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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

OR

Commission File Number 1-10031

NOBEL LEARNING COMMUNITIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Common Stock, par value

$.001 per share

(Title of each class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of December 31, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $16,399,819 (based upon the closing sale price of these shares on such date as reported by the Nasdaq National Market). Calculation of the number of shares held by non-affiliates is based on the assumption that the affiliates of the Company include the directors, executive officers and stockholders who have filed a Schedule 13D or 13G with the Company which reflects ownership of at least 5% of the outstanding common stock or have the right to designate a member of the Board of Directors, and no other persons. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes of the Securities and Exchange Commission.

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at September 29, 2003, was 6,612,109.

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“SAFE HARBOR” STATEMENT UNDER PRIVATE LITIGATION REFORM ACT OF 1995

Certain statements set forth in or incorporated by reference in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, our outlook for the current fiscal year ending June 30, 2004, other statements in this report other than historical facts relating to the financial conditions, results of operations, plans, objectives, future performance and business of Nobel Learning Communities, Inc. In addition, words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are based on our currently available operating budgets and forecasts, which are based upon detailed assumptions about many important factors such as market demand, market conditions and competitive activities. While we believe that our assumptions are reasonable, we caution that there are inherent difficulties in predicting the impact of certain factors, especially those affecting the acceptance of our newly developed schools and businesses and performance of recently acquired businesses, which could cause actual results to differ materially from those projected, expressed or implied by such forward-looking information. Readers are cautioned that the forward-looking statements reflect management’s analysis only as of the date hereof, and the Company assumes no obligation to update these statements. Actual future results, events and trends may differ materially from those expressed in or implied by such statements depending on a variety of factors set forth throughout this Form 10-K.

PART I

General

Nobel Learning Communities, Inc. (“NLCI” or “the Company”) is a for-profit provider of education and educational services products for the pre-elementary through 12^th grade market. Our programs are offered through a network of general education schools, schools and programs for learning challenged students, and special purpose high schools, under various local brand names as well as the global brand name “Nobel Learning Communities.” These schools typically provide summer camps and before-and-after school programs. Our credo is “Quality Education Maximizing a Child’s Life Opportunities.”

We were organized in 1984 as The Rocking Horse Childcare Centers of America, Inc. In 1985, The Rocking Horse Childcare Centers of America, Inc. merged into a publicly-traded entity that had been incorporated in 1983. In 1993, new management changed our strategic direction from a child care company to a curriculum-based, pre-elementary through 12^th grade private school system. This change in direction coincided with the change of our name to Nobel Education Dynamics, Inc. In 1998, we changed our name to Nobel Learning Communities, Inc. to reflect the organizational model that we use today, which supports cross-marketing and operational synergies within the “Nobel Learning Communities.”

Our corporate office is located at 1615 West Chester Pike, West Chester, PA 19382. Our telephone number is (484) 947-2000.

Educational Philosophy and Implementation

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

We have developed curriculum guidelines for each grade level and content area to assist principals and teachers in planning their daily and weekly programs. At our educator’s Web site we have linked the curriculum guidelines to

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the products and services that are most appropriate for addressing our standards. The Web site also provides our educators with links to our framework and philosophy as well as other resources that support our educational mission.

We maintain that small schools, small classes, clearly articulated curricula guidelines and excellent educational materials, delivered by highly qualified, innovative and enthusiastic teachers, comprise the basic ingredients of a quality education. Our philosophy is based on personalized instruction that leads to a student’s active involvement in learning and understanding. The program for our schools is a skills-based and developmentally-appropriate comprehensive curriculum. We implement the curriculum in ways that stimulate the learners’ curiosity, enhance students’ various learning styles and employ processes that contribute to lifelong achievement. Academic areas addressed include reading, writing, spelling, mathematics, science, social studies, visual and graphic arts, music, physical education/health and foreign language study. The critical areas of technology literacy and study skills are integrated into the program, as appropriate, in all content areas, with many schools incorporating a media center concept. Most schools in the Nobel Learning Communities introduce a second language between the ages of three and four and continue that instruction into the pre-K, kindergarten and school age programs.

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

We recognize that maintaining the quality of our teachers’ capabilities and professionalism is essential to sustaining our students’ high level of academic achievement and our profitability. We sponsor professional development days covering various aspects of teaching and education, using both internal trainers and external consultants. Staff members are recognized for the completion of continuing education experiences, encouraged to pursue formal advanced learning and rewarded for outstanding performance and achievement. Our educators serve on task forces and committees who regularly review and revise guidelines, programs, tools and current teaching methods.

We seek to assure that our schools meet or exceed the standards of appropriate licensing and accrediting agencies through an internal quality assurance program. Although not mandated by any governmental or regulatory authority, many of our schools are accredited, or are currently seeking accreditation, by the Commission on International and Trans-Regional Accreditation (CITA) (which renewed the Company’s accreditation in June 2003), the National Association for the Education of Young Children (NAEYC), or the National Independent Private Schools Association (NIPSA).

Operations/School Systems

In order to maintain uniform standards, our schools share consistent educational goals and operating procedures. To respond to local demands, principals are encouraged to tailor curricula, within the standards of Nobel Learning Communities, to meet local needs. Members of our management team visit schools and centers on a regular basis to review program and facility quality.

Our school principals are critical to our educational and financial success. They are responsible for managing school personnel and finances, ensuring teacher adherence to our curricula guidelines, and implementing local sales and marketing strategies. We treat each school as a separate cost center, holding each accountable for its own performance. Each school prepares an annual budget and submits weekly financial data to the corporate office and to appropriate district and division managers. Tuition revenue, operating costs and utilization rates are continually monitored, with each school measured weekly in relation to our business plan and prior year performance. Executive Directors, another critical component to our success, oversee the principals in their management responsibilities and report to regional Vice Presidents of Operations. School principals and Executive Directors work closely with regional and corporate management, particularly in the regular assessment of program quality.

Principals and Executive Directors are also responsible for raising additional revenues through ancillary programs, such as sales of school uniforms, children’s portraits and school stores. Our corporate office undertakes

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central management of several significant ancillary programs. This central management has enabled us to obtain more favorable terms from vendors and to encourage more active participation from schools.

We hire qualified individuals and look to promote from within whenever possible. Employment applications are reviewed with background checks to verify accurate employment history and establish understanding of the candidate’s background, reputation and character. After hiring, our faculty is reviewed and evaluated annually through a formal evaluation process. All of our principals and Executive Directors are eligible for incentive compensation based on the performance of their schools.

Pre-Elementary Schools and Elementary Schools

Our pre-elementary and elementary strategy is based on meeting the educational needs of children, beginning with infancy. We encourage our children to stay with our schools as they advance each school year, within our geographic clusters called “Nobel Learning Communities.” Through the use of strategically designed clusters, we seek to increase market awareness, achieve operating efficiencies, and provide cross-marketing opportunities, particularly by providing feeder populations from pre-elementary to elementary school, and elementary to middle school, as well as to and from our other specialty programs. Centralized administration provides an additional monitoring mechanism for program quality and development and significant operating efficiencies.

We seek to distinguish our schools from our competition with qualitative and quantitative program outcomes. At each level, we support a child’s development with age-appropriate curriculum-based programs. We foster a more individualized approach to learning through our small schools with small classes, with curricula that integrates community-based learning supported by technology. Further, in certain locations, we serve those with special needs through our schools for learning challenged and special purpose high schools. We believe that the empirical results support the quality of our programs. Standardized test results have shown that, on average, our students perform one and one-half to three grade levels above national norms in reading and mathematics.

Many of our pre-elementary and elementary schools operate from 6:30 a.m. to 6:00 p.m., allowing early drop-off and late pick-up by working parents. In most pre-elementary locations, programs are available for children starting at six weeks of age. For a competitive price, parents can feel comfortable leaving their children at one of our schools knowing the children will receive both a quality education and engage in well-supervised activities.

Most of our pre-elementary and elementary schools complement their programs with before-and-after school programs and summer camps (both sports and educational). Our schools also seek to improve margins by providing ancillary services and products, such as book sales, uniform sales and portrait services.

