UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





Form 10-Q




(Mark
One)




ý
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2008





or





o
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from _____ to _____







Commission
File Number 000-51371


LINCOLN
EDUCATIONAL SERVICES CORPORATION


(Exact
name of registrant as specified in its charter)




New
      Jersey
            57-1150621(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)




200
      Executive Drive, Suite 340
            07052West
      Orange, NJ
            (Zip
      Code)(Address
      of principal executive offices)





(973) 736-9340


(Registrant’s
telephone number, including area code)





No
change


(Former
name, former address and former fiscal year, if changed since last
report)





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 ý  No o




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





Large
      accelerated filer o
            Accelerated
      filerýNon-accelerated
      filer o(Do
      not check if a smaller reporting company)
            Smaller
      reporting company o





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




As of May
6, 2008, there were 26,027,733 shares of the registrant’s common stock
outstanding.












LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES




INDEX TO FORM 10-Q




FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2008






PART I.
            FINANCIAL
      INFORMATIONItem 1.
            Financial
      Statements
            1Condensed Consolidated Balance
      Sheets at March 31, 2008 and December 31, 2007
      (unaudited)
            1Condensed Consolidated Statements
      of Operations for the three months ended March 31, 2008 and 2007
      (unaudited)
            3Condensed Consolidated Statement
      of Changes in Stockholders’ Equity for the three months ended March 31,
      2008 (unaudited)
            4Condensed Consolidated Statements of
      Cash Flows for the three months ended March 31, 2008 and 2007
      (unaudited)
            5Notes to Unaudited Condensed
      Consolidated Financial Statements
            7Item 2.
            Management’s Discussion and Analysis
      of Financial Condition and Results of
Operations
            12Item 3.
            Quantitative and Qualitative
      Disclosures About Market Risk
            19Item 4.
            Controls and
      Procedures
            19PART II.
            OTHER
      INFORMATION
            19Item
1.
            Legal
      Proceedings
            19Item 6.
            Exhibits
            20


Index


PART
I – FINANCIAL INFORMATION





Item 1.
FinancialStatements




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share amounts)


(Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            5,620
            
            
            $
            3,502Accounts
      receivable, less allowance of $10,978 and $11,244 at March 31, 2008 and
      December
      31, 2007, respectively
            
            
            19,616
            
            
            
            23,286Inventories
            
            
            2,582
            
            
            
            2,540Deferred
      income taxes, net
            
            
            4,500
            
            
            
            4,575Due
      from federal programs
            
            
            -
            
            
            
            6,087Prepaid
      income taxes
            
            
            3,081
            
            
            
            -Prepaid
      expenses and other current assets
            
            
            3,645
            
            
            
            3,771Total
      current assets
            
            
            39,044
            
            
            
            43,761PROPERTY,
      EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and
      amortization of $82,362and $82,931 at March 31,
      2008 and December 31, 2007, respectively
            
            
            108,248
            
            
            
            106,564OTHER
      ASSETS:Noncurrent
      accounts receivable, less allowance of $244 and $159 at March 31, 2008 and
      December 31, 2007, respectively
            
            
            2,467
            
            
            
            1,608Deferred
      finance charges
            
            
            779
            
            
            
            827Pension
      plan assets, net
            
            
            1,713
            
            
            
            1,696Deferred
      income taxes, net
            
            
            6,068
            
            
            
            5,500Goodwill
            
            
            82,714
            
            
            
            82,714Other
      assets, net
            
            
            3,219
            
            
            
            3,513Total
      other assets
            
            
            96,960
            
            
            
            95,858TOTAL
      ASSETS
            
            $
            244,252
            
            
            $
            246,183





See notes
to unaudited condensed consolidated financial statements.


1
 Index




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share amounts)


(Unaudited)





March
      31,
            
            
            December 31,2008
            
            
            2007LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt and lease obligations
            
            $
            189
            
            
            $
            204Unearned
      tuition
            
            
            31,136
            
            
            
            34,810Accounts
      payable
            
            
            13,527
            
            
            
            13,721Accrued
      expenses
            
            
            10,739
            
            
            
            10,079Advance
      payments of federal programs
            
            
            105
            
            
            
            -Income
      taxes payable
            
            
            -
            
            
            
            1,460Other
      short-term liabilities
            
            
            1,106
            
            
            
            1,439Total
      current liabilities
            
            
            56,802
            
            
            
            61,713NONCURRENT
      LIABILITIES:Long-term
      debt and lease obligations, net of current portion
            
            
            17,136
            
            
            
            15,174Other
      long-term liabilities
            
            
            6,741
            
            
            
            6,829Total
      liabilities
            
            
            80,679
            
            
            
            83,716COMMITMENTS
      AND CONTINGENCIES (Note 11)STOCKHOLDERS'
      EQUITY:Preferred
      stock, no par value - 10,000,000 shares authorized, no shares issued and
      outstanding at March 31, 2008and
      December 31, 2007
            
            
            -
            
            
            
            -Common
      stock, no par value - authorized 100,000,000 shares at March 31, 2008 and
      December 31, 2007,issued
      and outstanding 25,986,648 shares at March 31, 2008 and 25,888,348 shares
      at December 31, 2007
            
            
            120,441
            
            
            
            120,379Additional
      paid-in capital
            
            
            13,661
            
            
            
            12,378Deferred
      compensation
            
            
            (3,951
            )
            
            
            (3,228
            )Retained
      earnings
            
            
            35,508
            
            
            
            35,024Accumulated
      other comprehensive loss
            
            
            (2,086
            )
            
            
            (2,086
            )Total
      stockholders' equity
            
            
            163,573
            
            
            
            162,467TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            244,252
            
            
            $
            246,183





See notes
to unaudited condensed consolidated financial statements.


2
 Index





LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)


(Unaudited)





Three
      Months EndedMarch 31,2008
            
            
            2007REVENUES
            
            $
            84,047
            
            
            $
            76,170COSTS
      AND EXPENSES:Educational
      services and facilities
            
            
            36,629
            
            
            
            34,151Selling,
      general and administrative
            
            
            46,132
            
            
            
            43,183Loss
      on disposal of assets
            
            
            37
            
            
            
            -Total
      costs and expenses
            
            
            82,798
            
            
            
            77,334OPERATING
      INCOME (LOSS)
            
            
            1,249
            
            
            
            (1,164
            )OTHER:Interest
      income
            
            
            45
            
            
            
            48Interest
      expense
            
            
            (504
            )
            
            
            (484
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
            
            
            790
            
            
            
            (1,600
            )PROVISION
      (BENEFIT) FOR INCOME TAXES
            
            
            306
            
            
            
            (670
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            
            484
            
            
            
            (930
            )LOSS
      FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
            
            
            -
            
            
            
            (688
            )NET
      INCOME (LOSS)
            
            $
            484
            
            
            $
            (1,618
            )BasicEarnings
      (loss) per share from continuing operations
            
            $
            0.02
            
            
            $
            (0.04
            )Loss
      per share from discontinued operations
            
            
            -
            
            
            
            (0.02
            )Net
      income (loss) per share
            
            $
            0.02
            
            
            $
            (0.06
            )DilutedEarnings
      (loss) per share from continuing operations
            
            $
            0.02
            
            
            $
            (0.04
            )Loss
      per share from discontinued operations
            
            
            -
            
            
            
            (0.02
            )Net
      income (loss) per share
            
            $
            0.02
            
            
            $
            (0.06
            )Weighted
      average number of common shares outstanding:Basic
            
            
            25,660
            
            
            
            25,460Diluted
            
            
            26,249
            
            
            
            25,460




See notes
to unaudited condensed consolidated financial statements.




