Company's stock option plans. Had
     compensation cost for the Company's stock option plans been determined
     based on the fair value at the grant date for awards in 1996 and 1995
     consistent with the provisions of SFAS No. 123, the Company's net income
     and net income per share would have been decreased to the pro forma amounts
     indicated below (dollars in thousands except per share data):

                               JUNE 30,              YEAR ENDED DECEMBER 31,
                                 1998      1997          1996        1995
     -----------------------------------------------------------------------
     Net (loss) income          
     - as reported                1,151  $  (885)       $2,463      $3,844
     Net (loss) income          
     - pro forma                    863   (1,222)        2,365       3,841
     Net (loss) income per share
     - as reported               $ .018  $ (0.16)       $ 0.42      $ 0.78
     Net (loss) income per share
     - pro forma                 $ 0.14  $ (0.20)       $ 0.41      $ 0.78

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions used for grants in 1998, 1997 and 1996:

               Expected dividend yield                      0%
               Expected stock price volatility          39.23%
               Risk-free interest rate            5.42 - 5.80%
               Expected life of options               3 years

     Activity (adjusted for the 4:1 reverse split) with respect to warrants
     outstanding at June 30, 1998 is as follows:

<TABLE>
<CAPTION>
                                                          NUMBER                      RANGE
     <S>                                                  <C>                  <C>             
     ------------------------------------------------------------------------------------------------
     Balance, January 1, 1995                                430,000           $2.00   to   $4.00
     Granted                                                 309,042           $7.52
     Canceled                                                      -               -           -
     Exercised                                               (25,000)          $2.00
     ------------------------------------------------------------------------------------------------
     Balance, December 31, 1995                              714,042           $2.00   to   $7.52
     ------------------------------------------------------------------------------------------------
     Granted                                                       -               -           -
     Canceled                                                      -               -           -
     Exercised                                               (25,000)          $4.13           -
     ------------------------------------------------------------------------------------------------
     Balance, December 31, 1996                              689,042           $2.00   to   $7.52
     ------------------------------------------------------------------------------------------------
     Granted                                                       -               -           -
     Canceled                                                 (5,000)          $2.00   to   $7.52
     Exercised                                              (250,000)          $2.00
     ------------------------------------------------------------------------------------------------
     Balance, December 31, 1997                              434,042           $4.00   to   $7.52
     ------------------------------------------------------------------------------------------------
     Granted                                                       -
     Canceled                                                      -
     Exercised                                                     -
     ------------------------------------------------------------------------------------------------
     Balance, June 30, 1998                                  434,042           $4.00   to   $7.52
     ------------------------------------------------------------------------------------------------
</TABLE> 

(11) OTHER (INCOME) EXPENSE:

     Other (income) expense consists of the following (dollars in thousands):

<TABLE> 
<CAPTION> 
                                         FOR THE SIX MONTHS ENDED    FOR THE YEAR ENDED DECEMBER 31,
                                                JUNE 30, 1998        1997            1996        1995
     ---------------------------------------------------------------------------------------------------
     <S>                                 <C>                         <C>           <C>           <C> 
     Interest income                             $     (95)            $(179)      $(470)        $(142)                            
     Rental income                                     (17)              (77)       (143)         (194)                            
     Depreciation related to                                                                                                       
     rental properties                                   9                33          73            82                             
     Other projects                                      -                (2)          -            29                             
     Costs related to centers                                                                                                      
     held for sale                                       1                67          58            99  
     ---------------------------------------------------------------------------------------------------                           
                                                 $    (102)            $(158)      $(482)        $(126) 
     ===================================================================================================
</TABLE> 
                  
(12) RELATED-PARTY TRANSACTIONS:

     Legal services were rendered to the Company by Drinker Biddle & Reath, of
     which a director of the Company is a partner. The Company expects this firm
     to continue to provide such services during 1998. Fees paid to the firm for
     the six months ended June 30, 1998 and for the years 1997, 1996 and 1995
     totaled $2,028, $36,000, $128,000, and $704,000, respectively.

                                      F-13
<PAGE>
 
(13) INCOME TAXES:

     Current tax provision (dollars in thousands):

<TABLE> 
<CAPTION> 
                                   FOR THE SIX MONTHS ENDED        FOR THE YEAR ENDED DECEMBER 31,
                                        JUNE 30, 1998                  1997       1996      1995
     -----------------------------------------------------------------------------------------------
     <S>                           <C>                            <C>           <C>        <C> 
     Federal                                 $467                     $   26    $    62    $    34
     States                                    89                        194        293         91
     -----------------------------------------------------------------------------------------------
                                             $556                     $  220    $   355    $   125
     Deferred tax provision                   277                         30    $ 1,207     (1,481)
     -----------------------------------------------------------------------------------------------
                                             $833                     $  250    $ 1,562    $(1,356)
     ===============================================================================================
</TABLE>

