**SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
  **FORM
10-KSB**
  x
    Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**for
      the fiscal year ended December 31, 2004**o
    Transition Report under Section 13 of 15(d)
      of the Securities Exchange Act of 1934For the transition period from
      ___________ to __________Commission file number
    1-14827**EVCI Career Colleges Holding
      Corp.**(Name of small business issuer in its
      charter)
 
 Delaware
    06-1488212(State
      or other jurisdiction of incorporation
      or organization)
    (I.R.S.
      Employer Identification No.)1 Van Der Donck Street, 2ndFloor, Yonkers, New York 10701(Address of principal executive
      offices)
    (Zip code)Issuer's telephone number, including area
      code: (914) 623-0700Securities registered under Section 12(b)
      of the Exchange Act:
 Title
      of each class
    
    
    
    Name
      of each exchange on which registeredcommon
      stock,$**.**0001
      par value per share
    
    
    
    Boston
      Stock ExchangeSecurities registered under Section 12(g)
      of the Exchange Act:common stock,$**.**0001
      par value per share(Title of class)
 
 Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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  Noo
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. o
  
 
  The
issuer's total revenues for its most recent fiscal year were
$33,069,973.
  As of
March 10, 2005, the aggregate market value of the issuer’s common equity held by
non-affiliates was $87,555,843 based on the closing price of $7.12 for its
common stock on The NASDAQ Small Cap Market on March 10, 2005. As of March 10,
2005, 12,429,603 shares of the issuer’s common stock were outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
  Issuer’s
definitive proxy statement for its 2005 annual meeting of stockholders is
incorporated into Part III of this Form 10-KSB.
  Transitional
Small Business Disclosure Formats (check one): Yes o No x
  
 
  **EVCI
CAREER COLLEGES HOLDING CORP.**
 
 **Form
10-KSB**
 
 **Year
Ended December 31, 2004**
 
 **TABLE
OF CONTENTS**
  **PART
I**
 **Item**
    
    **Page****1.**  
      Description of Business
    1General
    1About
      EVCI
    1Demand
      for Career College Education
    2Our
      Operating Strategy
    3Our
      Growth Strategy
    5Operations
    6Marketing
    8Government
      Regulation of Proprietary Schools
    8Competition
    12Employees
    13Forward-Looking
      Statements and Risk Factors
    13**2.**   
      Description of Property
    26**3.**   
      Legal Proceedings
    26**4.**   
      Submission of Matters to a Vote of Security Holders
    26**PART
      II****5.**   
      Market for Common Equity, Related StockholderMatters and Small Business
      Issuer Purchases of Equity Securities
    27**6.**   
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
    27Overview
    28Critical
      Accounting Policies
    312004
      Compared to 2003
    33Liquidity
      and Capital Resources
    37**7.**   
      Financial Statements
    F-1**8.**   
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosures
    38**8A.**
      Controls and Procedures
    38**PART
      III****9,
      10, 11, 12 and 14**
    39**13.**   
      Exhibits, List and Reports on Form 8-K
    39**SIGNATURES**
    44


**PART
I**




**Item
1.**  **Description of Business.**




**General**




EVCI
provides on-campus career college education, presently through its wholly-owned
subsidiary, Interboro Institute, Inc. Interboro offers degree programs leading
to the Associate in Occupational Studies degree and Associate in Applied
Sciences degree. It has a main campus in mid-town Manhattan and an extension
center in Flushing, New York and in the Washington Heights section of Manhattan,
New York. Interboro also has a college site in Yonkers, New York. Each of
Interboro’s four locations has a new annex that became operational for the fall
semester 2004. We acquired Interboro in January 2000.




**About
EVCI**




EVCI was
organized in March 1997. We completed an underwritten initial public offering of
our common stock in the first quarter of 1999. In February 2004, we relocated
our principal executive offices to 1 Van Der Donck Street, 2 nd Floor,
Yonkers, New York 10701. In August 2004, we changed our name to EVCI Career
Colleges Holding Corp. Our new telephone number is (914) 623-0700. Our code of
ethics is available on our Internet website at www.evcinc.com . Click
on “About Us” and then on “Our Business Conduct Policies.”




EVCI’s
significant 2004 accomplishments include:




·
    increasing
      total revenue to $33.1 million, up 63% from $20.2 million in
      2003.




·
    having
      net income available to common stockholders of $6.3 million and diluted
      earnings per share of $0.50.




·
    having
      income from operations of $4.6 million and diluted operating income per
      share of $0.37 (which is determined by dividing operating income by the
      diluted weighted average number of shares for 2004).




·
    increasing
      total assets by $18 million to $31.3 million (while total liabilities only
      increased by $1.1 million).




·
    increasing
      our current ratio from 1.6:1 to 2.9:1.




·
    raising
      additional equity capital, after expenses, of $10.2 million from the sale
      of common stock to institutional investors for $9.3 million and the
      exercise of warrants and options for $0.9
million.




·
    increasing
      our stockholders’ equity by $16.9 million to $23.9 million.




·
    increasing
      our stock price from an opening price of $5.39 on January 2, 2004 to a
      closing price of $9.60 on December 31,
2004.




1





·
    prevailing
      on the central issue of the arbitration with the former owner of
      Interboro.





·
    ceasing
      to be a small business issuer for filings beginning with our 2005 first
      quarter 10-Q as a result of having a public float of more than $25 million
      as of December 31, 2003 and 2004. Our public float is the aggregate market
      value of our common stock held by
non-affiliates.





·
    hiring
      Joseph D. Alperin, Esq. as its general counsel and vice president for
      corporate affairs.







Interboro’s
significant 2004 accomplishments are discussed below under the caption
“Operations-2004 developments.”




**Demand
for Career College Education**




*Target
market*




The
postsecondary education market is vast and growing. According to U.S.
Statistical Abstracts, this market was more than a $290 billion industry in 2002
and was increasing at $3 - $4 billion per year. People are seeking college
degrees because the salary gap continues to widen between those who have and do
not have a college degree.




While
Interboro is part of this national market, it has chosen to concentrate on a
specific niche in which it faces little direct competition. Interboro serves
students in the New York metropolitan area that come from economically
disadvantaged backgrounds, most of whom do not have a high school diploma or a
general equivalency diploma (GED), and thus have few educational opportunities
available to them. However, they can evidence their ability to perform college
level work and be accepted to Interboro by passing a federal “ability to benefit
examination”. This allows them to be admitted to college and to qualify for
federal and state grants which, for many students, can cover the cost of
Interboro’s tuition.




Approximately
45% to 50% of the students that start in the New York City public school system
do not graduate with a high school diploma. In addition, there is a large and
growing market of legal immigrants lacking an American high school education or
GED who may qualify for admission to Interboro.




*Availability
of tuition grants and loans*




Federal
and state financial aid programs are available to pay for Interboro’s tuition
costs. These are almost exclusively in the form of grants and/or subsidized and
unsubsidized loans.





Almost
all of Interboro’s students fund their tuition through federal Pell grants,
pursuant to Title IV of the Higher Education Act, and New York State Tuition
Assistance Program (TAP) grants. In addition, Interboro participates in the
federal College Work Study program, which allows a limited number of students to
receive additional aid by working in college. Interboro also participates
in the federal Supplemental Education Opportunity Grant program, which
provides some Interboro students additional money to meet college costs.
Interboro allows some of its students to pay over time the portion, if any, of
their tuition, that is not covered by Pell, TAP or other grants. However,
Interboro has chosen not to participate in any federal Title IV loan programs
that would subject it to liability or scrutiny as a result of defaults by its
students.





2


*The
rising cost of public and private colleges and universities*





We
believe tuition costs will continue to rise at both public and private colleges
faster than the rate of inflation. At Interboro, tuition is $4,100 per semester
for most programs of study and $4,200 for the Ophthalmic Dispensing program,
which is lower than most all private colleges and universities and currently can
be funded through full TAP and Pell grants at their current levels by satisfying
eligibility requirements. This gives eligible students, who otherwise could not
afford a college education, the opportunity to obtain an Associate Degree
without obtaining Title IV college loans.





**Our
Operating Strategy**





Key
components of our operating strategy follow:





*Focus
on career based academic curricula with transfer options*





Interboro
offers educational programs principally in the following car eer
related areas of academic study:





·
    business
      administration: accounting and management
 
 ·
    paralegal
      studies
 
 ·
    computer
      technology: networking
 
 ·
    ophthalmic
      dispensing
 
 ·
    office
      technologies: medical office assistant and executive assistant
 
 ·
    security services and
management







We see a
growing demand by employers for individuals possessing career-oriented skills,
in the degree majors and academic concentrations offered by Interboro. We
believe Interboro’s experience and expertise in career oriented college
education enables it to more effectively tailor its marketing plans and to
differentiate Interboro from most of its competitors.




Interboro’s
curriculum design prepares students who want to transfer to colleges that grant
bachelor degrees. A number of bachelor degree colleges have entered into formal
articulation agreements with Interboro under which they will accept its full
degree or academic credits that translate to their curriculum in approved
bachelor degree programs. Many more colleges accept the academic credits of
Interboro transfer students without formal articulation agreements.






3







*Provide
a quality and caring educational experience*





Most of
Interboro’s faculty members teaching career-based courses have direct work
experience in the areas they teach. Interboro’s full-time faculty is
particularly effective in providing any necessary remedial education. Typically,
full-time faculty members are hired after they have proven their effectiveness
as adjunct instructors at Interboro.




Most
students who start at Interboro do not have high school diplomas or a GED. They
also face the daily challenges endemic to those who are economically
disadvantaged. Interboro requires its faculty to recognize and be sensitive to
the special needs of its students. They are asked by us to educate the whole
person. Interboro believes its faculty is particularly adept at working with
students, and gaining their confidence and trust to assist them in the
remediation and developmental process necessary for them to succeed academically
at Interboro.




Interboro
faculty, administration and staff work to establish professional, yet personal,
relationships with students. Interboro strives to set realistic goals for its
students while maintaining our academic integrity. Students generally receive a
telephone call from a faculty member or an academic advisor if they miss class.
Professors and advisors work with students to meet particular academic needs.
Interboro offers a variety of support programs including intensive tutoring,
mentoring and internship programs. Its staff refers students to outside day care
agencies and social service agencies in order to help students meet personal
challenges and stay in college.





