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 September 30, 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
      filer xNon-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 x





As of
November 4, 2008, there were 25,458,821 shares of the registrant’s common stock
outstanding.










LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES





INDEX TO
FORM 10-Q





FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008








PART I.
                  FINANCIAL
      INFORMATIONItem 1.
                  Financial
      Statements
                  1Condensed Consolidated Balance
      Sheets at September 30, 2008 and December 31, 2007
      (unaudited)
                  1Condensed Consolidated Statements
      of Operations for the three and nine months ended September 30, 2008 and
      2007 (unaudited)
                  3Condensed Consolidated Statement
      of Changes in Stockholders’ Equity for the nine months ended
      September  30, 2008 (unaudited)
                  4Condensed Consolidated Statements
      of Cash Flows for the nine months ended September 30, 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
                  13Item 3.
                  Quantitative and Qualitative
      Disclosures About Market Risk
                  21Item 4.
                  Controls and
      Procedures
                  22PART II.
                  OTHER
      INFORMATION
                  22Item 1.
                  Legal
      Proceedings
                  22Item 2.
                  Unregistered Sales of Equity
      Securities and Use of Proceeds
                  22Item 6.
                  Exhibits
                  22


Index


PART I – FINANCIAL INFORMATION





Item 1. Financial Statements





LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share amounts)


(Unaudited)





September 30,
                                  
                                  
                                  December 31,2008
                                  
                                  
                                  2007ASSETSCURRENT
      ASSETS:Cash
                                  
                                  $
                                  6,145
                                  
                                  
                                  $
                                  3,502Accounts
      receivable, less allowance of $13,269 and $11,244 at September 30, 2008
      and December 31, 2007, respectively
                                  
                                  
                                  25,447
                                  
                                  
                                  
                                  23,286Inventories
                                  
                                  
                                  3,710
                                  
                                  
                                  
                                  2,540Deferred
      income taxes, net
                                  
                                  
                                  5,086
                                  
                                  
                                  
                                  4,575Due
      from federal programs
                                  
                                  
                                  158
                                  
                                  
                                  
                                  6,087Prepaid
      expenses and other current assets
                                  
                                  
                                  2,569
                                  
                                  
                                  
                                  3,771Total
      current assets
                                  
                                  
                                  43,115
                                  
                                  
                                  
                                  43,761PROPERTY,
      EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and
      amortization of $82,717 and $82,931 at September 30, 2008 and December 31,
      2007, respectively
                                  
                                  
                                  107,517
                                  
                                  
                                  
                                  106,564OTHER
      ASSETS:Noncurrent
      accounts receivable, less allowance of $367 and $159 at September 30, 2008
      and December 31, 2007, respectively
                                  
                                  
                                  3,306
                                  
                                  
                                  
                                  1,608Deferred
      finance charges
                                  
                                  
                                  681
                                  
                                  
                                  
                                  827Pension
      plan assets, net
                                  
                                  
                                  1,694
                                  
                                  
                                  
                                  1,696Deferred
      income taxes, net
                                  
                                  
                                  5,893
                                  
                                  
                                  
                                  5,500Goodwill
                                  
                                  
                                  82,714
                                  
                                  
                                  
                                  82,714Other
      assets, net
                                  
                                  
                                  3,428
                                  
                                  
                                  
                                  3,513Total
      other assets
                                  
                                  
                                  97,716
                                  
                                  
                                  
                                  95,858TOTAL
      ASSETS
                                  
                                  $
                                  248,348
                                  
                                  
                                  $
                                  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)


(Continued)





September 30,
                                
                                
                                December 31,2008
                                
                                
                                2007LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt and lease obligations
                                
                                $
                                147
                                
                                
                                $
                                204Unearned
      tuition
                                
                                
                                35,638
                                
                                
                                
                                34,810Accounts
      payable
                                
                                
                                13,655
                                
                                
                                
                                13,721Accrued
      expenses
                                
                                
                                15,778
                                
                                
                                
                                10,079Income
      taxes payable
                                
                                
                                308
                                
                                
                                
                                1,460Other
      short-term liabilities
                                
                                
                                481
                                
                                
                                
                                1,439Total
      current liabilities
                                
                                
                                66,007
                                
                                
                                
                                61,713NONCURRENT
      LIABILITIES:Long-term
      debt and lease obligations, net of current portion
                                
                                
                                10,075
                                
                                
                                
                                15,174Other
      long-term liabilities
                                
                                
                                6,882
                                
                                
                                
                                6,829Total
      liabilities
                                
                                
                                82,964
                                
                                
                                
                                83,716COMMITMENTS
      AND CONTINGENCIES (Note 10)STOCKHOLDERS'
      EQUITY:Preferred
      stock, no par value - 10,000,000 shares authorized, no shares issued and
      outstanding at September 30, 2008 and December 31, 2007
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, no par value - authorized 100,000,000 shares at September 30, 2008
      and December 31, 2007, issued 26,034,225 shares at September 30, 2008 and
      25,888,348 shares at December 31, 2007, outstanding 25,434,225 shares at
      September 30, 2008 and 25,888,348 shares at December 31,
    2008
                                
                                
                                120,453
                                
                                
                                
                                120,379Additional
      paid-in capital
                                
                                
                                14,838
                                
                                
                                
                                12,378Deferred
      compensation
                                
                                
                                (3,901
                                )
                                
                                
                                (3,228
                                )Treasury
      stock at cost - 600,000 shares at September 30, 2008 and no shares at
      December 31, 2007
                                
                                
                                (6,375
                                )
                                
                                
                                -Retained
      earnings
                                
                                
                                42,455
                                
                                
                                
                                35,024Accumulated
      other comprehensive loss
                                
                                
                                (2,086
                                )
                                
                                
                                (2,086
                                )Total
      stockholders' equity
                                
                                
                                165,384
                                
                                
                                
                                162,467TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                
                                $
                                248,348
                                
                                
                                $
                                246,183





See notes
to unaudited condensed consolidated financial statements.