     The difference between the actual income tax rate and the statutory U.S.
     federal income tax rate is attributable to the following (dollars in
     thousands):

<TABLE>
<CAPTION>
                                    FOR THE SIX MONTHS ENDED    FOR THE YEAR ENDED DECEMBER 31,
                                         JUNE 30, 1998            1997      1996     1995
     -------------------------------------------------------------------------------------------
     <S>                            <C>                         <C>        <C>       <C> 
     U.S. federal statutory rate            $674                  ($  63)  $ 1,364   $   867
     State taxes, net of            
     federal  tax benefit                     54                   $ 137   $   119   $   127
     Benefit from realization       
     of net operating losses                   0                       0         0     ($996)
     Reduction in valuation allowance          0                       0         0   $(1,481)
     Goodwill and other                      105                     176        79       127
     -------------------------------------------------------------------------------------------
                                            $833                   $ 250   $ 1,562   $(1,356)
     ===========================================================================================
</TABLE>

     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 which give rise to a significant
     portion of deferred tax assets and liabilities are as follows (dollars in
     thousands):

<TABLE>
<CAPTION>
                                   FOR THE SIX MONTHS            FOR THE YEAR ENDED DECEMBER 31,
                                   ENDED JUNE 30, 1998         1997             1996             1995
     ------------------------------------------------------------------------------------------------------------
                                        DEFERRED            DEFERRED         DEFERRED         DEFERRED
                                        TAX ASSETS          TAX ASSETS       TAX ASSETS       TAX ASSETS
                                       (LIABILITIES)       (LIABILITIES)   (LIABILITIES)     (LIABILITIES)
     ------------------------------------------------------------------------------------------------------------
     <S>                           <C>                     <C>               <C>              <C> 
     Depreciation                        ($725)             ($576)           $ (383)          $ (241)
     Provision for center   
     closings and           
     other restructurings                1,534              1,635               379            1,270
     Net operating losses                    0                  0               801              720
     AMT credit carryforward                95                 94                90              126
     Other                                 127                155               121              116
     ------------------------------------------------------------------------------------------------------------
     Net deferred tax asset             $1,031             $1,308            $1,008           $1,991
     ============================================================================================================
</TABLE>

     In 1995, based on three years of positive net income and the analysis of
     projections for the years 1996 through 1999, the Company removed the
     remaining valuation allowance. Accordingly, such amounts were recorded as a
     credit to income tax expense in the respective periods.

(14) EMPLOYEE BENEFIT PLANS:

     The Company has a 401(k) Plan whereby eligible employees may elect to
     enroll after one year of service. The Company matches 25% of an employee's
     contribution to the Plan of up to 6% of the employee's salary. Nobel's
     matching contributions under the Plan were $60,000, $90,000, $74,000 and
     $61,000 for the six months ended June 30, 1998 and the years ended December
     31, 1997, 1996 and 1995, respectively.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The fair value of financial instruments approximates carrying value. The
     following methods and assumptions were considered by the Company in
     determining its fair value disclosures for financial instruments:

     Cash and cash equivalents: The carrying amount reported in the balance
     sheet approximates fair value.

     Debt: The estimated fair value of the Company's debt as a whole was based
     on the discounted cash flows of all debt instruments.

(16) COMMITMENTS AND CONTINGENCIES:

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

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

(17) SUBSEQUENT EVENTS

     DEBT

     In July 1998, the Company issued a $10,000,000 senior subordinated note to
     Allied Capital Corporation. The senior subordinated note bears interest at
     10.0% and matures in two installments of principal, $5,000,000 in 2004 and
     $5,000,000 in 2005. Payments on the note are subordinate to the Company's
     senior bank debt. In connection with the financing transaction, the Company
     also issued to Allied Capital Corporation warrants to acquire 531,255
     shares of the Company's common stock at $8.5625 per share. The Company
     recorded a debt discount and allocated $900,000 of the proceeds of the
     transaction to the value of the warrants. This debt discount is being
     amortized to interest expense over the term of the note.

     FORMATION OF SUBSIDIARY AND ACQUISITION

     On August 17, 1998, the Company entered into a joint venture transaction
     with Developmental Resource Center, Inc. (DRC), which is owned 80% by Nobel
     Education Dynamics, Inc. and 20% by Dr. Deborah Levy, a recognized leader
     in the field of special education programs. The joint venture, Nobel
     Learning Solutions, LLC acquired the assets of DRC. The three schools,
     located in Florida, specialize in full day programs, summer camps, testing
     services and clinics for K-8th grade students who have learning challenges
     such as dyslexia, attention deficit disorder (ADD and ADHD), and other
     learning disabilities.

                                      F-14
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

Exhibit
Number    Description of Exhibit

3.1       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 September 30, 1997, and incorporated herein by
          reference.)

