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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended: March 31, 2005



OR



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



For the Transition Period From              to



Commission File Number: 000-21363



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EDUCATION MANAGEMENT CORPORATION

(Exact name of registrant as specified in
its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 25-1119571                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|210 Sixth Avenue, Pittsburgh, PA                               |  | 15222                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (412) 562-0900



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



The number of shares of the registrants Common Stock outstanding at March 31, 2005 was
74,316,366.



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##### Table of Contents

INDEX



|              |  |    |  |                       |  |   |  |                                                                                       |  |      
|------------- |  | -- |  | --------------------- |  | - |  | ------------------------------------------------------------------------------------- |  | -----
|              |  |    |  |                       |  |   |  |                                                                                       |  | PAGE 
|              |  |    | 
|PART I        |  |   |  | FINANCIAL INFORMATION |  |  
|              |  |    |  |                       | 
|              |  |    |  | ITEM 1                |  |  |  | FINANCIAL STATEMENTS                                                                  |  | 3-14 
|              |  |    |  | ITEM 2                |  |  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 15-24
|              |  |    |  | ITEM 3                |  |  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 24   
|              |  |    |  | ITEM 4                |  |  |  | CONTROLS AND PROCEDURES                                                               |  | 24   
|              |  |    | 
|PART II       |  |   |  | OTHER INFORMATION     |  |  
|              |  |    |  |                       | 
|              |  |    |  | ITEM 6                |  |  |  | EXHIBITS                                                                              |  | 25   
|              | 
|SIGNATURES    |  | 26
|              | 
|EXHIBIT INDEX |  | 27



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##### Table of Contents

PART I



ITEM 1  FINANCIAL STATEMENTS



EDUCATION MANAGEMENT CORPORATION



CONDENSED
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|---------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | ------------- |  | - | ------- | -
|                                               |  | As of         |        
|                                               |  | March 31,2005 |         |   | June 30,2004 |   |         | March 31,2004 | 
|                                               |  | (unaudited)   |         |   |              |   |         | (unaudited)   | 
|Assets                                         |  |               |         |   |              |   |         |               |  |   |         |  
|Current assets:                                |  |               |         |   |              |   |         |               |  |   |         |  
|Cash and cash equivalents                      |  | $             | 177,094 |   |              | $ | 116,728 |               |  | $ | 44,112  |  
|Restricted cash                                |  |               | 4,821   |   |              |   | 6,414   |               |  |   | 10,014  |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total cash and cash equivalents                |  |               | 181,915 |   |              |   | 123,142 |               |  |   | 54,126  |  
|Receivables, net                               |  |               | 54,533  |   |              |   | 52,196  |               |  |   | 49,251  |  
|Inventories                                    |  |               | 6,571   |   |              |   | 5,002   |               |  |   | 5,880   |  
|Deferred income taxes                          |  |               | 17,203  |   |              |   | 17,203  |               |  |   | 12,824  |  
|Other current assets                           |  |               | 8,880   |   |              |   | 7,511   |               |  |   | 10,583  |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total current assets                           |  |               | 269,102 |   |              |   | 205,054 |               |  |   | 132,664 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Property and equipment, net                    |  |               | 327,902 |   |              |   | 276,148 |               |  |   | 271,662 |  
|Other long-term assets                         |  |               | 15,792  |   |              |   | 14,676  |               |  |   | 14,326  |  
|Intangible assets, net of amortization         |  |               | 17,531  |   |              |   | 20,596  |               |  |   | 20,371  |  
|Goodwill                                       |  |               | 315,036 |   |              |   | 311,525 |               |  |   | 310,604 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total assets                                   |  | $             | 945,363 |   |              | $ | 827,999 |               |  | $ | 749,627 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Liabilities and shareholders investment       |  |               |         |   |              |   |         |               |  |   |         |  
|Current liabilities:                           |  |               |         |   |              |   |         |               |  |   |         |  
|Current portion of long-term debt              |  | $             | 3,516   |   |              | $ | 125,194 |               |  | $ | 92      |  
|Notes payable                                  |  |               |        |   |              |   | 11,000  |               |  |   | 11,000  |  
|Accounts payable                               |  |               | 27,929  |   |              |   | 30,079  |               |  |   | 25,536  |  
|Accrued liabilities                            |  |               | 46,717  |   |              |   | 39,189  |               |  |   | 35,544  |  
|Accrued income taxes                           |  |               | 7,990   |   |              |   | 6,786   |               |  |   | 13,834  |  
|Advanced payments                              |  |               | 143,944 |   |              |   | 46,351  |               |  |   | 128,476 |  
|Unearned tuition                               |  |               | 29,447  |   |              |   | 22,909  |               |  |   | 22,475  |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total current liabilities                      |  |               | 259,543 |   |              |   | 281,508 |               |  |   | 236,957 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Long-term debt, less current portion           |  |               | 1,896   |   |              |   | 3,366   |               |  |   | 3,390   |  
|Deferred income taxes                          |  |               | 5,818   |   |              |   | 5,892   |               |  |   | 3,583   |  
|Deferred rent                                  |  |               | 39,560  |   |              |   |        |               |  |   |        |  
|Other long-term liabilities                    |  |               | 11,061  |   |              |   | 8,546   |               |  |   | 4,539   |  
|Shareholders investment:                      |  |               |         |   |              |   |         |               |  |   |         |  
|Common stock                                   |  |               | 745     |   |              |   | 735     |               |  |   | 734     |  
|Additional paid-in capital                     |  |               | 309,580 |   |              |   | 296,038 |               |  |   | 283,247 |  
|Treasury stock, at cost                        |  |               | (1,791  | ) |              |   | (1,495  | )             |  |   | (1,495  | )
|Retained earnings                              |  |               | 312,341 |   |              |   | 230,382 |               |  |   | 215,473 |  
|Accumulated other comprehensive income         |  |               | 6,610   |   |              |   | 3,027   |               |  |   | 3,199   |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total shareholders investment                 |  |               | 627,485 |   |              |   | 528,687 |               |  |   | 501,158 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  
|Total liabilities and shareholders investment |  | $             | 945,363 |   |              | $ | 827,999 |               |  | $ | 749,627 |  
|                                               |  |               |         |   |              |   |         |               |  |   |         |  



The accompanying notes
to condensed consolidated financial statements are an integral part of these statements.



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EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in
thousands, except per share amounts)



|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|----------------------------------------------------- |  | ----------------------------------- | ------- | ---------------------------------- | ---- | - | ------- |  | ---- | ------- |  | - | -------
|                                                      |  | For the three monthsended March 31, |         | For the nine monthsended March 31,
|                                                      |  | 2005                                |         |                                    | 2004 |   | 2005    |  | 2004
|Net revenues                                          |  | $                                   | 274,599 |                                    |      | $ | 235,150 |  | $    | 764,001 |  | $ | 637,106
|Costs and expenses:                                   |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Educational services                                  |  |                                     | 166,605 |                                    |      |   | 142,112 |  |      | 474,842 |  |   | 401,413
|General and administrative                            |  |                                     | 50,880  |                                    |      |   | 46,439  |  |      | 149,041 |  |   | 123,295
|Amortization of intangible assets                     |  |                                     | 1,647   |                                    |      |   | 1,931   |  |      | 5,070   |  |   | 5,193  
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|                                                      |  |                                     | 219,132 |                                    |      |   | 190,482 |  |      | 628,953 |  |   | 529,901
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Income before interest and taxes                      |  |                                     | 55,467  |                                    |      |   | 44,668  |  |      | 135,048 |  |   | 107,205
|Interest expense (income), net                        |  |                                     | (276    | )                                  |      |   | 583     |  |      | 707     |  |   | 2,093  
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Income before income taxes                            |  |                                     | 55,743  |                                    |      |   | 44,085  |  |      | 134,341 |  |   | 105,112
|Provision for income taxes                            |  |                                     | 21,517  |                                    |      |   | 18,638  |  |      | 52,382  |  |   | 43,007 
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Net income                                            |  | $                                   | 34,226  |                                    |      | $ | 25,447  |  | $    | 81,959  |  | $ | 62,105 
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Earnings per share:                                   |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Basic                                                 |  | $                                   | 0.46    |                                    |      | $ | 0.35    |  | $    | 1.11    |  | $ | 0.86   
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Diluted                                               |  | $                                   | 0.45    |                                    |      | $ | 0.34    |  | $    | 1.09    |  | $ | 0.83   
|                                                      |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Weighted average number of shares outstanding(000s): |  |                                     |         |                                    |      |   |         |  |      |         |  |   |        
|Basic                                                 |  |                                     | 74,222  |                                    |      |   | 73,071  |  |      | 73,812  |  |   | 72,621 
|Diluted                                               |  |                                     | 75,718  |                                    |      |   | 75,493  |  |      | 75,237  |  |   | 74,549 





The accompanying notes to condensed consolidated financial statements are an integral part of these statements.



