Wow, I wish you lived close to us! I'd have sent my son there!
I'm sorry, I won't be of much help, but the first thing that comes to mind is that initially, you need to advertise MORE. In the local newspapers, on the radio even. Costly, no doubt. And in the future, you will not likely need to advertise as much... but up front, I think that will be key for you. You mentioned that you put flyers up at local bulletin boards, and I don't know what all that entails, but I'd make sure to place flyers at any kid venues, ymca, dance schools, gymnastics centers, etc. Also, I'd ask the local elementary schools if there is a place to advertise there (if that's acceptable.)
Unfortunately, I think it is typical for the first year(s) to be a little slow until word does spread about the great school you have. I also think people are hesitant to try something that is 'new' for fear that it will be hokey, or flop. But there certainly are parents/kids who would prefer the environment you describe. They just need to meet you, see your place, and learn about your program. How about having an Open House? Advertise an open house for any prospective students/parents to come check everything out?
That's all I have for now... I'll keep thinking though. Keep you chin up... You are doing a great thing, and if you stay the course, you'll make it work!