2
 Index


LINCOLN EDUCATIONAL SERVICESCORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)


(Unaudited)





Three
      Months Ended
                                            
                                            
                                            Nine
      Months EndedSeptember 30,
                                            
                                            
                                            September 30,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2007REVENUES
                                            
                                            $
                                            100,481
                                            
                                            
                                            $
                                            86,566
                                            
                                            
                                            $
                                            269,584
                                            
                                            
                                            $
                                            237,480COSTS
      AND EXPENSES:Educational
      services and facilities
                                            
                                            
                                            41,554
                                            
                                            
                                            
                                            37,053
                                            
                                            
                                            
                                            114,109
                                            
                                            
                                            
                                            104,540Selling,
      general and administrative
                                            
                                            
                                            48,485
                                            
                                            
                                            
                                            41,434
                                            
                                            
                                            
                                            141,058
                                            
                                            
                                            
                                            124,075Loss
      (gain) on disposal of assets
                                            
                                            
                                            51
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            91
                                            
                                            
                                            
                                            (15
                                            )Total
      costs and expenses
                                            
                                            
                                            90,090
                                            
                                            
                                            
                                            78,487
                                            
                                            
                                            
                                            255,258
                                            
                                            
                                            
                                            228,600OPERATING
      INCOME
                                            
                                            
                                            10,391
                                            
                                            
                                            
                                            8,079
                                            
                                            
                                            
                                            14,326
                                            
                                            
                                            
                                            8,880OTHER:Interest
      income
                                            
                                            
                                            33
                                            
                                            
                                            
                                            66
                                            
                                            
                                            
                                            96
                                            
                                            
                                            
                                            149Interest
      expense
                                            
                                            
                                            (579
                                            )
                                            
                                            
                                            (686
                                            )
                                            
                                            
                                            (1,665
                                            )
                                            
                                            
                                            (1,840
                                            )Other
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            26
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            26INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
                                            
                                            
                                            9,845
                                            
                                            
                                            
                                            7,485
                                            
                                            
                                            
                                            12,757
                                            
                                            
                                            
                                            7,215PROVISION
      FOR INCOME TAXES
                                            
                                            
                                            4,139
                                            
                                            
                                            
                                            3,115
                                            
                                            
                                            
                                            5,326
                                            
                                            
                                            
                                            3,008INCOME
      FROM CONTINUING OPERATIONS
                                            
                                            
                                            5,706
                                            
                                            
                                            
                                            4,370
                                            
                                            
                                            
                                            7,431
                                            
                                            
                                            
                                            4,207LOSS
      FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,331
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (5,487
                                            )NET
      INCOME (LOSS)
                                            
                                            $
                                            5,706
                                            
                                            
                                            $
                                            2,039
                                            
                                            
                                            $
                                            7,431
                                            
                                            
                                            $
                                            (1,280
                                            )BasicEarnings
      per share from continuing operations
                                            
                                            $
                                            0.23
                                            
                                            
                                            $
                                            0.17
                                            
                                            
                                            $
                                            0.29
                                            
                                            
                                            $
                                            0.17Loss
      per share from discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (0.09
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (0.22
                                            )Net
      income (loss) per share
                                            
                                            $
                                            0.23
                                            
                                            
                                            $
                                            0.08
                                            
                                            
                                            $
                                            0.29
                                            
                                            
                                            $
                                            (0.05
                                            )DilutedEarnings
      per share from continuing operations
                                            
                                            $
                                            0.22
                                            
                                            
                                            $
                                            0.17
                                            
                                            
                                            $
                                            0.29
                                            
                                            
                                            $
                                            0.16Loss
      per share from discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (0.09
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (0.21
                                            )Net
      income (loss) per share
                                            
                                            $
                                            0.22
                                            
                                            
                                            $
                                            0.08
                                            
                                            
                                            $
                                            0.29
                                            
                                            
                                            $
                                            (0.05
                                            )Weighted
      average number of common shares outstanding:Basic
                                            
                                            
                                            25,088
                                            
                                            
                                            
                                            25,503
                                            
                                            
                                            
                                            25,362
                                            
                                            
                                            
                                            25,482Diluted
                                            
                                            
                                            25,810
                                            
                                            
                                            
                                            26,050
                                            
                                            
                                            
                                            26,039
                                            
                                            
                                            
                                            26,029





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
                                
                                
                                Treasury
                                
                                
                                Retained
                                
                                
                                ComprehensiveShares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Compensation
                                
                                
                                Stock
                                
                                
                                Earnings
                                
                                
                                Loss
                                
                                
                                TotalBALANCE
      - January 1, 2008
                                
                                
                                25,888,348
                                
                                
                                $
                                120,379
                                
                                
                                $
                                12,378
                                
                                
                                $
                                (3,228
                                )
                                
                                $
                                -
                                
                                
                                $
                                35,024
                                
                                
                                $
                                (2,086
                                )
                                
                                $
                                162,467Net
      income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                7,431
                                
                                
                                
                                -
                                
                                
                                
                                7,431Stock-based
      compensation expenseRestricted
      stock
                                
                                
                                123,477
                                
                                
                                
                                -
                                
                                
                                
                                1,487
                                
                                
                                
                                (673
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                814Stock
      options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                957
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                957Treasury
      stock purchases
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,375
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,375
                                )Tax
      benefit of options exercised
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                16
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                16Exercise
      of stock options
                                
                                
                                22,400
                                
                                
                                
                                74
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                74BALANCE
      - September 30, 2008
                                
                                
                                26,034,225
                                
                                
                                $
                                120,453
                                
                                
                                $
                                14,838
                                
                                
                                $
                                (3,901
                                )
                                
                                $
                                (6,375
                                )
                                
                                $
                                42,455
                                
                                
                                $
                                (2,086
                                )
                                
                                $
                                165,384





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)





Nine
      Months Ended
                                            September 30,2008
                                          
                                          
                                          2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                          
                                          $
                                          7,431
                                          
                                          
                                          $
                                          (1,280
                                          )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                                          
                                          
                                          13,377
                                          
                                          
                                          
                                          11,734Amortization
      of deferred finance charges
                                          
                                          
                                          146
                                          
                                          
                                          
                                          143Deferred
      income taxes
                                          
                                          
                                          (904
                                          )
                                          
                                          
                                          (2,416
                                          )Loss
      (gain) on disposal of assets
                                          
                                          
                                          91
                                          
                                          
                                          
                                          (15
                                          )Impairment
      of goodwill and long-lived assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,099Fixed
      asset donations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (26
                                          )Provision
      for doubtful accounts
                                          
                                          
                                          15,855
                                          
                                          
                                          
                                          12,639Stock-based
      compensation expense
                                          
                                          
                                          1,771
                                          
                                          
                                          
                                          1,349Tax
      benefit associated with exercise of stock options
                                          
                                          
                                          (16
                                          )
                                          
                                          
                                          -Deferred
      rent
                                          
                                          
                                          341
                                          
                                          
                                          
                                          451(Increase)
      decrease in assets:Accounts
      receivable
                                          
                                          
                                          (19,714
                                          )
                                          
                                          
                                          (13,247
                                          )Inventories
                                          
                                          
                                          (1,170
                                          )
                                          
                                          
                                          (256
                                          )Prepaid
      expenses and other current assets
                                          
                                          
                                          354
                                          
                                          
                                          