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EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in
thousands)



|                                                                                 |  |                                     |          |   |      |   |          |  
|-------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                 |  | For the nine months ended March 31, |         
|                                                                                 |  | 2005                                |          |   | 2004 |  
|Cash flows from operating activities:                                            |  |                                     |          |   |      |   |          |  
|Net income                                                                       |  | $                                   | 81,959   |   |      | $ | 62,105   |  
|                                                                                 |  |                                    
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                                     |          |   |      |   |          |  
|Depreciation and amortization                                                    |  |                                     | 59,818   |   |      |   | 35,128   |  
|Allowances for tenant improvements                                               |  |                                     | 14,629   |   |      |   |         |  
|Amortization of intangibles                                                      |  |                                     | 5,070    |   |      |   | 5,193    |  
|Deferred income taxes                                                            |  |                                     | 196      |   |      |   |         |  
|Fixed asset impairment                                                           |  |                                     | 738      |   |      |   |         |  
|Stock based compensation expense                                                 |  |                                     | 787      |   |      |   | 620      |  
|Changes in current assets and liabilities:                                       |  |                                     |          |   |      |   |          |  
|Restricted cash                                                                  |  |                                     | 1,593    |   |      |   | (9,419   | )
|Receivables                                                                      |  |                                     | (2,124   | ) |      |   | (3,038   | )
|Inventories                                                                      |  |                                     | (1,523   | ) |      |   | (1,006   | )
|Other current assets                                                             |  |                                     | (1,438   | ) |      |   | 5,489    |  
|Accounts payable                                                                 |  |                                     | 148      |   |      |   | 1,825    |  
|Accrued liabilities                                                              |  |                                     | (5,843   | ) |      |   | 18,152   |  
|Advance payments                                                                 |  |                                     | 96,737   |   |      |   | 89,262   |  
|Unearned tuition                                                                 |  |                                     | 5,829    |   |      |   | 175      |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Total adjustments                                                                |  |                                     | 174,617  |   |      |   | 142,381  |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Net cash flows from operating activities                                         |  |                                     | 256,576  |   |      |   | 204,486  |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Cash flows from investing activities:                                            |  |                                     |          |   |      |   |          |  
|Acquisition of subsidiaries, net of cash acquired                                |  |                                     | (12,297  | ) |      |   | (157,777 | )
|Expenditures for property and equipment                                          |  |                                     | (68,139  | ) |      |   | (65,692  | )
|Investment in marketable securities                                              |  |                                     | (59,815  | ) |      |   |         |  
|Redemption of marketable securities                                              |  |                                     | 59,815   |   |      |   |         |  
|Other items, net                                                                 |  |                                     | (3,066   | ) |      |   | (745     | )
|                                                                                 |  |                                     |          |   |      |   |          |  
|Net cash flows from investing activities                                         |  |                                     | (83,502  | ) |      |   | (224,214 | )
|                                                                                 |  |                                     |          |   |      |   |          |  
|Cash flows from financing activities:                                            |  |                                     |          |   |      |   |          |  
|Revolving credit facility activity, net                                          |  |                                     | (125,100 | ) |      |   | (35,000  | )
|Principal payments on debt                                                       |  |                                     | (73      | ) |      |   | (56      | )
|Proceeds from issuance of Common Stock                                           |  |                                     | 12,469   |   |      |   | 9,937    |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Net cash flows from financing activities                                         |  |                                     | (112,704 | ) |      |   | (25,119  | )
|                                                                                 |  |                                     |          |   |      |   |          |  
|Effect of exchange rate changes on cash                                          |  |                                     | (4       | ) |      |   | 2        |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Net change in cash and cash equivalents                                          |  |                                     | 60,366   |   |      |   | (44,845  | )
|Cash and cash equivalents, beginning of period                                   |  |                                     | 116,728  |   |      |   | 88,957   |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Cash and cash equivalents, end of period                                         |  | $                                   | 177,094  |   |      | $ | 44,112   |  
|                                                                                 |  |                                     |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                |  |                                     |          |   |      |   |          |  
|Cash paid during the period for:                                                 |  |                                     |          |   |      |   |          |  
|Interest                                                                         |  | $                                   | 943      |   |      | $ | 1,426    |  
|Income taxes                                                                     |  |                                     | 49,540   |   |      |   | 23,248   |  
|Noncash investing and financing activities:                                      |  |                                     |          |   |      |   |          |  
|Tenant improvement allowances                                                    |  |                                     | 30,871   |   |      |   |         |  
|Expenditures for property and equipment included in accounts payable             |  |                                     | 3,854    |   |      |   | 3,301    |  



The accompanying notes
to condensed consolidated financial statements are an integral part of these statements.



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



BASIS OF PRESENTATION



The accompanying condensed consolidated financial statements
should be read in conjunction with the financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2004 (the Fiscal 2004 Annual Report). These condensed
consolidated financial statements include the accounts of Education Management Corporation and its consolidated subsidiaries. The accompanying condensed consolidated balance sheet at June 30, 2004 has been derived from the audited balance sheet
included in the Companys Fiscal 2004 Annual Report. The accompanying interim financial statements are unaudited; however, management believes that all adjustments necessary for a fair presentation have been made and all such adjustments are
considered normal and recurring. The results for the three months and nine months periods ended March 31, 2005 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 2005 and 2004
refer to the periods ended March 31, 2005 and 2004, respectively.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.



On October 25, 2004, the Company announced that its American
Education Centers campuses would be renamed Brown Mackie College (Brown Mackie) in order to establish a common national identity.



Effective April 1, 2005, the Company changed its regional structure to form seven operating divisions by geographic locations within North
America. These regions are the Northeast, Southeast, North Central, Central, South Central, Northwest and Southwest divisions. Accordingly, the Company will evaluate goodwill for impairment based on the new operating division structure in the fiscal
fourth quarter of 2005.



Certain prior period
balances have been reclassified to conform to the current period presentation.



NATURE OF OPERATIONS



Education Management Corporation (EDMC or the Company) is among the largest providers of private postsecondary education in North America, based on student enrollment and revenue. EDMCs
education institutions offer a broad range of academic programs concentrated in the media arts, design, fashion, culinary arts, behavioral sciences, health sciences, education, information technology, legal studies and business fields, culminating
in the award of associates through doctoral degrees. The Company delivers education to its students through traditional classroom settings as well as online.



The Companys quarterly revenues and income fluctuate primarily as a result of the pattern of student
enrollments. Student enrollment for the Companys Art Institutes typically peaked in the fall (fiscal year second quarter), when the largest number of recent high school and college graduates traditionally begin post-secondary education
programs. The first quarter is typically the lowest revenue recognition quarter due to student vacations. The seasonality of the Companys business has decreased over the last several years due to an increased percentage of students at the
Companys schools enrolling in bachelors and graduate degree programs. The decreased effect of seasonal fluctuations on the results of operations is discussed in Change in Accounting below.



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



CHANGES IN ACCOUNTING



In previous years, the Company allocated advertising and admissions expenses to each quarter within the
fiscal year as permitted under Accounting Principles Board (APB) Opinion 28, Interim Financial Reporting, which permits the allocation of costs to all periods within a fiscal year when future periods benefit from the
expenditure. Advertising and admissions expenses were not deferred from one fiscal year to the next. In recent years, a significantly larger percentage of the Companys students have enrolled in longer academic programs such as bachelors
and graduate degree programs as compared to earlier fiscal years. This has led to more students in attendance for a given fiscal year who started their degree in a prior fiscal year, as well as less fluctuation in starting student body on a quarter
to quarter basis, the metric by which the Company allocated the advertising and admissions expense within a fiscal year. The increased offerings of bachelors and graduate degree programs is due in part to acquisitions along with programmatic
diversification. Therefore, beginning with the three months ended September 30, 2004, the Company began expensing all advertising and admissions costs in the period in which they are incurred for interim reporting purposes. This prospective change
has no impact on the reported quarterly or annual results for prior years. Management also believes that expensing advertising and admissions costs as incurred is the preferable accounting method as it eliminates the uncertainty inherent in the
estimation process. In addition, the change conforms the Companys interim accounting policy with that used to prepare the annual financial statements.



The impact on quarterly net income and diluted earnings per share related to the change in accounting policy is as follows (in thousands
except per share data):



|                                                      |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       
|----------------------------------------------------- |  | --------------------------------------- | ------ | -------------------------------------- | - | ------ |  | - | ------ | - |  | - | ------
|                                                      |  | Three Months EndedMarch 31, (unaudited) |        | Nine Months EndedMarch 31, (unaudited)
|                                                      |  | 2005                                    |        | 2004                                   |   | 2005   |  |   | 2004  
|Net income before change in accounting policy         |  | $                                       | 32,750 |                                        | $ | 25,447 |  | $ | 82,714 |   |  | $ | 62,105
|Impact due to change in accounting policy, net of tax |  |                                         | 1,476  |                                        |   |       |  |   | (755   | ) |  |   |      
|                                                      |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       
|Net income, as reported                               |  | $                                       | 34,226 |                                        | $ | 25,447 |  | $ | 81,959 |   |  | $ | 62,105
|                                                      |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       
|Diluted EPS:                                          |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       
|Income before change in accounting policy             |  | $                                       | 0.43   |                                        | $ | 0.34   |  | $ | 1.10   |   |  | $ | 0.83  
|Impact due to change in accounting policy, net of tax |  |                                         | 0.02   |                                        |   |       |  |   | (0.01  | ) |  |   |      
|                                                      |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       
|Net income, as reported                               |  | $                                       | 0.45   |                                        | $ | 0.34   |  | $ | 1.09   |   |  | $ | 0.83  
|                                                      |  |                                         |        |                                        |   |        |  |   |        |   |  |   |       