Paladin Academy

Our Paladin Academy schools and programs serve the needs of children with learning challenges. Through these schools and programs, our mission is to improve the learning process and achievement levels of children and adults with dyslexia, attention deficit disorder and other learning difficulties. We offer clinical day schools, tutoring clinics and summer programs, as well as developmental testing and community outreach programs.

Paladin Academy schools offer full day programs serving the special needs of students from kindergarten through high school. One of the primary goals of Paladin Academy is to enable students to mainstream back into our general education population. We offer one-on-one tutorial clinics to students in our general education program, as well as to students from other schools who require a clinical educational approach.

As of September 29, 2003, we operated 13 Paladin Academy schools and/or programs. These include three “stand-alone” private schools in South Florida acquired in our August 1998 purchase of the assets of Development Resource Centers, one additional stand-alone school in Seattle, Washington and nine programs located within our elementary schools. One additional school, also in South Florida and acquired in February 2000, was closed in the fiscal year ended June 30, 2003, as this school did not fall within one of our cluster regions and represented a significant use of cash that would be better served in strengthening programs across the balance of our schools. As a part of our combination school strategy, most of our new Paladin Academy programs are conducted in classrooms of Nobel Learning Communities elementary schools. Paladin Academy schools and/or programs are now located in Florida, Nevada, New Jersey, North Carolina, Pennsylvania, Virginia and Washington.

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We plan to expand Paladin Academy schools and/or programs within our school clusters across the United States. Further, as Paladin Academy develops broader market recognition independent of our private elementary schools, we may roll out the program independently across the United States.

Expanding our initiatives in special education, since May 2000, under terms of a credit agreement, we have loaned funds to Total Education Solutions, which provides special education staffing and compliance solutions to charter schools and public schools which, because of a lack of internal capabilities or other reasons, wish to out-source their provision of special education programs.

Charter Schools

In July 1999, we entered into a management services contract with our first charter school, The Philadelphia Academy Charter School in Philadelphia, Pennsylvania, which serves 744 students in kindergarten through eighth grade. Our performance under that contract resulted in the March 2000 award of two additional contracts to provide management services for new charter schools in Philadelphia (one opened in September 2000 and the other opened in September 2001). Under these management agreements, which have terms of four to five years, subject to extension, we provide services such as administrative and development/construction management services to the charter schools pursuant to four or five-year terms, subject to extension. The actual holders of the charters, non-profit entities managed by a board of directors or trustees, fund their own operations, through payments from the School District of Philadelphia. In some cases, as part of the arrangements with the charter schools, we lease the charter school premises from a third party and sublease the premises to the non-profit entity.

Further adding to our charter school operations, in May 2000, we acquired two charter schools in Arizona: the Fletcher Heights Charter Elementary School in Peoria, Arizona and the Desert Heights Elementary School, which opened in Glendale, Arizona in August 2000. In contrast to our Philadelphia charter schools and charters contracts, we held the charter and owned and operated the Arizona charter schools independently, as Arizona law permits the charter funds to be paid directly to a for-profit corporation.

In May, 2003, we subleased to the Unified School District No. 11, of Maricopa County, Arizona, the premises at which we had previously operated our Fletcher Heights Charter Elementary School, and in August, 2003, we sold to Partnership With Parents, Inc. (an Arizona non-profit corporation) the premises at which we had previously owned and operated our Desert Heights Charter Elementary School. As a result of these two transactions in 2003, we exited both the Arizona market and our direct ownership of charter schools.

While we do not currently intend to own and operate charter schools directly, we do plan to pursue growth in charter school management by competing for contracts at charter schools owned by others. These include both charter management contracts which are up for renewal and charters currently being managed by a local not-for-profit administration.

Since the charter schools that we manage operate under a charter granted by a state or school board authority, we would lose the right to manage a school if the charter authority were to revoke the charter. Typically, the charter holder is a community group that engages us to manage portions of the school operation under a management agreement. As such, the charter authority could base such revocation on actions of the charter holder, which are outside of our control. Also, many state charter school statutes require periodic reauthorization. If state charter school legislation in such states were not reauthorized or were substantially altered, our charter opportunities in the charter school market could be materially adversely affected.

Houston Learning Academy / Saber Academy

In September 1999, we acquired all the capital stock of Houston Learning Academy (“HLA”), an operator of five special purpose high schools and one special purpose high school program in the Houston metropolitan marketplace. HLA schools, which are fully accredited by the Southern Association of Colleges and Schools, offer a half-day high school program, as well as summer school, tutorials and special education classes to residential hospitals. HLA schools and programs feature small class sizes and individualized attention, primarily for those students who are at risk of not completing their high school requirements in a more traditional setting, and/or are attracted to the schools’ program and flexible hours of service. In the fiscal year ended June 30, 2003 (“Fiscal 2003”), we opened an

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additional school in the Dallas market, using the existing HLA school model, under the name Saber Academy. We plan to grow the HLA / Saber Academy concept by leveraging our existing school model and accreditation to other Texas metropolitan areas (Dallas, San Antonio) under the name Saber Academy. Depending upon the performance of our HLA / Saber Academy schools and programs, we may then expand this concept through its introduction into existing and future Nobel Learning Community markets. We believe HLA / Saber Academy and Paladin Academy schools and programs may have significant marketing and other synergies with our other school concepts.

The Activities Club

In December 1999, we entered into a transaction to form The Activities Club. At the time of its inception, we owned 80% of the Activities Club. In May 2003, we acquired the remaining 20%. The Activities Club provides before-and-after school programs, summer camps, and theme-based programs to public schools, private schools, and corporations. The Activities Club is being repositioned by management to support the growing need for extended day learning and research-based programming that correlates with specific state standards and the need to improve student performance.

Principal Markets

Our schools are located in California, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington. The schools operate under various names, including Chesterbrook Academy (East, South and Midwest), Merryhill School (West), Evergreen Academy (Northwest), Paladin Academy (learning challenged) and Houston Learning Academy and Saber Academy (special purpose high schools). As of September 29, 2003, we operated 172 schools in 14 states, with an aggregate capacity of approximately 27,000 children.

While we do not currently anticipate exiting from any of our markets, we are in the process of analyzing the profitability of our existing schools, and have formed a Managed Assets Division to develop exit strategies for schools identified as under-performing and/or which do not fit well with our business or geographic strategies. Our management team evaluated each school, and identified certain schools as poor performers, along with the strategies to either improve or remove them from our portfolio. The schools that have been targeted for disposition have been or are in the process of being sold or closed. This represents an important step in redistributing funds to the balance of our schools in order to ensure the continued improvement of our program offerings.

Marketing

We generate a large portion of new enrollments from our reputation in the communities that we serve, primarily through word-of-mouth recommendations of the parents of our students. Further, we group our pre-elementary schools geographically to increase local market awareness and to supply a student population for our elementary and middle schools. Our educational continuum from pre-elementary school through elementary and middle school also helps demonstrate to parents our educational focus. We market our services through school open houses, yellow page advertising, print ads in local publications, radio and through distribution of promotional materials in residential areas. Marketing campaigns are conducted throughout the year, primarily at the local level by our school directors and principals. In addition, the various regional offices conduct targeted marketing programs, such as mass mailings and media advertising.

In our marketing, we strive to differentiate ourselves from our competition through the quality of our programs and the educational outcomes of our students. We emphasize the features and benefits of our schools, including a more individualized approach to learning, comprehensive curricula, small class sizes, accreditation, credentialed teachers, before-and-after school programs and summer camps. We promote early age introduction of foreign language and technology use. We evaluate student progress regularly, including the administration of standardized tests, which show that, on average, our school age children perform one and one-half to three grade levels above the national norms.

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Corporate Development – Nobel Learning Communities Strategy and Implementation

Our strategy to take advantage of the significant growth opportunities in the private education market includes internal growth of our existing schools, and may also include expansions of current facilities, new school development in both existing and new markets, and strategic acquisitions.