3
 Index




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(In
thousands, except shares amounts)


(Unaudited)





AccumulatedAdditional
            
            
            
            
            
            
            
            
            OtherCommon
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Earnings
            
            
            Loss
            
            
            TotalBALANCE
      - December 31, 2007
            
            
            25,888,348
            
            
            $
            120,379
            
            
            $
            12,378
            
            
            $
            (3,228
            )
            
            $
            35,024
            
            
            $
            (2,086
            )
            
            $
            162,467Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            484
            
            
            
            -
            
            
            
            484Stock-based
      compensation expenseRestricted
      stock
            
            
            80,000
            
            
            
            -
            
            
            
            960
            
            
            
            (723
            )
            
            
            -
            
            
            
            -
            
            
            
            237Stock
      options
            
            
            -
            
            
            
            -
            
            
            
            321
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            321Tax
      benefit of options exercised
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2Exercise
      of stock options
            
            
            18,300
            
            
            
            62
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            62BALANCE
      - March 31, 2008
            
            
            25,986,648
            
            
            $
            120,441
            
            
            $
            13,661
            
            
            $
            (3,951
            )
            
            $
            35,508
            
            
            $
            (2,086
            )
            
            $
            163,573





See notes
to unaudited condensed consolidated financial statements.


4
 Index




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Three
      Months EndedMarch 31,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            484
            
            
            $
            (1,618
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in)operating activities:Depreciation
      and amortization
            
            
            4,370
            
            
            
            3,844Amortization
      of deferred finance charges
            
            
            48
            
            
            
            48Deferred
      income taxes
            
            
            (493
            )
            
            
            (510
            )Loss
      on disposal of assets
            
            
            37
            
            
            
            -Provision
      for doubtful accounts
            
            
            4,030
            
            
            
            3,688Stock-based
      compensation expense
            
            
            558
            
            
            
            411Tax
      benefit associated with exercise of stock options
            
            
            (2
            )
            
            
            -Deferred
      rent
            
            
            110
            
            
            
            191(Increase)
      decrease in assets:Accounts
      receivable
            
            
            (1,219
            )
            
            
            (2,793
            )Inventories
            
            
            (42
            )
            
            
            15Prepaid
      expenses and current assets
            
            
            (400
            )
            
            
            (533
            )Due
      from federal programs
            
            
            6,192
            
            
            
            -Other
      assets
            
            
            247
            
            
            
            (198
            )Increase
      (decrease) in liabilities:Accounts
      payable
            
            
            1,723
            
            
            
            791Other
      liabilities
            
            
            (487
            )
            
            
            (14
            )Income
      taxes
            
            
            (4,539
            )
            
            
            (9,183
            )Accrued
      expenses
            
            
            604
            
            
            
            515Unearned
      tuition
            
            
            (3,674
            )
            
            
            (3,746
            )Total
      adjustments
            
            
            7,063
            
            
            
            (7,474
            )Net
      cash provided by (used in) operating activities
            
            
            7,547
            
            
            
            (9,092
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
            
            
            -
            
            
            
            (560
            )Capital
      expenditures
            
            
            (7,440
            )
            
            
            (5,192
            )Net
      cash used in investing activities
            
            
            (7,440
            )
            
            
            (5,752
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from borrowings
            
            
            7,000
            
            
            
            13,000Payments
      on borrowings
            
            
            (5,000
            )
            
            
            -Proceeds
      from exercise of stock options
            
            
            62
            
            
            
            35Tax
      benefit associated with exercise of stock options
            
            
            2
            
            
            
            28Principal
      payments of capital lease obligations
            
            
            (53
            )
            
            
            (22
            )Net
      cash provided by financing activities
            
            
            2,011
            
            
            
            13,041NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            2,118
            
            
            
            (1,803
            )CASH AND CASH
      EQUIVALENTS—Beginning of period
            
            
            3,502
            
            
            
            6,461CASH AND CASH
      EQUIVALENTS—End of period
            
            $
            5,620
            
            
            $
            4,658





See notes
to unaudited condensed consolidated financial statements.


5
 Index




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Three
      Months EndedMarch 31,2008
            
            
            2007SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
            
            $
            484
            
            
            $
            430Income
      taxes
            
            $
            5,641
            
            
            $
            8,498SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING ACTIVITIES:Fixed
      assets acquired in noncash transactions
            
            $
            1,969
            
            
            $
            165


6
 Index




LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2008 AND 2007


(In
thousands, except share and per share amounts and unless otherwise
stated)


(Unaudited)




1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




Business
Activities – Lincoln Educational Services Corporation and subsidiaries
(the "Company") is a diversified provider of career-oriented post-secondary
education. The Company offers recent high school graduates and working adults
degree and diploma programs in five principal areas of study: automotive
technology, health sciences, skilled trades, business and information technology
and hospitality services. The Company currently has 34 schools in 17 states
across the United States.





Basis of
Presentation – The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”).  Certain information and footnote disclosures normally included
in annual financial statements have been omitted or condensed pursuant to such
regulations.  These statements, when read in conjunction with the December
31, 2007 consolidated financial statements of the Company, reflect all
adjustments, consisting solely of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations, and
cash flows for such periods.  The results of operations for the three
months ended March 31, 2008 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2008.




The
unaudited condensed consolidated financial statements as of March 31, 2008 and
for the three months ended March 31, 2008 and 2007 and the audited consolidated
financial statements as of December 31, 2007 include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.




Use of Estimates
in the Preparation of Financial Statements – The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period.  On an ongoing basis, the Company evaluates the estimates and
assumptions, including those related to revenue recognition, bad debts, fixed
assets, goodwill and other intangible assets, stock-based compensation, income
taxes, benefit plans and certain accruals.  Actual results could differ
from those estimates.





2.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” (“SFAS No. 161”) –an amendment to FASB
Statement No. 133.   The Statement is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
The Statement will be effective for the Company as of January 1, 2009. The
adoption of the provision of SFAS No. 161 is not expected to have a material
effect on the Company’s consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations". The
Statement establishes revised principles and requirements for how the Company
will recognize and measure assets and liabilities acquired in a business
combination. The Statement will be effective for the Company’s business
combinations completed on or after January 1, 2009.  The Company is
currently evaluating the impact of the adoption of the Statement on its
consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(“ARB”) No. 51," (“SFAS No. 160”). The Statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Statement will be
effective for the Company as of January 1, 2009.  The adoption of the
provision of SFAS No. 160 is not expected to have a material effect on the
Company’s consolidated financial statements.




7
 Index




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.  Historically, GAAP
has required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. SFAS No. 159
helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with detailed rules for hedge
accounting.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the Company’s choice to use fair value on
its earnings. It also requires entities to display the fair value of those
assets and liabilities for which the entity has chosen to use fair value on the
face of the balance sheet.  SFAS No. 159 became effective for the Company
as of January 1, 2008; however, the Company did not elect to utilize the option
to report selected assets and liabilities at fair value.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”,(“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with
GAAP, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements; FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
The provisions of SFAS No. 157 became effective for the Company as of January 1,
2008. The adoption of the provision of SFAS No. 157 had no effect on the
Company’s consolidated financial statements.