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



Had the prior period advertising expense been recognized consistent with the policy
used in the current fiscal year, the Companys quarterly net income and diluted earnings per share would have reflected the pro forma amounts below. To clarify the impact of this change, the quarterly impact on operating income and the annual
impact for each line is also provided.



|                                                            |  |                                 |        |   |                       |   |               |  |              |        |  |   |        |   |  |   |       
|----------------------------------------------------------- |  | ------------------------------- | ------ | - | --------------------- | - | ------------- |  | ------------ | ------ |  | - | ------ | - |  | - | ------
|                                                            |  | Three Months Ended: (unaudited) |        |   | YearEndedJune 30,2004
|                                                            |  | September 30,2003               |        |   | December 31,2003      |   | March 31,2004 |  | June 30,2004 |        | 
|Increase (decrease) in operating income (in thousands)      |  | $                               | (1,974 | ) |                       | $ | 2,014         |  | $            | 274    |  | $ | (314   | ) |  | $ |      
|Net income (in thousands):                                  |  |                                 |        |   |                       |   |               |  |              |        |  |   |        |   |  |   |       
|Before change in accounting policy (as reported)            |  |                                 | 4,501  |   |                       |   | 32,157        |  |              | 25,447 |  |   | 14,909 |   |  |   | 77,014
|Pro forma reflecting impact of change in accounting policy  |  |                                 | 3,297  |   |                       |   | 33,364        |  |              | 25,605 |  |   | 14,748 |   |  |   | 77,014
|Diluted earnings per share:                                 |  |                                 |        |   |                       |   |               |  |              |        |  |   |        |   |  |   |       
|Before change in accounting policy (as reported)            |  |                                 | 0.06   |   |                       |   | 0.43          |  |              | 0.34   |  |   | 0.20   |   |  |   | 1.03  
|Pro forma reflecting impact of change in accounting policy* |  |                                 | 0.04   |   |                       |   | 0.44          |  |              | 0.34   |  |   | 0.20   |   |  |   | 1.03  

|* | Quarterly pro forma earnings per share do not total to the annual amount due to rounding.
|- | -----------------------------------------------------------------------------------------



ACCOUNTING FOR LEASES



During the third quarter of fiscal 2005, the Company initiated a review of all of its current real estate
operating leases and determined that its previous method of accounting for landlord incentives or allowances was not in accordance with recent guidance issued by the Securities and Exchange Commission. The Company historically accounted for tenant
improvement allowances as reductions to the related leasehold improvement asset when cash was received from the landlord. Similarly, these reimbursements were reflected as reductions to capital expenditures in investing activities on the statements
of cash flows. In the past, where tenant improvement allowances were paid directly by the landlord, no accounting entries were made. Management determined that the appropriate interpretation of Financial Accounting Standards Board (FASB)
Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, requires these allowances to be recorded as a leasehold improvement asset and deferred rent liability on the condensed consolidated balance sheet and as both an
investing activity (addition to property and equipment) and component of operating activities on the condensed consolidated statement of cash flows. Both items are amortized as a component of educational services expense.



The Company also reviewed its leases to account for rent
holidays and, and in some cases, revised its accounting to account for rent charges from the date where the Company had possession and control of the facility. However, the Company continues to apply the capitalization method
of deferring rent during construction and amortizing that expense to depreciation and amortization expense. The net impact of these accounting adjustments resulted in additional leasehold improvements and deferred rent liability of approximately
$35.7 million and $39.5 million, respectively, at March 31, 2005. In addition, amortization expense for the nine months ended March 31, 2005 reflected an increase of approximately $20.0 million, while rent expense was reduced by approximately $16.2
million. The net result was a non-cash, pretax charge of approximately $3.8 million ($2.3 million or $0.03 per share after tax) reflected in educational



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##### Table of Contents

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



services expense in the Companys fiscal 2005 third quarter. The adjustments described above include approximately $14.6 million of reimbursements from
landlords, used to fund leasehold improvements. These reimbursements are reflected as an increase to cash flows from operations and an offsetting increase to expenditures for property and equipment in the accompanying cash flow statement.



REVISION IN THE CLASSIFICATION OF CERTAIN SECURITIES



In connection with the preparation of
this report, the Company concluded that it was appropriate to classify its auction rate securities as marketable securities. Auction rate securities are investments which are typically tied to short-term interest rates that are reset at
predetermined short-term intervals through an auction process. Previously, such investments had been classified as cash and cash equivalents. Accordingly, the Company has revised the classification to report these instruments as marketable
securities. This change had no impact on previously reported net income.



At March 31, 2005, the Company had no investments in auction rate securities. However, as of December 31, 2004 and September 30, 2004, the Company held investments of $12.5 million and $59.8 million, respectively, in
these current investments and were previously classified as cash and cash equivalents on the Companys Consolidated Balance Sheet. The condensed consolidated statements of cash flows has been revised to include the investment and redemption of
these securities in investing activities for the nine month period ended March 31, 2005. The inclusion of these activities had no net impact on net cash flows from investing activities.



FIXED ASSET IMPAIRMENT



During the third quarter of fiscal 2005, the Company recognized a fixed asset impairment charge of $0.7
million at one of our Canadian facilities related to certain fixed assets. The asset impairment charge was triggered as a result of the Companys current intention to relocate the school to another facility. The Companys review, based on
consideration of current fiscal year operating results and the forecasted operating results of the school, indicated that the estimated future cash flows were insufficient to recover the carrying value of long-lived assets. Accordingly, the Company
adjusted the carrying value of these long-lived assets, including leasehold improvements to managements estimated fair value, which was based upon fair market valuations performed by a third party. In connection with the change recorded on
personal property, leasehold improvements were completely written off.



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



2.    STOCK-BASED COMPENSATION:



The Company maintains a 1996 Stock Incentive Plan, 2003 Incentive Plan and
Employee Stock Purchase Plan for directors, executive management and key personnel which are described more fully in Note 13 of the Companys Fiscal 2004 Annual Report. The Company accounts for these plans using the intrinsic value method
described in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. With the exception of a restricted stock grant made in the first quarter of fiscal 2004, there is no stock-based employee
compensation cost reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying Common Stock on the date of grant. The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. See Note 8 for additional
information regarding SFAS 123(R), Share-Based Payment, which will be adopted by the Company for the first quarter of fiscal 2006.



|                                                                                         |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                         |  | Three months endedMarch 31, |        |   | Nine months endedMarch 31, |  
|                                                                                         |  | 2005                        |        |   | 2004                       |   |        | 2005 |  |   | 2004    |  
|Net income (in thousands)                                                                |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                              |  | $                           | 34,226 |   |                            | $ | 25,447 |      |  | $ | 81,959  |   |  | $ | 62,105  |  
|Stock-based employee compensation expense included in reported net income, net of tax    |  |                             | 157    |   |                            |   | 164    |      |  |   | 475     |   |  |   | 378     |  
|Stock-based employee compensation expense determined under fair value method, net of tax |  |                             | (3,994 | ) |                            |   | (5,274 | )    |  |   | (12,998 | ) |  |   | (10,703 | )
|                                                                                         |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Pro forma                                                                                |  | $                           | 30,389 |   |                            | $ | 20,337 |      |  | $ | 69,436  |   |  | $ | 51,780  |  
|                                                                                         |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Basic earnings per share                                                                 |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                              |  | $                           | 0.46   |   |                            | $ | 0.35   |      |  | $ | 1.11    |   |  | $ | 0.86    |  
|Pro forma                                                                                |  |                             | 0.41   |   |                            |   | 0.28   |      |  |   | 0.94    |   |  |   | 0.71    |  
|Diluted earnings per share                                                               |  |                             |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                              |  | $                           | 0.45   |   |                            | $ | 0.34   |      |  | $ | 1.09    |   |  | $ | 0.83    |  
|Pro forma                                                                                |  |                             | 0.40   |   |                            |   | 0.27   |      |  |   | 0.92    |   |  |   | 0.69    |  



The Company made a
restricted stock grant of 100,000 shares in the first quarter of fiscal 2004. Compensation expense of approximately $3.1 million is being recognized on a straight-line basis over the vesting period of which approximately $0.3 million, $0.8 million,
$0.3 million and $0.6 million was recognized for the three and nine months ended March 31, 2005 and 2004, respectively. (See Note 8.)



3.    EARNINGS PER SHARE:



Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is
calculated to reflect the potential dilution related to stock options, using the treasury stock method (in thousands).



|                           |  |                             |  |                            |  |        |  |       
|-------------------------- |  | --------------------------- |  | -------------------------- |  | ------ |  | ------
|                           |  | Three months endedMarch 31, |  | Nine months endedMarch 31,
|                           |  | 2005                        |  | 2004                       |  | 2005   |  | 2004  
|Basic shares               |  | 74,222                      |  | 73,071                     |  | 73,812 |  | 72,621
|Dilution for stock options |  | 1,496                       |  | 2,422                      |  | 1,425  |  | 1,928 
|                           |  |                             |  |                            |  |        |  |       
|Diluted shares             |  | 75,718                      |  | 75,493                     |  | 75,237 |  | 74,549
|                           |  |                             |  |                            |  |        |  |       



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



For the quarter ended March 31, 2005, options to purchase 614,973 shares were excluded from the
diluted earnings per share calculation because of their antidilutive effect (due to the exercise price of such options exceeding the average market price for the period).