3.2       Registrant's Certificate of Designation, Preferences and Rights of
          Series A Convertible Preferred Stock. (Filed as Exhibit 7(c) to the
          Registrant's Current Report on Form 8-K filed on June 14, 1993 and
          incorporated herein by reference.)

3.3       Registrant's Certificate of Designation, Preferences and Rights of
          Series C Convertible Preferred Stock. (Filed as Exhibit 4(ae) to the
          Registrant's Quarterly Report on Form 10-Q with respect to the quarter
          ended June 30, 1994 and incorporated herein by reference.)

3.4       Registrant's Certificate of Designation, Preferences and Rights of
          Series D Convertible Preferred Stock. (Filed as Exhibit 4E to the
          Registrant's Current Report on Form 8-K filed on September 11, 1995,
          date of earliest event reported August 25, 1995, and incorporated
          herein by reference.)

3.5       Registrant's Amended and Restated By-laws. (Filed as Exhibit 3.4 to
          the Registrant's Quarterly Report on Form 10-Q for the quarter ended
          June 30, 1996, and incorporated herein by reference.)

4.1       Loan and Security Agreement dated August 30, 1995 (the "Loan and
          Security Agreement") among the Registrant, certain subsidiaries of the
          Registrant and Summit Bank (formerly First Valley Bank). (Filed as
          Exhibit 4F to the Registrant's Current Report on Form 8-K filed on
          September 11, 1995, date of earliest event reported August 25, 1995,
          and incorporated herein by reference.)

4.2       Second Amendment and Modification dated April 4, 1996 and Third
          Amendment and Modification dated July 2, 1996 to the Loan and Security
          Agreement. (Filed as Exhibit 4.1 to the Registrant's Quarterly Report
          on Form 10-Q for the quarter ended June 30, 1996, and incorporated
          herein by reference.)

4.3       Fourth Amendment and Modification dated November 1, 1996 to Loan and
          Security Agreement. (Filed as Exhibit 4.2 to the Registrant's
          Quarterly Report on Form 10-Q for the quarter ended September 30,
          1996, and incorporated herein by reference.)

4.4       Fifth Amendment and Modification dated March 20, 1997 to Loan and
          Security Agreement. (Filed as Exhibit 4.4 to the Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1997, and
          incorporated herein by reference.)

4.5       Sixth Amendment and Modification dated May 5, 1997 to Loan and
          Security Agreement. (Filed as Exhibit 4.1 to the Registrant's
          Quarterly Report on Form 10-Q for the quarter ended March 31, 1997,
          and incorporated herein by reference.)

4.6       Seventh Amendment and Modification dated December 22, 1997 to Loan and
          Security Agreement.  (Filed as Exhibit 4.6 to the Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1997, and
          incorporated herein by reference.)

4.7       Eighth Amendment and Modification dated April __, 1998 to Loan and
          Security Agreement.

4.8       Ninth Amendment and Modification dated as of June 30, 1998 to Loan and
          Security Agreement.

4.9       Revolving and Term Facility Note A dated December 22, 1997 in the
          principal sum of $22,000,000 payable to the order of Summit Bank.
          (Filed as Exhibit 4.7 to the Registrant's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1997, and incorporated herein
          by reference.)

4.10      Revolving and Term Facility Note B dated December 22, 1997 in the
          principal sum of $3,000,000 payable to the order of Summit Bank.
          (Filed as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1997, and incorporated herein
          by reference.)

4.11      Investment Agreement dated as of June 30, 1998 between Registrant and
          its subsidiaries and Allied Capital Corporation

4.12      Senior Subordinated Note dated as of June 30, 1998 in the principal
          amount of $10,000,000 payable to the order of Allied Capital
          Corporation.

          The Registrant has omitted certain instruments defining the rights of
          holders of long-term debt in cases where the indebtedness evidenced by
          such instruments does not exceed
<PAGE>
 
          10% of the Registrant's total assets. The Registrant agrees to furnish
          a copy of each of such instruments to the Securities and Exchange
          Commission upon request.

10.1      1986 Stock Option and Stock Grant Plan of the Registrant, as amended.
          (Filed as Exhibit 10(1) to the Registrant's Registration Statement on
          Form S-1 (Registration Statement No. 33-1644) filed on August 12, 1987
          (the "Form S-1") and incorporated herein by reference.)

10.2      1988 Stock Option and Stock Grant Plan of the Registrant. (Filed as
          Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q dated
          March 31, 1988 and incorporated herein by reference.)

10.3      1995 Stock Incentive Plan of the Registrant, as amended.

10.4      Form of Stock Option Agreement, for stock option grants under 1995
          Stock Incentive Plan.

10.5      Stock and Warrant Purchase Agreement between the Registrant and
          various investors, dated April 14, 1992. (Filed as Exhibit 10(r) to
          the Registrant's Annual Report on Form 10-K for the year ended
          December 31, 1991 and incorporated herein by reference.)