                                          (941
                                          )Due
      from federal programs
                                          
                                          
                                          5,929
                                          
                                          
                                          
                                          -Other
      assets
                                          
                                          
                                          2
                                          
                                          
                                          
                                          (250
                                          )Increase
      (decrease) in liabilities:Accounts
      payable
                                          
                                          
                                          2,377
                                          
                                          
                                          
                                          1,321Other
      liabilities
                                          
                                          
                                          (1,211
                                          )
                                          
                                          
                                          1,800Income
      taxes
                                          
                                          
                                          (1,136
                                          )
                                          
                                          
                                          (8,529
                                          )Accrued
      expenses
                                          
                                          
                                          5,652
                                          
                                          
                                          
                                          1,919Unearned
      tuition
                                          
                                          
                                          828
                                          
                                          
                                          
                                          1,455Total
      adjustments
                                          
                                          
                                          22,572
                                          
                                          
                                          
                                          10,230Net
      cash provided by operating activities
                                          
                                          
                                          30,003
                                          
                                          
                                          
                                          8,950CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (612
                                          )Capital
      expenditures
                                          
                                          
                                          (15,919
                                          )
                                          
                                          
                                          (16,391
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (15,919
                                          )
                                          
                                          
                                          (17,003
                                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from borrowings
                                          
                                          
                                          23,000
                                          
                                          
                                          
                                          21,500Payments
      on borrowings
                                          
                                          
                                          (28,000
                                          )
                                          
                                          
                                          (16,500
                                          )Proceeds
      from exercise of stock options
                                          
                                          
                                          74
                                          
                                          
                                          
                                          145Tax
      benefit associated with exercise of stock options
                                          
                                          
                                          16
                                          
                                          
                                          
                                          68Principal
      payments of capital lease obligations
                                          
                                          
                                          (156
                                          )
                                          
                                          
                                          (84
                                          )Purchase
      of treasury stock
                                          
                                          
                                          (6,375
                                          )
                                          
                                          
                                          -Net
      cash (used in) provided by financing activities
                                          
                                          
                                          (11,441
                                          )
                                          
                                          
                                          5,129NET
      INCREASE (DECREASE) IN CASH
                                          
                                          
                                          2,643
                                          
                                          
                                          
                                          (2,924
                                          )CASH—Beginning
      of period
                                          
                                          
                                          3,502
                                          
                                          
                                          
                                          6,461CASH—End
      of period
                                          
                                          $
                                          6,145
                                          
                                          
                                          $
                                          3,537





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)


(Continued)





Nine
      Months Ended
                                September 30,2008
                              
                              
                              2007SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                              
                              $
                              1,571
                              
                              
                              $
                              1,770Income
      taxes
                              
                              $
                              7,754
                              
                              
                              $
                              9,898SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING ACTIVITIES:Fixed
      assets acquired in capital lease transactions
                              
                              $
                              -
                              
                              
                              $
                              652Fixed
      assets acquired in noncash transactions
                              
                              $
                              1,505
                              
                              
                              $
                              1,814





See notes
to unaudited condensed consolidated financial statements.


6
 Index


LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS


THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 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 35 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, should be read in conjunction with the
December 31, 2007 consolidated financial statements of the Company, and 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 and
nine months ended September 30, 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 include the accounts of
the Company and its subsidiaries.  All 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.





Stock Based
Compensation – The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of SFAS No. 123R, “Share Based
Payment.” The accompanying condensed consolidated
statements of operations include compensation expense of approximately $0.6
million and $0.5 million for the three months ended September 30, 2008 and 2007,
respectively, and $1.8 million and $1.3 million for the nine months ended
September 30, 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 at the
time options are granted.





2.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS
No. 163”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  SFAS No. 163 will be effective for the Company as of
January 1, 2009.  The implementation of this standard is not expected
to have a material impact on the Company’s consolidated financial
statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 will be effective for the Company as of November 15,
2008.  The implementation of this standard is not expected to have
material impact on the Company’s consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” (“SFAS No. 161”) –an amendment to FASB
Statement No. 133.   SFAS No. 161 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.


7
 Index


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 new standard requires, among other things, transaction costs
incurred in a business combination to be expensed, establishes a new measurement
date for valuing acquirer shares issued in consideration for a business
combination, and requires the recognition of contingent consideration and
pre-acquisition gain and loss contingencies. SFAS No. 141R will be
effective for the Company’s business combinations completed on or after January
1, 2009.  The Company expects that the adoption of SFAS No. 141R could
have a material impact on its financial statements when accounting for future
material acquisitions.




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”). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 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.




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.  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. SFAS No. 157 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.


8
 Index


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





Three
      Months Ended
                        
                        
                        Nine
      Months EndedSeptember 30,
      2007
                        
                        
                        September 30,
      2007Revenues
                        
                        $
                        727
                        
                        
                        $
                        4,230Operating
      expenses
                        
                        
                        (4,775
                        )
                        
                        
                        (13,760
                        )(4,048
                        )
                        
                        
                        (9,530
                        )Benefit
      for income taxes
                        
                        
                        (1,717
                        )
                        
                        
                        (4,043
                        )Loss
      from discontinued operations
                        
                        $
                        (2,331
                        )
                        
                        $
                        (5,487
                        )





4.
            WEIGHTED
      AVERAGE COMMON SHARES





The
weighted average number of common shares used to compute basic and diluted
income per share for the three and nine months ended September 30, 2008 and
2007, respectively, was as follows:





Three
      Months Ended
                            
                            
                            Nine
      Months EndedSeptember 30,
                            
                            
                            September 30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Basic
      shares outstanding
                            
                            
                            25,087,946
                            
                            
                            
                            25,503,417
                            
                            
                            
                            25,361,821
                            
                            
                            
                            25,481,986Dilutive
      effect of stock options
                            
                            
                            721,765
                            
                            
                            
                            546,549
                            
                            
                            
                            677,530
                            
                            
                            
                            547,302Diluted
      shares outstanding
                            
                            
                            25,809,711
                            
                            
                            
                            26,049,966
                            
                            
                            
                            26,039,351
                            
                            
                            
                            26,029,288





For the
three months ended September 30, 2008 and 2007, options to acquire 546,708 and
691,208 shares, respectively, and for the nine months ended September 30, 2008
and 2007, options to acquire 546,708 and 691,208 shares, respectively, were
excluded from the above table as the effect of their inclusion on reported
earnings per share would have been antidilutive.





5.
            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 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 December 31,
2007 through September 30, 2008.