4.    CAPITAL STOCK:



The Companys Capital Stock consists of the following:



| |  |  | 10,000,000 authorized shares of Preferred Stock, $0.01 par value; and
| | - |  | ---------------------------------------------------------------------



| |  |  | 120,000,000 authorized shares of Common Stock, $0.01 par value.
| | - |  | ---------------------------------------------------------------



|                  |  |               |  |              |  |              
|----------------- |  | ------------- |  | ------------ |  | -------------
|                  |  | March 31,2005 |  | June 30,2004 |  | March 31,2004
|Issued:           |  |               |  |              |  |              
|Preferred Stock   |  |              |  |             |  |             
|Common Stock      |  | 74,506,600    |  | 73,519,497   |  | 73,336,203   
|Held in treasury: |  |               |  |              |  |              
|Preferred Stock   |  |              |  |             |  |             
|Common Stock      |  | 190,234       |  | 180,364      |  | 180,364      
|Outstanding:      |  |               |  |              |  |              
|Preferred Stock   |  |              |  |             |  |             
|Common Stock      |  | 74,316,366    |  | 73,339,133   |  | 73,155,839   



5.    BUSINESS
ACQUISITIONS:



On October 1, 2003, the Company acquired
Dubrulle International Culinary & Hotel Institute of Canada (Dubrulle), located in Vancouver, British Columbia. On October 8, 2003, the Company acquired Bradley Academy for the Visual Arts (Bradley), located in York,
Pennsylvania. The aggregate purchase price for these two entities was approximately $10.6 million. Dubrulle allowed the Company to expand on its current base of students in the Vancouver area, while the purchase of Bradley complemented the
Companys existing presence in Pennsylvania by enabling the Company to reach students interested in a suburban setting and also reach the more populous centers of Baltimore, MD and Harrisburg, PA. The pro forma information presented below does
not include these two acquisitions because their impact on operations was not material.



On September 2, 2003, the Company acquired 100% of the outstanding stock of American Education Centers and related companies. American Education Centers operated 18 education institutions in eight states, mainly in
the Midwest, offering programs in health sciences, business, information technology, legal studies and design technologies. The Company paid approximately $103.5 million in cash; an additional $11.0 million in notes, that were repaid on September 2,
2004; and assumed $3.5 million in debt. The purchase of the schools operated by American Education Centers, which have subsequently been renamed Brown Mackie College, broadened the Companys range of academic programs for working adults.



On July 14, 2003, the Company acquired 100% of the outstanding
stock of South University, Inc. (South). South operated four campuses in the southeastern United States and offers undergraduate and graduate degree programs in business, legal studies, information technology and health sciences fields.
The Company paid approximately $51.0 million for South, which includes $4.0 million held in escrow. Funds from this account will be transferred to the previous owner if certain conditions are met. These conditions primarily relate to the development
and performance of certain health profession programs. On November 3, 2004, $1.3 million was paid from escrow and a corresponding entry was made to goodwill. The purchase of South broadened the Companys program offerings in the health
sciences.



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



The results of operations for Brown Mackie and South have been consolidated as of the respective
closing dates. Net cash paid for acquisitions during the first quarter of fiscal 2004 was approximately $149.1 million, net of cash acquired of $6.4 million and the issuance of a note payable of $11.0 million, which since has been repaid. After
allocation of purchase price, assets acquired and liabilities assumed were $179.4 million and $12.9 million, respectively.



The following table reports pro forma information as if the acquisitions of Brown Mackie and South had been completed at the beginning of each respective
fiscal year (unaudited, in thousands, except per share amounts). Pro forma results for nine month period ended March 31, 2004 include $15.9 million in expenses for Brown Mackie pertaining to stock compensation payouts and costs incurred related to
the acquisition by EDMC. These stock plans at Brown Mackie are no longer in place, and the Company does not expect to incur charges of this nature in future periods.



|                           |  |                            |         |      |   |        
|-------------------------- |  | -------------------------- | ------- | ---- | - | -------
|                           |  | Nine months endedMarch 31,
|                           |  | 2005                       |         | 2004
|Net revenues               |  |                            |         |      |   |        
|As reported                |  | $                          | 764,001 |      | $ | 637,106
|Pro forma                  |  |                            | 764,001 |      |   | 647,435
|Net income                 |  |                            |         |      |   |        
|As reported                |  | $                          | 81,959  |      | $ | 62,105 
|Pro forma                  |  |                            | 81,959  |      |   | 52,943 
|Diluted earnings per share |  |                            |         |      |   |        
|As reported                |  | $                          | 1.09    |      | $ | 0.83   
|Pro forma                  |  |                            | 1.09    |      |   | 0.71   



These acquisitions
were accounted for as purchases in accordance with SFAS No. 141, Business Combinations. The results of operations for each of the acquired entities have been consolidated as of the respective closing date. The fair value for the material
acquisitions described above has been determined by an independent third-party appraisal. Any excess purchase price over the fair market value of the net assets acquired is recorded as goodwill and other intangible assets.



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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



6.    INTANGIBLE ASSETS:



The Company accounts for its intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. The Company reviews intangible assets with an identifiable useful life for impairment, when indicators of impairment exist, as defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



Amortization of intangible assets for the three months and
nine months ended March 31, 2005 and 2004 was approximately $1.7 million, $5.1 million, $1.9 million, and $5.2 million, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ending June 30 is as
follows:



|                 |  |                       
|---------------- |  | ----------------------
|Fiscal years     |  | Expense (in thousands)
|2005 (remainder) |  | $1,627                
|2006             |  | 4,212                 
|2007             |  | 2,734                 
|2008             |  | 2,346                 
|2009             |  | 1,583                 



Intangible assets
arise principally from acquisitions. A portion of curriculum relates to costs incurred to develop curriculum from online programs. These assets consisted of the following (in thousands):



|                                   |  |                     |        |                         |   |         |                                           |  |                     |  |                         |        |  |   |         |  
|---------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------- | ----------------------------------------- |  | ------------------- |  | ----------------------- | ------ |  | - | ------- | -
|                                   |  | At March 31, 2005   |        | At June 30, 2004        |  
|                                   |  | GrossCarryingAmount |        | AccumulatedAmortization |   |         | WeightedAverageAmortizationPeriod (years) |  | GrossCarryingAmount |  | AccumulatedAmortization |       
|Curriculum                         |  | $                   | 15,466 |                         | $ | (6,726  | )                                         |  | 6                   |  | $                       | 13,260 |  | $ | (4,973  | )
|Accreditation                      |  |                     | 4,023  |                         |   | (1,255  | )                                         |  | 14                  |  |                         | 4,023  |  |   | (1,043  | )
|Bachelors degree programs         |  |                     | 1,100  |                         |   | (324    | )                                         |  | 15                  |  |                         | 1,100  |  |   | (270    | )
|Student contracts and applications |  |                     | 12,566 |                         |   | (10,552 | )                                         |  | 3                   |  |                         | 12,502 |  |   | (7,804  | )
|Software                           |  |                     | 464    |                         |   | (388    | )                                         |  | 4                   |  |                         | 424    |  |   | (299    | )
|Title IV                           |  |                     | 1,130  |                         |   | (244    | )                                         |  | 12                  |  |                         | 1,130  |  |   | (172    | )
|Tradename                          |  |                     | 500    |                         |   |        |                                           |  | Indefinite          |  |                         | 500    |  |   |        |  
|Other                              |  |                     | 3,433  |                         |   | (1,662  | )                                         |  | 15                  |  |                         | 3,738  |  |   | (1,520  | )
|                                   |  |                     |        |                         |   |         |                                           |  |                     |  |                         |        |  |   |         |  
|Total                              |  | $                   | 38,682 |                         | $ | (21,151 | )                                         |  | 5                   |  | $                       | 36,677 |  | $ | (16,081 | )
|                                   |  |                     |        |                         |   |         |                                           |  |                     |  |                         |        |  |   |         |  



7.    COMPREHENSIVE INCOME:



Comprehensive income consisted of the following (in thousands):



|                             |  |                             |        |   |                            |   |        |      |  |      |        |  |   |       
|---------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | ---- | ------ |  | - | ------
|                             |  | Three months endedMarch 31, |        |   | Nine months endedMarch 31,
|                             |  | 2005                        |        |   | 2004                       |   |        | 2005 |  | 2004
|Net income                   |  | $                           | 34,226 |   |                            | $ | 25,447 |      |  | $    | 81,959 |  | $ | 62,105
|Other comprehensive income:  |  |                             |        |   |                            |   |        |      |  |      |        |  |   |       
|Foreign currency translation |  |                             | (289   | ) |                            |   | (320   | )    |  |      | 3,583  |  |   | 717   
|                             |  |                             |        |   |                            |   |        |      |  |      |        |  |   |       
|Comprehensive income         |  | $                           | 33,937 |   |                            | $ | 25,127 |      |  | $    | 85,542 |  | $ | 62,822
|                             |  |                             |        |   |                            |   |        |      |  |      |        |  |   |       



Accumulated other
comprehensive income represents the foreign currency translation adjustment of approximately $6.6 million and $3.0 million at March 31, 2005 and June 30, 2004, respectively.





