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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: March 31, 2004

For the transition period from              to             

Commission File Number 1-10031

NOBEL LEARNING COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

(484) 947-2000

(Registrant’s telephone number, including area code)

Indicate by check whether the registrant (1) has filed all report(s) 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  ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 6,837,707 shares of Common Stock outstanding at May 10, 2004.

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INDEX TO FORM 10-Q

Nobel Learning Communities, Inc.

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PART I

Financial Information

“Safe Harbor” Statement under Private Securities Litigation Reform Act of 1995

Certain statements set forth in or incorporated by reference in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, the Company’s outlook for the fiscal year ended June 30, 2004 (“Fiscal 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 the Company. 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 management’s 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 the Company believes that its assumptions are reasonable, readers are cautioned that there are inherent difficulties in predicting the impact of certain factors, especially those affecting the acceptance of the Company’s newly developed schools and businesses and performance of recently acquired businesses, which could cause actual results to differ materially from predicted results. 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 Quarterly Report on Form 10-Q.

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

The accompanying notes and the notes in the financial statements included in the Registrant’s Annual Report on Form 10-K

are an integral part of these financial statements.

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars in thousands except per share data)

(unaudited)

The accompanying notes and the notes in the financial statements included in the Registrant’s Annual Report on Form 10-K

are an integral part of these financial statements.

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Cash Flow

For the Nine Months Ended March 31, 2004 and 2003

(Dollars in thousands)

The accompanying notes and the notes in the financial statements included in the Registrant’s Annual Report on Form 10-K

are an integral part of these financial statements.

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Nobel Learning Communities, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

For the Nine Months Ended March 31, 2004

(Dollars in thousands except share data)

The accompanying notes and the notes in the financial statements included in the Registrant’s Annual Report on Form 10-K

are an integral part of these financial statements.

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NOBEL LEARNING COMMUNITIES, INC. AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements

for the nine months ended March 31, 2004 and 2003

(unaudited)

Note 1 - Basis of Presentation

The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.

Due to the inherent seasonal nature of the education and child care businesses, annualization of amounts in these interim financial statements may not be indicative of the actual operating results for the full year.

Future results of operations of the Company involve a number of risks and uncertainties. Factors that could affect future operating results and cause actual results to vary materially from historical results include, but are not limited to, consumer acceptance of the Company’s business strategy with respect to expansion into new and existing markets, the Company’s debt and related financial covenants, difficulties in managing the Company’s growth including attracting and retaining qualified personnel and additional enrollments, impairment, if any, of goodwill, increased competition, changes in government policy and regulation and the ability to obtain additional financing or capital required to implement fully the Company’s business plan. Negative developments in these areas could have a material effect on the Company’s business, financial condition and results of operations.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Note 2 – Liquidity

Refinancing

On February 20, 2004, the Company completed a refinancing of its senior credit facility and its senior subordinated debt.

The Company entered into a $23,000,000 Credit Agreement with Harris Trust and Savings Bank (the “Credit Agreement”) which provides for a $14,995,000 term loan (the “Term Loan”) and an $8,000,000 working capital line (the “Working Capital Line”). Proceeds from the Term Loan were used by the Company to retire approximately $15,000,000 in obligations outstanding under the Company’s previous Amended and Restated Credit Agreement with Fleet Bank. The Term Loan will mature on February 15, 2009 and provides for $2,000,000 annual amortization with the balance paid at maturity. The Working Capital Line is scheduled to terminate on February 15, 2009. Up to $3,000,000 of the Working Capital Line may be used for the issuance of letters of credit. The Company’s obligations under the Credit Agreement are guaranteed by subsidiaries which are 80% or more owned by the Company, and are collateralized by a pledge of stock of the Company’s subsidiaries. In addition, the Credit Agreement is secured by liens on real property owned by the Company. At March 31, 2004, the Company had $14,995,000 outstanding under the Term Loan and no amounts outstanding under the Working Capital Line.

The Credit Agreement bear interest, at the Company’s option, at either of the following rates, which may be adjusted in quarterly increments based on the achievement of performance goals: (1) an adjusted LIBOR rate plus a debt to EBITDA-dependent rate ranging from 3.25% to 3.75%, or (2) base rate plus a debt to EBITDA-dependent rate ranging from 1.00% to 1.5%. At March 31, 2004, the weighted average interest rate on the Credit Agreement was 8.03%.

The Company also pays a letter of credit fee based on the face amount of each letter of credit calculated at the rate per year then applicable to loans under the Credit Agreements bearing interest based on an adjusted LIBOR rate plus a debt to EBITDA-dependent rate ranging from 3.0% to 3.5%. At March 31, 2004, the Company had $1,246,000 committed under outstanding letters of credit.