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





September 30,
      2008
                                    
                                    
                                    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
                                    
                                    
                                    
                                    261
                                    
                                    
                                    
                                    439
                                    
                                    
                                    
                                    700
                                    
                                    
                                    
                                    208
                                    
                                    
                                    
                                    492Non-compete
                                    
                                    5
                                    
                                    
                                    
                                    201
                                    
                                    
                                    
                                    95
                                    
                                    
                                    
                                    106
                                    
                                    
                                    
                                    201
                                    
                                    
                                    
                                    65
                                    
                                    
                                    
                                    136Total
                                    
                                    
                                    
                                    
                                    $
                                    4,693
                                    
                                    
                                    $
                                    2,571
                                    
                                    
                                    $
                                    2,122
                                    
                                    
                                    $
                                    4,693
                                    
                                    
                                    $
                                    2,485
                                    
                                    
                                    $
                                    2,208





Amortization
of intangible assets was approximately $27 thousand and $90 thousand for the
three months ended September 30, 2008 and 2007, respectively, and $86 thousand
and $281 thousand for the nine months ended September 30, 2008 and 2007,
respectively.


9
 Index


The
following table summarizes the estimated future amortization
expense:





Year Ending
    December 31,2008
                          
                          $
                          282009
                          
                          
                          1102010
                          
                          
                          1102011
                          
                          
                          862012
                          
                          
                          70Thereafter
                          
                          
                          142$
                          546





6.
            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 September 30, 2008, the Company had
outstanding letters of credit aggregating $4.1 million which were 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.





As of
December 31, 2007, the Company had $5.0 million outstanding under its credit
agreement.  During the nine months ended September 30, 2008, the
Company borrowed an additional $23.0 million and repaid $28.0 million under its
credit agreement.  As of September 30, 2008, the Company had no
outstanding borrowings under its credit agreement.  Interest rates on
the loans during the quarter ranged from 3.46% to 5.00%.





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 September 30, 2008, the
Company was in compliance with the financial covenants contained in the credit
agreement.





7.
            EQUITY





The
Company has two stock incentive plans:  a Long-Term Incentive Plan
(the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the
“Non-Employee Directors Plan”).





Under 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; 80,000
shares, valued at $1.0 million, on February 29, 2008; 8,000 shares, valued at
$0.1 million, on May 2, 2008; and 8,000 shares, valued at $0.1 million, on May
5, 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 and
nine months ended September 30, 2008 was $0.2 million and $0.6 million,
respectively. The deferred compensation or unrecognized restricted stock expense
under the LTIP as of September 30, 2008 was $3.4 million.





Pursuant
to the Non-Employee Directors Plan, each non-employee director of the Company
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 September 30, 2008, there were a total of 84,954 shares
awarded and 37,772 shares vested under the Non-Employee Directors Plan. The
recognized restricted stock expense for the three months ended September 30,
2008 and 2007 was $0.1 million and $0.09 million, respectively, and for the nine
months ended September 30, 2008 and 2007 was $0.2 million and $0.2 million,
respectively. The deferred compensation or unrecognized restricted stock expense
under the Non-Employee Directors Plan as of September 30, 2008 and 2007 was $0.5
million and $0.6 million, respectively.


10
 Index


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.  During the three months ended June 30, 2008, the Company
repurchased 600,000 shares of its common stock for approximately $6.4 million at
an average price of $10.63 per share.  The Company did not repurchase
any shares of its common stock during the three months ended September 30,
2008.





Fair
Value of Stock Options





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 $6.69 using the following weighted average assumptions for
grants:





September 30,
      2008Expected
      volatility
                57.23%Expected
      dividend yield
                0%Expected
      life (term)
                6
      YearsRisk-free
      interest rate
                2.76%
      - 3.29%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
                  
                  
                  145,500
                  
                  
                  
                  11.97Cancelled
                  
                  
                  (74,000
                  )
                  
                  
                  15.81Exercised
                  
                  
                  (22,400
                  )
                  
                  
                  3.34
                  
                  
                  
                  $
                  219Outstanding
      as of September 30, 2008
                  
                  
                  1,561,263
                  
                  
                  
                  9.67
                  
                  5.39
      years
                  
                  
                  7,564Exercisable
      as of September 30, 2008
                  
                  
                  1,146,625
                  
                  
                  
                  8.15
                  
                  4.39
      years
                  
                  
                  7,242





As of
September 30, 2008, the pre-tax compensation expense for all unvested stock
option awards was $1.5 million.  This amount will be expensed over the
weighted-average period of approximately 1.0 years.





The
following table presents a summary of options outstanding:





September 30,
      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
                                                  
                                                  
                                                  
                                                  0.72
                                                  
                                                  
                                                  $
                                                  1.55
                                                  
                                                  
                                                  
                                                  50,898
                                                  
                                                  
                                                  $
                                                  1.553.10
                                                  
                                                  
                                                  
                                                  630,157
                                                  
                                                  
                                                  
                                                  3.28
                                                  
                                                  
                                                  
                                                  3.10
                                                  
                                                  
                                                  
                                                  630,157
                                                  
                                                  
                                                  
                                                  3.104.00-13.99
                                                  
                                                  
                                                  
                                                  333,500
                                                  
                                                  
                                                  
                                                  8.60
                                                  
                                                  
                                                  
                                                  11.47
                                                  
                                                  
                                                  
                                                  78,678
                                                  
                                                  
                                                  
                                                  9.8814.00-19.99
                                                  
                                                  
                                                  
                                                  429,208
                                                  
                                                  
                                                  
                                                  6.40
                                                  
                                                  
                                                  
                                                  15.26
                                                  
                                                  
                                                  
                                                  299,492
                                                  
                                                  
                                                  
                                                  15.0920.00-25.00
                                                  
                                                  
                                                  
                                                  117,500
                                                  
                                                  
                                                  
                                                  5.86
                                                  
                                                  
                                                  
                                                  22.88
                                                  
                                                  
                                                  
                                                  87,400
                                                  
                                                  
                                                  
                                                  23.101,561,263
                                                  
                                                  
                                                  
                                                  5.39
                                                  
                                                  
                                                  
                                                  9.67
                                                  
                                                  
                                                  
                                                  1,146,625
                                                  
                                                  
                                                  
                                                  8.15


11
 Index


8.
            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 nine months ended September 30,
2008, $0.5 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.





9.
            INCOME
      TAXES





The
effective tax rate for the three months ended September 30, 2008 and 2007 was
42.0% and 41.6%, respectively, and for the nine months ended September 30, 2008
and 2007 was 41.7% and 41.7%, respectively.





10.
            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.





11.
            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 cost was $36 thousand for the three months ended September 30,
2008.  The net periodic benefit income was $11 thousand for the three
months ended September 30, 2007.  The net periodic benefit cost was $2
thousand for the nine months ended September 30, 2008.  The net
periodic benefit income was $33 thousand the nine months ended September 30,
2007.