Our growth to date has been a function of new school development along with strategic acquisitions of existing schools. Before we enter a new market, we devote resources to evaluating that market’s potential. Evaluation criteria include the number and age of children living in proximity to the site; family income data; incidence of two-wage earner and single parent families; traffic patterns; wage and fixed cost structure; competition; price elasticity; family educational data; local licensing requirements; local public school statistics and perception; and real estate costs.

New School Development

During Fiscal 2003, we opened four pre-elementary schools. In addition, two elementary schools that we opened at the end of the fiscal year ended June 30, 2002 commenced operations during Fiscal 2003. From July 1, 2003 through September 30, 2003, we have opened one pre-elementary school. Throughout the remainder of the twelve months ending June 30, 2004 (“Fiscal 2004”) we plan to open approximately two pre-elementary schools, one elementary school and six Paladin Academy programs. The funds to open these schools will be provided by cash flow from operations.

After identifying regions for targeted development, proposed sites are presented to us through a network of developers and realtors. After site selection, we engage a developer or contractor to build a facility to our specifications. We currently work with several developers who purchase the land, build the facility and lease the premises to us under a long-term lease. Alternatively, we purchase land, construct the building with our own or borrowed funds and then seek to enter into a sale and lease-back transaction with an investor. Our development plans depend upon the continued availability of developer and financing arrangements.

Acquisitions

Since 1994, we have acquired 74 schools: 47 pre-elementary schools, 21 elementary schools, five special purpose high schools and one special purpose high school program. We strive to make only acquisitions that are strategic in nature: to enhance our presence within an existing cluster; to establish a base in a new geographic area with growth potential; or to provide an entry into a new education business (e.g., learning challenged students). Key acquisition criteria include reputation, geographic location in markets with excellent demographics and growth prospects, ability to integrate into existing, or become the foundation for new, Nobel Learning Communities and quality of personnel.

We have used strategic acquisitions in the past to expand our market offerings. These acquisitions not only allowed us to enter markets we believe have strong potential, but also presented opportunities for profitable synergies with our other educational offerings. In August 1998, we commenced our special education offerings with the acquisition of the Developmental Resource Centers in Southern Florida. With our September 1999 acquisition of the Houston Learning Academy schools, we now offer special purpose high schools and programs for children who require a more individualized learning environment. The acquisition of The Activities Club facilitated our entry into the summer program and after school market through the sale of curriculum-based products for the public, charter and private school markets.

Service Marks

We have registered various service marks in the United States Patent and Trademark Office, including, among others, Chesterbrook Academy^®, Merryhill Country School^®, Paladin Academy^®, Camp Zone ^® and The Activities Club ^®. We believe that certain of our service marks have substantial value in our marketing in the respective areas in which our schools operate.

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Seasonality

Our elementary and middle schools historically have lower operating revenues in the summer due to the end of the traditional academic year and reduced enrollment in our summer programs. Summer revenues of pre-elementary schools tend to remain more stable.

Industry and Competition

Education reform movements in the United States are providing new alternatives to the public schools. Among others, these reforms include charter schools, private management of public schools, home schooling, private schools and voucher programs. Our strategy is to provide parents a quality alternative to public schools through our privately owned and operated schools, utilizing a proven curriculum in a safe and challenging environment.

To attract school age children, we compete with other for-profit private schools, non-profit schools and home schooling. We anticipate that, given the perceived potential of the education market, well-financed competition may emerge, including possible competition from the large for-profit child care companies. The only material for-profit competitor that integrates elementary and pre-elementary schools of which we are aware which currently competes beyond a regional level is Children’s World Learning Centers, which was acquired in 2003 by Knowledge Learning Corp.

We offer a national-curriculum based program with excellent standards. We believe that the population in our target market – parents seeking curriculum-based learning programs for their children – seek services beyond those provided by child care providers without curriculum based learning. We believe these parents desire to give their children the best educational advantage available, since, as educators have found, the learning process should start earlier than what is generally available in the public schools, preferably somewhere between the ages of two and three.

While price is an important factor in competition in both the school age and pre-elementary school markets, we believe that other competitive factors also are important, including professionally developed educational programs, well-equipped facilities, trained teachers and a broad range of ancillary services, including transportation and infant care. Many of these services are not offered by many of our competitors, particularly in the pre-elementary school market.

Regulation

Our schools are subject to numerous state and local regulations and licensing requirements. We have policies and procedures in place to assist in complying with such regulations and requirements. These regulations vary from jurisdiction to jurisdiction, and can apply different requirements within the same jurisdiction to a pre-elementary school or an elementary school. Although the regulatory and licensing requirements tend to be more stringent with respect to pre-elementary schools, government agencies generally review the fitness and adequacy of buildings and equipment, the ratio of staff personnel to enrolled children, staff training, record keeping, childrens’ dietary program, the daily curriculum and compliance with health and safety standards. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of the schools and licenses must be renewed periodically. Most jurisdictions establish requirements for background checks or other clearance procedures for new employees of schools. Repeated failures of a school to comply with applicable regulations can subject it to sanctions, which might include probation or, in more serious cases, suspension or revocation of the school’s license to operate and could also lead to investigations of our other schools located in the same jurisdiction. In addition, this type of action could lead to negative publicity extending beyond that jurisdiction.

We believe that our operations are in substantial compliance with all material regulations applicable to our business. However, there is no assurance that a licensing authority will not determine a particular school to be in violation of applicable regulations and take action against that school and possibly other schools in the same jurisdiction. In addition, there may be unforeseen changes in regulations and licensing requirements, such as changes in the required ratio of child center staff personnel to enrolled children, that could have a material adverse effect on our operations. States in which we operate routinely review the adequacy of regulatory and licensing requirements and implement changes which may significantly increase our costs to operate in those states.

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In August and September of 1998, the National Highway Transportation Safety Administration (“NHTSA”), issued interpretive letters modifying its interpretation of regulations governing the sale by automobile dealers of vehicles intended to be used for the transportation of children to and from school by child care providers. These letters indicate that dealers may no longer sell 15-passenger vans for this use, and that any vehicle designed to transport eleven or more persons must meet federal school bus standards if it is likely to be used significantly to transport children to and from school or school-related events. These interpretations have affected the type of vehicle that may be purchased by us for use in transporting children and, in effect, required us to commence a scheduled replacement of our remaining fleet of vans with school buses. NHTSA’s interpretation and potential related changes in state and federal transportation regulations have increased our costs to transport children because school buses are more expensive to purchase and maintain and, in some jurisdictions, require drivers with commercial licenses.

Environmental Compliance

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

Insurance

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

Employees

On September 29, 2003, we employed approximately 4,595 persons, approximately 1,290 of whom were employed on a part-time or seasonal basis. We believe that our relationship with our employees is satisfactory.

Available Information

We file electronically with the Securities and Exchange Commission (the “SEC”) our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

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

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EXECUTIVE OFFICERS OF THE COMPANY

The following table lists the names, ages and positions held by all executive officers of NLCI as of September 29 , 2003.

The following description contains certain information concerning the foregoing persons:

George H. Bernstein. Mr. Bernstein was named our Chief Executive Officer and Director in July, 2003. Between 1997 and 2002, Mr. Bernstein was employed in various positions within divisions of Cole National Corporation. Between 2000 and 2002, Mr. Bernstein was President of Pearle Vision, Inc. an 840 unit operator and franchiser of optical retail stores. During parts of 1999 and 2000, Mr. Bernstein was Executive Vice President – Strategic Planning and President of Vision Operations for Cole Vision. Between 1997 and 1999, Mr. Bernstein was the Senior Vice President and General Manager at Things Remembered, an 800 store chain of personalized gift stores. Mr. Bernstein started his business career as a consultant with Bain and Company, a leading strategy consulting firm. Mr. Bernstein earned a B.S. degree in Business Administration from Bucknell University, and a J.D. degree from Harvard Law School.