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On February 20, 2004, the Company also retired its existing $10,000,000 senior subordinated debt outstanding with Allied Capital Corporation by issuing a $5,000,000 senior subordinated note to Blesbok LLC and a $5,000,000 senior subordinated note to Mollusk Holdings LLC (the “Notes”). The Notes are due August 15, 2009 and bear interest at the rate of 13.25%. The Company may make prepayments on the Notes, in whole or in part, after February 20, 2005.

The Credit Agreement and the Notes contain customary covenants and provisions that restrict the Company’s ability to change its business, declare dividends, grant liens, incur additional indebtedness and make capital expenditures. In addition, the Credit Agreement and the Notes provide that the Company must meet or exceed defined amounts for EBITDA and fixed charges and must not exceed leverage ratios.

In connection with the issuance of the Credit Agreement and the Notes, the Company incurred $1,300,000 of cost related to legal, investment banking and commitment fees. The fees have been capitalized and will be amortized over the term of the agreements. In addition, the Company expensed $82,000 of unamortized debt fees related to the retirement of the senior subordinated note issued to Allied Capital Corporation.

Amendments related to the Amended and Restated Loan and Security Agreement with Fleet Bank Retired by the February 20, 2004 Refinancing

On September 29, 2003, the Company entered into its sixth amendment to the Amended and Restated Loan and Security Agreement with Fleet Bank. 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 non-cash expenses associated with the Company’s Fiscal 2003 and its first quarter Fiscal 2004 results to be excluded from EBITDA, (ii) required a $1,000,000 pay down on the acquisition credit facility, (iii) reduced its working capital line of credit from $10,000,000 to $5,000,000, (iv) required the Company to have a commitment by October 31, 2003 for refinancing of its existing senior credit facility and (v) required that all of the Company’s senior debt be paid off by December 31, 2003. On October 31, 2003, the Company received a commitment letter to refinance its existing debt.

On October 24, 2003, the Company and its senior lenders agreed to replace Exhibit I (which defined non-cash charges excluded from the definition of EBITDA) to the sixth amendment to the Amended and Restated Loan and Security Agreement, to further modify the definition of EBITDA to allow the exclusion of additional non-cash expenses related to certain non-compete and consulting agreements (See Note 3).

On May 28, 2003, the Company entered into its fifth amendment to the Amended and Restated Loan and Security Agreement with Fleet Bank. 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, required a capital infusion of at least $5,000,000 by June 30, 2003, (v) 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 (vi) placed a limitation on capital expenditures.

In connection with the above amendments, the company incurred $465,000 in fees paid to Fleet Bank which are reflected in interest expense.

Issuance of Preferred Stock

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 years 1, 2 and 3. If the average stock price per share during the last 5 days of the third year is greater than $8 per share, then the dividend rate would remain at 5% for years 4 and 5, otherwise it would increase to 8%. Under either scenario, the dividend rate would increase to 12% in year 6. In addition, if during the 12 month period ending June 2004, the Company’s EBITDA is less than $12,000,000, the dividend rate would increase to 8% until the Company achieves an EBITDA of at least $14,000,000. 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. All dividends will be paid prior to and in preference to the Common Stock. Upon liquidation, the holders of Series F Convertible Preferred Stock are entitled to receive, before any distribution or payment is made upon the Common Stock, the Series F

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Purchase Price plus any unpaid dividends, plus a liquidation preference equal to the greater of 1.5 times the Series F Purchase Price, or the amount such holders would have received if all shares of Series F Convertible Preferred Stock had been converted into Common Stock immediately prior to such liquidation. 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 were 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.

On June 17, 2003 the Company completed a private placement of 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 Preferred Stock is convertible into Common Stock at a conversion rate of one share of Common Stock for each Series E Convertible Preferred Stock. 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 with the remainder being available for working capital purposes.

Conversion of Preferred Stock

During the nine months ended March 31, 2004, 90,000 shares of Series A Preferred Stock were converted into 26,460 shares of common stock and 403,226 shares of Series C Preferred Stock were converted into 100,806 shares of common stock.

Sale of Property

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 $3,935,000. On September 2, 2003, the Company used the proceeds from the sale of the Arizona property to make a required $4,000,000 payment against the acquisition credit facility.

As a result of these events and scheduled payments, the total amount outstanding under the Company’s senior credit bank agreements was $14,995,000 at March 31, 2004 as compared to $23,990,000 at June 30, 2003, as shown below (dollars in thousands):

Note 3 – Non-Compete and Consulting Agreements

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 each 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 is being paid $200,000 per year.