12.
            SUBSEQUENT
      EVENT





On
October 14, 2008, the Company has entered into a definitive purchase agreement
to acquire Briarwood College for approximately $11.4 million in cash. Briarwood
is regionally accredited by the New England Association of Schools and Colleges
and currently offers two Bachelor's degree programs and 31 Associate's degree
programs to approximately 700 students from Connecticut and surrounding states.
Briarwood is located on a 33-acre campus in Southington, Connecticut, a suburb
of Hartford, and offers on-campus housing for its students. For its fiscal year
ending June 30, 2008, Briarwood generated $9.2 million in
revenue.  The purchase agreement includes certain purchase price
adjustments and is subject to regulatory approvals and customary closing
conditions.  The transaction is expected to close during December
2008.


12
 Index


Item 2.  MANAGEMENT’SDISCUSSION 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 (“SEC”) and in our other filings with the SEC. 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 SEC 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 SEC, 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 various industries, employers and state and federal
accrediting bodies. We believe that diversification limits our dependence on any
one industry for enrollment growth or placement opportunities and broadens our
opportunity to introduce new programs. As of September 30, 2008, 22,404 students
were enrolled at our 35 campuses across 17 states. Our campuses primarily
attract students from their local communities and surrounding areas, although
our destination schools attract students from across the United States, and in
some cases, from other countries.





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 Ended
                      
                      
                      Nine
      Months EndedSeptember 30,
      2007
                      
                      
                      September 30,
      2007Revenues
                      
                      $
                      727
                      
                      
                      $
                      4,230Operating
      expenses
                      
                      
                      (4,775
                      )
                      
                      
                      (13,760
                      )(4,048
                      )
                      
                      
                      (9,530
                      )Benefit
      for income taxes
                      
                      
                      (1,717
                      )
                      
                      
                      (4,043
                      )Loss
      from discontinued operations
                      
                      $
                      (2,331
                      )
                      
                      $
                      (5,487
                      )





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.


13
 Index


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
goods are delivered or services are performed.  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 our 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 September
30, 2008 and 2007 was 6.3% and 5.3%, respectively, and for the nine months ended
September 30, 2008 and 2007 was 5.9% and 5.2%, 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 September 30, 2008 and 2007 would have resulted in an increase in
bad debt expense of $1.0 million and $0.9 million, respectively, and for
the nine months ended September 30, 2008 and 2007 would have resulted in an
increase in bad debt expense of $2.7 million and $2.4 million,
respectively.





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 September 30, 2008,
goodwill represented approximately $83.0 million, or 33.3%, 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 have
required retesting.





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 key performance objectives.  Although we
believe our estimated liability recorded for bonuses is reasonable, actual
results could differ and require adjustment of the recorded
balance.


14
 Index


Effect
of Inflation





Inflation
has not had a material effect on our operations.





Recent
Accounting Pronouncements





In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS
No. 163”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  SFAS No. 163 will be effective for us as of January 1,
2009.  The implementation of this standard is not expected to have a
material impact on our consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 will be effective for us as of November 15, 2008.  The
implementation of this standard is not expected to have a material impact on our
consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,”(“SFAS No. 161”)–an amendment to FASB
Statement No. 133.  SFAS No. 161 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 new standard requires, among other things, transaction costs incurred in a
business combination to be expensed, establishes a new measurement date for
valuing acquirer shares issued in consideration for a business combination, and
requires the recognition of contingent consideration and pre-acquisition gain
and loss contingencies. SFAS No. 141R will be effective for our business
combinations completed on or after January 1, 2009.  We expect that
the adoption of SFAS No. 141R could have a material impact on our financial
statements when accounting for future material acquisitions.




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".SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 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.  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. SFAS No. 157 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.


15
 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 Ended
                                      September 30,
                                    
                                    
                                    Nine
      Months Ended
                                      September 30,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2007Revenues
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    100.0
                                    %
                                    
                                    
                                    100.0
                                    %Costs
      and expenses:Educational
      services and facilities
                                    
                                    
                                    41.4
                                    %
                                    
                                    
                                    42.8
                                    %
                                    
                                    
                                    42.3
                                    %
                                    
                                    
                                    44.0
                                    %Selling,
      general and administrative
                                    
                                    
                                    48.3
                                    %
                                    
                                    
                                    47.9
                                    %
                                    
                                    
                                    52.3
                                    %
                                    
                                    
                                    52.2
                                    %Total
      costs and expenses
                                    
                                    
                                    89.7
                                    %
                                    
                                    
                                    90.7
                                    %
                                    
                                    
                                    94.6
                                    %
                                    
                                    
                                    96.2
                                    %Operating
      income
                                    
                                    
                                    10.3
                                    %
                                    
                                    
                                    9.3
                                    %
                                    
                                    
                                    5.4
                                    %
                                    
                                    
                                    3.8
                                    %Interest
      expense, net
                                    
                                    
                                    (0.5
                                    %)
                                    
                                    
                                    (0.7
                                    %)
                                    
                                    
                                    (0.6
                                    %)
                                    
                                    
                                    (0.7
                                    %)Income
      from continuing operations before income taxes
                                    
                                    
                                    9.8
                                    %
                                    
                                    
                                    8.6
                                    %
                                    
                                    
                                    4.8
                                    %
                                    
                                    
                                    3.1
                                    %Provision
      (benefit) for income taxes
                                    