Edward H. Chambers. Since May 2003, Mr. Chambers has served, in his capacity as a consultant to the Company, as its Interim Chief Financial Officer. From the beginning of 2003, Mr. Chambers has been a principal with The Chambers Group, LLC, a consulting firm specializing in business planning. Mr. Chambers served as Executive Vice President – Finance and Administration of Wawa, Inc. from March 1988 to December 2002. During the period April 1984 through March 1988, he served as President and Chief Executive Officer, and as a director, of Northern Lites, Ltd., an owner and operator of quick-service restaurants operating pursuant to a franchise from D’Lites of America, Inc. From 1982 to July 1984, Mr. Chambers was President – Retail Operations of Kentucky Fried Chicken Corp., a franchiser of quick-service restaurants. He is also a director of Riddle Memorial Hospital. Mr. Chambers served as a director of NLCI from 1988 to 2003.

D. Scott Clegg. Mr. D. Scott Clegg rejoined us as Vice Chairman, President and Chief Operating Officer in February 2002. Previously, Mr. D. Scott Clegg had been with us from 1993 until 1997, commencing with his appointment as Vice President – Operations for the Merryhill Country Schools division in June 1993, and culminating with his appointment in early 1996 as Vice President – Operations, with responsibility for nationwide operations. Mr. D. Scott Clegg left the Company in 1997, to become a principal and founder of Pathways Education Group, L.L.C., a management consulting firm serving the public and private sectors in education. He was formerly Vice President of New Business Development at JBS Investment Banking, Ltd. Mr. D. Scott Clegg also served as General Manager and Chief Operating Officer of Dynasil Corporation of America, a public company, and also served as a member of Dynasil’s board of directors. Mr. D. Scott Clegg is the son of A. J. Clegg, our former Chairman, Chief Executive Officer and Director.

Kathy E. Herman. Ms. Herman joined us in June 2001 as its General Counsel, and was named Vice President and General Counsel in July 2003. Ms. Herman was previously with IBAH, Inc., where she served as its General Counsel, Secretary and Vice President, Quality Assurance from 1998 through 1999, and as its Corporate

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Counsel – International and Pharmaceutics Divisions from 1997 through 1998. Prior to joining IBAH, Ms. Herman was engaged in the private practice of law with a number of law firms, most recently with Drinker Biddle & Reath LLP, where she served in the corporate and securities group from 1995 to 1997. Ms. Herman has a B.A. in political science from Ursinus College and a J.D. from the University of Pittsburgh School of Law.

Jeanne Marie Welsko. Ms. Welsko joined us as our Vice President, Human Resources in September 2003. Between November 2000 and July 2003, Ms. Welsko served as a Human Resources consultant to Alignis, Inc. Prior to this period, she was the Vice President of Human Resources for Nova Care, Inc. from February 1999 through January 2000. From September 1996 through January 1999, Ms. Welsko was the Vice President of Human Resources for Valley Forge Dental Associates, Inc. Ms. Welsko earned her B.A. from Bloomsburg University and her M.S. degree from Villanova University.

Gary V. Lea. Mr. Lea was appointed Vice President - Southern Operations in June 2001. Mr. Lea joined NLCI in January of 2000 as Executive Director. Mr. Lea was formerly with KinderCare Learning Centers, Inc. from July 1988 through August of 1996, as a Regional Vice President covering 11 states and 150 schools. He has also had extensive experience in the restaurant and service industry. He was formerly the Director of Operations with Boston Market for a large southwest territory. Mr. Lea attended Southwest Missouri State University where he earned a B.S. in Business and Psychology. In February 2001, Mr. Lea filed for Chapter 7 bankruptcy protection in the U.S. Bankruptcy Court for the District of Nevada, with respect to which a discharge was filed in June 2001.

Kimberly D. Pablo. Ms. Pablo has been with NLCI since it acquired Merryhill Schools in 1989. She ran one of NLCI’s three largest schools for approximately four years as a principal, during which time enrollment grew at that school from 150 students to 250 students. In 1997 Ms. Pablo was promoted to one of two District Managers, and ran a successful district of 13 elementary, middle and preschools. In 1999, she was promoted to Vice President – Western Operations. Ms. Pablo graduated with a B.A. from Humboldt State University in CA and received her Masters Degree in Organizational Management in 1999.

Kathleen L. Willard. Ms. Willard was named Vice President – Northern Operations in December 1999. Between January 1997 and December of 1999, Ms. Willard was the Executive Director for the Florida district schools of NLCI. From 1985 to 1997, prior to the acquisition of the schools in Florida by NLCI, Ms. Willard served as a school administrator with Another Generation Preschools (a privately held preschool company in the Ft. Lauderdale area).

At September 29, 2003, we operated 172 schools on nine owned and 163 leased properties in 14 states. Our schools are geographically distributed as follows: 29 in California, 15 in Florida, one in Georgia, 13 in Illinois, one in Maryland, seven in Nevada, 15 in New Jersey, 22 in North Carolina, three in Oregon, 23 in Pennsylvania, two in South Carolina, 11 in Texas, 22 in Virginia and eight in Washington. Our schools generally are located in suburban settings.

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

From time to time, we purchase undeveloped land for future development. At June 30, 2003, we held one such property.

We lease 22,500 square feet of space for our corporate offices in West Chester, Pennsylvania.

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

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On August 7, 2002, a civil action was commenced in the Court of Chancery in the State of Delaware in New Castle County. The plaintiff in that action sought to represent a putative class consisting of the public stockholders of the Company. Named as defendants in the complaint were the Company, members of the Company’s Board of Directors and one former member of the Company’s Board of Directors. The plaintiff alleged, among other things, that the proposed merger between the Company and Socrates Acquisition Corporation was unfair and that the Company’s directors breached their fiduciary duties by failing to disclose fully material non-public information related to the value of the Company and by engaging in self-dealing. The complaint sought an injunction, damages and other relief. A stipulation and dismissal of that case was ordered by the court on February 27, 2003 due to the fact that the proposed merger had been terminated.

The Company held an annual meeting of stockholders on April 2, 2003. The following matters were approved by the stockholders by the votes indicated:

PART II

Market Information

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

The table below sets forth the quarterly high and low bid prices for our common stock as reported by Nasdaq for each quarter during the period from July 1, 2001 through June 30, 2003 and through October 8, 2003.

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Holders

At September 29, 2003, there were approximately 338 holders of record of shares of our common stock.

Dividend Policy

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

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Equity Compensation Plan Information

The following table summarizes our information regarding securities authorized for issuance under equity compensation plans as of June 30, 2003:

Options issued outside of the stockholder-approved plans have been issued with features substantially similar to those of the stockholder-approved plans.

Recent Sales of Unregistered Securities

On May 27, 2003, the Company issued 57,143 shares of its common stock, in connection with the acquisition of the remaining 20% of The Activities Club, Inc. not already owned by the Company, and the settlement of related litigation involving Children’s Out-of-School Time, Inc., Joan Bergstrom, William D. Putt, Craig Bergstrom, the Company and The Activities Club, Inc.

On June 17, 2003, the Company issued an aggregate of 1,333,333 shares of its Series E Convertible Preferred Stock, $.0001 par value, in exchange for an investment of $6,000,000 pursuant to a Series E Convertible Preferred Stock Purchase Agreement dated as of June 17, 2003 by and among the Company, Camden Partners Strategic Fund II-A, L.P. and Camden Partners Strategic Fund II-B, L.P. Proceeds will be used for the repayment of debt, and for working capital and other general corporate purposes. The Series E Convertible Preferred Stock is convertible into common stock at a conversion rate, subject to adjustment, of one share of common stock for each share of Series E Convertible Preferred Stock. The Certificate of Designation, Preferences and Rights of the Series E Convertible Preferred Stock is filed as Exhibit 3.6 hereto.

On September 9, 2003, the Company issued an aggregate of 588,236 shares of its Series F Convertible Preferred Stock, $.001 par value, in exchange for an investment of $3,000,000 pursuant to a Series F Convertible Preferred Stock Purchase Agreement dated as of September 9, 2003 by and among the Company, Camden Partners Strategic Fund II-A, L.P., Camden Partners Strategic Fund II-B, L.P., Allied Capital Corporation, Mollusk Holdings, LLC and Blesbok, LLC. Proceeds will be used for the repayment of debt, and for working capital and other general corporate purposes. The Series F Convertible Preferred Stock is convertible into common stock at a conversion rate, subject to adjustment, of one share of common stock for each share of Series F Convertible Preferred Stock. The Certificate of Designation, Preferences and Rights of the Series F Convertible Preferred Stock is filed as Exhibit 3.7 hereto.