10.6      Registration Rights Agreement dated May 28, 1992 among the Registrant,
          JBS Investment Banking, Ltd., and Pennsylvania Merchant Group, Ltd.
          (Filed as Exhibit 4(a) to the Registrant's Current Report on Form 8-K
          dated June 11, 1992, date of earliest event reported May 28, 1992, and
          incorporated herein by reference.)

10.7      Stock Purchase Agreement dated May 28, 1992 between Registrant and a
          limited number of accredited investors at $0.50 per share totaling
          3,200,000 shares of common stock. (Filed as Exhibit 4(d) to the
          Registrant's Current Report on Form 8-K dated June 11, 1992, date of
          earliest event reported May 28, 1992, and incorporated herein by
          reference.)

10.8      Series 1 Warrants for shares of Common Stock issued to Edison Venture
          Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit
          4(ad) to the Registrant's Quarterly Report on Form 10-Q with respect
          to the quarter ended June 30, 1994 and incorporated herein by
          reference.)

10.9      Registration Rights Agreement between Registrant and Edison Venture
          Fund II, L.P. and Edison Venture Fund II-PA, L.P. (Filed as Exhibit
          4(af) to the Registrant's Quarterly Report on Form 10-Q with respect
          to the quarter ended June 30, 1994 and incorporated herein by
          reference.)

10.10     Amendment dated February 23, 1996 to Registration Rights Agreement
          between Registrant and Edison Venture Fund II, L.P. and Edison Venture
          Fund II-PA, L.P. (Filed as Exhibit 10.14 to the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1995 and
          incorporated herein by reference.)

10.11     Investment Agreement dated as of August 30, 1995 by and among the
          Registrant, certain subsidiaries of the Registrant and Allied Capital
          Corporation and its affiliated funds. (Filed as Exhibit 4A to the
          Registrant's Current Report on Form 8-K dated September 11, 1995, date
          of earliest event reported August 25, 1995, and incorporated herein by
          reference.)

10.12     Common Stock Purchase Warrant dated August 30, 1995 entitling Allied
          Capital Corporation to purchase up to 92,172.25 shares (subject to
          adjustment) of the Common 
<PAGE>

          Stock of the Registrant. (Filed as Exhibit 4C to the Registrant's
          Current Report on Form 8-K dated September 11, 1995, date of earliest
          event reported August 25, 1995, and incorporated herein by reference.)

Exhibit 10.12 is one in a series of four Common Stock Purchase Warrants issued
pursuant to the Investment Agreement dated as of August 30, 1995 that are
identical except for the Warrant No., the original holder thereof and the number
of shares of Common Stock of the Registrant for which the Warrant may be
exercised, which are as follows:

<TABLE>
<CAPTION>
                                                       Number of Shares
                                                       of Common Stock
       Warrant No.  Holder                             (subject to adjustment)
       -----------  ------                             -----------------------
       <S>          <C>                                <C>
       2            Allied Capital Corporation II      142,932.25
       3            Allied Investment Corporation      92,713
       4            Allied Investment Corporation II   50,219.5
</TABLE>

10.13     Common Stock Purchase Warrant dated as of June 30, 1998 entitling
          Allied Capital Corporation to purchase up to 531,255 shares (subject
          to adjustment) of the Common Stock of the Registrant.

10.14     First Amended and Restated Registration Rights Agreement dated as of
          June 30, 1998 by and between the Registrant and Allied Capital
          Corporation.

10.15     Nobel Education Dynamics, Inc. Executive Severance Pay Plan Statement
          and Summary Plan Description, Issued February, 1997, as amended on
          June 11, 1998.

10.16     Employment Agreement dated June 4, 1996 between Registrant and Barbara
          Z. Presseisen. (Filed as Exhibit 10.21 to the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1996 and
          incorporated herein by reference.)

10.17     Noncompete Agreement dated as of March 11, 1997 between John R. Frock
          and the Registrant. (Filed as Exhibit 10.22 to the Registrant's Annual
          Report on Form 10-K for the year ended December 31, 1996 and
          incorporated herein by reference.)

10.18     Contingent Severance Agreement dated as of March 11, 1997 between John
          R. Frock and the Registrant. (Filed as Exhibit 10.23 to the
          Registrant's Annual Report on Form 10-K for the year ended December
          31, 1996 and incorporated herein by reference.)

21        List of subsidiaries of the Registrant.

23        Consent of Coopers & Lybrand L.L.P.

27        Financial Data Schedule

Certain schedules (and similar attachments) to Exhibits 4.1 through 4.8 and
Exhibits 4.11 and 10.11 have not been filed. The Registrant will furnish
supplementally a copy of any omitted schedules or attachments to the Commission
upon request.