*Improve
student retention*





Improving
student retention is essential to the continuing success of Interboro and is one
of Interboro’s greatest challenges and opportunities. The retention process
starts from the initial enrollment and continues through graduation. As is true
throughout the country for disadvantaged students, a large number of Interboro’s
students do not finish their degree programs for personal, financial or academic
reasons. Interboro recognizes that its ability to retain students until
graduation is an important indicator of its success and that modest improvements
in retention rates can result in meaningful increases in revenue and
profitability.




Interboro
has increased its retention and graduation rates since EVCI acquired Interboro
in January 2000 from less than 10% to approximately 20%. Interboro has hired
full-time remediation and developmental specialists whose sole job is to work,
in and outside the classroom, with students, faculty and tutors in order to
provide students with the skill sets required for them to succeed in college.
Notwithstanding the extra expense of intense tutoring intervention, it generally
has been more cost-effective for Interboro to retain students than to recruit
new students. Interboro has submitted to the New York State Education Department
(NYSED) a plan to assure a graduation rate of 25% before Interboro’s
accreditation expires on September 30, 2008.






Improved
retention and graduation rates continue to be a top priority at Interboro. It
considers student retention the responsibility of the entire college personnel.






4










*Maintain
academic integrity and create cutting edge programs*




Interboro
strives to meet the changing needs of its students and their potential
employers. Interboro regularly evaluates its academic programs, considers
revisions to existing courses and programs and develops new curricula and tests
based upon its evaluations. In addition, Interboro creates flexible
schedules to accommodate the needs of its students.




**Our
Growth Strategy**




*2005
enrollments*








We expect
to grow Interboro’s enrollments in 2005 at a rate that is consistent with its
historical compounded annual growth rate of enrollments that has averaged
approximately 40% per year since we acquired Interboro in 2000. At this rate,
Interboro will continue to significantly exceed industry averages for enrollment
growth at proprietary colleges owned by public companies. In order to meet
Interboro’s 2005 growth target, it will need to increase capacity by the fall
2005 semester.





*Existing
sites*





Interboro
is aggressively seeking space to relocate and consolidate its Manhattan main
campus and Washington Heights extension center into larger more efficient
facilities. It is also seeking to relocate and expand its annex at its Flushing
extension center. Annexes are located within close walking distance to the
existing site.





*New
sites*





With the
NYSED’s approval, Interboro will, in the future, open new college sites in
communities with economically disadvantaged populations that recognize the need
for Interboro programs. We believe that convenience is a strong factor
considered by students when selecting a college. Besides increasing enrollment
capacity, new sites allow Interboro to more effectively leverage its
infrastructure and its investment in curricula. They also increase its name
recognition and reputation in New York State. In 2005, Interboro does not plan
to open a new college site, as distinguished from an annex.





*Acquisitions*





With the
substantial improvements in our financial condition and operating results,
acquisitions again became an integral part of our growth strategy. We look to
acquire fully operational, or licenses to operate, for-profit, career-oriented
colleges. We seek fully operational colleges that have sound management,
functional operations and quality educational programs. We seek colleges that
will benefit from our management experience and operating strengths and will
allow us to increase their enrollment, revenue and profitability. Our first
priority is to acquire fully operational colleges that can serve the same target
market as Interboro serves.





In
January, 2005, we acquired Information Computer Systems, Inc. for $670,000. We
then changed its name to Pennsylvania School of Business. PSB is located in the
outskirts of Allentown, Pennsylvania. It is authorized to offer two Associate in
Specialized Business degree programs and two diploma programs in information
technology as well as three business diploma programs that were recently
authorized: Business Administration, Office Administration and Medical
Information Technology. Pending a planned relocation to downtown Allentown, PSB
is conducting limited operations. PSB plans to recommence full operations on or
before January 2006. As permitted by the Pennsylvania State Education
Department, after six months of teaching the three business diploma programs, we
plan to seek authorization to award the Associate in Special Business Degree for
those programs.





5


PSB will
not be operated using the identical model as Interboro because Pennsylvania
state grants are only available to students who have a high school diploma or
GED. Accordingly, PSB will be targeting students from high schools and
organizations that provide training for a GED. Nevertheless, we believe PSB can
benefit significantly from Interboro’s experience and strengths.





**Operations**





*Enrollments*





Interboro
has spring, summer and fall semesters and morning, afternoon and evening
classes. There are approximately 3,700 full-time students enrolled at Interboro
for the 2005 spring semester, a 32% increase over the 2004 spring semester.
Interboro’s current per semester optimum capacity is about 5,000 students,
without expanding its limited weekend classes. Optimum capacity is achieved when
there is balanced distribution of students throughout Interboro’s sites and
during morning, afternoon and evening classes. Our plans for expansion are
discussed above under the caption “Growth Strategy” and below in “Managements
Discussion and Analysis of Financial Condition and Results of
Operations.”





*Tuition*





Interboro’s
$4,100 to $4,200 per semester tuition rate is one of the lowest for a private
college, but like many private colleges, is somewhat higher than public
institutions, such as community colleges and state universities.





The per
semester maximum grants per student are: Pell, $2,025 and TAP, $2,500. Interboro
students, who qualify for Pell and TAP grants that exceed Interboro’s tuition,
generally have the excess grant funds applied to pay for their books and
transportation. Any credit balance after tuition, books and transportation is
refunded to the students. For 2004, Interboro students qualifying for financial
aid received an average of $1,628 in Pell grants and $2,075 in TAP grants, or a
total averaging $3,703.





Most of
Interboro’s new students who pay their tuition with Pell and TAP grants do not
have a high school diploma or GED but have passed a federally approved exam that
establishes their “ability to benefit” from the degree programs offered by
Interboro. Because of Interboro’s niche market, Interboro believes a higher
percentage of its total student body consists of ability to benefit students
than almost all other colleges or universities that receive Pell and TAP
grants.




6


*Placement
of Interboro graduates*





Based on
surveys of Interboro graduates, and information from our faculty, at least 75%
of Interboro’s graduates are either currently employed or attending a
baccalaureate degree college.





*2004
developments*




Significant
2004 developments at Interboro include:





·
    Full-time
      student enrollments for the full year increased by 65% to 8,675 from 5,250
      in 2003.





·
    Full-time
      student enrollments increased each semester over the same semester of
      2003:





****
    ****
    **Spring**
    ****
    **Summer**
    ****
    **Fall**
    ******2004**
    ****
    ****
    2,800
    ****
    ****
    1,975
    ****
    ****
    3,900
    ********
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******2003**
    
    
    1,850
    
    
    1,100
    
    
    2,300





·
    Student
      retention and graduation rates were better than in
2003.




·
    Interboro
      increased capacity at its main campus building by leasing 10,000 square
      feet of another floor for classrooms and administrative services.




·
    In
      June 2004, Interboro graduated the largest class in Interboro’s recent
      history, a 41% increase over 2003.




·
    Interboro
      leased an additional approximately 23,500 square feet of space for four
      new annexes: mid-town Manhattan, 9,000; Flushing, 4,500; Washington
      Heights, 4,000; and Yonkers, 6,000. These annexes were ready for use by
      the beginning of the 2004 fall semester.





·
    Interboro
      received authority from the New York State Board of Regents to grant
      Associate in Applied Sciences (AAS) degrees for two of its computer
      technology programs. These are the first AAS degrees Interboro has been
      authorized to grant. The AAS degree requires a minimum of one-third of the
      courses to consist of liberal arts. This requirement gives AAS graduates a
      better chance to be accepted into four-year colleges as transfer students.
      While not mandated by the Board of Regents, Interboro requires a number of
      liberal arts courses in each of its Associate in Occupational Studies
      degree programs in order to enhance the employment and college transfer
      opportunities of its graduates.





·
    Interboro
      hired a senior compliance officer with substantial experience at schools
      participating in Title IV programs and TAP to replace a senior compliance
      officer who retired from full-time employment.







7


·
    100%
      of Interboro’s ophthalmic dispensing students passed the New York State
      ophthalmic examination.





·
    Interboro
      was advised by the Office of the New York State Comptroller that the total
      disallowance resulting from the settlement of the routine TAP audit is
      $903,150. The final report detailing the calculation of the disallowance
      was rendered in March 2005.





·
    The
      Higher Education Services Corporation, acting on behalf of the New York
      State Education Department, notified all colleges which receive TAP awards
      that a deferral up to 30% of TAP awards for the summer 2004, fall 2004,
      and for spring 2005 semesters would be made by deferring a portion of the
      TAP award in the spring 2005 semester until August 1, 2005. In December
      2004, Interboro was advised by HESC that it was deferring $2,749,309
      related to Interboro’s spring 2005 semester until August 1, 2005.





**Marketing**





Interboro
employs a variety of marketing and advertising techniques to generate qualified
leads of potential students for its college sites. It primarily uses newspaper
and subway ads, telemarketing, direct mail and community events. The
effectiveness of its marketing and advertising campaigns greatly depends on the
message, placement and timing of ads as well as following up with timely and
accurate lead tracking. Effectiveness also depends on the rate of conversion of
leads to enrollments. Interboro also works with community based organizations
and school districts in promoting Interboro to prospective students.




Each
college site is responsible for converting leads to enrollments. Lead tracking
occurs at each campus. Interboro’s lead tracking capability generally allows it
to identify leads generated by specific media and adjust its marketing to focus
on the most cost-effective lead sources. Word of mouth from Interboro’s current
students and graduates is the most effective means of recruiting new students.






**Government
Regulation of Proprietary Schools**






Interboro
is subject to extensive regulation by governmental agencies that administer
Title IV and TAP and by the NYSED. As a result, Interboro must comply with a
complex framework of laws and regulations and is subjected to frequent
compliance and financial reviews and detailed oversight.




*Title
IV*




Pell is
one of the federal student financial aid programs that is authorized by Title IV
of the federal Higher Education Act of 1965 (HEA), and related regulations
issued by the U.S. Department of Education (DOE). Participants in Title IV
programs are subjected to significant regulatory scrutiny in the form of
numerous standards they must satisfy. These include obtaining and maintaining
authorization by appropriate state and accrediting agencies.