3.
            DISCONTINUED
      OPERATIONS




On July
31, 2007, the Company’s Board of Directors approved a plan to cease operations
at three of the Company’s campuses.  As a result of that decision, the
Company recognized a non-cash impairment charge related to goodwill at these
three campuses of approximately $2.1 million as of June 30,
2007.  Additionally, the Company determined that certain long-lived
assets would not be recoverable at June 30, 2007 and recorded a non-cash charge
of $0.9 million to reduce the carrying value of these assets to their estimated
fair value.





As of
September 30, 2007, all operations had ceased at these campuses, and
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.





The
following amounts relate to discontinued operations at these three
campuses:




Three
      Months EndedMarch
      31, 2007Revenues
            
            $
            1,972Operating
      expenses
            
            
            (3,167
            )(1,195
            )Benefit
      for income taxes
            
            
            507Loss
      from discontinued operations
            
            $
            (688
            )








4.
            STOCK-BASED
      COMPENSATION




The
Company currently accounts for stock-based employee compensation arrangements in
accordance with the provisions of SFAS No. 123R, “Share Based
Payment.”Reflected in the accompanying condensed consolidated
statements of operations were compensation expense of approximately $0.6 million
and $0.4 million for the three months ended March 31, 2008 and 2007,
respectively.  The Company uses the Black-Scholes valuation model and
utilizes straight-line amortization of compensation expense over the requisite
service period of the grant.  The Company makes an estimate of
expected forfeitures upon grant issuance.




8
 Index


5.
            WEIGHTED
      AVERAGE COMMON SHARES




The
weighted average numbers of common shares used to compute basic and diluted
income per share for the three months ended March 31, 2008 and 2007,
respectively, were as follows:




Three
      Months EndedMarch
      31,2008
            
            
            2007Basic
      shares outstanding
            
            
            25,659,964
            
            
            
            25,460,082Dilutive
      effect of stock options
            
            
            589,315
            
            
            
            -Diluted
      shares outstanding
            
            
            26,249,279
            
            
            
            25,460,082








For the
three months ended March 31, 2008 and 2007, options to acquire 581,708 and
725,375 shares, respectively, were excluded from the above table as the effect
of their inclusion on reported earnings per share would have been
antidilutive.





6.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS




The
Company accounts for its intangible assets in accordance with SFAS No. 142,“Goodwill and Other Intangible
Assets.”  The Company reviews intangible assets with an indefinite
useful life for impairment when indicators of impairment exist.  Annually,
or more frequently, if necessary, the Company evaluates goodwill for impairment,
with any resulting impairment reflected as an operating expense.





There
were no changes in the carrying amount of goodwill from the year ended December
31, 2007 to the three months ended March 31, 2008.




Intangible
assets, which are included in other assets in the accompanying condensed
consolidated balance sheets, consist of the following:




At
      March 31, 2008
            
            
            At
      December 31, 2007Weighted
      Average Amortization Period (years)
            
            
            Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying Amount
            
            
            Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying AmountStudent
      Contracts
            
            1
            
            
            $
            2,215
            
            
            $
            2,215
            
            
            $
            -
            
            
            $
            2,215
            
            
            $
            2,212
            
            
            $
            3Trade
      name
            
            Indefinite
            
            
            
            1,270
            
            
            
            -
            
            
            
            1,270
            
            
            
            1,270
            
            
            
            -
            
            
            
            1,270Accreditation
            
            Indefinite
            
            
            
            307
            
            
            
            -
            
            
            
            307
            
            
            
            307
            
            
            
            -
            
            
            
            307Curriculum
            
            10
            
            
            
            700
            
            
            
            225
            
            
            
            475
            
            
            
            700
            
            
            
            208
            
            
            
            492Non-compete
            
            5
            
            
            
            201
            
            
            
            75
            
            
            
            126
            
            
            
            201
            
            
            
            65
            
            
            
            136Total
            
            
            
            
            $
            4,693
            
            
            $
            2,515
            
            
            $
            2,178
            
            
            $
            4,693
            
            
            $
            2,485
            
            
            $
            2,208





Amortization
of intangible assets was approximately $30 thousand and $94 thousand for the
three months ended March 31, 2008 and 2007, respectively.





7.
            LONG-TERM
      DEBT




The
Company has a credit agreement with a syndicate of banks which expires on
February 15, 2010.  Under the terms of the credit agreement, the syndicate
provided the Company with a $100 million credit facility.  The credit
agreement permits the issuance of up to $20 million in letters of credit, the
amount of which reduces the availability of permitted borrowings under the
agreement.  At the time of entering into the credit agreement, the
Company incurred approximately $0.8 million of deferred finance
charges.  At March 31, 2008, the Company had outstanding letters of
credit aggregating $4.4 million which was primarily comprised of letters of
credit for the Department of Education and real estate leases.





The
obligations of the Company under the credit agreement are secured by a lien on
substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries’ common stock.  Outstanding
borrowings bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as
defined, or a base rate (as defined in the credit agreement).  In
addition to paying interest on outstanding principal under the credit agreement,
the Company and its subsidiaries are required to pay a commitment fee to the
lender with respect to the unused amounts available under the credit agreement
at a rate equal to 0.25% to 0.40% per year, as defined.


9
 Index




In
January 2008, the Company repaid all debt outstanding under its credit agreement
and subsequently borrowed $7.0 million under its credit agreement to meet its
working capital needs.  The interest rate under all borrowings was
5.25% at March 31, 2008.





The
credit agreement contains various covenants, including a number of financial
covenants.  Furthermore, the credit agreement contains customary
events of default as well as an event of default in the event of the suspension
or termination of Title IV Program funding for the Company’s and its
subsidiaries' schools aggregating 10% or more of the Company’s EBITDA (as
defined) or its consolidated total assets and such suspension or termination is
not cured within a specified period.  As of March 31, 2008, the Company was
in compliance with the financial covenants contained in the credit
agreement.





8.
            EQUITY





Under the
Company’s Long-Term Incentive Plan (the “LTIP”), certain employees received an
award of restricted shares of common stock totaling 200,000 shares, valued at
$2.9 million, on October 30, 2007 and 80,000 shares, valued at $1.0 million, on
February 29, 2008.  The restricted shares vest ratably on the first
through fifth anniversary of the grant date; however, there is no vesting period
on the right to vote or the right to receive dividends on these restricted
shares.  The recognized restricted stock expense for the three months
ended March 31, 2008 was $0.2 million. The deferred compensation or
unrecognized restricted stock expense under the LTIP as of March 31,
2008 was $3.6 million.