The foregoing sales of the Company’s common stock were made in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, as amended and/or Rule 506 of Regulation D promulgated thereunder for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sales of securities. These sales were made without general solicitation or advertising. Each purchaser was an accredited investor or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the shares were being acquired for investment.

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The following table sets forth selected historical consolidated financial and other data, with dollars in thousands, except per share amounts. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included elsewhere in this report. The historical operating results below has been restated to reflect the reclassification of discontinued operations from continuing operations to (loss) income form discontinued operations.

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EBITDA does not represent the Company’s liquidity as defined by accounting principles generally accepted in the United States of America (“GAAP”). Management believes EBITDA has been a useful tool for certain investors and creditors for measuring our ability to meet debt service requirements. Additionally, management uses EBITDA for purposes of reviewing our results of operations on a more comparable basis. The Company has provided EBITDA in previous filing and continues to provide this measure for comparability between periods. EBITDA was restated from amounts reported in previous filings in order to comply with SEC Regulation G, Conditions for Use of Non-GAAP Financial Measures. EBITDA is a non-GAAP financial measure. EBITDA is not necessarily indicative of financial performance and should not be considered an alternative to net income under GAAP for purposes of evaluating our results of operations.

EBITDA for Fiscal 2003 was impacted by goodwill and intangible impairments, fees related to transaction, the write-down of a note receivable and asset impairments and disposal costs included in loss from discontinued operations. The aggregated effect of these charges is $16,495,000.

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Introduction

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

Management Changes

On July 10, 2003, Mr. A.J. Clegg resigned as Chief Executive Officer and Chairman of the Board of Directors of the Company and on August 28, 2003, Mr. Frock resigned as the Company’s Vice Chairman of Corporate Development. In August 2003, Mr. A.J. Clegg and Mr. Frock resigned from the Board of Directors of the Company.

On July 25, 2003, George Bernstein was appointed as the Company’s Chief Executive Officer and appointed to its Board of Directors.

Discontinued Operations

During the first quarter of Fiscal 2003, the Company discontinued the operations of a leased school in Sarasota, Florida. In January 2003, the Company entered into a sub-lease agreement for the remaining term of that lease in excess of the future lease payment obligations.

In May 2003, the Company subleased to the Unified School District No. 11, of Maricopa County, Arizona, the premises at which the Company had previously operated its Fletcher Heights Charter Elementary School. In the second quarter of Fiscal 2003, the Company entered into an agreement to sell its Desert Heights Charter Elementary School and reduced the carrying value of that property to its net realizable value of $3,850,000. The Company recorded a charge of $2,297,000 for the write-down of this asset to its net realizable value of $3,850,000. In August 2003, the Company sold to Partnership With Parents, Inc. (an Arizona non-profit corporation) the premises at which the Company had previously owned and operated its Desert Heights Charter Elementary School. As a result of these two transactions in 2003, the Company exited both the Arizona market, and its direct ownership of charter schools.

In the fourth quarter of Fiscal 2003, the Company created a plan to develop exit strategies for schools identified as  under-performing and/or which do not fit well with the Company’s business or geographic strategies. The plan includes 10 schools (two of which are owned and the rest leased) and one undeveloped school location. The Company is actively seeking buyers for these schools and will continue to operate these schools until disposal or the expiration of their lease terms. As part of this plan, in June 2003 the Company closed an elementary school located in Wilmington, North Carolina and in August 2003, the Company closed a preschool located in Cary, North Carolina.

In addition to school operating losses of $1,980,000 associated with these schools, the Company had an additional $5,613,000 of charges related to the impairment of goodwill, write down of property and equipment and reserves for closed schools.

The Company’s historical operating results has been restated to reflect the reclassification of discontinued operations from continuing operations to (loss) from discontinued operations.

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Results of Operations

Fiscal 2003 compared to Fiscal Year ended June 30, 2002 (“Fiscal 2002”)

At June 30, 2003, the Company operated 174 schools in 15 states. During Fiscal 2003, the Company opened four pre-elementary schools, two elementary schools and one specialty high school and closed six schools. From July 1, 2003 through September 29, 2003, the Company opened one pre-elementary school. Four of the schools closed during Fiscal 2003 are included in discontinued operations and were closed prior to the expiration of their lease terms. Two additional schools closed at the end of their lease term during Fiscal 2003.

Revenues

Revenues from continuing operations for Fiscal 2003 increased $4,821,000 or 3.3% to $149,938,000 from $145,117,000 for Fiscal 2002. The increase in revenues is primarily attributable to a full year of operations for schools opened in Fiscal 2002 and the opening of six new schools. The revenue increase for Fiscal 2003 as compared to Fiscal 2002 is as follows (dollars in thousands):

Schools opened before June 30, 2001 increased $262,000 in Fiscal 2003 compared to Fiscal 2002. This increase was due to tuition increases, offset by a decrease in enrollment in certain pre-elementary and elementary schools. The decrease in enrollment was due to economic conditions that are forcing parents to consider pre-elementary school and elementary school alternatives such as fewer days in attendance in the Company’s pre-elementary schools and public school alternatives for elementary schools. The five schools that opened in Fiscal 2002 had an increase in revenues of $1,189,000 due to a full year of operating results in Fiscal 2003. The six new schools opened in Fiscal 2003 had revenues of $4,192,000.

School operating profit

School operating profit from continuing operations in Fiscal 2003 decreased $3,958,000 or 18.0% to $18,054,000 from $22,012,000 for Fiscal 2002. Total school operating profit as a percentage of revenue decreased from 15.2% for Fiscal 2002 to 12.0% for Fiscal 2003. The decrease in school operating profit for Fiscal 2003 as compared to Fiscal 2002 is as follows (dollars in thousands):

Operating profit from schools opened before June 30, 2001 decreased $3,945,000 in Fiscal 2003 compared to Fiscal 2002. School operating profit as a percentage of applicable revenue for these schools decreased from 16.2% in Fiscal 2002 to 13.4% in Fiscal 2003. This decrease is primarily due to increases in school labor cost related to annual employee wage increase that were not offset by expected increases in tuition revenue due to decreases in enrollment in certain pre-elementary and

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elementary schools. In addition, the decrease in school operating profit was also due to increases in insurance costs for health care benefits, property and casualty insurance and annual rent increases.

The five schools that opened in Fiscal 2002 had increases in school operating profit of $495,000 due to a full year of operating results in Fiscal 2003. New schools opened in Fiscal 2003 had first year losses of $1,303,000 due in part to the normal new school enrollment ramp up period. Losses in Fiscal 2002 for schools opened in Fiscal 2003 are related to pre-opening expenses incurred prior to the opening of a school. Fiscal 2003 pre-opening expense for the one school that will open at the beginning of Fiscal 2004 was $23,000.

Goodwill and other intangible impairment

During Fiscal 2003, the Company had impairment charges related to its goodwill and other intangibles totaling $8,715,000.

The Company was required by SFAS 142 to evaluate the Company’s goodwill for recovery based on the facts and circumstances at December 31, 2002. This test was required as a result of the termination of the merger agreement with Socrates Acquisition Corporation and the decline in the price of the Company’s common stock. The Company estimated fair values for each reporting unit using discounted cash flow projections in evaluating and measuring a potential level one impairment charge. The level one impairment test as required under SFAS 142 as of December 31, 2002 indicated that two of the Company’s 10 reporting units were impaired (Washington/Oregon and Pennsylvania/New Jersey). The results of the Company’s level one test were reviewed by an independent consultant. Based on the consultant’s independent valuation and completion of the level two analysis, the Company recorded an impairment loss related to these two reporting units of $2,200,000.

During the fourth quarter of Fiscal 2003, the Company performed its annual impairment test as required under SFAS 142. The Company estimated fair values as of June 30, 2003 for each reporting unit using discounted cash flow projections in evaluating and measuring a potential impairment charge. The level one impairment test as required under SFAS 142 indicated that three of the Company’s 10 reporting units were impaired (North Carolina, Florida and Nevada) as a result of deteriorating operating performance since December 2002. The results of the Company’s level one test were reviewed by an independent consultant. Based on the consultant’s independent valuation and completion of the level two analysis, the Company recorded an impairment loss related to these three reporting units of $5,500,000.