8


Under the
HEA, regulatory authority is divided among:





·
    the
      federal government, which acts through the DOE
 
 ·
    the accrediting agencies recognized by the
  DOE
 
 ·
    state higher education regulatory
bodies


The HEA
regulations must be complied with on an institutional basis. The regulations
define an institution as a main campus and its additional locations, if any. If
any location violates these regulations, the school could suffer financial
liabilities, greater scrutiny and/or limitations on its participation in Title
IV programs.




*Accreditation*




Accreditation
provides the basis for:




·
    the
      recognition and acceptance by other higher education institutions,
      employers and governmental entities of the degrees and credits earned by
      students




·
    qualification
      to participate in Title IV programs, including Pell and TAP
      grants






Interboro
is accredited by the New York State Board of Regents. As a result of the change
in control that occurred when we acquired Interboro in January 2000, its
accreditation was probationary until 2003 when the Board of Regents took
Interboro off probation and granted it accreditation for the five years ending
September 30, 2008.




The New
York State Education Department requires periodic registration and approval of
all degree programs. TAP funds are only available to students enrolled in
registered programs.  All  Interboro degree programs are approved and
registered through September 30, 2008. The Commission of Opticianry also
accredits Interboro’s AOS degree in Ophthalmic Dispensing. Additional
accreditation by the American Bar Association for Interboro’s paralegal program
is pending.




*Title
IV grants*




Title IV
provides grant, loan and work-study programs. Interboro is not participating in
any federal loan program that would subject it to any loan default rate scrutiny
or liability.




Federal
financial aid under the Pell grant program is awarded on the basis of the
student’s financial need. This is generally defined as the difference between
the cost of attendance and the amount a student can contribute according to a
federal formula.




Factors
that could affect Interboro's participation in the Pell grant program
include:




·
    Interboro
      could lose its eligibility to participate if it receives in excess of 90%
      of its cash basis revenue from Title IV programs for tuition, fees and
      institutional charges. For 2004, approximately 41% of Interboro's net
      revenue was derived from Pell grants.
  9
 
 
 
 ·
    Interboro cannot pay any commission, bonus, or other
      incentive payment, based directly or indirectly on success in securing new
      student enrollments or financial aid, to any person or entity engaged in
      any domestic student recruitment, admission or financial aid awarding
      activity. However, Interboro can increase salaries college-wide based on
      increases in enrollments as a result of improved retention and
      recruitment.
 
 ·
    Interboro's participation in Title IV is based, in part,
      on satisfying administrative capability requirements. Interboro must
      demonstrate that it complies with Title IV regulations, has capable and
      sufficient personnel to administer its Title IV program and advise
      students about financial aid, satisfactorily measures its students’
      academic progress, and timely submits all reports and financial statements
      as required by DOE.
 
 ·
    Our
      independent auditors annually audit Interboro’s administration of Title IV
      funds. The resulting audit report is submitted to the DOE. If it is
      determined that Interboro improperly disbursed Title IV funds or violated
      a provision of the HEA, it could be required to repay such funds and might
      be assessed an administrative fine. Interboro could also become subject to
      heightened monitoring or transfer from the advance system of payment to
      the reimbursement system, under which it must disburse its own funds to
      students and document the student's eligibility for Title IV funds before
      receiving funds from the DOE.
 
 ·
    Violations of Title IV requirements could also subject
      Interboro to other civil and criminal penalties including loss of Title IV
      eligibility.
 
 ·
    In the event a student withdraws or stops attending and
      does not complete an academic program during a semester, Interboro’s
      tuition refund policy must meet the requirements of the DOE. For example,
      Interboro must return to the Pell program a portion of the Title IV funds
      received by Interboro if a student withdraws prior to completion of more
      than 60% of a semester. Many of our students do not formally withdraw and
      therefore the return of the funds is based on when Interboro confirms a
      student has stopped attending.
 
 ·
    Interboro must satisfy DOE numeric standards of financial
      responsibility. Compliance with these standards is evaluated for purposes
      of recertification to participate in Title IV and also annually after
      submission of audited financial statements to the DOE. If the DOE
      determines Interboro does not meet the standards of financial
      responsibility, it can continue to participate in the Title IV programs if
      it can demonstrate that it is financially responsible on an alternative
      basis. Alternatives include posting a letter of credit in favor of the DOE
      and possibly accepting other conditions on participation in Title IV
      programs.





Interboro
has policies and procedures that are designed to assure its compliance with
Title IV regulations. Since Interboro was acquired by EVCI, its Pell oversight
of Interboro’s compliance reports has not resulted in material deficiencies.




10




*TAP
grants*




The TAP
grant program is part of the New York State budget. Each year the governor makes
budget recommendations to the New York State Senate and Assembly. The governor’s
position on TAP under his proposed 2005-2006 budget is described below in a risk
factor captioned “Changes in the amount or timing of TAP disbursements could
materially impede Interboro’s ability to operate.” As in prior years, Interboro
is working aggressively with other colleges and universities to oppose any
changes in TAP that could negatively impact the educational opportunities of
economically disadvantaged students.




Each
student seeking a TAP grant must be a U.S. citizen or permanent resident and
must meet New York State residency requirements.




TAP
academic requirements for Interboro are basically the same as the Pell academic
requirements.




Factors
that could affect Interboro’s participation in TAP include:




·
    Interboro must timely disburse financial aid funds due to
      students.
 
 ·
    Interboro cannot certify ineligible students to receive
      TAP grants.
 
 ·
    Interboro
      must have and comply with an acceptable tuition refund
policy.




*Change
of ownership or control*




*Title
IV.* A change
in control of a school can affect its eligibility to participate in Title IV
programs. After a change in control, the school must re-establish its state
authorization and accreditation and satisfy DOE’s requirements to be recertified
by the DOE as an eligible institution under new ownership.




If a
school is recertified following a change of control, it will be on a provisional
basis. While provisionally certified, the school may be subject to closer review
by the DOE and to summary adverse action for violations of Title IV program
requirements. Provisional certification does not otherwise limit an
institution's access to Title IV Program funds.




Following
its acquisition by EVCI, Interboro initially received its temporary
certification that became a provisional certification on April 4, 2000.
Interboro has continued to be provisionally certified because of loan default
rates on loans made under Title IV prior to our acquisition of Interboro in
January 2000. In 2006, Interboro expects that it should no longer be
provisionally certified as a result of those loan default rates.




Because
EVCI is a publicly traded corporation, DOE regulations provide that a change of
control of EVCI, and, therefore, Interboro, occurs under either of the following
two standards:




·
    It
      occurs if a person acquires ownership and control that requires EVCI to
      file a Form 8-K with the Securities and Exchange Commission disclosing a
      change of control.






11


·
    It
      occurs if an existing stockholder (other than an institutional investor)
      ceases to be a controlling stockholder. A controlling stockholder is
      someone who holds or controls by agreement 25% or more of the total
      outstanding voting stock and more shares of voting stock than any other
      stockholder. EVCI does not have a controlling stockholder under this
      definition.






According
to the Board of Regents, a change of ownership or control includes a merger or
consolidation with any corporation; a sale, lease, exchange or other disposition
of all or substantially all of the assets of an institution; and the transfer of
controlling interest of an institution’s stock.




*Opening
new college sites and adding educational college programs*




The HEA
generally requires that proprietary colleges be fully operational for two years
before applying to participate in Title IV programs. However, a college that is
certified to participate in Title IV programs may establish a new site and apply
to participate in Title IV programs at that site immediately, if such new site
satisfies all other applicable eligibility requirements, including approval by
the state licensing agency and accrediting agency.





Generally,
a college that is eligible to participate in Title IV programs may add a new
educational program without DOE approval if that new program leads to an
associate level or higher degree and the school already offers programs at that
level. Also, a college may generally add a new program that prepares students
for gainful employment in the same or related occupation as an educational
program that has previously been designated as an eligible program at that
school and the program meets minimum length requirements. If a college
erroneously determines that an educational program is eligible for Title IV
programs, the school would likely be liable for repayment of the Title IV funds
provided to students in that educational program. New educational programs
require approval from the New York State Board of Regents.





**Competition**




Interboro
has chosen a business model that subjects it to limited direct competition. A
key component of this model is Interboro’s focus on a target market of “ability
to benefit” students. The availability to most of Interboro’s students of Title
IV and TAP grants that cover the full cost of their Interboro tuition is also a
key component of Interboro’s business model.




Most of
our for-profit public competitors have substantially greater financial and other
resources than we do. In general, they have not acquired colleges that
principally serve our target market.




We have
competitive advantages over potential new entrants into the post-secondary
education market. They will face significant barriers to entry that include:




·
    the
      Title IV requirement that proprietary and vocational post-secondary
      institutions be fully operational for two years before applying to
      participate in Title IV programs




·
    the
      time it takes to obtain accreditation






12


·
    the
      considerable expense of start-up operations




·
    the
      difficulty of achieving acceptable margins with a low tuition rate that is
      competitive with Interboro




·
    for
      those existing colleges or universities that need to participate in Title
      IV loan programs, the risk of losing eligibility to participate in any
      Title IV program because loan default rates exceed permissible limits.
      Because of their financial circumstances, students from our target market
      are more likely to default. Interboro students do not take out Title IV
      loans because the combination of federal and state grants generally covers
      the cost of tuition for full time students.




Changes
in the regulatory environment have stimulated consolidation in the postsecondary
education industry. Regulations adopted in recent years have tightened standards
for educational content, established strict standards for student loan default
rates, required intensified scrutiny by state education agencies and accrediting
agencies and created more stringent standards for the evaluation of an
institution’s financial responsibility and administrative capability. As a
result, some career-oriented schools have been forced to sell out or close
because they lacked the necessary skill and resources to keep up with these
changes. The opportunity for us to acquire Interboro arose because its former
management was unable to satisfy TAP authorities and the New York State
Education Department.





**Employees**





As of
December 31, 2004, we had 314 full-time employees, 150 part-time adjunct faculty
and 67 other part-time time employees. Out of a total of approximately 300
full-time Interboro administrative employees, 128 are members of Local 153 of
the Office & Professional Employees International Union. We believe our
relationship with our employees is good.