Pursuant
to the Company’s 2005 Non-Employee Directors Restricted Stock Plan (the
“Non-Employee Directors Plan”), each of the Company’s seven non-employee
directors receives an annual award of restricted shares of common stock on the
date of the Company’s annual meeting of shareholders.  The number of
shares granted to each non-employee director is based on the fair market value
of a share of common stock on that date.  The restricted shares vest
ratably on the first through third anniversary of the grant date; however, there
is no vesting period on the right to vote or the right to receive dividends on
these restricted shares. As of March 31, 2008, there were a total of 57,477
shares awarded and 21,862 shares vested under the Non-Employee Directors Plan.
The recognized restricted stock expense for the three months ended March 31,
2008 and 2007 was $0.1 million and $0.1 million, respectively. The deferred
compensation or unrecognized restricted stock expense under the Non-Employee
Directors Plan as of March 31, 2008 and 2007 was $0.3 million and $0.4 million,
respectively.





The fair
value of the stock options used to compute stock-based compensation is the
estimated present value at the date of grant using the Black-Scholes
option pricing model.  The weighted average fair values of
options granted during 2008 were $6.68 using the following weighted average
assumptions for grants:




March
      31, 2008Expected
      volatility
              
              57.23%Expected
      dividend yield
              
              0%Expected
      life (term)
              
              6
      YearsRisk-free
      interest rate
              
              2.76%Expected
      forfeiture rate
              
              20.00%


The
following is a summary of transactions pertaining to the option
plans:




Shares
              
              
              Weighted
      Average Exercise Price Per Share
              
              Weighted
      Average Remaining Contractual Term
              
              Aggregate
      Intrinsic ValueOutstanding
      as of December 31, 2007
              
              
              1,512,163
              
              
              $
              9.65Granted
              
              
              94,000
              
              
              
              12.00Cancelled
              
              
              (27,500
              )
              
              
              17.78Exercised
              
              
              (18,300
              )
              
              
              3.40
              
              
              
              $
              184Outstanding
      as of March 31, 2008
              
              
              1,560,363
              
              
              
              9.73
              
              5.82
      years
              
              
              6,349Exercisable
      as of March 31, 2008
              
              
              1,113,427
              
              
              
              7.70
              
              4.81
      years
              
              
              6,337


As of
March 31, 2008, the pre-tax compensation expense for all unvested stock option
awards was $2.0 million.  This amount will be expensed over the
weighted-average period of approximately 1.2 years.


10
 Index




The
following table presents a summary of options outstanding:







At
      March 31, 2008Stock
      Options Outstanding
            
            
            Stock
      Options ExercisableRange
      of Exercise Prices
            
            
            Shares
            
            
            Contractual
      Weighted Average Life (years)
            
            
            Weighted
      Average Price
            
            
            Shares
            
            
            Weighted
      Exercise Price$
            1.55
            
            
            
            50,898
            
            
            1.22
            
            
            $
            1.55
            
            
            
            50,898
            
            
            $
            1.553.10
            
            
            
            634,257
            
            
            3.79
            
            
            
            3.10
            
            
            
            634,257
            
            
            
            3.104.00-13.99
            
            
            
            293,500
            
            
            8.92
            
            
            
            11.41
            
            
            
            80,513
            
            
            
            10.0114.00-19.99
            
            
            
            464,208
            
            
            7.01
            
            
            
            15.28
            
            
            
            276,159
            
            
            
            14.7320.00-25.00
            
            
            
            117,500
            
            
            6.36
            
            
            
            22.88
            
            
            
            71,600
            
            
            
            23.141,560,363
            
            
            5.82
            
            
            
            9.73
            
            
            
            1,113,427
            
            
            
            7.70








9.
            SLM
      FINANCIAL CORPORATION LOAN
AGREEMENT





The
Company entered into a tiered discount loan program agreement, effective
September 1, 2007, with SLM Financial Corporation (SLM) to provide up to $16.0
million of private non-recourse loans to qualifying students.  Under
this agreement, the Company was required to pay SLM either 20% or 30% of all
loans disbursed, depending on each student borrower’s credit
score.  The Company was billed at the beginning of each month based on
loans disbursed during the prior month. For the three months ended March 31,
2008, $0.4 million of loans were disbursed, resulting in a $0.1 million loss on
sale of receivables.  Loss on sale of receivables is included in
selling, general and administrative expenses in the accompanying statements of
operations.





In
January 2008, SLM notified the Company that it was terminating its tiered
discount loan program, effective February 18, 2008.  The termination
of this agreement did not have a significant impact on the Company’s financial
condition.





10.
            INCOME
      TAXES




The
effective tax rate for the three months ended March 31, 2008 and 2007 was
38.7% and 41.9%, respectively.




11.
            COMMITMENTS
      AND CONTINGENCIES




Litigation and
Regulatory Matters– In the ordinary conduct of its business, the Company
is subject to periodic lawsuits, investigations and claims, including, but not
limited to, claims involving students or graduates and routine employment
matters. Although the Company cannot predict with certainty the ultimate
resolution of lawsuits, investigations and claims asserted against it, the
Company does not believe that any currently pending legal proceeding to which it
is a party will have a material adverse effect on the Company’s business,
financial condition, results of operations or cash flows.





12.
            PENSION
      PLAN




The
Company sponsors a noncontributory defined benefit pension plan covering
substantially all of the Company’s union employees.  Benefits are
provided based on employees’ years of service and earnings.  This plan
was frozen on December 31, 1994 for non-union employees.  While the
Company does not expect to make any contributions to the plan in 2008, after
considering the funded status of the plan, movements in the discount rate,
investment performance and related tax consequences, the Company may choose to
make contributions to the plan in any given year.  The net periodic
benefit income was $17 thousand and net periodic benefit cost was $25 thousand
for the three months ended March 31, 2008 and 2007, respectively.





13.
            SUBSEQUENT
      EVENTS




On April
1, 2008, the Company’s Board of Directors approved the repurchase of up to
1,000,000 shares of its common stock over the period of one year.  The
purchases will be made in the open market or in privately negotiated
transactions from time to time as permitted by securities laws and other legal
requirements.  The timing, manner, price and amount of any repurchases
will be determined by the Company in its discretion and will be subject to
economic and market conditions, stock price, applicable legal requirements and
other factors.  The program may be suspended or discontinued at any
time.


11
 Index





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




The
following discussion may contain forward-looking statements regarding us, our
business, prospects and our results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause our
actual business, prospects and results of operations to differ materially from
those that may be anticipated by such forward-looking statements.  Factors
that could cause or contribute to such differences include, but are not limited
to, those described in the “Risk Factors” section of our Annual Report on Form
10-K for the year ended December 31, 2007, as filed with the Securities and
Exchange Commission.  Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report.  We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise.  Readers are urged to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
Securities and Exchange Commission that advise interested parties of the risks
and factors that may affect our business.




The
interim financial statements filed on this Form 10-Q and the discussions
contained herein should be read in conjunction with the annual financial
statements and notes included in our Form 10-K for the year ended December 31,
2007, as filed with the Securities and Exchange Commission, which includes
audited consolidated financial statements for our three fiscal years ended
December 31, 2007.





General




We are a
leading and diversified for-profit provider of career-oriented post-secondary
education. We offer recent high school graduates and working adults degree and
diploma programs in five areas of study: automotive technology, health sciences,
skilled trades, business and information technology and hospitality services.
Each area of study is specifically designed to appeal to and meet the
educational objectives of our student population, while also satisfying the
criteria established by the various industries and employers. We believe that
the resulting diversification limits dependence on any one industry for
enrollment growth or placement opportunities and broadens our opportunity to
introduce new programs. As of March 31, 2008, 18,600 students were enrolled at
our 34 campuses across 17 states. Our campuses primarily attract students from
their local communities and surrounding areas, although our five destination
schools attract students from across the United States, and in some cases, from
abroad.