In addition, the Company recorded a goodwill impairment charge of $1,015,000 related to the intangible assets of The Activities Club, a school products company owned by the Company. This impairment charge was to record the asset to its fair value in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Transaction related costs

Transaction related costs of $1,168,000 are related to legal and professional fees associated with a merger agreement that was terminated on February 3, 2003.

On August 5, 2002, the Company entered into an Agreement and Plan of Merger with Socrates Acquisition Corporation (“Socrates”), a corporation formed by Gryphon Partners II, L.P. and Cadigan Investment Partners, Inc. That agreement (as amended by a First Amendment thereto, dated as of October 2, 2002, the “Merger Agreement”) contemplated that Socrates would be merged into the Company, with the Company as the surviving corporation.

The Company’s Board of Directors, acting upon the unanimous recommendation of a special committee of the Board comprised of three disinterested directors (the “Special Committee”), approved the Merger Agreement and the proposed merger. In reaching its decision, the Special Committee and the Board received a fairness opinion from the Company’s financial advisor, Legg Mason Wood Walker, Incorporated.

As part of the negotiation and execution of the Merger Agreement, the stockholder rights plan previously adopted by the Company in May 2000 was amended, by Amendment No. 1 on August 4, 2002 (so that the dilutive effect of the rights was not triggered by the announcement of a public bid), and by Amendment No.2 on August 5, 2002 (so that the dilutive effect of the rights would not be triggered by the consummation of the proposed merger).

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Under the Merger Agreement, Socrates’ obligation to consummate the proposed merger was subject to its ability to obtain financing, and at the time the Merger Agreement was signed, Socrates had received signed commitment letters providing for the necessary debt and equity financing, subject to certain conditions. However, Socrates did not ultimately receive the financing necessary to consummate the proposed merger. Accordingly, the Company terminated the Merger Agreement, in accordance with its terms, on February 3, 2003.

General and administrative expenses

General and administrative expenses increased $2,109,000 or 17.9% from $11,776,000 in Fiscal 2002 to $13,885,000 in Fiscal 2003. The largest portion of this increase in general and administrative expenses was related to a $1,000,000 allowance recorded against the Company’s $2,500,000 note receivable from Total Education Solutions (“TES”). As part of the evaluation of the carrying value of TES, a number of positive and negative factors affecting TES were considered including: (i) operating results and outlook for TES, (ii) expected future cash flows, (iii) current conditions and trends in the industry; (iv) other industry comparables, and (v) the Company’s plans and ability to hold this investment. As a result of this evaluation, a valuation allowance of $1,000,000 was recorded during Fiscal 2003 to reflect the current net realizable value of the Company’s note receivable with TES. In addition, general and administrative expenses increased over Fiscal 2002 due to $286,000 in expenses related to deferred development fees, and an increase related to the use of various recruiting, accounting and legal services of $481,000.

Operating income

Primarily as a result of the factors mentioned above, operating income decreased $15,950,000 from $10,236,000 in Fiscal 2002 to a loss of $5,714,000 in Fiscal 2003.

Other income

Other income increased $49,000 during Fiscal 2003 as compared to the comparable period in the prior year. This increase was primarily due to an increase in interest income from investments and notes receivable. Other income for Fiscal 2002 also includes the gain recognized on the settlement of a promissory note of $383,000, offset by the write-off of expenses of $344,000 related to unsuccessful acquisitions.

Interest expense

Interest expense increased $103,000 or 2.8% from $3,637,000 for Fiscal 2002 to $3,740,000 for Fiscal 2003. The increase is related to the write-off of $356,000 related to deferred debt fees caused by recent amendments to the Company’s senior credit facility. This increase is offset by decreases in interest rates and repayments on the Company’s senior credit facility and a decrease in interest associated with subordinated notes due to repayments.

Income tax (benefit) expense

Income tax benefit totaled $2,438,000 for Fiscal 2003 as compared to income tax expense of $2,674,000 in Fiscal 2002. The income tax benefit for Fiscal 2003 is less than the combined statutory income tax rate of 38% due to the non-deductibility of a portion of the goodwill that was impaired. Some goodwill associated with the acquisition of the stock of a company is not deductible for tax purposes. As a result of the losses incurred in Fiscal 2003, the Company can carry back these losses two years.

Loss from discontinued operations

Loss from discontinued operations, net of income tax benefit was $4,707,000 in Fiscal 2003 and $1,217,000 in Fiscal 2002.

During the first quarter of Fiscal 2003, the Company discontinued the operations of a leased school in Sarasota, Florida. In January 2003, the Company entered into a sub-lease agreement for the remaining term of that lease in excess of the future lease payment obligations.

In May 2003, the Company subleased to the Unified School District No. 11, of Maricopa County, Arizona, the premises at which the Company had previously operated its Fletcher Heights Charter Elementary School. In the second quarter of Fiscal 2003, the Company entered into an agreement to sell its Desert Heights Charter Elementary School and reduced the carrying value of the property to its net realizable value of $3,850,000. The Company

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recorded a charge of $2,297,000 for the write-down of that asset to its net realizable value of $3,850,000. In August 2003, the Company sold to Partnership With Parents, Inc. (an Arizona non-profit corporation) the premises at which the Company had previously owned and operated its Desert Heights Charter Elementary School. As a result of these two transactions in 2003, the Company exited both the Arizona market, and its direct ownership of charter schools in general.

In the fourth quarter of Fiscal 2003, the Company created a plan to develop exit strategies for schools identified as under-performing and/or which do not fit well with the Company’s business or geographic strategies. The plan includes 10 schools (two of which are owned and the rest leased) and one undeveloped school location. The Company is actively seeking buyers for these schools and will continue to operate these schools until disposal or the expiration of their lease terms. As part of this plan, in June 2003 the Company closed an elementary school located in Wilmington, North Carolina and in August 2003, the Company closed a preschool located in Cary, North Carolina.

All of these schools meet the criteria for discontinued operations in SFAS 144. The operating results for these schools are classified as discontinued operations in the statements of operations for all periods presented, net of tax. A summary of discontinued operations is as follows (dollars in thousands):

Reserve for closed schools includes discounted present values of future rent payments net of subleases and expected losses from the sale of an undeveloped school property.

Net (loss) income

As a result of the above factors, the Company had a net loss for Fiscal 2003 of $11,534,000 as compared to net income of $2,834,000 in Fiscal 2002.

Fiscal 2002 compared to Fiscal Year ended June 30, 2001(“Fiscal 2001”)

At June 30, 2002, the Company operated 174 schools. From July 1, 2001 to June 30, 2002, the Company opened five new schools: two pre-elementary schools and two Paladin programs in existing elementary schools and began performing services under a management contract associated with a charter school. At the beginning of Fiscal 2002, the Company closed three Paladin programs in existing elementary schools and one pre-elementary school.

Revenues

Revenues for Fiscal 2002 increased $7,949,000 or 5.8% to $145,117,000 from $137,168,000 for Fiscal 2001. The increase in revenues was primarily attributable to tuition increases, a full year of operations for schools opened in Fiscal 2001 and the commencement of operations of five new schools in continuing operations. The revenue increase for Fiscal 2002 as compared to Fiscal 2001 is as follows (dollars in thousands):

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Schools opened before June 30, 2000 increased $2,760,000, or 2.2% in Fiscal 2002 compared to Fiscal 2001. This increase was related to tuition increases of approximately 5% offset by a decrease in enrollment in many of the Company’s pre-elementary schools. This decrease in enrollment was due to the economy which often results in the loss of employment by at least one parent with a child in pre-elementary school. The 16 new schools that opened in Fiscal 2001 had an increase in revenues of $5,078,000 due to a full year of operating results in Fiscal 2002. The increase in revenues related to the five new schools opened in Fiscal 2002 that are in continuing operations totaled $973,000. These increases were offset by a decrease in revenues of $862,000 related to all schools closed since the beginning of Fiscal 2002.