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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



8.    NEW ACCOUNTING STANDARDS:



On December 16, 2004, the Financial Accounting Standards Board issued SFAS
No. 123(R), Share-Based Payment, which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires the compensation cost
related to share-based payments, such as stock options and employee stock purchase plans, be recognized in the issuers financial statements and is effective for all annual periods beginning after June 15, 2005. Thus, SFAS 123(R) will be
effective for the Company beginning with the first quarter of fiscal 2006, or July 1, 2005.



The Company currently accounts for share-based payments to employees using the intrinsic value method under APB Opinion 25 and, as such, generally recognizes no compensation cost for employee stock options and the
employee stock purchase plan. Accordingly, the adoption of SFAS 123(R) may have a significant impact on the Companys results of operations. However, the charge would be non-cash and not expected to have a significant impact on the
Companys overall financial position. The new rule may be adopted either prospectively or using a retrospective method. Under the prospective method, a company would value its unvested stock options using an approved valuation method (e.g.
Black-Scholes or the binomial method) and allocate the expense over the future vesting period of the options. Under the retrospective method, a company would recognize employee compensation cost for periods presented prior to the adoption of the new
standard using the pro forma disclosures contained in prior period financial statements. For periods after July 1, 2005, the prospective method described above would be applied. The Company has not decided which method to adopt. The impact of
adoption of SFAS 123(R) will depend on levels of share-based compensation granted in the future. If the Company had adopted SFAS 123(R) in prior periods, the expense recognized would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share in Note 1 to the Companys annual consolidated financial statements and Note 2 of this quarterly report. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required. This new requirement will reduce net operating cash flows and increase, by the same amount, net financing cash flows in periods
after adoption. While the Company cannot estimate what these amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax deductions were approximately $10.5 million, $8.2 million, and $5.9
million in fiscal 2004, 2003 and 2002, respectively.



9.    ACCOUNTING FOR INCOME TAXES:



The effective tax rate for the Company was 38.6% and 39.0% for the third quarter and first nine months of fiscal 2005, respectively, as compared to 42.3% and 40.9% in the respective prior fiscal year periods. The decrease in the
year-to-date rate and the quarterly rate over the prior period was primarily due to the favorable resolution of a tax audit as well as a favorable return to provision adjustment related to the fiscal 2004 tax return filed during the fiscal 2005
third quarter, and a reduction in tax reserves recorded during the fiscal 2005 second quarter. The effective rates differed from the combined federal and state statutory rates due primarily to expenses that are non-deductible for tax purposes.



10.    GUARANTEES:



The Company guarantees a significant portion of real estate obligations for
its subsidiaries, including a mortgage on a building that Western State University College of Law occupies, which had an outstanding balance of $3.3 million at March 31, 2005. The Company would be required to perform under these guarantees if the
subsidiary could not satisfy the obligations.





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##### Table of Contents

ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This Quarterly Report on Form 10-Q contains statements that may be forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Those statements can be identified by the use of forward-looking terminology such as believes, estimates, anticipates, continues, contemplates, expects,
may, will, could, should or would or the negatives thereof. Those statements are based on the intent, belief or expectation of the Company as of the date of this Quarterly Report. The
following discussion should also be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations  Risk Factors included in the Companys Annual Report on Form 10-K for the
fiscal year ended June 30, 2004, which identifies certain risk factors related to the Company. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties that are outside the control of the
Company. Actual results may vary materially from the forward-looking statements contained herein as a result of changes in United States and Canada or international economic conditions, governmental regulations and other factors. The Company
expressly disclaims any obligation or understanding to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Companys expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. The following discussion of the Companys financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial
statements of the Company and the notes thereto, included herein. Unless otherwise noted, references to 2005 and 2004 are to the periods ended March 31, 2005 and 2004, respectively.



Revenue



Our net revenues consist of tuition and fees, student housing fees, bookstore sales, restaurant sales in connection with culinary programs, workshop fees
and sales of related study materials. Tuition revenue generally varies based on the average tuition charge per credit hour, type of program, specific curriculum and the average student population. Bookstore and housing revenue is largely a function
of the average student population at our Art Institutes. Advance payments represent that portion of payments received but not earned, while unearned tuition represents amounts billed but not earned, both are reflected as current liabilities in the
accompanying consolidated balance sheets. The advanced payments are typically related to future academic periods and are for the most part, refundable.



Operating Expenses



Educational services expense consists primarily of costs related to the development, delivery and administration of our education programs. Major cost
components are faculty compensation, administrative salaries, costs of educational materials, facility occupancy costs, information systems costs, bad debt expense and depreciation and amortization of property and equipment.



General and administrative expense consists of marketing and student
admissions expenses and certain central staff departmental costs such as executive management, finance and accounting, legal, corporate development and other departments that do not provide direct services to our students. We have centralized many
of these services to gain consistency in management reporting, efficiency in administrative effort and cost control.



Depreciation is recognized using the straight-line method over the useful lives or lease terms of the related assets for financial reporting purposes and
accelerated methods for income tax reporting purposes. Amortization of intangibles relates to the values assigned to identifiable intangible assets. These intangible assets arose principally from the acquisition of schools.



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##### Table of Contents

Critical Accounting Policies



In preparing our financial statements in conformity with accounting principles generally accepted in the United States,
judgments and estimates are made about the amounts reflected in the consolidated financial statements. As part of the financial reporting process, our management collaborates to determine the necessary information on which to base judgments and
develop estimates used to prepare the consolidated financial statements. Historical experience and available information are used to make these judgments and estimates. However, different amounts could be reported using different assumptions and in
light of changes in facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the accompanying financial statements.



Use of Estimates



Generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. We believe that the
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.



Revenue Recognition and Receivables



We bill tuition and housing revenues at the beginning of an academic term and recognize the revenue on a pro rata basis over the term of instruction or
occupancy. For most of our programs, the academic and fiscal quarters are the same; therefore, unearned revenue is not significant at the end of a fiscal quarter. However, Argosy University, Brown Mackie and to a lesser degree South University and
certain Art Institutes have educational programs with starting and ending dates that differ from our fiscal quarters. Therefore, at the end of the fiscal quarter, we have revenue from these programs that has not yet been earned in accordance with
the Securities and Exchange Commissions Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements.



Refunds are calculated and paid in accordance with applicable federal, state and accrediting agency standards.



The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States and Canada. We determine our allowance for doubtful accounts for most locations primarily by categorizing gross receivables according to the enrollment status of the student (in-school
vs. out-of-school) and establishing a reserve based on the likelihood of collection consistent with our historical experience. Student accounts are monitored and when certain criteria are met (primarily aging past the due date by three or four
months) and internal collection measures have been taken without success, the account is placed with an outside collection agency. Student accounts in collection are fully reserved and evaluated on a case-by-case basis before being written off. If
current collection trends differ significantly from historic collections, an adjustment would be required to our allowance.



Leases



We lease most of our administrative and educational facilities under operating lease agreements. These lease agreements typically contain tenant
improvement allowances and rent holidays. In instances where one or more of these items are included in a lease agreement, we record these allowances as a leasehold improvement asset (which is included in property and equipment, net) and a related
deferred rent liability on our balance sheets and amortize these items on a straight-line basis over shorter of the term of the lease or useful life of the asset as additional deprecation expense and a credit to rent expense. Lease agreements
sometimes contain rent escalation clauses, which are straight-lined over the life of the lease. Our lease terms generally range from one to twenty



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years with at least one or more renewal options. We typically either renew or replace these leases. For leases with renewal options, we record rent expense
and amortize the leasehold improvements on a straight-line basis over the original lease term. Consistent with prior practice, we utilize the capitalization method to account for rent costs recognized during the period of time we perform
build-out or construction activities. This time period is typically 120 days, but can extend longer for larger construction projects. Capitalization ceases when the leased premises are substantially ready for use and the capitalized cost is included
with the cost of the leasehold improvements amortized over the life of the lease as an addition to depreciation expense. We also lease space from time to time on a short-term basis in order to provide specific courses or programs.



During the third quarter of fiscal year 2005, we initiated a review of all of
our current real estate operating leases and determined that our previous method of accounting for landlord incentives or allowances was not in accordance with recent guidance issued by the Securities and Exchange Commission. We had historically
accounted for tenant improvement allowances as reductions to the related leasehold improvement asset when cash was received from the landlord. Similarly, these reimbursements were reflected as reductions to capital expenditures in investing
activities on the statements of cash flows. In the past, where tenant improvement allowances were paid directly by the landlord, no accounting entries were made. We determined that the appropriate interpretation of Financial Accounting Standards
Board (FASB) Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, requires these allowances to be recorded as a leasehold improvement asset and deferred rent liability on the condensed consolidated balance
sheet and as both an investing activity (addition to property and equipment) and component of operating activities on the condensed consolidated statements of cash flow. Both items are amortized as a component of educational services expense.