**Forward-Looking
Statements and Risk Factors**





Statements
and financial discussion and analysis by our management contained in this 10-KSB
that are not historical facts are forward-looking statements. They reflect
management’s current views with respect to future events and, accordingly, are
subject to certain assumptions, risks and uncertainties, including the risk
factors discussed below. If any of the following or other risks actually occurs,
or should our assumptions prove incorrect, actual results may vary materially
from those anticipated by those forward-looking statements. Furthermore, our
business, financial condition and results of operations could be materially and
adversely affected.





**Interboro
Institute’s failure to comply with extensive federal and New York State
regulations could have a material adverse impact on its ability to operate and
grow.**




Interboro
derived approximately 94% of its 2004 net revenue from Pell and TAP grants.
Interboro’s participation in the Pell and TAP grant programs subjects it to
frequent reviews and detailed oversight. It must comply with complex laws and
regulations, including with respect to its accreditation, operations, growth and
change of its or EVCI’s corporate structure. The regulations, standards and
policies of the regulatory agencies frequently change.




13


Interboro’s
failure to comply with existing requirements or its inability or failure to
comply with changes or new interpretations could materially limit and adversely
affect Interboro’s ability to operate and grow. Some of the specific significant
regulatory risks are described in risk factors below.





**Adverse
changes in the rules governing, or the amount or timing of, TAP disbursements
could materially impede Interboro’s ability to operate.**




Approximately
53% of our 2004 net revenue and 49% of our 2003 net revenue constituted TAP
grants. There could be changes in TAP regulations that decrease the amount of
TAP grants or require Interboro to materially increase its administrative costs
and practices relating to TAP. Those changes could have a material adverse
impact on Interboro’s revenue, margins and ability to continue in business using
its current business model.




The
legislative debate each year over the New York State budget usually includes
controversy over TAP. We cannot predict what will happen each budget year
because the issues relating to TAP are political in nature.




Faced
with substantial budget deficits, Governor Pataki has been proposing to change
TAP requirements for the past few years in a manner that would be materially
adverse to Interboro. However, the actual changes made by the New York State
legislature have not been materially adverse to Interboro. The Governor has
offered to retreat on his most recent proposal to withhold 50% of TAP grants
until after the recipient graduates college, if lawmakers can come up with the
$168 million he hoped to save by withholding a portion of TAP grants during the
2005-2006 budget year. We cannot predict if lawmakers will change the TAP
program materially and adversely for the 2005-2006 budget year.




However,
we believe the Governor’s proposal suggests that any deferral of TAP that is
tied to graduation would be financed by loans guaranteed by the U.S. government
and/or provided by TAP. New York State funds would be disbursed to pay the
amount of their deferred TAP award plus accrued interest on their loans if and
when they receive their degrees. If a student does not graduate, the deferral
would not be paid. The New York State legislature has successfully opposed tying
TAP awards to retention or graduation rates because many colleges, universities
and other interested parties have aggressively lobbied against the governor’s
proposals.




A large
majority of Interboro’s students do not graduate. If TAP grants were tied to
graduation, we believe there are students who would not take out a loan to start
or continue at Interboro. A substantial decrease in enrollment would have a
material adverse impact on Interboro.




If
Interboro students do take out loans guaranteedor provided under  a New York State program, and loan default rate
rules are similar to Title IV loan default rate rules, Interboro could, over
time, become ineligible to participate in the TAP program. Accordingly,
Interboro does not know whether a loan program, even if used by Interboro
students, would lessen the adverse impact on Interboro of a deferral or cutback
in TAP grants with respect to those students.





14


In
addition, budgetary issues have caused delays in TAP disbursements. TAP payments
relating to Interboro’s spring semesters that would otherwise be made during the
period from the last week of December through May were, or are being,
deferred:


·
    TAP withheld $620,000 payable for Interboro’s spring 2003
      semester until July 2003.
 
 ·
    TAP withheld $1.3 million payable for Interboro’s spring
      2004 semester until July 2004.
 
 ·
    TAP
      has advised that $2.7 million of payments payable for Interboro’s spring
      2005 semester
      is being deferred until August 1, 2005.





Past TAP
deferrals have not adversely affected our ability to operate or grow. The
current deferral is not expected to affect our ability to operate and grow.
However, future deferrals could adversely affect our operations and
growth.


****


**Adverse
changes in the rules governing, or the amount or timing of, Pell program
disbursements could materially impede Interboro’s ability to
operate.**





Title IV
must be reauthorized by congress every six years. The reauthorization expired in
December 2004. The congressional reauthorization process is ongoing. Until
Congress votes on reauthorization, the current Title IV legislation remains
effective. Congress also reviews appropriations for Title IV programs annually.
Mounting budget deficits could negatively affect Congress’ appropriations.
Nevertheless, the administration is proposing increases in Pell grants of $100
per year for the five years beginning spring 2006.





Any
significant decreases in the amount or timing of revenue we receive through the
Pell program would have a material adverse effect on Interboro. Additionally,
legislative or regulatory actions may materially increase Interboro’s
administrative costs and require Interboro to modify its practices in a material
adverse manner.





**An
ongoing or future Title IV program review could result in Interboro being
required to make material refunds of Pell grants and EVCI being required to
reduce its income by the amount of those refunds.**





Schools
participating in Title IV programs are routinely reviewed by DOE personnel to
determine their compliance with Title IV regulations.





A routine program
review is currently being conducted by the DOE of Interboro’s compliance with
respect to approximately $30 million of Title IV grants made to Interboro
students during Interboro’s academic years 2002/ 2003, 2003/ 2004 and 2004/
2005. Based on discussions with the DOE reviewers, Interboro believes that
it will not be required to make refunds of Title IV grants exceeding
$150,000. Interboro expects that, after an additional day of file review
scheduled for March 28, 2005, the DOE will submit the reviewers’ draft written
report to Interboro within 60 days. That report will be based not only on
their fieldwork at Interboro, but also on a review of written information
provided to them. Accordingly, Interboro could be wrong in its belief and may be
unsuccessful in challenging the draft report.





15


An open
Title IV program review could also result in the DOE adversely conditioning its
approval of a change of ownership resulting from an acquisition of another
college by EVCI.





We cannot
predict when another Title IV program review will occur or what effect it will
have on our results of operations and liquidity or on our ability to operate and
grow.





**A
future TAP audit could result in Interboro being required to make material
refunds of TAP grants and EVCI being required to reduce its income by the full
amount of those refunds.**




The
Office of the New York State Comptroller periodically conducts routine audits of
colleges and universities that participate in TAP. The principle purpose of an
audit is to determine whether Interboro complied with rules and regulations in
certifying the TAP eligibility of its students **.**




In March
2005, Interboro received the final report from the Comptroller that details the
reasons for disallowances of $903,150 resulting from the TAP audit commenced in
February 2004 of Interboro’s three academic years ended June 30, 2001, 2002 and
2003. As of December 31, 2004, we had accrued an additional $75,000 in
anticipation of having to make Pell grant refunds related to certain causes of
the TAP disallowances. The total amount of TAP grants made to Interboro students
during the period covered by the TAP audit was approximately
$21,000,000.




As
Interboro continues to grow, its participation in TAP increases. We believe that
there may be a correlation between the amount and rate of Interboro’s growth and
the likelihood of another TAP audit covering other academic years. Even though
HESC has publicly stated that a routine TAP audit is normally scheduled every
three to four years, we cannot predict when another TAP audit will occur. We
also cannot predict what affect a future TAP audit will have on our results of
operations and liquidity or on our ability to operate and grow.




**Changes
in Ability to Benefit regulations could materially and adversely affect
Interboro’s ability to operate and grow.**




Approximately
94% of Interboro’s total enrollment consists of ATB students. They are students
who entered Interboro without a high school diploma or a GED because they
achieved a minimum score on a test approved by the DOE that demonstrates that
they have the “ability to benefit” from Interboro’s program of study. There is a
long-standing debate over the extent to which taxpayer money should be spent on
trying to educate ATB students. It is a politically charged issue that most
greatly affects African-American and Hispanic students dealing with the
challenges endemic to poverty. If current regulations were to be changed to
materially limit Interboro’s ability to enroll ATB students or the availability
of financial aid to ATB students, Interboro may not be able to continue in
business unless it is able to change its business model to accommodate the
change. In the interim, its financial condition and results of operations could
be materially and adversely affected.







16




**Interboro’s
aggressive growth has attracted significant attention that could result in
higher regulatory scrutiny and media coverage that could have an adverse affect
on us and our stock price.**




Interboro’s
compounded annual growth rate of enrollments of approximately 40% since it was
acquired by EVCI in January 2000, substantially exceeds industry averages. This
fact and the fact that approximately 94% of Interboro’s student population is
comprised of ATB students have greatly increased Interboro’s visibility, not
only in its target market, but also to regulators and the media. Higher
visibility translates into greater scrutiny, especially in view of the
continuing adverse publicity concerning public companies owning for profit
career colleges. Greater scrutiny increases the likelihood that regulators will
seek to limit Interboro’s growth. It also increases the likelihood that the
media may unfairly seek to discredit Interboro’s business model and conduct of
its business.




**If
the New York State Education Department does not give Interboro the requisite
approval to open new college sites or to receive extension center status for its
Yonkers site, Interboro’s operations and growth could be adversely affected.**




Interboro
has an application pending for extension center status at its Yonkers site.
While Interboro believes its application should be granted, the New York State
Education Department could deny or condition the approval because it believes
Interboro’s growth is adversely affecting Interboro’s overall performance,
including Interboro’s implementation of a plan to improve retention and
graduation rates that is discussed in the next risk factor. This could result in
significant limitations on the amount of enrollments at Interboro’s Yonkers
site. The NYSED could also try to limit the pace of Interboro’s growth by
slowing down the extension center approval process.