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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 by 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 is being paid $100,000 per year.

Total payments to be made with respect to the above consulting agreements over the next five years is $1,500,000 and estimated future payments for future health insurance coverage based on life expectancy is approximately $1,304,000. During the first quarter of Fiscal 2004, the Company recorded a $1,500,000 charge to cover the present value of the future payments to be made with respect to these consulting agreements of approximately $1,290,000 and charges for future health insurance coverage of approximately $210,000.

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 was capitalized in the first quarter of Fiscal 2004 and will be amortized over the contract period.

On October 17, 2003, the Company announced that Scott Clegg was resigning as Vice Chairman, President and Chief Operating Officer of the Company, effective October 31, 2003.

The Company entered into a certain Separation Agreement and General Release with Mr. D. Scott Clegg dated October 15, 2003 (the “Clegg Separation Agreement”). Pursuant to the Clegg Separation Agreement, Mr. D. Scott Clegg’s employment with the Company terminated on October 31, 2003, and he agreed to continue to serve the Company as a consultant through April 30, 2004 (the “Salary Continuation Period”). The Agreement provided for Mr. D. Scott Clegg to continue to receive, on a bi-weekly basis for a period of six months, that amount which he would have received as his base salary had he still been employed by the Company. The Company agreed to continue to forgive, during each month of the Salary Continuation Period, the remaining principal amount and interest on the sum of $35,000 previously paid to him for relocation expenses. Mr. D. Scott Clegg agreed to 20 consulting days at an additional $1,000 per day, first to be used to offset any remaining relocation balance, with any additional sums to paid in cash. In addition, Mr. D. Scott Clegg received a lump sum payment equal to the number of days of vacation, which had accrued but were unused, multiplied by his prorated daily compensation. Pursuant to the Clegg Separation Agreement, Mr. D. Scott Clegg also agreed not to compete against the Company for a period of 18 months following his separation with the Company.

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Note 4 - Earnings Per Share

Earnings per share are based on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Company’s non-interest bearing convertible preferred stock if they are dilutive. In the calculation of basic earnings per share, weighted average number of shares outstanding are used as the denominator. The Company was in a loss position for the nine months ended March 31, 2004 and March 31, 2003. The common stock equivalents of stock options, warrants and convertible securities issued and outstanding during each nine month period were not included in the computation of diluted earnings per share as they were antidilutive. Earnings per share are computed as follows (dollars and average common stock outstanding in thousands):

Note 5. Discontinued Operations

Effective July 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the disposal of a segment of business. SFAS 144 modifies the accounting and reporting for long-lived assets to be disposed of by sale and broadens the presentation of 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. The Company recorded a charge during the nine months ended March 31, 2004 of $585,000 for the write-off of the leasehold improvements related to this school.

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. The sublease with the Unified School District No. 11 is for five years with a provision to terminate the sublease after two years. The Company’s commitment under the lease expires August 2016.

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. In August 2003, the Company sold to Partnership With Parents, Inc. (an Arizona non-profit corporation), for $3,935,000, the premises at which the Company had previously owned and operated its Desert Heights Charter Elementary School.

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 pre-elementary school located in Cary, North Carolina.

In April 2001, the Company entered into a lease agreement to lease and open a school in the Atlanta, Georgia area by October 1, 2003. The Company decided not to pursue the development of this school and as a result, the Company was required to purchase the property on October 1, 2003 for approximately $1,860,000. 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 $1,150,000 and $1,250,000. At June 30, 2003, the Company recorded an expected loss on the sale of this property of $594,000, which amount was included in losses from discontinued operations. Additional cost related to this property to be incurred in the future is estimated to be between $100,000 to $200,000 for related carrying cost and closing fees.

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

At June 30, 2003, the Company recorded a reserve for closed schools of $1,904,000. As of March 31, 2004, the Company had paid $964,000 in cash items related to this reserve. Of this amount, $370,000 is related to lease payments on closed schools and $594,000 related to carrying cost and other expenses above the market value of property purchased in Atlanta, Georgia.

Note 6 – Segment Information

The Company manages private schools, which consist of pre-elementary, elementary, and programs for special needs children in 14 states. In Fiscal 2000, the Company acquired The Activities Club and began providing management services to charter schools. These operations have different characteristics and are managed separately from the school operations. These operations do not currently meet the quantification criteria and therefore are not deemed reportable under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information” and are reflected in the “other” category.

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The table below presents information about the financial results and condition of the Company’s operating segments for the three and nine months ended March 31, 2004 and 2003 (dollars in thousands):