Discontinued
Operations




On July
31, 2007, our Board of Directors approved a plan to cease operations at three of
our campuses.  As a result of that decision, we recognized a non-cash
impairment charge related to goodwill at these three campuses of approximately
$2.1 million as of June 30, 2007.  Additionally, we determined that
certain long-lived assets would not be recoverable at June 30, 2007 and recorded
a non-cash charge of $0.9 million to reduce the carrying value of these assets
to their estimated fair value.





As of
September 30, 2007, all operations had ceased at these campuses, and
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.





The
following amounts relate to discontinued operations at these three
campuses:




Three
      Months EndedMarch 31,
      2007Revenues
            
            $
            1,972Operating
      expenses
            
            
            (3,167
            )(1,195
            )Benefit
      for income taxes
            
            
            507Loss
      from discontinued operations
            
            $
            (688
            )


12
 Index




Critical
Accounting Policies and Estimates




Our
discussions of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”).  The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period.  On an ongoing
basis, we evaluate our estimates and assumptions, including those related to
revenue recognition, bad debts, fixed assets, goodwill and other intangible
assets, income taxes and certain accruals.  Actual results could differ
from those estimates.  The critical accounting policies discussed herein
are not intended to be a comprehensive list of all of our accounting
policies.  In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not result in significant
management judgment in the application of such principles. We believe that
the following accounting policies are most critical to us in that they represent
the primary areas where financial information is subject to the application of
management’s estimates, assumptions and judgment in the preparation of our
consolidated financial statements.




Revenue
recognition.  Revenues are derived primarily from programs taught at
our schools.  Tuition revenues, textbook sales and one-time fees, such as
nonrefundable application fees and course material fees, are recognized on a
straight-line basis over the length of the applicable program, which is the
period of time from a student’s start date through his or her graduation date,
including internships or externships that take place prior to graduation. 
If a student withdraws from a program prior to a specified date, any paid but
unearned tuition is refunded.  Refunds are calculated and paid in
accordance with federal, state and accrediting agency standards.  Other
revenues, such as tool sales and contract training revenues are recognized as
services are performed or goods are delivered.  On an individual student
basis, tuition earned in excess of cash received is recorded as accounts
receivable, and cash received in excess of tuition earned is recorded as
unearned tuition.




Allowance for
uncollectible accounts.  Based upon experience and judgment, we
establish an allowance for uncollectible accounts with respect to tuition
receivables.  We use an internal group of collectors, augmented by
third-party collectors as deemed appropriate, in our collection efforts. 
In establishing our allowance for uncollectible accounts, we consider, among
other things, a student’s status (in-school or out-of-school), whether or not
additional financial aid funding will be collected from Title IV Programs or
other sources, whether or not a student is currently making payments and overall
collection history.  Changes in trends in any of these areas may impact the
allowance for uncollectible accounts.  The receivables balances of
withdrawn students with delinquent obligations are reserved based on our
collection history.  Although we believe that our reserves are adequate, if
the financial condition of our students deteriorates, resulting in an impairment
of their ability to make payments, additional allowances may be necessary, which
will result in increased selling, general and administrative expenses in the
period such determination is made.




Our bad
debt expense as a percentage of revenues for the three months ended March 31,
2008 and 2007 was 4.8% and 4.7%, respectively.  Our exposure to
changes in our bad debt expense could impact our operations. A 1% increase in
our bad debt expense as a percentage of revenues for the three months ended
March 31, 2008 and 2007 would have resulted in an increase in bad debt expense
of $0.8 million in each year.




Because a
substantial portion of our revenues is derived from Title IV programs, any
legislative or regulatory action that significantly reduces the funding
available under Title IV programs or the ability of our students or schools to
participate in Title IV programs could have a material effect on our ability to
realize our receivables.




Goodwill. We
test our goodwill for impairment annually, or whenever events or changes in
circumstances indicate impairment may have occurred, by comparing its fair value
to its carrying value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations, including changes
that restrict the activities of the acquired business, and a variety of other
circumstances. If we determine that impairment has occurred, we are required to
record a write-down of the carrying value and charge the impairment as an
operating expense in the period the determination is made. In evaluating the
recoverability of the carrying value of goodwill and other indefinite-lived
intangible assets, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded
balances.




Goodwill
represents a significant portion of our total assets. As of March 31, 2008,
goodwill represented approximately $83.0 million, or 34.0%, of our total assets.
At December 31, 2007, we tested our goodwill for impairment utilizing a market
capitalization approach and determined that there was no impairment of our
goodwill.  No events have occurred subsequently that would mandate
retesting.




13
 Index




Stock-based
compensation.  We currently account for stock-based employee
compensation arrangements in accordance with the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment.” 
We use a fair value-based method of accounting for options as prescribed by SFAS
No. 123 “Accounting for
Stock-Based Compensation”.





Bonus
costs.  We accrue the estimated cost of our bonus programs using
current financial and statistical information as compared to targeted financial
achievements and actual student graduate outcomes.  Although we
believe our estimated liability recorded for bonuses is reasonable, actual
results could differ and require adjustment of the recorded
balance.





Effect
of Inflation




Inflation
has not had a material effect on our operations.




Recent
Accounting Pronouncements




In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures about Derivative Instruments and
Hedging Activities,”(“SFAS No. 161”)–an amendment to FASB
Statement No. 133.  The Statement is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations; and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The Statement will be
effective for us as of January 1, 2009. The adoption of the provision of SFAS
No. 161 is not expected to have a material effect on our consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations”. The
Statement establishes revised principles and requirements for how we will
recognize and measure assets and liabilities acquired in a business combination.
The Statement will be effective for our business combinations completed on or
after January 1, 2009.  We are currently evaluating the impact of the
adoption of the Statement on our consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, (“SFAS No. 160”), an amendment of
Accounting Research Bulletin (“ARB”) No. 51".The Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The Statement will
be effective for us as of January 1, 2009.  The adoption of the
provision of SFAS No. 160 is not expected to have a material effect on our
consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.  Historically GAAP
has required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. SFAS No. 159
helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with detailed rules for hedge
accounting.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of our choice to use fair value on its
earnings. It also requires entities to display the fair value of those assets
and liabilities for which the entity has chosen to use fair value on the face of
the balance sheet.  SFAS No. 159 became effective for us as of January 1,
2008; however, we did not elect to utilize the option to report selected assets
and liabilities at fair value.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,(“SFAS No. 157”). SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements; FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
The provisions of SFAS No. 157 became effective for us as of January 1, 2008.
The adoption of the provision of SFAS No. 157 had no effect on our consolidated
financial statements.


14
 Index




Results
of Operations





Certain
reported amounts in our analysis have been rounded for presentation
purposes.