School operating profit

School operating profit in Fiscal 2002 increased $3,032,000 or 16.0% to $22,012,000 from $18,980,000 for Fiscal 2001. Total school operating profit as a percentage of revenue increased from 13.8% for Fiscal 2001 to 15.2% for Fiscal 2002. The results for Fiscal 2002 include the effect of discontinuing goodwill amortization as a result of the adoption of SFAS 142, “Goodwill and Other Intangible Assets”, which resulted in a $1,528,000 reduction in goodwill amortization expense in continuing operations and $149,000 in discontinued operations in Fiscal 2002 as compared to Fiscal 2001. The increase in school operating profit for Fiscal 2002 as compared to Fiscal 2001 is as follows (dollars in thousands):

Schools opened before June 30, 2000 increased $2,307,000 in Fiscal 2002 as compared to Fiscal 2001. School operating profit as a percentage of applicable revenue for these schools improved from 14.6% in Fiscal 2001 to 16.6% in Fiscal 2002. Excluding the effect of the adoption of SFAS 142, school operating profit for these schools increased $779,000 or 4.1%.

The 16 schools that opened in Fiscal 2001 had an increase in school operating profit of $1,633,000 due to a full year of operating results in Fiscal 2002. New schools opened in Fiscal 2002 had first year losses of $277,000 due in part to the normal new school enrollment ramp up period. Fiscal 2002 pre-opening expense for the six new schools that opened at the beginning of Fiscal 2003 was $516,000.

General and administrative expenses

General and administrative expenses increased $772,000 or 7.0% from $11,004,000 in Fiscal 2001 to $11,776,000 in Fiscal 2002. As a percentage of revenue, general and administrative expense was 8.1% for Fiscal 2002 and 8.0% for Fiscal 2001. The increase in general and administrative expenses was primarily related to additional corporate staffing, increased rent related to new corporate office location and increased fees for professional and legal services.

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Operating income

As a result of the factors mentioned above, operating income increased $2,260,000 from $7,976,000 in Fiscal 2001 to $10,236,000 in Fiscal 2002. Operating income as a percentage of revenue increased from 5.8% in Fiscal 2001 to 7.1% in Fiscal 2002.

Other income

Other income decreased $264,000 during Fiscal 2002 as compared to the comparable period in the prior year. This decrease was primarily due to a decrease in interest income from investments and notes receivable. Other income for Fiscal 2002 also included a gain recognized on the settlement of a promissory note of $383,000, offset by the write-off of $344,000 expenses related to unsuccessful acquisitions.

Interest expense

Interest expense decreased $534,000 or 12.8% from $4,171,000 for Fiscal 2001 to $3,637,000 for Fiscal 2002. The decrease is due to decreased interest rates on the Company’s senior credit facility and a decrease in interest associated with subordinated notes due to repayments. The decreases were offset by an increase in the interest rate on the Company’s senior subordinated debt, which increased from 10.0% to 12.0% in October 2001.

Income tax expense

Income tax expense totaled $2,674,000 for Fiscal 2002, which reflects a 39.8% effective tax rate. Income tax expense for Fiscal 2001 totaled $1,848,000, which reflects a 43.9% effective tax rate. The reduction in the tax rate from Fiscal 2001 is principally caused by the implementation of SFAS 142, as the Company is no longer amortizing non-deductible goodwill.

Loss from discontinued operations

Losses from discontinued operations, net of taxes, were $1,217,000 in Fiscal 2002 and $562,000 in Fiscal 2001. During Fiscal 2003, the Company closed or sold and created a plan to close or sell schools that were under-performing or do not fit with the Company’s business or geographic strategies. Discontinued operations represent the operating results for all periods presented for these schools.

Loss from discontinued operations included the following: (dollars in thousands)

Change in accounting principle

The Company implemented SAB No. 101 with respect to non-refundable fee revenues in the first quarter of Fiscal 2001. This resulted in a one-time charge of $295,000, net of taxes, which was recorded as a cumulative effect of a change in accounting principle.

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Liquidity and Capital Resources

Senior Bank Facility and recent events

The Company terminated the Merger Agreement with Socrates on February 3, 2003. During Fiscal 2003, the Company expensed approximately $1,168,000 of legal, professional and other registration fees and expenses associated with the Merger Agreement and the proposed merger. These charges, coupled with the overall impact of general economic conditions on the Company’s revenues, placed the Company in noncompliance with certain of its senior debt facility financial covenants as of the quarters ended December 31, 2002 and March 31, 2003.

On May 28, 2003, the Company entered into a fifth amendment to the Amended and Restated Loan and Security Agreement. This amendment (i) waived the Company’s noncompliance with its financial ratios for the periods ending December 31, 2002 and March 31, 2003, (ii) reset future required financial covenant ratios, (iii) changed the maturity of the Acquisition Credit Facility to December 31, 2003, (iv) increased the interest rate spread over the prime rate, (v) required a capital infusion of at least $5,000,000 by June 30, 2003, (vi) required that a minimum of $4,000,000 of additional capital infusion be received by the Company with the proceeds applied against the Acquisition Credit Facility by August 30, 2003, and (vii) placed a limitation on capital expenditures.

On September 29, 2003, the Company entered into a sixth amendment to the Amended and Restated Loan and Security Agreement. This amendment (i) modified the definition of EBITDA (defined as earnings before interest expense, income taxes, depreciation and amortization and excludes certain one time charges) to allow for additional certain non-cash expenses associated with the Company’s Fiscal 2003 results to be excluded from EBITDA, (ii) provided for a $1,000,000 pay down on the Acquisition Credit Facility, and a reduction of the Working Capital Line of Credit from $10,000,000 to $5,000,000, (iii) required the Company to have a commitment by October 31, 2003 for a refinancing of the existing senior credit facility, and (iv) required that all debt be paid-off by December 31, 2003.

As a result, Company is currently in compliance with its senior debt facility financial covenants.

On June 17, 2003 the Company issued in a private placement an aggregate of 1,333,333 shares of Series E Convertible Preferred Stock, $.001 par value, for a purchase price of $6,000,000. The Series E Convertible Preferred Stock is convertible into common stock at a conversion rate, subject to adjustment, of one share of common stock for each share of Series E Convertible Preferred Stock. Holders of Series E Convertible Preferred Stock are entitled to dividends which shall accrue and be paid quarterly in arrears at an annual rate of 5% of the Series E Purchase Price during the first three years with increases thereafter based on the Company’s stock price. The dividends will be paid in kind with additional shares of Series E Convertible Preferred Stock during the first three years, and in cash or in kind, at the option of the Company thereafter. The proceeds from the issuance of the Series E Convertible Preferred Stock were used to pay down the Company’s Working Capital Line of Credit by $4,543,000 and the remainder for working capital purposes.

On August 28, 2003, the Company completed the sale of an owned school located in the greater Phoenix, Arizona area and received net proceeds of $3,934,000. The Company recorded a charge of $2,297,000 to write down this asset to its net realizable value, which charge is reflected as part of the loss from discontinued operations for Fiscal 2003. On September 2, 2003, the Company used the proceeds from the sale of this Arizona property to make the required $4,000,000 payment against the Acquisition Credit Facility.

On September 9, 2003, the Company issued in a private placement an aggregate of 588,236 shares of Series F Convertible Preferred Stock, $.001 par value, in exchange for an investment of $3,000,000. The Series F Convertible Preferred Stock is convertible into common stock at a conversion rate, subject to adjustment, of one share of common stock for each share of Series F Convertible Preferred Stock. Holders of Series F Convertible Preferred Stock are entitled to dividends which shall accrue and be paid quarterly in arrears at an annual rate of 5% of the Series F Purchase Price during the first three years with increases thereafter based on the Company’s stock price. The dividends will be paid in kind with additional shares of Series F Convertible Preferred Stock during the first three years, and in cash or in kind, at the option of the Company thereafter. Each outstanding share of Series F Convertible Preferred Stock shall be entitled to .9623 of a vote, subject to adjustment. The proceeds from the issuance of the Series F Convertible Preferred Stock will be used for the repayment of debt, to meet certain bank covenants, to meet certain requirements relating to the negotiations for the sixth amendment to the Amended and Restated Loan and Security Agreement, requirements for working capital and other general corporate purposes.