We also reviewed our leases to account for rent holidays and,
and in some cases, corrected our accounting to account for rent charges from the date where we had possession and control of the facility. However, we continued to apply the capitalization method of deferring rent during
construction and amortizing that expense to deprecation and amortization expense which was consistent with our prior practice. The net impact of these accounting adjustments resulted in additional leasehold improvements and deferred rent liability
of approximately $35.7 million and $39.5 million, respectively at March 31, 2005. In addition, amortization expense for the nine months ended March 31, 2005 reflected an increase of approximately $20.0 million, while rent expense was reduced by
approximately $16.2 million. The net result was a non-cash, pretax charge of approximately $3.8 million ($2.3 million or $0.03 per share after tax) reflected in educational services in our fiscal 2005 third quarter. The adjustments described above
include approximately $14.6 million of reimbursements from landlords, used to fund leasehold improvements. These reimbursements are reflected as an increase to cash flows from operations and an offsetting increase to expenditures for property and
equipment in the accompanying cash flow statement.



Long-Lived Assets



We evaluate the
recoverability of property, plant and equipment and intangible assets with finite lives whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Changes in circumstances include economic conditions or operating performance. When impairment indicators arise from changing conditions, we perform an evaluation based upon
assumptions about the estimated future cash flows. If the projected undiscounted future cash flows are less than the carrying value, we would determine the fair value of the asset based upon a discounted cash flow model or a third party valuation.
When utilizing a discounted cash flow model to determine fair value, if the discounted cash flows are less than the carrying value of the asset, an impairment loss is recognized. We apply our judgment when performing these evaluations to determine
the timing of the testing, the undiscounted cash flows (if applicable) used to assess recoverability and the fair value of the asset. Key to this process is the identification of indicators of impairment and accurately estimating cash flows. The
failure to identify an indicator or inaccurate cash flow estimates could result in unrecognized impairments. To date, we believe our processes of identifying and estimating have produced timely and accurate recognition of impairments.



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During the third quarter of fiscal 2005, we recognized a fixed asset impairment charge of $0.7 million
facilities related to certain fixed assets. The asset impairment charges were triggered as a result of our current intent to relocate the school to another facility. Our review, based upon consideration of current fiscal year operating results and
the forecasted operating results of the school, indicated that the estimated future cash flows were insufficient to recover the carrying value of long-lived assets. Accordingly, we adjusted the carrying value of these long-lived assets, including
leasehold improvements to managements estimated fair value, which was based upon fair market valuations performed by a third party. In connection with the charge recorded on personal property, leasehold improvements were completely written
off.



We evaluate the recoverability of the goodwill
attributable to each reporting unit as required under SFAS 142, Goodwill and Other Intangible Assets, by comparing the fair value of each reporting unit with its carrying value. Historically individual campus components were
aggregated to form three distinct operating divisions by geographic location within North America. These divisions are the Eastern, Central and Western divisions and were considered reporting units. The evaluation is performed at least annually and
when potential impairment indicators exist as required by SFAS No. 142. We completed our annual impairment test during the first quarter of fiscal 2005 and determined that goodwill was not impaired. We apply our judgment when performing these
evaluations to determine the financial projections used to assess the fair value of each reporting unit. The fair market value of the reporting units is estimated by applying multiples to earnings before interest, taxes and depreciation. To validate
the multiples used, we compare the multiples to recent identified transactions where businesses similar to ours were sold.



Effective April 1, 2005, we changed our regional structure to form seven operating divisions by geographic locations within North America. These regions
are the Northeast, Southeast, North Central, Central, South Central, Northwest and Southwest divisions. Accordingly, we will evaluate goodwill for impairment based upon the new operating division structure in the fiscal fourth quarter of 2005.



Income Taxes



We account for income taxes in accordance with SFAS 109, Accounting
for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities result from (i) temporary differences in the recognition of income and expense for financial and federal income
tax reporting requirements, and (ii) differences between the recorded value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases.



At March 31, 2005, we had net state operating loss carryforwards of
approximately $48.8 million. These carryforwards expire at varying dates beginning in fiscal 2010 through 2025. No valuation allowance has been established against the state deferred tax assets, as we believe that these tax benefits will be
realizable through tax carryforward availability and our demonstrated ability to produce taxable income.



At March 31, 2005, we had Canadian net operating loss carryforwards of approximately $22.0 million which results in $9.2 million in deferred tax assets
related to our Canadian entities. We have determined that it is currently more likely than not that no portion of these benefits will be realized and have established a valuation allowance equal to the entire deferred tax assets related
to the foreign net operating loss carryforwards. These carryforwards expire at varying dates beginning in fiscal 2008 through fiscal 2012. We continue to fully reserve all losses incurred related to Canadian operations and thereby we recognize no
tax benefit. We evaluate on a quarterly basis whether, based on all available evidence, the deferred income tax assets are realizable. During the nine months ended March 31, 2005, we increased the valuation allowance by $2.9 million to fully reserve
the tax asset associated with the losses incurred by our Canadian entities during the period.



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New Accounting Standards



On December 16, 2004, the FASB issued SFAS 123(R), Share-Based Payment, which supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends SFAS 95, Statement of Cash Flows. SFAS 123(R) requires the compensation cost related to share-based payments, such as stock options and employee stock purchase plans, be
recognized in the issuers financial statements and is effective for all annual periods beginning after June 15, 2005. Thus, SFAS 123(R) will be effective for our financial statements beginning with the first quarter of fiscal 2006, or July 1,
2005.



We currently account for share-based payments to
employees using the intrinsic value method under APB Opinion 25 and, as such, generally recognize no compensation cost for employee stock options and employee stock purchase plan. Accordingly, the adoption of SFAS 123(R) may have a significant
impact on our result of operations, although it is not expected to have a significant impact on our overall financial position. The new rule may be adopted either prospectively or using a retrospective method. Under the prospective method, a company
would value its unvested stock options using an approved valuation method (e.g. Black-Scholes or the binomial method) and allocate the expense over the future vesting period of the options. Under the retrospective method, a company would recognize
employee compensation cost for periods presented prior to the adoption of the new standard using the pro forma disclosures contained in prior period financial statements. For periods after July 1, 2005, the prospective method described above would
be applied. We have not decided which method to adopt. The impact of adoption of SFAS 123(R) will depend on levels of share-based payments granted in the future. If we had adopted SFAS 123(R) in prior periods, the expense recognized would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our annual consolidated financial statements and Note 2 of this quarterly report. SFAS 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as currently required. This new requirement will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While we cannot estimate what these amounts will be in the future, the amount of operating cash flows recognized in prior periods for such excess tax deductions were approximately $10.5 million, $8.2 million,
and $5.9 million in fiscal 2004, 2003 and 2002, respectively.



Results of
Operations



Three months ended March 31, 2005 compared to the three
months ended March 31, 2004



Net revenues for the three
months ended March 31, 2005 increased 16.8% to $274.6 million, compared to $235.2 million for the same period a year ago, primarily resulting from a 12.1% increase in total student enrollment and an approximate 6% increase in average tuition rates.
Total enrollment at the start of the third quarter of fiscal 2005 was 66,103 students compared to 58,950 students for the same period last year.



Our educational services expense increased by $24.5 million, or 17.2%, to $166.6 million in the third quarter of 2005 from $142.1 million in fiscal 2004,
due primarily to the incremental costs incurred to support higher student enrollment. Educational services expense includes faculty and certain administrative compensation, rent and other facility operating costs, cost of sales, bad debt, and
depreciation and amortization. Overall, educational services expense as a percentage of revenue increased approximately 30 basis points to 60.7% in the third quarter of fiscal 2005 from 60.4% in the third quarter of fiscal 2004. This increase
includes the net impact of the recorded lease accounting adjustment recorded during the third quarter of fiscal 2005. As described above, these adjustments increased depreciation expense and reduced rent expense resulting in a net $3.8 million
non-cash charge. This net increase was partially offset by decreases, as a percentage of revenue, in legal, supplies and telecommunication expenses. Some of these favorable items were due in part to the formation of shared services locations, which
combine certain facilities and administrative functions of some of our schools located in the same geographic region. Other educational services expenses were relatively flat compared to the comparable period last year.



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General and administrative expense was $50.9 million for the three months ended March 31, 2005, an
increase of 9.6% from $46.4 million in the prior year period. The increase was primarily due to costs associated with our higher student enrollment, including higher advertising, salaries and audit expenses. During the first quarter of fiscal 2005,
we changed our method of accounting for marketing and admissions activity to expense the costs when incurred rather than allocate the expense to each quarter during a fiscal year. For the third quarter of fiscal 2005, the impact on marketing and
admissions expense along with the change in accounting methodology was immaterial when compared to the year ago period. Advertising and admissions expense recorded for an entire fiscal year are not affected by the new accounting policy.



As a percentage of net revenue, general and administrative expense
decreased approximately 120 basis points to 18.5% as compared to 19.7% in the third quarter of fiscal 2004. This decrease as a percentage of net revenue was a result of lower consulting, legal, telecommunication and other operating expenses in
relation to revenue. These decreases from the third quarter of fiscal 2004 were partially offset by a 20 basis point increase in advertising and admissions expense along with higher expense for internet and television and non-inquiry generating
marketing expense and a 10 basis point increase for higher audit (including Sarbanes-Oxley compliance) expense. Other general and administrative expenses were flat as a percentage of net revenue compared to the year ago period.