The
following table sets forth selected consolidated statements of operations data
as a percentage of revenues for each of the periods indicated:




Three
      Months EndedMarch 31,2008
            
            
            2007Revenues
            
            
            100.0
            %
            
            
            100.0
            %Costs
      and expenses:Educational
      services and facilities
            
            
            43.6
            %
            
            
            44.8
            %Selling,
      general and administrative
            
            
            54.9
            %
            
            
            56.7
            %Total
      costs and expenses
            
            
            98.5
            %
            
            
            101.5
            %Operating
      income (loss)
            
            
            1.5
            %
            
            
            (1.5
            %)Interest
      expense, net
            
            
            (0.5
            %)
            
            
            (0.6
            %)Income
      (loss) from continuing operations before income taxes
            
            
            1.0
            %
            
            
            (2.1
            %)Provision
      (benefit) for income taxes
            
            
            0.4
            %
            
            
            (0.9
            %)Net
      income (loss) from continuing operations
            
            
            0.6
            %
            
            
            (1.2
            %)








Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007




Revenues. 
Revenues increased by $7.9 million, or 10.3%, to $84.0 million for the quarter
ended March 31, 2008 from $76.2 million for the quarter ended March 31,
2007.  The increase in revenues for the quarter was primarily attributable
to a 9.3% increase in average student population, which increased to 18,459 for
the quarter ended March 31, 2008 from 16,885 for the quarter ended March 31,
2007.  The remainder of this increase was due to tuition
increases.  For a general discussion of trends in our student
enrollment, see “Seasonality and Trends” below.




Educational
services and facilities expenses.  Our educational services and
facilities expenses for the quarter ended March 31, 2008 were $36.6 million,
representing an increase of $2.5 million, or 7.3%, as compared to $34.2 million
for the quarter ended March 31, 2007. The increase in educational services
and facilities expenses was due to instructional expenses and books and
tools expenses, which increased by $1.1 million, or 6.0%, and $0.9 million, or
26.7%, respectively, over the same quarter in 2007.  Increases in
instructional expenses and books and tools expenses were due to a 7.5% increase
in student starts during the first quarter of 2008 as compared to the first
quarter of 2007 and as a result of the overall increase in student
population.  We began 2008 with approximately 1,400 more students than
we began with on January 1, 2007.   The remainder of the increase
in educational services and facilities expenses was due to facilities expenses,
which increased by approximately $0.4 million over the first quarter of 2007
primarily due to increased depreciation expense of $0.7 million, offset by
decreases in repairs and maintenance during the period. As a percentage of
revenues, educational services and facilities expenses for the first quarter of
2008 decreased to 43.6% from 44.8% for the first quarter of 2007.





Selling, general
and administrative expenses.  Our selling, general and
administrative expenses for the quarter ended March 31, 2008 were $46.1 million,
representing an increase of $2.9 million, or 6.8%, as compared to $43.2 million
for the quarter ended March 31, 2007.  The increase in our selling, general
and administrative expenses during the period was primarily due to a $0.2
million, or 6.0%, increase in student services and a $2.6 million, or 11.7%,
increase in administrative expenses for the quarter ended March 31, 2008 over
the quarter ended March 31, 2007.  The increase in student services
was primarily due to increases in compensation and benefit expenses attributed
to increased financial aid and career services personnel as a result of larger
student population during the first quarter of 2008 as compared to the first
quarter of 2007.   The increase in administrative expenses during
the first quarter of 2008 as compared to the first quarter of 2007 was primarily
due to (a) a $1.0 million increase in compensation and benefits, resulting from
annual compensation increases and increased cost of benefits provided to
employees; (b)  a $0.4 million increase in bad debt expense;
(c) a $0.2 million increase in employee training expenses; and (d) a $0.2
million increase in software maintenance expenses resulting from increased
software licenses for our student management system.   As a
percentage of revenues, selling, general and administrative expenses for the
first quarter of 2008 decreased to 54.9% from 56.7% for the first quarter of
2007.





For the
quarter ended March 31, 2008, our bad debt expense as a percentage of revenue
was 4.8% as compared to 4.7% for the same quarter in 2007.  This
increase was primarily attributable to higher accounts receivable due to a 10.3%
increase in revenues during the first quarter of 2008 as compared to the first
quarter of 2007.  The number of days sales outstanding at March 31,
2008 increased slightly to 23.9 days compared to 23.5 days at March 31,
2007.


15
 Index





Net interest
expense.  Our net interest expense for the quarter ended March 31,
2008 was $0.5 million, essentially flat as compared to the quarter ended March
31, 2007.





Income
taxes.  Our provision for income taxes for the quarter ended March
31, 2008 was $0.3 million, or 38.7% of pretax income, as compared to a benefit
of $0.7 million, or 41.9% of pretax loss, for the quarter ended March 31,
2007.  The decrease in our effective tax rate for the quarter ended March
31, 2008 was primarily attributable to favorable shifts in state taxable income
between various states.





Liquidity
and Capital Resources




Our
primary capital requirements are for facility expansion and maintenance,
acquisitions and the development of new programs.  Our principal sources of
liquidity have been cash provided by operating activities and borrowings under
our credit agreement.





The
following chart summarizes the principal elements of our cash flows (in
thousands):




Three
      Months EndedMarch 31,2008
            
            
            2007Net
      cash provided by (used in) operating activities
            
            $
            7,547
            
            
            $
            (9,092
            )Net
      cash used in investing activities
            
            
            (7,440
            )
            
            
            (5,752
            )Net
      cash provided by financing activities
            
            
            2,011
            
            
            
            13,041








At March
31, 2008, we had cash and cash equivalents of $5.6 million, compared to $3.5
million as of December 31, 2007.  For the three months ended March 31,
2008, cash and cash equivalents increased by approximately $2.1 million from
December 31, 2007.  Historically, we have financed our operating
activities and organic growth primarily through cash generated from
operations.  We have financed acquisitions primarily through borrowings
under our credit facility and cash generated from operations.  During the
first quarter of 2008, we borrowed $7.0 million under our credit
facility.  We currently anticipate that we will be able to meet both
our short-term cash needs, as well as our need to fund operations and meet our
obligations beyond the next twelve months with cash generated by operations,
existing cash balances and, if necessary, borrowings under our credit agreement.
At March 31, 2008, we had net borrowings available under our $100 million credit
agreement of approximately $88.6 million, including a $15.6 million sub-limit on
letters of credit.




Our
primary source of cash is tuition collected from the students. The majority of
students enrolled at our schools rely on funds received under various
government-sponsored student financial aid programs to pay a substantial portion
of their tuition and other education-related expenses. The largest of these
programs are Title IV Programs which represented approximately 80% of our cash
receipts relating to revenues in 2007. Students must apply for a new loan for
each academic period. Federal regulations dictate the timing of disbursements of
funds under Title IV Programs and loan funds are generally provided by lenders
in two disbursements for each academic year. The first disbursement is usually
received approximately 30 days after the start of a student's academic year
and the second disbursement is typically received at the beginning of the
sixteenth week from the start of the student's academic year. Certain types of
grants and other funding are not subject to a 30-day delay. Our programs range
from 14 to 105 weeks. In certain instances, if a student withdraws from a
program prior to a specified date, any paid but unearned tuition or prorated
Title IV financial aid is refunded according to state and federal
regulations.




As a
result of the significance of the Title IV funds received by our students, we
are highly dependent on these funds to operate our business. Any reduction in
the level of Title IV funds that our students are eligible to receive or any
impact on our ability to be able to receive Title IV funds would have a
significant impact on our operations and our financial condition.