**If
Interboro is unable to continue to improve its retention and graduation rates,
the New York State Education Department may seek to limit its operations and
growth and may even seek to have the Board of Regents deny or adversely
condition Interboro’s reaccredidation.**




The NYSED
wants to improve the retention and graduation rates of colleges it accredits. In
response to the NYSED’s requirement, Interboro submitted to the NYSED a plan to
assure a 25% graduation rate before September 30, 2008. The plan was accepted by
the NYSED. If Interboro does not succeed in implementing this plan, the NYSED
could persuade the Board of Regents to deny or onerously condition Interboro’s
reaccredidation. In addition, the NYSED could seek to limit Interboro’s growth
during the period prior to reaccredidation because it believes Interboro is not
effectively implementing the plan. Or the NYSED could decide that Interboro is
not effectively screening applicants to identify those who are not likely to
succeed and continue as students at Interboro. One or more of these risks could
occur even though there are no specific legal requirements that Interboro
achieve a 25% graduation rate or for screening applicants.








17







However,
we believe the following is a legal requirement.





A college
awarding an associate degree that has a graduation rate below the mean associate
degree graduation rate reported by all colleges in New York State accredited by
the NYSED,





·
    must
      show an improvement over the preceding year of at least 3%
    or





·
    must
      prepare and submit a plan to improve graduation rates that includes
      strategies and time lines to achieve at least the mean, or a 3% annual
      improvement within two years.





Although
Interboro has met this requirement since it received its five year accreditation
in September 2003, it must continue to do so in the future. If it is out of
compliance when seeking Regents reaccredidation, it may not be reaccredited or
its reaccredidation may be onerously conditioned.





Interboro
will not be able to continue to operate if the New York State Board of Regents
does not renew Interboro’s accreditation when it expires and if Interboro is
unable to obtain accreditation from another accrediting agency before then that
is acceptable to the U.S. and New York State Departments of Education. To
ameliorate this risk, Interboro is also applying for national accreditation by
the Accrediting Council of Independent Colleges and Schools
(ACICS).





**If
Interboro is unable to obtain additional or replacement space, Interboro’s
internal growth rate will be materially limited.**




Our
organic growth cannot be sustained unless we expand or relocate our existing
sites. Interboro is aggressively seeking to relocate and consolidate its main
campus and Washington Heights extension center into larger and more efficient
facilities and to relocate the annex for its Flushing extension center. The
lease for our Washington Heights main site expires July 31, 2005. There are many
factors that could prevent Interboro from accomplishing these goals. It is
becoming increasingly difficult to find space in desirable locations, at
reasonable rentals and that complies with zoning requirements and landlord
restrictions. Competition for space, and the time it takes to complete site
identification, lease negotiations and renovations are additional hurdles
Interboro must overcome before it can operate in any new space.




If we do
not obtain additional space for our mid-town Manhattan and Washington Heights
sites in time for the fall 2005 semester, our enrollment growth will for 2005
will be less than Interboro’s compounded annual growth rate of enrollments of
approximately 40% since we acquired Interboro in 2000.




**If
the maximum Title IV and TAP grants do not increase over time, our margins and,
eventually, our ability to operate without participating in Title IV loan
programs could be adversely affected.**





18


Approximately
94% of our net revenue consisted of TAP and Pell grants in each of 2004 and
2003. The maximum Pell award per semester has risen from $1,150 for the academic
year 1994/ 1995 to its current level of $2,025. Since academic year 2000/ 2001,
the maximum semester Pell award has been:





2000/
      2001
    
    $
    1,6502001/
      2002
    
    
    1,8752002/
      2003
    
    
    2,0002003/
      2004
    
    
    2,0252004/
      2005
    
    
    2,025





The
maximum TAP award per semester has been $2,500 since May 2000 and was $2,062
from 1994 through April 2000.





Interboro’s
tuition is set at a level that permits most all of its students to pay their
full tuition and book costs out of their Pell and TAP grants. As we have grown,
we have been able to improve our margins through economies of scale and other
operating efficiencies.





We cannot
continue this trend if Interboro’s tuition cannot be increased periodically to
keep pace with its increasing costs, particularly salaries and benefits. If the
maximum available Pell and TAP grants do not continue to exceed Interboro’s
tuition and student book costs, the gap would have to be made up by
participating in Title IV loan programs in order to protect our margins.
However, since we acquired Interboro, it has avoided participating in any Title
IV loan programs because it did not want to risk losing eligibility to
participate in the Pell grant program as a result of its students exceeding
permissible Title IV loan repayment default rates.





**Interboro’s
failure to effectively open and operate new college sites, or annexes to
existing sites, could adversely affect our business.**




Opening
additional college sites, or annexes to existing sites, requires Interboro to
use its cash for new personnel, capital expenditures, marketing expenses and
other startup costs. To open a new college site, Interboro is also required to
obtain appropriate regulatory approvals. Interboro’s failure to effectively
locate, open and manage the operations, or to obtain authorization to
participate in the federal and state financial aid programs, of newly
established sites could have a material adverse effect on those and Interboro’s
other sites.




**The
seasonality of Interboro’s enrollments is expected to produce significant
variations in our results from quarter to quarter.**





Interboro’s
revenue varies seasonally as a result of changes in student enrollment. Total
student enrollment and net revenue are typically highest in our fourth and first
quarters, which include October through March. As a result, our second and third
quarters have not been profitable prior to our 2003 third quarter in which we
had net income of $79,000. In 2004, we lost $585,000 in our second quarter and
$1,180,000 in our third quarter. Furthermore, while for a full fiscal year,
changes in enrollments directly relate to changes in revenue, enrollments for
academic semesters do not have the same direct relationship to revenues for any
particular fiscal quarter. Interboro’s courses are 15 weeks long and revenue per
semester is, therefore, reported over two quarters.




19


**The
loss of the services of key management personnel of EVCI or Interboro, could
have a material adverse effect on our operations and growth.**




The
efforts of Dr. Arol I. Buntzman, chairman of EVCI and chairman and chancellor of
Interboro, and Dr. John J. McGrath, chief executive officer and president of
EVCI and chief executive officer and vice chairman of Interboro, are essential
to our operations and growth. The loss of the services of Drs. Buntzman or
McGrath would materially adversely affect us. We maintain insurance on the life
of Dr. Buntzman in the amount of $2.0 million. We intend to seek insurance on
the life of Dr. McGrath. We have employment agreements, expiring December 31,
2006, with each of Dr. Buntzman and Dr. McGrath.




**If
Interboro is unable to compete effectively for the additional management
personnel that it needs to competently handle its growth, Interboro’s
operations, regulatory compliance and financial results could be adversely
affected.**




As
Interboro continues to grow, it must hire additional middle management personnel
who can function effectively within the confines of Interboro’s unique business
model. Interboro’s low tuition and low cost structure could limit its ability to
offer the competitive salaries and benefits needed to attract managers with
these attributes.




**Our
failure to effectively manage our aggressive enrollment growth could hurt our
business.**




Our rapid
growth has at times strained our management, operations, employees and
resources. We want to continue to grow to the extent our resources and
regulators will permit. The challenges of recruiting, hiring, training and
managing supervisory and support personnel, maintaining infrastructure and of
planning and budgeting, become far more complex as we grow. These and other
factors may prevent us from effectively managing our expanding operations or
achieving significant growth on a profitable basis.




**Our
business and results could materially suffer if we improperly balance or divert
resources from our operations to making acquisitions or if we make acquisitions
that do not meet our expectations.**








We expect
to seek acquisitions, especially accredited colleges. We are engaging in
evaluations of, and discussions with, possible acquisition candidates. We may
choose not to purchase a school after we conduct our due diligence and negotiate
terms. In 2001, after a significant expenditure of time, effort and money, we
decided not to acquire one of Canada’s largest operators and franchisors of
post-secondary business career schools. Our acquisition in 2001 and sale in 2002
of ICTS was costly. From these and other experiences, we know that it takes time
and resources to identify and acquire suitable acquisition candidates. In
retrospect, that expenditure of time, money and other resources may have been
better made to manage existing operations. Furthermore, the quarter in which we
decide not to complete an acquisition will be adversely impacted by the expenses
incurred on the acquisition. Whereas, if an acquisition is completed, the
acquisition expenses are capitalized and become part of the purchase price.




20


If we do
make acquisitions, our success with Interboro may not be repeated. Potential
hurdles for us include:




·
    an
      inability to increase enrollments, particularly if the college has had
      declining enrollments




·
    possible
      loss of key employees




·
    an
      inability to integrate the acquisition because of differences in vision,
      management style, work ethic or other
causes




·
    difficulties
      in integrating academic, administrative and financial systems, including
      technology of the acquired company with
ours




·
    diversion
      of our management resources or otherwise stretching our resources too thin




·
    adverse
      effects on our operating results as a result of lower operating margins of
      the acquired company




·
    unanticipated
      business or regulatory uncertainties or
liabilities




·
    an
      inability to fund operations of the acquired
company




·
    breaches
      of representations or warranties by the seller of the acquired company for
      which we do not have adequate recourse




·
    underestimation
      of capital needs




·
    failure
      to develop or implement a viable business plan, including with respect to
      managing Title IV loans that are needed to support
  tuition




·
    an
      inability to continue a school’s participation in financial aid programs
      as a result of regulatory change in control
provisions




·
    an
      inability to effectively deal with unions






The
acquisition of PSB may have adverse effects on our operating results because of
delays and expenses incurred in recommencing PSB’s operations.







21









**Threatened
or actual legal proceedings against Interboro by regulatory agencies or private
parties could have a material adverse effect on our business.**




From time
to time, we may be subject to investigations, claims of non-compliance, or
lawsuits by governmental agencies or third parties, which may allege statutory
violations, regulatory infractions, or common law causes of action. If the
results of the investigations are unfavorable to us or if we are unable to
successfully defend against third-party lawsuits, we may be required to pay
money damages or be subject to fines, penalties, injunctions, loss of financial
aid eligibility, or other censure that could have a materially adverse effect on
our business. Even if we adequately address the issues raised by an agency
investigation or successfully defend a third-party lawsuit, we may have to
devote significant money and management resources to address these issues. This
could also materially hurt our business.




**If
the operation of Interboro’s computer system is adversely affected by computer
viruses that are not recognized by available anti-virus software, or for any
other reason, its ability to operate could be severely
impaired.**





Interboro’s
computers were inoperable for one week at the beginning of the fall 2004
semester as the result of a virus that could not be stopped initially by
existing anti-virus software. While Interboro was able to continue to operate
during this period without any material adverse effect, this may not be the case
in the future. Furthermore, our computers could be affected by other problems in
the future that could adversely affect our operations.