Amortization of intangibles decreased to $1.6 million in the third quarter of
fiscal 2005, as compared to $1.9 million in the third quarter of fiscal 2004 due to certain short-lived intangible assets becoming fully amortized.



Income before interest and taxes (operating income) increased by $10.8 million to $55.5 million in fiscal 2005 third quarter from $44.7 in the
fiscal 2004 third quarter. The corresponding margin increased approximately 120 basis points to 20.2% for the quarter as compared to 19.0% for the prior year quarter due to the factors described above.



Net interest income was $0.3 million in the third quarter of fiscal 2005 as
compared to expense of $0.6 million in comparable year ago period. The net interest income primarily due to income on short-term investments. However, net interest income was offset by amortization of $0.1 million in fees paid in connection with
securing our revolving credit agreement and interest expense on mortgage indebtedness at two of our schools.



Our effective tax rate was 38.6% for the third quarter of fiscal 2005, as compared to 42.3% recorded in the comparable quarter of the prior year. The
effective tax rate for the entire fiscal year 2004 was 41.0%. The decrease in the rate as compared to the prior year period was primarily due to a favorable return to provision adjustment for the tax year ending June 30, 2004, which was determined
during the fiscal 2005 third quarter. The effective rates differed from the combined federal and state statutory rates due primarily to expenses that are non-deductible for tax purposes.



Net income increased by $8.8 million to $34.2 million in the fiscal 2005 third quarter from $25.4 million the year ago
period. The increase is attributable to improved results from operations, and a lower effective tax rate.



Nine months ended March 31, 2005 compared to the nine months ended March 31, 2004



Our net revenues increased by 19.9% to $764.0 million in the first nine months of fiscal 2005 from $637.1 million in the first nine months of fiscal 2004
primarily due to increases in student enrollment and tuition rates, as well as acquisitions made during the first quarter of fiscal 2004. Average student enrollment for the nine months of fiscal 2005 increased 17.5% to 61,785 as compared to 52,585
in the comparable prior fiscal year. Revenues for Brown Mackie and South were $78.0 million in the first nine months of fiscal 2005 as compared to $54.6 million in the year ago period. Results for Brown Mackie and South have been included since the
date of acquisition for each entity, which was September 2, 2003 and July 14, 2003, respectively.



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Our educational services expense increased by $73.4 million, or 18.3%, to $474.8 million in the first
nine months of fiscal 2005 from $401.4 million in the year ago period, due primarily to the incremental costs incurred to support higher student enrollment. Educational services expense includes faculty and certain administrative compensation, rent
and other facility operating costs, cost of sales, bad debt, and depreciation and amortization. Education services expenses for Brown Mackie and South were $46.7 million in the first nine months of fiscal 2005 as compared to $31.2 million in the
comparable year ago period. Overall, educational services expense as a percentage of revenue decreased approximately 80 basis points to 62.2% in fiscal 2005 from 63.0% in fiscal 2004. This decrease is attributable primarily to leverage on our
personnel and facilities expenses, which decreased 90 basis points and 50 basis points (excluding the effect of the lease accounting adjustment) as a percent of revenue, respectively. Other decreases in educational services expenses as a percentage
of revenue include legal and supplies expenses. These favorable items were in part due to the formation of shared services locations, which combine certain facilities and administrative functions of some of our schools located in the same
metropolitan area. The improvements were partially offset by an increase in bad debt expense, which as a percentage of revenue was 40 basis points higher than the year ago period. Other educational services expenses were relatively flat compared to
the same period last year.



General and administrative expense
was $149.0 million in the first nine months of fiscal 2005, up 20.9% from $123.3 million in fiscal 2004. The increase over the comparable period in the prior year reflects the inclusion of Brown Mackie and South for the entire period in fiscal 2005,
higher advertising, salaries, audit (including Sarbanes-Oxley compliance) and telecommunication expenses, and, to a lesser degree, the change in our accounting for marketing and admissions expenses. General and administrative expense for Brown
Mackie and South were $23.0 million in the first nine months of fiscal 2005 as compared to $10.1 million in fiscal 2004. The effect of the change in accounting increased general and administrative expense by approximately $1.2 million in the first
nine months of fiscal 2005. This change has no impact on the expense recorded for any fiscal year, as we did not change our accounting policy of expensing these costs as incurred on an annual basis. As a percentage of net revenues, general and
administrative expense increased approximately 10 basis points to 19.5% as compared to 19.4% in the first nine months of fiscal 2004. This change reflects a 70 basis point increase in advertising expenses, partially offset by decreases in other
miscellaneous expense. Other general and administrative expense categories were relatively flat in the first nine months of fiscal 2005 as compared to the year ago period.



Amortization of intangibles decreased slightly to $5.1 million in the first nine months of fiscal 2005, as compared to $5.2
million in the first nine months of fiscal 2004 due to certain short-lived intangible assets becoming fully amortized. Amortization attributed to South and Brown Mackie was $1.8 million in the first nine months of fiscal 2005 as compared to $1.6
million in the year ago period.



Income before interest and
taxes (operating income) increased by $27.8 million to $135.0 million in fiscal 2005 from $107.2 million in fiscal 2004. The corresponding margin increased approximately 90 basis points to 17.7% for first nine months of fiscal 2005 as
compared to 16.8% for the prior year due to the factors described above.



Net interest expense was $0.7 million and $2.1 million in the nine months of fiscal 2005 and fiscal 2004, respectively. This decrease is primarily attributable an increase in income on short-term investments and lower
borrowings during fiscal 2005. Net interest expense for fiscal 2005 and fiscal 2004 includes the amortization of $0.3 million in fees paid in connection with securing the revolving credit agreement and interest expense on mortgage indebtedness at
two of our schools.



Our effective tax rate for was 39.0% for
the nine months ended March 31, 2005, as compared to 40.9% recorded in the first nine months of the prior year. The effective tax rate for fiscal year 2004 was 41.0%. The decrease in the rate as compared to the prior year was primarily due to a
reduction in tax reserves recorded during fiscal 2005 related to the favorable resolution of a tax audit as well as a favorable return to provision adjustment for the fiscal year ending June 30, 2004, which was determined when the returns were
completed and filed during



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the fiscal 2005 third quarter. The decrease in the tax rate was partially offset by an increase in the valuation allowance related to Canadian deferred tax
assets in the first nine months of fiscal 2005, which served to increase our annual effective tax rate. We recognized a benefit for these losses in the first and second quarters of fiscal 2004; however, during the third quarter of fiscal 2004, we
determined that it was no longer more likely than not that the Canadian tax benefits would be realized and provided an appropriate allowance. We now fully reserve all tax losses recognized related to Canadian operations, thus recognizing
no benefit. The effective rate was also affected by the distribution of taxable income to states with higher tax rates. The effective rates differed from the combined federal and state statutory rates due primarily to the valuation allowance and
expenses that are non-deductible for tax purposes. We expect the effective tax rate to be 39.3% for fiscal 2005.



Net income increased by $19.9 million to $82.0 million in fiscal 2005 from $62.1 million in fiscal 2004. The increase is attributable to improved results
from operations, lower interest expense and a lower effective tax rate.



Seasonality and Other Factors Affecting Quarterly Results



Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. Student enrollment at our Art Institute schools has typically peaked in the fall (fiscal year second quarter),
when the largest number of recent high school and college graduates traditionally begin post-secondary education programs. The first quarter is typically the lowest revenue recognition quarter due to student vacations. The seasonality of our
business has decreased over the last several years due to an increased percentage of students at our schools enrolling in bachelors and graduate degree programs.



Liquidity and Funds of Capital Resources



Our working capital was approximately $9.6 million at March 31, 2005. Our current liabilities exceeded current assets by $76.5 million and $104.3 million
at June 30, 2004 and March 31, 2004, respectively. The decrease in the excess of current liabilities over current assets from March 31, 2004 to March 31, 2005 resulted primarily from a higher cash balance at March 31, 2005, which was primarily
caused by favorable operating results. Our unrestricted cash balance exceeded borrowings by $171.7 million and $40.6 million at March 31, 2005 and 2004, respectively. Our net debt, or borrowings less unrestricted cash, was $22.8 million at June 30,
2004. During the first nine months of fiscal 2004, we used $157.8 million of cash from operations and borrowings on our revolving credit facility to fund acquisitions, as compared to the first nine months of fiscal 2005 where as $12.3 million of
cash was used to fund the repayment of a note issued in connection with our acquisition of Brown Mackie and an earnout payment associated with the acquisition of South. We used cash on hand and from operations during the nine months ended March 31,
2005 to repay $125.1 million of borrowings on our revolving credit facility which were outstanding at June 30, 2004. The result of these investing and financing activities, together with an increase in the incremental cash generated from operations
and the for the most recent quarter, led to higher cash and lower borrowing balances at March 31, 2005 compared to the year ago period. Partially offsetting the significant decrease in debt was the growth in advance payments and unearned tuition,
due to to the increase in enrollment.