Cash
Flow Operating Activities





Net cash
provided by operating activities was $7.5 million for the three months ended
March 31, 2008 compared to net cash used of $9.1 million for the three months
ended March 31, 2007.  The $16.6 million increase in cash provided by
operating activities was primarily due to an approximately $6.2 million increase
of cash received from federal fund programs and a reduction of approximately
$4.6 million in cash paid for income taxes for the quarter ended March 31, 2008
as compared to the quarter ended March 31, 2007. The reminder of the increase
was primarily due to an increase in net income for the quarter ended March 31,
2008 as compared to a net loss for the quarter ended March 31,
2007.


16
 Index


Cash
Flow Investing Activities




Net cash
used in investing activities increased by $1.6 million to $7.4 million for the
three months ended March 31, 2008 from $5.8 million for the three months ended
March 31, 2007.  Our cash used in investing activities was primarily
related to the purchase of property and equipment.  Our capital
expenditures primarily result from facility expansion, leasehold improvements,
and investments in classroom and shop technology.





Capital
expenditures are expected to increase in 2008 as we upgrade and expand current
equipment and facilities or open new facilities to meet increased student
enrollments. We anticipate capital expenditures to range between 8% and 10% of
revenues in 2008 and expect to fund these capital expenditures with cash
generated from operating activities and, if necessary, with borrowings under our
credit agreement.





Cash
Flow Financing Activities




Net cash
provided by financing activities was $2.0 million for the three months ended
March 31, 2008, as compared to $13.0 million for the three months ended March
31, 2007.  This decrease of $11.0 million was attributable to a decrease in
our net borrowings under our credit agreement for the three months ended
March 31, 2008, as compared to the three months ended March 31,
2007.




Under the
terms of our credit agreement, the lending syndicate provided us with a $100
million credit facility with a term of five years.  The credit agreement
permits the issuance of letters of credit of up to $20 million, the amount of
which reduces the availability of permitted borrowings under the
agreement.   At the time of entering into the credit agreement we
incurred approximately $0.8 million of deferred finance charges.




The
following table sets forth our long-term debt (in thousands):




At
      March 31,
            
            
            At
      December 31,2008
            
            
            2007Credit
      agreement
            
            $
            7,000
            
            
            $
            5,000Finance
      obligation
            
            
            9,672
            
            
            
            9,672Automobile
      loans
            
            
            10
            
            
            
            16Capital
      leases (with rates ranging from 2.9% to 8.5%)
            
            
            643
            
            
            
            690Subtotal
            
            
            17,325
            
            
            
            15,378Less
      current maturities
            
            
            (189
            )
            
            
            (204
            )Total
      long-term debt
            
            $
            17,136
            
            
            $
            15,174








Contractual
Obligations




Long-term
Debt.  As of March 31, 2008, our long-term debt consisted of amounts
borrowed under our credit agreement, the finance obligation in connection with
our sale-leaseback transaction in 2001 and amounts due under capital lease
obligations.




Lease
Commitments.  We lease offices, educational facilities and equipment
for varying periods through the year 2023 at basic annual rentals (excluding
taxes, insurance, and other expenses under certain leases).




The
following table contains supplemental information regarding our total
contractual obligations as of March 31, 2008, measured from the end of our
fiscal year, December 31, 2007 (in thousands):




Payments
      Due by PeriodTotal
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            4-5
      years
            
            
            After
      5 yearsCredit
      agreement
            
            $
            7,000
            
            
            $
            -
            
            
            $
            7,000
            
            
            $
            -
            
            
            $
            -Capital
      leases (including interest)
            
            
            762
            
            
            
            227
            
            
            
            321
            
            
            
            214
            
            
            
            -Operating
      leases
            
            
            131,074
            
            
            
            16,435
            
            
            
            27,791
            
            
            
            24,516
            
            
            
            62,332Rent
      on finance obligation
            
            
            12,202
            
            
            
            1,381
            
            
            
            2,763
            
            
            
            2,763
            
            
            
            5,295Automobile
      loans (including interest)
            
            
            16
            
            
            
            16
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      contractual cash obligations
            
            $
            151,054
            
            
            $
            18,059
            
            
            $
            37,875
            
            
            $
            27,493
            
            
            $
            67,627


17
 Index




Off-Balance
Sheet Arrangements




We had no
off-balance sheet arrangements as of March 31, 2008, except for our letters of
credit of $4.4 million which are primarily comprised of letters of credit for
the DOE and security deposits in connection with certain of our real estate
leases. These off-balance sheet arrangements do not adversely impact our
liquidity or capital resources.




Seasonality
and Trends




Our net
revenues and operating results normally fluctuate as a result of seasonal
variations in our business, principally due to changes in total student
population.  Student population varies as a result of new student
enrollments, graduations, student attrition and seasonal enrollment
patterns.  Historically, our schools have experienced lower student
populations in our first and second quarters and larger class starts in the
third and fourth quarters as well as higher student attrition in the first half
of the year.  Our second half growth is largely dependent on a successful
high school recruiting season.  We recruit our high school students
several months ahead of their scheduled start dates, and thus, while we have
visibility on the number of students who have expressed interest in attending
our schools, we cannot predict with certainty the actual number of new student
enrollments and the related impact on revenues.  Our expenses,
however, do not vary significantly over the course of a year with changes in our
student population and net revenues.  During the first half of the year, we
make significant investments in marketing, staff, programs and facilities to
ensure that we meet our second half targets and, as a result, such expenses do
not fluctuate significantly on a quarterly basis.  To the extent new
student enrollments, and related revenues, in the second half of the year fall
short of our estimates, our operating results could suffer.  We expect
quarterly fluctuations in operating results to continue as a result of seasonal
enrollment patterns.  Such patterns may change, however, as a result of new
school openings, new program introductions, increased enrollments of adult
students and/or acquisitions.





Similar
to other public for-profit post secondary education companies, the increase in
our average undergraduate enrollments has not met anticipated growth
rates.  As a result of the slow down in 2005 and 2006, we entered 2007
with fewer students enrolled than we had in January 2006.  This trend
continued through the first quarter of 2007 and resulted in a shortfall in our
expected enrollments during the first quarter of 2007.  The slow down
that has occurred in the for-profit post secondary education sector appears to
have had a greater impact on companies, like ours, that are more dependent on
their on-ground business as opposed to on-line students.  We believe
that the slow down can be attributed to many factors, including (a) the economy
(b) the availability of student financing; (c) the dependency on television to
attract students to our school; (d) turnover of our sales representatives; and
(e) increased competition in the marketplace.  These trends began to
reverse in the second quarter of 2007.  As a result, we achieved
positive organic growth through the remainder of 2007 and into the first quarter
of 2008.  We began 2008 with approximately 1,400 more students than we
began with on January 1, 2007, which we attribute to improved execution
resulting from the growth initiatives we introduced in the third quarter of 2006
and not from any changes in the macro environment.





Despite
soft organic enrollment trends and increased volatility in the near term, we
believe that our growth initiatives as well as the steps we have taken to
address the challenging trends that our industry and we are currently facing
will produce positive growth over the long-term.   While our
operating strategy, business model and infrastructure are well suited for the
short-term and we have ample operating flexibility, we continue to be prudent
and realistic and have taken the necessary steps to ensure that operations that
have not grown as rapidly as expected are right sized.  We also
continue to make investments in areas that are demonstrating solid
growth.