                                    
                                    4.1
                                    %
                                    
                                    
                                    3.6
                                    %
                                    
                                    
                                    2.0
                                    %
                                    
                                    
                                    1.3
                                    %Income
      from continuing operations
                                    
                                    
                                    5.7
                                    %
                                    
                                    
                                    5.0
                                    %
                                    
                                    
                                    2.8
                                    %
                                    
                                    
                                    1.8
                                    %





Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007





Revenues. 
Revenues increased by $13.9 million, or 16.1%, to $100.5 million for the quarter
ended September 30, 2008 from $86.6 million for the quarter ended September 30,
2007.  The increase in revenues for the quarter was primarily attributable
to a 13.6% increase in average student population, which increased to 20,665 for
the quarter ended September 30, 2008, from 18,185 for the quarter ended
September 30, 2007.  Revenues were also favorably impacted by tuition
increases, which averaged from 3.0% to 3.5% during the quarter and increases in
tool sales and interest income collected on student loans, which increased by
$0.2 million and $0.2 million, respectively, as compared to the third quarter of
2007. For the quarter ended September 30, 2008, average revenue per student
increased 2.1% as compared to the third quarter of 2007, primarily due to
tuition increases during the quarter, offset by a shift in student population to
students enrolled in lower tuition programs.  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 September 30, 2008 were $41.6 million,
representing an increase of $4.5 million, or 12.1%, as compared to $37.1 million
for the quarter ended September 30, 2007. The increase in educational
services and facilities expenses was due to instructional expenses and books and
tool expenses, which increased by $1.8 million, or 9.8%, and $1.2 million, or
18.8%, respectively, over the same quarter in 2007, resulting from an 8.6%
increase in student starts during the third quarter of 2008 as compared to the
third quarter of 2007 and as a result of the overall increase in student
population and higher tool sales as compared to the third quarter of
2007.  We began the third quarter of 2008 with approximately 2,400
more students than we had on July 1, 2007.   The remainder of the
increase in educational services and facilities expenses was due to facilities
expenses, which increased by approximately $1.5 million over the same quarter in
2007.   This increase in facilities expense was primarily due to
a $0.6 million increase in depreciation expense resulting from capital
expenditures during 2007 and the first nine months of
2008.  Capital expenditures during these periods included the
renovation and conversion of our former auto school in Grand Prairie, Texas to a
skilled trades school, the opening of a culinary school at our Columbia,
Maryland campus and the opening of our new campus, Aliante, in North Las Vegas,
Nevada. The remainder of the increase in facilities expenses was primarily due
to a $0.5 increase in repairs and maintenance at our campuses, and higher
utility and property taxes at our campuses. As a percentage of revenues,
educational services and facilities expenses for the third quarter of 2008
decreased to 41.4% from 42.8% for the third quarter of 2007.





Selling, general
and administrative expenses.  Our selling, general and
administrative expenses for the quarter ended September 30, 2008 were $48.5
million, representing an increase of $7.1 million, or 17.0%, as compared to
$41.4 million for the quarter ended September 30, 2007.  The increase in
our selling, general and administrative expenses during the period was primarily
due to a $0.5 million, or 14.0%, increase in student services, a $1.5 million,
or 9.0%, increase in sales and marketing expenses and a $5.0 million, or 24.0%,
increase in administrative expenses for the quarter ended September 30, 2008 as
compared to the quarter ended September 30, 2007.  The increase in
student services was primarily due to increases in compensation and benefit
expenses, additional financial aid personnel attributed to a larger student
population during the third quarter of 2008 as compared to the third quarter of
2007 as well as the incremental costs associated with our efforts to centralize
the back office process with respect to financial aid.  During 2008,
we began a pilot program to centralize the back office administration of our
financial aid department in an effort to improve the effectiveness and
timeliness of our financial aid processing.  The increase in sales and
marketing expenses was due to annual compensation increases to sales
representatives, the hiring of additional sales representatives and increased
call center support as compared to the third quarter of 2007, coupled with
increased investments in marketing to continue to grow our student population.
The increase in administrative expenses was primarily due to (a) a $2.4 million
increase in compensation and benefits, resulting from annual compensation
increases, including increases in employee bonuses and stock compensation
expense and the increased cost of benefits provided to employees; (b) a $1.7
million increase in bad debt expense; (c) $0.4 million of expenses incurred in
connection with two registrations statements on Form S-3, filed with the SEC
during 2008 and certain other related 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 third quarter of 2008 increased to 48.3% from
47.9% for the third quarter of 2007.


16
 Index


For the
quarter ended September 30, 2008, our bad debt expense as a percentage of
revenue was 6.3% as compared to 5.3% for the same quarter in
2007.  This increase was primarily attributable to higher accounts
receivable due to a 16.1% increase in revenues during the third quarter of 2008
as compared to the third quarter of 2007.  The number of days sales
outstanding at September 30, 2008 increased to 26.3 days compared to 22.8 days
at September 30, 2007.  The increase in days sales outstanding is
primarily attributable to our decision to internally finance the gap in student
tuition for which students are unable to obtain third-party
financing.  As of September 30, 2008, we had made loan commitments to
our students of $22.3 million as compared to $20.1 million and $15.7 million at
June 30, 2008 and December 31, 2007, respectively.  Loan commitments,
net of interest that would be due on the loans through maturity, were $15.4
million at September 30, 2008 as compared to $13.7 million and $10.8 million at
June 30, 2008 and December 31, 2007, respectively.





Net interest
expense.  Our net interest expense for the quarter ended September
30, 2008 was $0.5 million, representing a decrease of $0.1 million, as compared
to $0.6 million for the quarter ended September 30, 2007. This was primarily due
to a decrease in our average outstanding borrowings under our credit agreement.
As of September 30, 2008, we had no outstanding borrowings under our credit
agreement compared to $5.0 million outstanding under our credit agreement as of
September 30, 2007.





Income
taxes.  Our provision for income taxes for the quarter ended
September 30, 2008 was $4.1 million, or 42.0% of pretax income, as compared to
$3.1 million, or 41.6% of pretax income, for the quarter ended September 30,
2007.  The increase in our effective tax rate for the quarter ended
September 30, 2008 was primarily attributable to shifts in state taxable income
among various states.





Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007





Revenues. 
Revenues increased by $32.1 million, or 13.5%, to $269.6 million for the nine
months ended September 30, 2008 from $237.5 million for the nine months ended
September 30, 2007.  The increase in revenues for the period was primarily
attributable to an 11.8% increase in average student population, which increased
to 19,221 for the nine months ended September 30, 2008, from 17,192 for the nine
months ended September 30, 2007.  Revenues were also favorably
impacted during the period by tuition increases, which averaged from 3.0% to
3.5% during the quarter and increases in tool sales and interest income
collected on student loans, which increased by $0.7 million and $0.7 million,
respectively, from the nine months ended September 2007.   For
the nine months ended September 30, 2008, average revenue per student increased
1.5% from nine months ended September 2007, primarily due to tuition increases
during the quarter, offset by a shift in our student population to students
enrolled in lower tuition programs.  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 nine months ended September 30, 2008 were $114.1
million, representing an increase of $9.6 million, or 9.2%, as compared to
$104.5 million for the nine months ended September 30, 2007. The increase
in educational services and facilities expenses was due to instructional
expenses and books and tools expenses, which increased by $4.4 million, or 8.0%,
and $2.4 million, or 17.8%, respectively, over the same period in 2007,
reflecting a 11.3% increase in student starts during the nine months ended
September 30, 2008 as compared to the same period in 2007 and as a result of the
overall increase in student population and higher tool sales as compared to the
nine months ended September 30, 2007.   We began 2008 with
approximately 1,400 more students than we had on January 1, 2007 and as of
September 30, 2008 our population was approximately 2,941 higher than as of
September 30, 2007.   The remainder of the increase in
educational services and facilities expenses was due to facilities expenses,
which increased by approximately $2.8 million over the same period in
2007.  This increase was primarily due to an increase in depreciation
expense of $2.2 million resulting from increased levels of capital expenditures
during 2007 and the first nine months of 2008 versus the comparable periods in
prior years.  The remainder of the increase was due to higher utility,
rent and repairs and maintenance expenses at our campuses.  These
expenditures included the renovation and conversion of our former auto school in
Grand Prairie, Texas to a skilled trades school, the opening of a culinary
school at our Columbia, Maryland campus as well as the opening of our new
campus, Aliante, in North Las Vegas, Nevada. As a percentage of revenues,
educational services and facilities expenses for the nine months ended September
30, 2008 decreased to 42.3% from 44.0% for the same period in
2007.