Trade accounts
receivable increased by $2.3 million and $5.3 million over last year end and the year ago period, respectively. Days sales outstanding (DSO) in receivables decreased from 18.9 to 17.9 days at March 31, 2005 as compared to last year. We calculate DSO
by dividing net trade receivables by average daily revenue for the preceding quarter. Quarterly average daily revenue is determined by taking the total revenue for a quarter and dividing by the daily number of days in a quarter. The decrease in DSO
was primarily due to better collections along with greater use of third party loans by our students. As a means of controlling our credit risk, we have established alternative loan programs with student loan lenders. These programs, which are
non-recourse to us, help bridge the gap between tuition rates that rise faster than financial aid sources. We believe that these loans are attractive to our students because they provide for repayment post graduation and are available to borrowers
with lower than average credit ratings.



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Net cash flow from operations was $256.6 million for the first nine months ended March 31, 2005, an
increase of approximately $52.1 million as compared to the year ago period. The increase in net cash flow from operations over the prior year was primarily due to the increase in net income, non-cash expenses (primarily depreciation and
amortization) and lower restricted cash. These increases were offset by lower accrued liabilities and increases in other current assets. Cash flow from operations increased by $18.5 million compared to the year ago period due to cumulative
adjustments related to lease accounting (See Note 1 of the Notes to the Condensed Consolidated Financial Statements).



Capital expenditures were $68.1 million, or 8.9% of revenue for the first nine months of fiscal 2005, compared to $65.7 million, or 10.3% of revenue in
the year ago period. Capital expenditures for the first nine months of fiscal 2005 include a $14.6 million cumulative accounting adjustment related to cash received directly from landlords for leasehold improvements. The reduction in capital
expenditures as a percentage of revenue is due in part to our focus on improving our capital efficiency and the timing of expenditures. Contributing to the efficiency was our acquisition of Brown Mackie, which has less capital-intensive operations
than our other educational systems.



The fiscal 2005 capital
expenditures to date relate to the investment in schools acquired or started during the previous several years and schools to be added in fiscal 2005, continued expansion and improvements to current facilities, additional or replacement school and
housing facilities, and classroom and administrative technology. We expect fiscal 2005 capital expenditures will be less than 9.0% of net revenue.



Our amended and restated revolving credit facility allows for borrowings up to $250 million expires August 18, 2008. The agreement contains customary
covenants that, among other matters, require us to meet specified financial ratios, restrict the repurchase of Common Stock and limit the incurrence of additional indebtedness. Outstanding letters of credit reduce the availability of borrowings
under the revolving credit facility. At March 31, 2005, we had no borrowings outstanding under this facility and were in compliance with all covenants under the agreement. Our availability of borrowings under the revolving credit agreement was
approximately $247 million at March 31, 2005. The revolving credit agreement allows us to guarantee up to $3 million of student debt to Sallie Mae, Inc. per fiscal year. We are currently evaluating whether we will enter into such
guarantees. We repaid all borrowings outstanding at June 30, 2004 in July 2004. Additionally, on September 2, 2004, we retired $11.0 million in notes payable related to our acquisition of Brown Mackie.



Borrowings under the revolving credit agreement are available to us to
finance acquisitions and fund occasional working capital needs resulting from the seasonal pattern of cash receipts throughout the year. The level of accounts receivable reaches a peak immediately after the billing of tuition and fees at the
beginning of each academic period. Collection of these receivables is heaviest at the start of each academic period. Additionally, federal financial aid proceeds for continuing students can be received up to ten days prior to the start of an
academic quarter.



Our primary source of cash is tuition
collected from our students. We finance our operating activities primarily from cash generated from operations. Acquisitions are primarily financed through cash generated from operations as well as credit facility borrowings. We believe that cash
flow from operations, supplemented from time to time with borrowings under the Credit Agreement, will provide adequate funds for ongoing operations, planned expansion to new locations, planned capital expenditures and debt service during the next
twelve months.



We lease the most of our facilities. We
anticipate that future commitments on existing leases will be paid from cash provided from operating activities. We also expect to extend the terms of leases that will expire or enter into similar long term commitments for comparable space.



We guarantee a significant portion of real estate lease
obligations for our subsidiaries, including a mortgage on the building that the Western State University College of Law occupies, which had an outstanding balance of $3.3 million at March 31, 2005. We would be required to perform under these
guarantees if the subsidiary could not satisfy the obligations.



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The following table describes our commitments under various contracts and agreements at March 31, 2005
(in thousands):



|                              |  |                       |                 |                             |           |        |           |   |                 |  |   |         |  |   |        
|----------------------------- |  | --------------------- | --------------- | --------------------------- | --------- | ------ | --------- | - | --------------- |  | - | ------- |  | - | -------
|                              |  | Totalamountscommitted |                 | Payments due by fiscal year
|                              |  |                       | 2005(remainder) |                             | 2006-2007 |        | 2008-2009 |   | 2010-Thereafter
|Line of credit borrowings (1) |  | $                     |                |                             | $         |       |           | $ |                |  | $ |        |  | $ |       
|Standby letters of credit (2) |  |                       | 3,028           |                             |           |       |           |   |                |  |   |        |  |   |       
|Mortgage obligation           |  |                       | 5,412           |                             |           | 72     |           |   | 3,677           |  |   | 404     |  |   | 1,259  
|Operating leases              |  |                       | 450,240         |                             |           | 17,119 |           |   | 129,435         |  |   | 109,049 |  |   | 194,637
|Other                         |  |                       | 23              |                             |           |       |           |   | 23              |  |   |        |  |   |       
|                              |  |                       |                 |                             |           |        |           |   |                 |  |   |         |  |   |        
|Total commitments             |  | $                     | 458,703         |                             | $         | 17,191 |           | $ | 133,135         |  | $ | 109,453 |  | $ | 195,896
|                              |  |                       |                 |                             |           |        |           |   |                 |  |   |         |  |   |        

|(1) | Under the terms of our Amended and Restated Credit Agreement, all outstanding borrowings become due at expiration of the facility in fiscal 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | We do not anticipate these letters of credit will be drawn on.
|--- | --------------------------------------------------------------



We are a defendant in certain legal proceedings arising out of the conduct of our businesses. In the opinion of our management, based upon its
investigation of these claims and discussion with legal counsel, the ultimate outcome of such legal proceedings, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations
or liquidity.



In December 2004, three of our schools received
show cause orders from the Accrediting Council of Independent Colleges and Schools (ACICS) due to the failure to timely file certain financial information. The schools subject to the show cause orders are The Art Institute of
California  Los Angeles (including its branches The Art Institute of California  San Francisco and The Art Institute of California  Orange County), The Art Institute of Charlotte and The Art Institutes International Minnesota.
ACICS issued the show cause orders because information we filed was received by ACICS Financial Review Committee after the adjournment of a meeting convened by the Committee to review the information. These show cause orders were vacated by
ACICS at its meeting in April 2005.



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to market risks in the ordinary course of business that include foreign currency exchange rates. We do not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. We are subject to fluctuations in the value of the Canadian dollar relative to the U.S. dollar. We do not believe it is subject to
material risks from reasonably possible near-term change in exchange rates.



ITEM 4  CONTROLS AND PROCEDURES



(a) We maintain disclosure controls and procedures designed to ensure that we are able to collect the information it is required to disclose in the reports we file with the Securities and Exchange Commission (the SEC) and to
process, summarize and disclose this information within the time periods specified in the SECs rules. Our management, including the chief executive officer and chief financial officer, evaluated disclosure controls and procedures at March 31,
2005. Based on that evaluation, we concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our
periodic filings with the SEC.



(b) There have not been any
significant changes in our internal controls or in other factors that could significantly affect such controls during the quarterly period ended March 31, 2005.



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##### Table of Contents

PART II



ITEM 6  EXHIBITS



|    |  |           |  |                                                                                 
|--- |  | --------- |  | --------------------------------------------------------------------------------
|(a) |  | Exhibits:
|    |  |          
|    |  | (15.1)    |  | Registered Independent Accountants Review Report                               
|    |  |          
|    |  | (15.2)    |  | Auditors Acknowledgement                                                       
|    |  |          
|    |  | (31.1)    |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer           
|    |  |          
|    |  | (31.2)    |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer           
|    |  |          
|    |  | (32.1)    |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
|    |  |          
|    |  | (32.2)    |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.



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##### Table of Contents

SIGNATURES



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



|                   |  |                                                     
|------------------ |  | ----------------------------------------------------
|                   |  | EDUCATION MANAGEMENT CORPORATION                    
|                   |  | (Registrant)                                        
|                   | 
|Date: May 10, 2005 |  |                                                     
|                   | 
|                   |  | /s/    JOHN R. MCKERNAN,
JR.                        
|                   |  | John R. McKernan, Jr.                               
|                   |  | Vice Chairman and Chief Executive Officer           
|                   | 
|                   |  | /s/    ROBERT T. MCDOWELL                           
|                   |  | Robert T. McDowell                                  
|                   |  | Executive Vice President and Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX



|      |   |  |                                                                                 
|----- | - |  | --------------------------------------------------------------------------------
|      |  
|(15.1 | ) |  | Registered Independent Accountants Review Report                               
|      |  
|(15.2 | ) |  | Auditors Acknowledgement                                                       
|      |  
|(31.1 | ) |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer           
|      |  
|(31.2 | ) |  | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer           
|      |  
|(32.1 | ) |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
|      |  
|(32.2 | ) |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.



27