Operating
income is negatively impacted during the initial start-up phase of new campus
expansions.  We incur sales and marketing costs as well as campus personnel
costs in advance of the opening of each campus.  Typically we begin to
incur such costs approximately 15 months in advance of the campus opening with
the majority of such costs being incurred in the nine-month period prior to a
campus opening.




18
 Index




Item
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We are
exposed to certain market risks as part of our on-going business
operations.  We have a credit agreement with a syndicate of banks. 
Our obligations under the credit agreement are secured by a lien on
substantially all of our assets and our subsidiaries and any assets that we or
our subsidiaries may acquire in the future, including a pledge of substantially
all of our subsidiaries’ common stock. Outstanding borrowings bear interest at
the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a base rate (as
defined in the credit agreement).  As of March 31, 2008, we had $7.0
million outstanding under our credit agreement.  The interest rate under
this borrowing was 5.25% at March 31, 2008.





Based on
our outstanding debt balance, a change of one percent in the interest rate would
cause a change in interest expense of approximately $0.1 million, or less than
$.01 per basic share, on an annual basis.  Changes in interest rates could
have an impact on our operations, which are greatly dependent on students’
ability to obtain financing.  Any increase in interest rates could
greatly impact our ability to attract students and have an adverse impact on the
results of our operations.





The
remainder of our interest rate risk is associated with miscellaneous capital
equipment leases, which are not material.




Item
4.  CONTROLS AND PROCEDURES




(a)Evaluation of disclosure controls
and procedures.  Our Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the
end of the quarterly period covered by this report, have concluded that our
disclosure controls and procedures are adequate and effective to reasonably
ensure that material information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specific by Securities and Exchange
Commissions’ Rules and Forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.




(b) Changes in Internal Control Over
Financial Reporting.  There were no changes made during our most
recently completed fiscal quarter in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.




PART II. OTHER INFORMATION




Item
1.  LEGAL PROCEEDINGS




In the
ordinary conduct of our business, we are periodically subject to lawsuits,
investigations and claims, including, but not limited to, claims involving
students or graduates and routine employment matters.  Although we cannot
predict with certainty the ultimate resolution of lawsuits, investigations and
claims asserted against us, we do not believe that any currently pending legal
proceeding to which we are a party will have a material adverse effect on our
business or financial condition, results of operations or cash flows.




19
 Index




Item
6.  EXHIBITS




EXHIBIT
INDEX





The
following exhibits are filed with or incorporated by reference into this Form
10-Q.








ExhibitNumber
            
            Description3.1
            
            Amended
      and Restated Certificate of Incorporation of the Company
    (1).3.2
            
            Amended
      and Restated By-laws of the Company (2).4.1
            
            Stockholders’
      Agreement, dated as of September 15, 1999, among Lincoln Technical
      Institute, Inc., Back to School Acquisition, L.L.C. and Five Mile River
      Capital Partners LLC (1).4.2
            
            Letter
      agreement, dated August 9, 2000, by Back to School Acquisition, L.L.C.,
      amending the Stockholders’ Agreement (1).4.3
            
            Letter
      agreement, dated August 9, 2000, by Lincoln Technical Institute, Inc.,
      amending the Stockholders’ Agreement (1).4.4
            
            Management
      Stockholders Agreement, dated as of January 1, 2002, by and among Lincoln
      Technical Institute, Inc., Back to School Acquisition, L.L.C. and the
      Stockholders and other holders of options under the Management Stock
      Option Plan listed therein (1).4.5
            
            Assumption
      Agreement and First Amendment to Management Stockholders Agreement, dated
      as of December 20, 2007, by and among Lincoln Educational Services
      Corporation, Lincoln Technical Institute, Inc., Back to School
      Acquisition, L.L.C. and the Management Investors parties therein
      (6).4.6
            
            Registration
      Rights Agreement between the Company and Back to School Acquisition,
      L.L.C. (2).4.7
            
            Specimen
      Stock Certificate evidencing shares of common stock
(1).10.1
            
            Credit
      Agreement, dated as of February 15, 2005, among the Company, the
      Guarantors from time to time parties thereto, the Lenders from time to
      time parties thereto and Harris Trust and Savings Bank, as Administrative
      Agent (1).10.2
            
            Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and David F. Carney (3).10.3
            
            Separation
      and Release Agreement, dated as of October 15, 2007, between the Company
      and Lawrence E. Brown (4).10.4
            
            Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Scott M. Shaw (3).10.5
            
            Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Cesar Ribeiro (3).10.6
            
            Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Shaun E. McAlmont (3).10.7
            
            Lincoln
      Educational Services Corporation 2005 Long Term Incentive Plan
      (1).10.8
            
            Lincoln
      Educational Services Corporation 2005 Non Employee Directors Restricted
      Stock Plan (1).10.9
            
            Lincoln
      Educational Services Corporation 2005 Deferred Compensation Plan
      (1).




20
 Index




10.10
              
              Lincoln
      Technical Institute Management Stock Option Plan, effective January 1,
      2002 (1).10.11
              
              Form
      of Stock Option Agreement, dated January 1, 2002, between Lincoln
      Technical Institute, Inc. and certain participants (1).10.12
              
              Form
      of Stock Option Agreement under our 2005 Long Term Incentive Plan
      (7).10.13
              
              Form
      of Restricted Stock Agreement under our 2005 Long Term Incentive Plan
      (7).10.14
              
              Management
      Stock Subscription Agreement, dated January 1, 2002, among Lincoln
      Technical Institute, Inc. and certain management investors
      (1).10.15
              
              Stockholder’s
      Agreement among Lincoln Educational Services Corporation, Back to School
      Acquisition L.L.C., Steven W. Hart and Steven W. Hart 2003 Grantor
      Retained Annuity Trust (2).10.16
              
              Stock
      Purchase Agreement, dated as of March 30, 2006, among Lincoln Technical
      Institute, Inc., and Richard I. Gouse, Andrew T. Gouse, individually and
      as Trustee of the Carolyn Beth Gouse Irrevocable Trust, Seth A. Kurn and
      Steven L. Meltzer (5).31.1 *
              
              Certification
      of Chairman & Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2 *
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32 *
              
              Certification
      of Chairman & Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 ________________________________________________




(1)
            Incorporated
      by reference to the Company’s Registration Statement on Form S-1
      (Registration No. 333-123664).




(2)
            Incorporated
      by reference to the Company’s Form 8-K dated June 28,
  2005.





(3)
            Incorporated
      by reference to the Company’s Form 10-K for the year ended December 31,
      2006.





(4)
            Incorporated
      by reference to the Company’s Form 8-K dated October 15,
    2007.




(5)
            Incorporated
      by reference to the Company’s Form 10-Q for the quarterly period ended
      March 31, 2006.




(6)
            Incorporated
      by reference to the Company’s Registration Statement on Form S-3
      (Registration No. 333-148406).





(7)
            Incorporated
      by reference to the Company’s Form 10-K for the year ended December 31,
      2007.





*
            Filed
      herewith.


21
 Index




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.







LINCOLN
      EDUCATIONAL SERVICES CORPORATIONDate:
      May 8, 2008
            By:
            /s/CesarRibeiroCesar
      RibeiroChief
      Financial Officer(Principal
      Accounting and Financial Officer)




22