17
 Index


Selling, general
and administrative expenses.  Our selling, general and
administrative expenses for the nine months ended September 30, 2008 were $141.1
million, representing an increase of $17.0 million, or 13.7%, as compared to
$124.1 million for the nine months ended September 30, 2007.  The increase
in our selling, general and administrative expenses during the period was
primarily due to a $1.3 million, or 11.9%, increase in student services, a $3.0
million, or 5.9%, increase in sales and marketing and a $12.7 million, or 20.3%,
increase in administrative expenses for the nine months ended September 30, 2008
as compared to the same period in 2007.  The increase in student
services was primarily due to increases in compensation and benefit expenses
attributed to additional financial aid and career services personnel as a result
of a larger student population during the nine months ended September 30, 2008
as compared to the same period in 2007. In addition, we began a pilot program to
centralize the back office administration of our financial aid department in an
effort to improve the effectiveness of our financial aid
processing.  This resulted in the hiring of additional financial aid
representatives during the first nine months of 2008.  The increase in
sales and marketing expense was due to annual compensation increases to sales
representatives, the hiring of additional sales representatives and increased
call center support for the nine months ended September 30, 2008 as compared to
the prior year period coupled with increased investments in marketing to
continue to grow our student population. The increase in administrative expenses
was primarily due to (a) a $6.5 million increase in compensation and benefits,
resulting from annual compensation increases, including increases in employee
bonuses and stock compensation expense and the increased cost of benefits
provided to employees; (b)  a $3.6 million increase in bad debt
expense; (c) $0.2 million refunded to the U.S. Department of Education resulting
from a program review at Southwestern College; (d) a $0.7 million increase in
software maintenance expenses resulting from increased software licenses for our
student management system; and (e) $0.7 million of expenses incurred in
connection with two registration statements on Form S-3, filed with the SEC
during 2008 and certain other related expenses.  As a percentage of
revenues, selling, general and administrative expenses for the nine months ended
September 30, 2008 was 52.3%, essentially unchanged from the same period in
2007.





For the
nine months ended September 30, 2008, our bad debt expense as a percentage of
revenue was 5.9% as compared to 5.2% for the same period in
2007.  This increase was primarily attributable to higher accounts
receivable due to an increase in average student population during the nine
months ended September 30, 2008 as compared to the same period in 2007 of
11.8%.  The number of days sales outstanding for the nine months ended
September 30, 2008 increased to 29.2 days compared to 24.7 days for the same
period in 2007 primarily due to our decision to internally finance the gap in
student tuition for which students are unable to obtain third-party
financing.





Net interest
expense.  Our net interest expense for the nine months ended
September 30, 2008 decreased slightly to $1.6 million from $1.7 million for the
same period in 2007 due to lower average borrowings outstanding during the
period.





Income
taxes.  Our provision for income taxes for the nine months ended
September 30, 2008 was $5.3 million, or 41.7% of pretax income, as compared to
$3.0 million, or 41.7% of pretax income, for the same period in
2007.





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):





Nine
      Months Ended
                            September 30,2008
                          
                          
                          2007Net
      cash provided by operating activities
                          
                          $
                          30,003
                          
                          
                          $
                          8,950Net
      cash used in investing activities
                          
                          $
                          (15,919
                          )
                          
                          $
                          (17,003
                          )Net
      cash (used in) provided by financing activities
                          
                          $
                          (11,441
                          )
                          
                          $
                          5,129





At
September 30, 2008, we had cash of $6.1 million, representing an increase of
approximately $2.6 million as compared to $3.5 million as of 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 nine months of 2008, we
borrowed $23.0 million and repaid $28.0 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.
In addition, in the future, we may also consider accessing financial markets as
a source of liquidity for capital requirements, acquisitions and general
corporate purposes to the extent such requirements are not satisfied by cash on
hand or operating cash flows.  However, we cannot assure you that we
will be able to raise additional capital on favorable terms, if at
all.  At September 30, 2008, we had net borrowings available under our
$100 million credit agreement of approximately $95.9 million, including a $15.9
million sub-limit on letters of credit.


18
 Index


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 31 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.  See
“Risk Factors” in Item 1A, included in our Annual Report on Form 10-K for the
year ended December 31, 2007.





On
October 14, 2008, we have entered into a definitive purchase agreement to
acquire Briarwood College for approximately $11.4 million in cash. Briarwood is
regionally accredited by the New England Association of Schools and Colleges and
currently offers two Bachelor's degree programs and 31 Associate's degree
programs to approximately 700 students from Connecticut and surrounding states.
Briarwood is located on a 33-acre campus in Southington, Connecticut, a suburb
of Hartford, and offers on-campus housing for its students. For its fiscal year
ending June 30, 2008, Briarwood generated $9.2 million in
revenue.  The purchase agreement includes certain purchase price
adjustments and is subject to regulatory approvals and customary closing
conditions.  The transaction is expected to close during December
2008.





Cash
Flow Operating Activities





Net cash
provided by operating activities was $30.0 million for the nine months ended
September 30, 2008 compared to $9.0 million for the nine months ended September
30, 2007.  The $21.0 million increase in cash provided by operating
activities was primarily due to an increase in net income of approximately $8.7
million for the nine months ended September 30, 2008 from the nine months
ended September 30, 2007; approximately $5.9 million increase in cash received
from federal fund programs and a reduction of approximately $2.1 million in cash
paid for income taxes for the nine months ended September 30, 2008 as compared
to the nine months ended September 30, 2007. The remainder of the increase was
primarily due to increases in cash provided by other working capital
items.





Cash
Flow Investing Activities





Net cash
used in investing activities decreased by $1.1 million to $15.9 million for the
nine months ended September 30, 2008 from $17.0 million for the nine months
ended September 30, 2007.  Our cash used in investing activities was
primarily related to purchases of property and equipment.  Our capital
expenditures primarily resulted from facility expansion, leasehold improvements,
and investments in classroom and shop technology.