**Terrorist
activity, or the threat of it, in the New York Metropolitan area could adversely
affect Interboro.**




All of
Interboro’s sites are located in or near New York City. If New York City is
again a target or threatened target of terrorists, Interboro’s operations,
enrollments and retention rates could be adversely impacted.




**Interboro’s
inability to foster and maintain relationships with community organizations in
the communities where its college sites are located could adversely affect those
sites.**




A college
site may require the support of the community-based organizations that serve the
minority populace from which the site seeks to recruit and retain economically
disadvantaged students. Local politics and rivalries can jeopardize Interboro’s
relationships with these organizations. Changes in our relationships with
community-based organizations or other events beyond Interboro’s control might
adversely affect the operations and growth of an existing site.




**A
change of control of EVCI would adversely affect Interboro’s receipt of Pell and
TAP funds.**




Under DOE
regulations, a change in control includes a stockholder becoming and ceasing to
be a controlling stockholder. A controlling stockholder is someone who holds or
controls by agreement 25% or more of EVCI’s voting stock and more voting stock
than any other EVCI stockholder. Under the DOE definitions, EVCI does not now
have a controlling stockholder. Under TAP regulations, a change of control
includes the transfer of controlling interest in EVCI. A significant acquisition
or disposition of our common stock may be beyond our control.




22


After a
change of control, Interboro’s cash flow could be adversely affected by the
withholding of significant portions of grant funds until the change of control
is reaffirmed, if at all. A change of control could take several months. If not
reaffirmed, Interboro would lose its ability to participate in the Pell and TAP
programs and would not be able to continue operating.




**A
change of control of EVCI would cause regulatory and accrediting authorities to
return Interboro to a probationary status.**




If a
change of control were to occur in the future, Interboro would have to be
reviewed and recertified for participation in Pell and its accreditation would
have to be reaffirmed by the New York Board of Regents. A change of control
would return Interboro to a provisional accreditation status. That status
subjects Interboro to more scrutiny by the New York State Education Department,
including by means of additional reporting requirements, greater restrictions on
expansion activities and the Board of Regents retaining authority to award
degrees for Interboro.




Board of
Regents retention of degree granting authority results in a greater level of
scrutiny for each degree and delays in the awarding of degrees.




**Future
changes in ownership of our common stock could substantially limit the
utilization of our net operating loss carryforwards.**




Complex
regulations under Section 382 of the Internal Revenue Code govern the
determination of whether one or more changes of ownership of EVCI’s common stock
will result in limitations on EVCI’s ability to offset taxable income against
its approximately $21.5 million of available net operating loss carryforwards.
Sales of EVCI’s common stock by EVCI and persons defined as 5% holders under
Section 382 regulations must be monitored by us so we can determine whether
ownership changes have occurred that result in limitations on our net operating
losses (NOL) utilization. We have no control over sales by 5% holders. Our
effective cost of raising capital may be affected by these
regulations.




**Actual
or potential future sales of shares of our common stock by management could have
an adverse effect on the market price of our common stock.**




Sales of
our common stock from time to time by management may cause the marketplace to
think the seller is not confident about our prospects. This may be so even if
the reason is otherwise and is stated publicly. A rise of our stock price
increases the likelihood that directors and officers will sell shares of our
common stock.




**Our
share price has ranged greatly since we went public and may be very volatile in
the future.**




Since our
public offering in February 1999, the market price of our common stock has
ranged between $0.26 and $40.94. Recently, our share price rose to a high of
$11.05 the day of our press release reporting our 2004 preliminary results and
subsequently declined to $7.70 within a week after our press release reporting
our spring 2005 record enrollment growth.




23







Our share
price also could be affected by a number of other factors,
including:




·
    exceeding or not meeting expectations for our semester
      enrollment numbers and our quarterly or yearly operating results
 
 ·
    trading
      by investors that are more interested in quarterly versus long-term
      results, including where our first, second or third quarter results are
      negatively impacted by a delayed start of a
semester
 
 ·
    changes in securities analysts’ expectations as to our
      future performance
 
 ·
    regulatory
      developments that affect our cash flow or ability to open or expand
      sites
 
 ·
    an
      ongoing TAP audit or Pell program review
 
 ·
    allegations,
      even if untrue, that Interboro failed to comply with regulations relating
      to TAP or Title IV, its accreditation by the Board of Regents or its
      compliance with Sarbanes-Oxley or other securities
laws
 
 ·
    increased competition in our target market
 
 ·
    adverse
      media coverage of Interboro or other for profit schools owned by public
      companies
 
 ·
    the operating and stock price performance of other
      comparable companies, including as a result of fraud allegations or
      Congressional investigations relating to their
operations
 
 ·
    general stock market or economic conditions, including as
      a result of uncertainty about, or the occurrence of, war or
      terrorism
 
 ·
    sales of our stock by our management or others pursuant
      to a prospectus or otherwise
 
 ·
    acquisitions of other colleges
 
 ·
    additional financings





Furthermore,
the stock market in general has experienced volatility that often has been
unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our
common stock regardless of our actual operating performance.




**Provisions
of laws or regulations, our certificate of incorporation and by-laws and
agreements with our executive officers could discourage takeover attempts and
other investments in our common stock.**




We are
subject to a provision of Delaware law that prohibits a party that has acquired
15% or more of our common stock, without our board’s approval, from causing a
business combination (as defined) involving EVCI or its subsidiaries unless
approved by our board and two-thirds of our common stock held by our other
stockholders.




24


The
adverse regulatory effect of a change of ownership of EVCI’s common stock
resulting in a change of control could discourage bids for our outstanding
shares at a premium or otherwise.




The
effects of the classified board provisions of our certificate of incorporation
are explained in the next risk factor.




Our
by-laws prohibit stockholders from calling, or proposing any business at, a
special meeting of stockholders. Our by-laws also require a stockholder to give
us substantial advance notice of any business to be proposed by the stockholder
at an annual meeting, including nominees for election as directors.





In
addition, we have change of control agreements with each of our chairman, chief
executive officer and president, and chief financial officer that require
substantial payments to them in the event their employment is terminated, except
for cause, following a change of control of EVCI.





These
provisions are intended to encourage persons seeking control of EVCI to engage
in negotiations with our board rather than initiate a hostile takeover. They
could also have the effect of entrenching management that resists an acquisition
a majority of our stockholders might think is good. Accordingly, they could also
limit the price that other investors might be willing to pay for our common
stock because they believe our management can defeat a takeover of us that could
be beneficial to non-management stockholders.





**Our
classified board limits stockholder voting for election and removal of
directors.**





Our board
of directors is divided into three classes. The directors in each class are
elected for three-year terms when their class stands for election at a
stockholders meeting. This staggering of director terms protects directors from
being removed from office by anyone engaged in a proxy contest for control of
the board and dilutes the ability of stockholders to influence corporate
governance policies. Furthermore, our directors can only be removed, with or
without cause, by the holders of 66 2/3% of the shares entitled to vote at an
election of directors.





The
effect of these provisions is to make it difficult for any stockholder to take
control of our board of directors in a proxy contest that is not waged with
respect to two of our annual stockholder meetings.





**Indemnification
and limitation of liability of our officers and directors may insulate them from
accountability to stockholders at substantial cost to us.**




Our
certificate of incorporation and by-laws include provisions whereby our officers
and directors are to be indemnified against liabilities to the fullest extent
permissible under Delaware law. Our certificate of incorporation also limits a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. In addition, we have agreed to advance the legal
expenses of our officers and directors who are required to defend against
claims. These provisions and agreements may have the effect of reducing the
likelihood of suits against directors and officers even though such suits, if
successful, might benefit EVCI and its stockholders. Furthermore, we may be
adversely affected by paying the cost of settlement and damage awards against
directors and officers.




25
 **Item
2.** **Description
of Property.**




Interboro
has ten sites, including five annexes and a mid-town Manhattan admissions
office, all of which are leased. The annexes average approximately 5,900 square
feet under leases expiring between May 2005 and August 2015. The following table
sets forth the location, approximate square footage, lease expiration date and
use of each principal site used by Interboro and EVCI:





**Location****(1)**
    
    **Square
      Footage****(1)**
    
    **Expiration
      Date****(2)**
    
    **Use**Mid-town
      New
      York, NY
    
    
    37,000
    
    
    1/31/2014
    
    
    Interboro’s
      mid-Manhattan main campusFlushing,
      NY
    
    
    14,000
    
    
    12/31/2010
    
    
    Interboro’s
      Flushing extension centerWashington
      Heights,
      Manhattan,
      NY
    
    
    11,000
    
    
    7/31/2005
    
    
    Interboro’s
      Washington Heights extension centerYonkers,
      NY
    
    
    6,000
    
    
    12/28/2009
    
    
    Interboro’s
      Yonkers siteYonkers,
      NY
    
    
    2,400
    
    
    10/31/2013
    
    
    EVCI’s
      corporate and administrative offices





(1) Does
not include annexes.


(2)
Includes renewals at Interboro’s option.


****


**Item
3.**   **Legal
Proceedings.**





Not
Applicable.




**Item
4.** **Submission
of Matters to a Vote of Security Holders.**




Not
applicable





26


**Part
II**


**Item
5.** **Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities.**




Our
common stock is quoted on The NASDAQ Small Cap Market and the Boston Stock
Exchange under the symbol “EVCI”. The following table sets forth the high and
low sales prices, of our common stock, as reported by NASDAQ, for each quarter
of 2003 and 2004.




**2003**
    
    ******High**
    
    **Low**First
      Quarter
    
    $
    0.90
    
    $
    0.42Second
      Quarter
    
    
    2.50
    
    
    0.85Third
      Quarter
    
    
    3.02
    
    
    1.95Fourth
      Quarter
    
    
    5.80
    
    
    2.37
  **2004**First
      Quarter
    
    
    12.82
    
    
    5.20Second
      Quarter
    
    
    14.77
    
    
    8.50Third
      Quarter
    
    
    11.00
    
    
    5.75Fourth
      Quarter
    
    
    10.74
    
    
    5.55





As of
March 18, 2005, the number of EVCI’s stockholders of record was 37 and the
number of beneficial owners of its common stock was
approximately 1,350.