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As a result of these events, the total amount outstanding under the Company’s senior credit facility was $18,624,000 at September 29, 2003 as compared to $23,990,000 at June 30, 2003, as detailed below (dollars in thousands):

As a result of the requirement to have the senior debt facility refinanced by December 31, 2003, the entire amount outstanding is included in current portion of long-term debt at June 30, 2003.

The Company is actively seeking lenders to refinance the senior credit facility and intends to engage an investment banking firm to assist with obtaining the best available terms for such refinancing. However, the Company is confident that a refinancing of its senior credit facility will occur by December 31, 2003. This belief is supported by a commitment from an investor to refinance the amounts outstanding under the senior credit facility, which amounts will come due on December 31, 2003.

Cash Flow

The Company’s principal sources of liquidity are cash flow from operations and amounts available under its Working Capital Credit Facility (which is subject to a requirement that it be replaced no later than December 31, 2003). In addition, the Company uses third parties and site developers to build new schools and lease them to the Company. Principal uses of liquidity are debt service and capital expenditures related to the maintenance of its existing schools.

Total cash and cash equivalents increased $2,935,000 from $1,787,000 at June 30, 2002 to $4,722,000 at June 30, 2003. The net increase was primarily related to cash provided from operations totaling $7,807,000 and proceeds from the sale of preferred stock of $6,000,000. These sources of cash were offset by $4,732,000 in capital expenditures and repayments on senior and subordinated debt of $5,626,000.

EBITDA, which is a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation, amortization and the related components of discontinued operations. EBITDA is a non-GAAP financial measure of the Company’s liquidity. Management believes EBITDA has been a useful tool for certain investors and creditors for measuring our ability to meet debt service requirements. Additionally, management uses EBITDA for purposes of reviewing our results of operations on a more comparable basis. The Company has provided EBITDA in previous filing and continues to provide this measure for comparability between periods. EBITDA was restated from amounts reported in previous filings in order to comply with SEC Regulation G, Conditions for Use of Non-GAAP Financial Measures. EBITDA is a non-GAAP financial measure. EBITDA is not necessarily indicative of financial performance and should not be considered an alternative to net income under GAAP for purposes of evaluating our results of operations.

The decline in EBITDA during Fiscal 2003 was primarily due to goodwill and intangible impairments, transaction expenses, the write-down of a note receivable and asset impairments and disposal cost included in loss from discontinued operations. The aggregated effect of these charges is $16,495,000.

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Long-Term Obligations and Commitments

In May 2001, the Company entered into an Amended and Restated Loan and Security Agreement, which increased the Company’s borrowing capacity to $40,000,000. Three separate facilities were established under the Amended and Restated Loan and Security Agreement: (1) $10,000,000 Working Capital Credit Facility, (2) $15,000,000 Acquisition Credit Facility, and (3) $15,000,000 Term Loan. Under the terms of this amendment, the Term Loan Facility would have matured on April 1, 2006 and provided for $2,143,000 annual interim amortization with the balance paid at maturity. Under the latest Amended and Restated Loan and Security Agreement, the Acquisition Credit Facility, the Term Loan and the Working Capital Credit Facility will all mature on December 31, 2003. In addition, the credit facilities provide that NLCI must meet or exceed defined interest coverage ratios and must not exceed leverage ratios.

At June 30, 2003, a total of $23,990,000 was outstanding under the Amended and Restated Loan Agreement as detailed below (dollars in thousands):

In addition, $676,000 was outstanding under letters of credit. The Company also has $10,588,000 outstanding under subordinated debt agreements and $906,000 under capital lease obligations.

The Company has a commitment under a lease agreement to lease and open a school in the Atlanta, Georgia area by October 1, 2003. The Company has decided not to pursue the development of this school and as a result, the Company was required to purchase the property for approximately $1,800,000. The Company has listed the property with a real estate broker and is actively pursuing the sale and disposition of this property. It is anticipated that the proceeds from the sale of this property will be between $1,200,000 and $1,400,000. At June 30, 2003, the Company recorded an expected loss on the sale of this property of $594,000, which amount is included in losses from discontinued operations.

On August 29, 2001, the Company entered into Employment and Termination Agreements with each of Mr. A.J. Clegg and Mr. John Frock. These agreements provided, as to each of these executives, that if such executive voluntarily terminated his employment with the Company, the Company would continue to provide, at its cost, family health insurance coverage to the executive and his spouse for the remainder of their lives or, in the event that the Company is unable under its then-current group health insurance plan to provide such family health insurance coverage, the Company would reimburse the executive and his spouse up to $24,000 per year for the cost of obtaining similar health insurance coverage. Upon such termination, the Company would also provide the executive with two full, annual scholarships per year for life to the Company school of his choice. In the Employment and Termination Agreements, each executive also agreed not to compete with the Company for a period of three years following termination of his employment, in exchange for which the Company would, for each such year, pay to Mr. A.J. Clegg the sum of $100,000 and to Mr. Frock the sum of $50,000. Annual payments made with respect to the agreements not to compete will be expensed annually.

Upon Mr. A.J. Clegg’s voluntary termination of his employment in July 2003, the Company became obligated to Mr. A.J. Clegg for the payments and benefits to be provided to him pursuant to the terms of his Employment and Termination Agreement. In addition, the Company, Mr. A.J. Clegg and Tuscan Business Solutions, Inc. (an entity owned and controlled by Mr. A.J. Clegg) entered into a consulting agreement, as required by Mr. A.J. Clegg’s Employment and Termination Agreement, pursuant to which Tuscan Business Solutions agreed, for a term of five years, to provide up to 10 hours of consulting services each month for the Company, for which Tuscan Business Solutions will be paid $200,000 per year.

Upon Mr. Frock’s voluntary termination of his employment in August 2003, the Company became obligated to Mr. Frock for the payments and benefits to be provided to him pursuant to the terms of his Employment and Termination Agreement. In addition, the Company and Mr. Frock entered into a consulting agreement, as required

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Oby Mr. Frock’s Employment and Termination Agreement, pursuant to which Mr. Frock agreed, for a term of five years, to provide up to 10 hours of consulting services each month for the Company, for which Mr. Frock will be paid $100,000 per year.

During the first quarter of Fiscal 2004, the Company will record a charge for the present value of the future payments to be made with respect to the consulting agreements of approximately $1,300,000 and additional charges for future health insurance coverage.

The Company and Mr. Frock are also parties to a Noncompete Agreement, dated as of March 11, 1997, which provided that the Company would make a payment to Mr. Frock of $255,000 following his termination for any reason (including, without limitation, resignation) if, within 30 days of his termination date, Mr. Frock delivered a letter to the Company agreeing not to engage in specified activities in competition with the Company for four years. On August 28, 2003, Mr. Frock resigned his employment with the Company, and delivered such a letter to the Company. Accordingly, the Company has made the payment to Mr. Frock required under the terms of this agreement, which will be capitalized in the first quarter of Fiscal 2004 and will be amortized over the contract period.

In addition to the above commitments, the Company has significant commitments under operating lease agreements.

The Company has certain contractual obligations. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a loan agreement or lease agreement. The Company’s contractual obligations at June 30, 2003 were as follows: (dollars in thousands)

Capital Expenditures

During Fiscal 2003, the Company placed six new schools in operation and moved one elementary school from a temporary location to a permanent location. All new schools opened in Fiscal 2003 were financed by developers and leased to the Company. Capital expenditures for new school development include school equipment furniture and fixtures and curricula purchased by the Company for the operations of the school. During the fiscal year ended June 2004, the Company plans to open approximately two pre-elementary schools, one elementary school and six Paladin Academy programs. The funds to open these schools will be provided by cash flow from operations. Renovations and equipment purchases are expenditures incurred for existing schools in order to maintain the operations and, where necessary, upgrade the school facility. The Company’s current senior bank credit facility has quarterly limitations on the amount of capital expenditures. Capital expenditures are as follows: (dollars in thousands)

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