Capital
expenditures are expected to continue to increase in the remainder of 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 6% and 7% 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
used in financing activities was $11.4 million for the nine months ended
September 30, 2008, as compared to net cash provided by financing activities of
$5.1 million for the nine months ended September 30, 2007.  This decrease
of $16.6 million was attributable to an increase in repayments of borrowings of
$11.5 million and repurchases of our common stock for $6.4 million partially
offset by an increase in our borrowings under our credit agreement of $1.5
million for the nine months ended September 30, 2008, as compared to the nine
months ended September 30, 2007.  Due to normal seasonal patterns, our
student population is generally at the lowest level during the first half of the
year and increases during the second half of the year.  As a result,
during the first half of the year, we typically borrow funds to finance our
operations and repay those funds in the second half of the year.





On April
1, 2008, our Board of Directors approved the repurchase of up to 1,000,000
shares of our common stock over the period of one year.  During the
quarter ended June 30, 2008, we repurchased 600,000 shares of our common stock
for approximately $6.4 million.  We did not repurchase any shares of
our common stock during the three months ended September 30,
2008.


19
 Index


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.





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





At
      September 30,
                    
                    
                    At
      December 31,2008
                    
                    
                    2007Credit
      agreement
                    
                    $
                    -
                    
                    
                    $
                    5,000Finance
      obligation
                    
                    
                    9,672
                    
                    
                    
                    9,672Automobile
      loans
                    
                    
                    -
                    
                    
                    
                    16Capital
      leases (with rates ranging from 2.9% to 8.5%)
                    
                    
                    550
                    
                    
                    
                    690Subtotal
                    
                    
                    10,222
                    
                    
                    
                    15,378Less
      current maturities
                    
                    
                    (147
                    )
                    
                    
                    (204
                    )Total
      long-term debt
                    
                    $
                    10,075
                    
                    
                    $
                    15,174





Contractual
Obligations





Long-term
Debt.  As of September 30, 2008, our long term debt consisted of 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 September 30, 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
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Capital
      leases (including interest)
                          
                          
                          720
                          
                          
                          
                          67
                          
                          
                          
                          322
                          
                          
                          
                          331
                          
                          
                          
                          -Operating
      leases
                          
                          
                          125,581
                          
                          
                          
                          16,294
                          
                          
                          
                          27,163
                          
                          
                          
                          24,527
                          
                          
                          
                          57,597Rent
      on finance obligation
                          
                          
                          11,511
                          
                          
                          
                          1,381
                          
                          
                          
                          2,763
                          
                          
                          
                          2,763
                          
                          
                          
                          4,604Total
      contractual cash obligations
                          
                          $
                          137,812
                          
                          
                          $
                          17,742
                          
                          
                          $
                          30,248
                          
                          
                          $
                          27,621
                          
                          
                          $
                          62,201





Off-Balance
Sheet Arrangements





We had no
off-balance sheet arrangements as of September 30, 2008, except for our letters
of credit of $4.1 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 students
and/or acquisitions. We have
achieved positive organic growth for five consecutive quarters since the second
half of 2007 and into the third quarter of 2008.  We began the third
quarter of 2008 with approximately 2,400 more students than we had on July 1,
2007, which we attribute primarily to improved execution resulting from the
growth initiatives we introduced in the third quarter of 2006 and to some extent
from the counter-cyclicality of our business.    Similar to
other public for-profit post secondary education companies, in the recent past,
the increase in our average undergraduate enrollments had 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 slowdown 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 reversed in the second quarter of
2007.


20
 Index


We
believe that our growth initiatives and the steps we have taken as well as our
program diversification have positioned us well to produce positive growth over
the long-term.





Start-ups,
campus expansions and acquisitions also negatively impact operating
income.  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.





Update
Regarding Regulatory and Accreditation Matters





In a
letter received from the Accrediting Commission of Career Schools and Colleges
of Technology (“ACCSCT”), dated July 7, 2008, we were informed of a “show cause”
action regarding our Lincoln Technical Institute institution in Philadelphia,
PA.  An institution under “show cause” is required to satisfy its
accrediting agency within a prescribed period, typically 18 months, that it has
satisfactorily resolved the deficiency.  We responded to ACCSCT’s
“show cause” request in September 2008 and the motion to vacate the “show cause”
order will be reviewed at ACCSCT’s November 2008 meeting.





Recent
Regulatory Developments





On August
14, 2008, the Higher Education Authority (“HEA”) was reauthorized when President
Bush signed into law the Higher Education Opportunity Act, Public Law 110-315,
reauthorizing the Title IV HEA programs through at least June 30, 2015. The
recently passed HEA reauthorization revises the 90/10 Rule, revises the
calculation of an institution’s cohort default rate, requires additional
disclosures and certifications with respect to non-Title IV alternative loans,
prohibits certain activities or relations between lenders and schools to
discourage preferential treatment of lenders based on factors not in students’
best interests, and makes other changes.





Under the
HEA reauthorization, an institution that derives more than 90% of its total
revenue from the Title IV programs for two consecutive fiscal years becomes
immediately ineligible to participate in the Title IV programs and may not
reapply for eligibility until the end of two fiscal years. Effective July 1,
2008, the annual Stafford loans available for undergraduate students under the
Federal Family Education Loan Program (“FFEL”) increased. This loan limit
increase, coupled with recent increases in grants from the Pell program and
other Title IV loan limits, will result in some of our schools experiencing an
increase in the revenues they receive from the Title IV programs. The HEA
reauthorization provides some relief from this effect by excluding portions of
the loan limit increase from the Title IV component of the 90/10 rule
calculation.





Under the
HEA reauthorization, an institution’s cohort default rate is redefined to be
based on the rate at which its former students default on their FFEL loans over
a period of time that is one year longer than the period of time during which
rates currently are calculated. As a result, most institutions’ respective
cohort default rates are expected to increase on the effective date of the
provision, which first would apply to cohort default rates calculated after
October 1, 2011. The HEA reauthorization also redefines the cohort default
three-year threshold as 30% for the year when the HEA reauthorization becomes
effective, compared to the present 25% threshold.




Item 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES 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 September 30, 2008,
we had no outstanding borrowings under our credit agreement.


21
 Index


Because
we had no borrowings under our credit agreement on September 30, 2008, a change
of one percent in the interest rate would not cause a change in our interest
expense.  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 significant.




Item 4.  CONTROLSAND 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.





Item 2.  UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF
PROCEEDS





We did
not repurchase any shares of our common stock during the three months ended
September 30, 2008.





Item 6.  EXHIBITS





EXHIBIT
INDEX





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








Exhibit
                    Number
                  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).


22
 Index




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).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.


23
 Index







(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.


24
 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:
      November 6, 2008
                  
                  By:
                  /s/CesarRibeiroCesar
      RibeiroChief
      Financial Officer(Principal
      Accounting and Financial
Officer)





25