In
December 2004, warrants were exercised to purchase 117,925 shares of our common
stock at $2.12 per share. These shares were issued to a sophisticated investor
and, accordingly, were exempt from registration under the Securities Act of 1933
in reliance upon Section 4 (2) of such Act.




We have
never declared or paid any cash dividends on our common stock. We currently have
no restrictions on the payment of dividends on our common stock. However, we
anticipate retaining any future earnings to finance internal growth and
potential acquisitions.




**Item
6.** **Management's
Discussion and Analysis of Financial Condition and Results of
Operations.**




The
following information should be read in conjunction with the financial
statements and notes thereto included in this report for the year ended December
31, 2004. All numbers that have been rounded are approximate.







27





**Overview**





Interboro
has spring, summer and fall semesters with day, afternoon and evening classes.
Full-time student enrollment for 2004 increased 65% to 8,675 from 5,250 in 2003.
There are 3,700 full-time students enrolled at Interboro for the 2005 spring
semester, a 32% increase over the 2004 spring semester. In computing enrollment
numbers, two part-time students are counted by Interboro as one full-time
student. The following table compares 2004 with 2003 full-time student
enrollments by semester.





**2004**
    
    **2003****Spring**
    
    
    2,800
    
    
    1,850**Summer**
    
    
    1,975
    
    
    1,100**Fall**
    
    
    3,900
    
    
    2,3008,675
    
    
    5,250







Interboro
operates in a niche market because it primarily targets and recruits students
who will qualify each semester for Pell and TAP grants that cover most, if not
all, of the cost of their tuition. Pell and TAP grants are made based on a
student’s financial need. Accordingly, Interboro’s target market is the
economically disadvantaged in minority communities.





Current
Interboro tuition is $4,100 to $4,200 per semester. The per semester maximum
grants per full-time student are: Pell, $2,025 and TAP, $2,500. Students who
qualify for Pell and TAP grants that exceed Interboro’s tuition generally have
the excess grant funds applied to pay for their books and transportation. Any
balance after tuition, books and transportation is refunded to the students. For
2004, Interboro students qualifying for financial aid received an average of
$1,628 in Pell grants and $2,075 in TAP grants, or a total averaging $3,703. TAP
grants were 53% and Pell grants were 41% of our 2004 net revenue.





More than
90% of Interboro’s new students do not have high school diplomas or GED’s. They
must, therefore, pass a federal “ability to benefit” exam in order to be
accepted into Interboro and qualify for Pell and TAP grants. We believe that no
other college or university in New York, which receives Pell and TAP grants, has
a higher percentage of its students who are ability to benefit students than
Interboro. Accordingly, serving Interboro’s target market provides significant
opportunities, as well as challenges and uncertainties, for the
college.





We
believe that there are significant barriers to entry into Interboro’s target
market, by new entrants, that include:





·
    the
      Title IV requirement that a school be fully operational for two years
      before it can apply to participate in Title IV
programs





·
    the
      time it takes to obtain accreditation





·
    the
      considerable expense of start-up operations
  28
 
 
 
 ·
    the
      difficulty of achieving acceptable margins with a low tuition rate that is
      competitive with Interboro’s tuition
 
 ·
    for
      those existing colleges or universities that need to participate in Title
      IV loan programs, the risk of losing eligibility to participate in any
      Title IV program because loan default rates exceed permissible limits.
      Because of their financial circumstances, students from our target market
      are more likely to default. Interboro does not participate in Title IV
      loan programs.




*Capacity*





Interboro’s
current optimum capacity is approximately 5,000 full-time students per semester,
without increasing late afternoon or weekend classes. On a site-by-site basis,
including annexes, its current capacity is approximately as
follows:





Manhattan
      main campus
    
    
    2,640Flushing
      extension center
    
    
    1,080Washington
      Heights extension center
    
    
    880Yonkers
      site
    
    
    400Total
    
    
    5,000




Interboro
is currently looking for additional space to support its continuing growth. It
is aggressively seeking space to relocate and consolidate its Manhattan main
campus and Washington Heights extension center into larger more efficient
facilities. It is also seeking to relocate the annex for its Flushing extension
center. Annexes are located within close walking distance to the existing site.





*Components
of net revenue and other income*




Net
revenue consists of tuition after deducting the cost of books, Pell and TAP
refunds made because students stopped attending classes and Interboro grants to
students who would otherwise be unable to attend Interboro. In 2004,
approximately 94% of our net revenue consisted of TAP and Pell grants. The
remaining 6% consisted of tuition from part-time students and students who could
not cover their full tuition with TAP and Pell grants. Other income consists
primarily of book commissions received from sales of books to Interboro students
by an outside vendor. It also includes miscellaneous charges to students as well
as fees charged for Interboro’s optical services rendered by its ophthalmology
department.





*Net
revenue recognition*





Interboro
recognizes revenue ratably during each semester on a daily basis over 70 week
days (including holidays). Each semester has 14 weeks, or 70 days, of classroom
instruction. Final examinations are given in the 15 th week of
the semester. Each week of classroom instruction during the semester includes
five days of revenue recognition. The first and last days of Interboro’s three
academic semesters usually vary from year to year and do not coincide with the
first and last days of EVCI’s calendar quarters. As a result, increases in
Interboro’s enrollment do not directly relate to increases in its revenue for
the first, second or third quarters. However, increases in Interboro’s
enrollment for all of the three semesters included in a calendar year directly
relate to increases in Interboro’s revenue for that calendar year.





29


Revenue,
to the extent it has not been earned, is classified on our balance sheet under
current liabilities as deferred revenue. At year-end, our deferred revenue is
comprised of a TAP prepayment for the next spring semester.





This
prepayment was $955,000 at December 31, 2003 and $1,834,000 at December 31,
2004. Interboro has received TAP prepayments for the spring and fall
semesters equal to a portion of the TAP payments received with respect to the
immediately preceding semester’s enrollments.




*Seasonality*





Interboro’s
revenue varies as a result of changes in the level of its
enrollments.




Most
colleges and universities traditionally experience a greater seasonal increase
in enrollments for the fall semester over the spring semester in an academic
year (fall, spring and summer semesters). For each of Interboro’s academic years
ended June 30 of 2001-2004, spring semester enrollment has been greater than the
immediately preceding fall semester’s enrollment, due to our expansion and
progress in increasing retention of Interboro students. Enrollment during the
summer semester is traditionally significantly lower than the remainder of the
same academic year. As a result of these factors, total student enrollment and
net revenue are typically highest in our fourth and first quarters, which
include October through March.




*Accounts
receivable*




Accounts
receivable consists of tuition earned, but not yet paid by Pell and TAP grants
or by students Interboro allows to pay in installments the portion of their
tuition and fees that are not covered by Pell and TAP. We keep our bad debt
exposure low by requiring students to keep their tuition installments current in
order to continue their degree program the next semester.





Accounts
receivable are recorded as Interboro recognizes revenue. Bills for tuition are
generally sent four weeks after the start of the semester. We do not bill
tuition for students that have enrolled but have not attended class for each
course at least twice.





Up to 90%
of a semester’s total Pell grant entitlement is generally received by Interboro
prior to the completion of the semester and the balance is usually paid to
Interboro within 30 days after the semester ends. The collection of Pell funds
for continuing students can begin at the beginning of the semester. For new
students, Interboro can start collecting Pell funds after they have completed
60% of the semester.




Continuing
students who drop out or stop attending before 60% of the semester is complete
cannot get full Pell. Their Pell grant entitlement is prorated based on the time
they actually attended. Interboro refunds to the DOE those Pell grant funds it
has received but is not entitled to as a result of students’ early withdrawal.





30


In order
to be eligible for TAP, among other requirements, a student must be taking at
least 12 semester hours during the semester and have attended class at least
once. As the semester progresses and Interboro determines its students’
eligibility for TAP, it certifies or decertifies students. This process applies
to new students as well as continuing students. The majority of TAP funds
received in payment of tuition for a semester is generally received by Interboro
prior to the start of the next semester and the balance is usually substantially
collected over the next two to three months. This collection rate assumes the
New York State budget is passed on time without adversely affecting
TAP.




*Cost
of revenue*




Cost of
revenue mostly consists of salaries of academic, administrative and staff
personnel such as deans, instructors, admissions personnel, and library staff.
It also includes student transportation allowance, testing and vaccination
costs, graduation costs and optical eye glass expenses.




*Salaries
and benefits*




These
costs are included in selling, general and administrative expense. All employee
costs that are not included in cost of sales are included in this category,
including benefit costs for all of our employees.




In
February, 2004, Interboro entered into a collective bargaining agreement with
Local 153 of the Office & Professional Employees International Union that
expires August 31, 2006. Of Interboro’s 314 total full-time employees at
December 31, 2004, 128 were members of Local 153. The agreement provides for
minimum and maximum average annual salary increases of 3% and 6% and gives
management full control over Interboro’s operations. Increases over the minimum
are tied to increases in Interboro’s enrollment.




*Marketing
costs*





Marketing
costs are expensed as incurred.





**Critical
Accounting Policies**





Our
discussion and analysis of our financial condition and the results of our
operations are based upon our consolidated financial statements and the data
used to prepare them. Our consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. On an ongoing basis we re-evaluate our judgments and estimates
including those related to accounts receivable, goodwill, fixed assets, deferred
revenue, income taxes, accruals, litigation and contingencies. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies:




·
    EVCI
      reviews goodwill and identified intangibles for impairment whenever events
      or changes in circumstances indicate that the carrying value of an asset
      may not be fully recoverable. EVCI performs nondiscounted cash flow
      analyses to determine if impairment exists.






31


·
    EVCI‘s
      recognition of revenue is discussed above.




·
    Accounts
      receivable are reported at their outstanding unpaid principal balances
      reduced by an allowance for doubtful accounts. EVCI estimates doubtful
      accounts based on historical bad debts and factors related to specific
      students. EVCI writes off accounts receivable against the allowance when a
      balance is determined to be uncollectible.




·
    Property
      and equipment is recorded at cost. Depreciation is provided for by the
      straight-line method over the estimated useful lives of the property and
      equipment. Amortization of leasehold improvements is provided for by the
      straight-line method over the term of the
lease.




·
    Marketing
      costs are discussed above.




·
    EVCI
      employs the liability method of accounting for income taxes pursuant to
      Statement of Financial Accounting Standards (“SFAS”) No. 109. Under this
      method, recorded deferred income taxes reflect the tax consequences on
      future years of temporary differences (differences between the tax basis
      of assets and liabilities and their financial amounts at year-end). EVCI
      provides a valuation allowance that reduces deferred tax assets to their
      net realizable value.




·
    SFAS
      No. 128,*Earnings
      per Share*,
      requires dual presentation of basic earnings per share and diluted EPS on
      the face of all statements for all entities with complex capital
      structures. Basic EPS is computed as net earnings divided by the
      weighted-average number of common shares outstanding for the period.
      Diluted EPS reflects the potential dilution that could occur from common
      shares issuable through stock-based compensation including stock options,
      restricted stock awards, warrants and other convertible
      securities.





32


****


**2004
Compared to 2003**




The
following table summarizes our operating results as a percentage of revenue for
2004 and 2003.




**Year
      Ended December 31,****2004**
    
    **2003**Revenue:Net
      revenue
    
    
    98.9
    
    
    98.4Other
      income
    
    
    1.1
    
    
    1.6Total
      revenue
    
    
    100.0
    
    
    100.0Operating
      expenses:Cost
      of revenue
    
    
    22.1
    
    
    24.4Selling,
      general and administrative expenses
    
    
    63.9
    
    
    67.5Total
      operating expenses
    
    
    86.0
    
    
    91.9Income
      from operations
    
    
    14.0
    
    
    8.1Other
      expense, net
    
    
    3.5
    
    
    0.6Benefit
      for income taxes
    
    
    8.4
    
    
    9.2Net
      income
    
    
    18.9
    
    
    16.7Net
      income available to common stockholders
    
    
    18.9
    
    
    12.7







Net
revenue for 2004 increased 64%, or $12,806,000, to $32,718,000 from $19,912,000
for 2003, because Interboro’s full-time student enrollment rose by 64% to 8,675
from 5,250 in 2003. Each of Interboro’s sites contributed to the net revenue
increase: Manhattan $7,478,000, Flushing $1,553,000, Washington Heights
$2,519,000 and Yonkers $1,350,000. These increases are net of a $94,000 decrease
at EVCI.





For the
spring semester of 2004, Interboro’s full-time enrollment was at 97% of its
capacity of 3,100 students. With the availability of four new annexes for the
fall 2004, Interboro was operating at 78% of its capacity of 5,000 students. In
addition to increasing capacity for the fall 2004 semester, Interboro increased
its tuition by $200 per semester. This increase resulted in approximately
$780,000 of additional revenue for the fall 2004 semester.





Other
income increased by $27,000, to $352,000 for 2004 from $325,000 for 2003, as a
direct result of Interboro’s enrollment increases. Other income is comprised of
application fees for our students and commissions from third-party book sales.
Book sales commissions increased approximately $100,000 to $180,000 in 2004.
This increase was offset by the elimination of Interboro’s $35 student
application fee in the fall of 2004.




Cost of
revenue increased by $2,386,000, to $7,314,000 for 2004 from $4,928,000 for
2003. Most of the increase is attributable to an increase during the year from
172 to 289 in full and part-time personnel that are included in cost of revenue.
Salaries made up 94% of the cost of revenue in 2004 and 92% of the cost of
revenue in 2003. The balance for each of 2004 and 2003 was primarily made up of
costs for student transportation, graduation ceremonies, student vaccinations
and Interboro’s ophthalmic laboratory. The number of personnel by job
descriptions, that are included in cost of revenue are:




33


****





**2004***
    
    **2003***Adjunct
      instructors
    
    
    150
    
    
    76Full
      time instructors**
    
    
    42
    
    
    32Part-time
      tutors
    
    
    48
    
    
    30Admissions
      staff
    
    
    40
    
    
    28Dean
      and staff
    
    
    9
    
    
    6Librarians
    
    
    289
    
    
    172
 * During
the fall semester
**With
the increase to 70 full-time instructors for the spring 2005 semester, 56% of
Interboro’s courses are taught by full-time instructors as compared to 45% in
2004.





The
following table sets forth our selling, general and administrative expense items
as a percentage of our total revenue for 2004 and 2003:





2004
    
    2003Salaries
      and benefits
    
    
    32.5
    
    
    31.7Marketing
    
    
    9.0
    
    
    9.4Depreciation
      and amortization
    
    
    3.1
    
    
    4.3Other
      expenses
    
    
    17.1
    
    
    17.8Professional
      fees
    
    
    2.2
    
    
    4.3








Salaries
and benefits increased by 68%, or $4,344,000, to $10,762,000 for 2004 from
$6,418,000 for 2003. During the fall semester, the Interboro selling, general
and administrative full- and part-time personnel were 175 in 2004 and 135 in
2003. As a percentage of our revenue, salaries and benefits increased because
the cost of the additional administrative and clerical employees was
proportionately more than the increase in revenues resulting from our enrollment
growth. In September 2004, our administrative and clerical staff received a
salary increase of approximately 6%. The table below summarizes changes in
salaries and wages.





2004
    
    2003Wages
    
    $
    8,021,000
    
    $
    4,782,000Bonuses
    
    
    550,000
    
    
    250,000Employee
      benefits
    
    
    836,000
    
    
    499,000Payroll
      taxes
    
    
    1,355,000
    
    
    887,000Total
    
    $
    10,762,000
    
    $
    6,418,000


Marketing
costs increased by $1,078,000, or 56%, to $2,987,000 for 2004 from $1,909,000
for 2003. These costs were mostly for newspaper and subway ads, telemarketing,
direct mail and community events.




34


Professional
fees and consulting fees decreased by $154,000 to $723,000 for 2004, from
$877,000 for 2003. The decrease mostly related to savings in legal costs for SEC
and general corporate counseling as a result of the addition of EVCI’s general
counsel on January 1, 2004 and savings in labor cost related to the negotiation
of the union agreement with Local 153 in 2003. Offsetting the decreases were
increases in director’s fees, accounting and tax services, and legal costs for
the arbitration with the former owner of Interboro and for annex leases.





Depreciation
and amortization increased by $135,000 to $1,012,000 for 2004 from $877,000 for
2003, primarily as a result of leasehold improvements made and computer
equipment purchased to support Interboro’s growth.





As a
result of Interboro’s growth, other expenses, included in selling, general and
administrative expenses, increased by $1,672,000 to $5,244,000 for 2004 from
$3,572,000 for 2003. Approximately 88% of other expenses consisted of the
following:




**2004**
    ****
    **2003**Rent
      and utilities*
    
    $
    2,398,000
    
    $
    1,620,000Insurance
    
    
    426,000
    
    
    405,000Telephone
      and internet
    
    
    594,000
    
    
    359,000Supplies
    
    
    401,000
    
    
    237,000Equipment
      rental
    
    
    217,000
    
    
    208,000Travel
      and entertainment
    
    
    237,000
    
    
    163,000Outside
      security services
    
    
    129,000
    
    
    —Investor
      relations
    
    
    110,000
    
    
    106,000Sales
      and real estate taxes
    
    
    110,000
    
    
    64,000Total
    
    $
    4,622,000
    
    $
    3,162,000





* The
2004 rent increase consisted of $744,000 for new space and $34,000 for rent
escalations.





Other
income (expense), net, increased by $ 1,016,000 to $ 1,131,000 for 2004 from $
115,000 for 2003 mostly due to the settlement of tuition disallowances resulting
from the TAP audit. The audit began in February 2004 and, after protracted
negotiations with the auditors from the office of the New York State
Comptroller, in December 2004, EVCI was advised that the total of the
disallowances would be $903,000. In March 2005, Interboro received the final
report that details the reasons for the amount of the disallowances. After
receipt of an invoice from HESC, Interboro will pay the entire $903,000. The
remaining $75,000 of the tuition disallowances constitutes accrued refunds of
Pell grants related to certain causes of the TAP disallowances. The amount was
paid to the DOE in January 2005.




A routine
program review is currently being conducted by the DOE of Interboro
students’ eligibility for Title
IV grants of approximately $30 million during Interboro’s academic years
2002/ 2003, 2003/ 2004 and 2004/ 2005. Based
on discussions with the DOE reviewers, Interboro believes that it will not
be required to make refunds of grants exceeding $150,000. Interboro expects
that, after an additional day of file review scheduled for March 28,
2005, the DOE will submit the reviewers’ draft written report to
Interboro within 60 days. That report will be based not only on their
fieldwork at Interboro, but also on a review of written information provided to
them. Interboro will then have an opportunity to dispute the disallowances
itemized in the report. Alternatively, it may decide to accept the report so
that the program review can be concluded.




35


Benefit
for income taxes increased by $902,000 to 2,762,000 in 2004 from $1,860,000 in
2003. The following table summarizes the calculation:





**2004**
    
    **2003**Federal
      tax benefit
    
    $
    3,482,000
    
    $
    2,000,000State
      taxes due
    
    
    720,000
    
    
    140,000Benefit
      for income taxes
    
    $
    2,762,000
    
    $
    1,860,000





Our
federal income tax benefits are derived from our historical losses from
discontinued operations. We have carryforward losses that will offset our
federal taxable income in future years. This resulted in a deferred tax asset
recorded on our books. Due to the uncertainty of being able to utilize all of
the net operating losses, we have recorded a valuation allowance against the
deferred tax asset. As we have become more profitable, we have reduced the
valuation allowance against the deferred tax asset as it became more likely than
not that we would be able to utilize the net operating losses. The decrease in
the valuation allowance resulted in a federal income tax benefit of $2,000,000
in 2003 and $3,482,000 in 2004. Additionally, we still have $1,828,000 as a
valuation allowance against our deferred tax asset, which we believe will result
in an additional federal income tax benefit in the future.




Net
income available to common stockholders for 2004 was $6,254,000 as compared to
$2,570,000 for 2003. Our net income available to common stockholders in 2003 was
decreased by $ 810,000 for the accreted value of warrants and transaction costs
and undeclared preferred stock dividends. These charges related to our Series B
preferred stock and, accordingly, did not recur in 2004.







36




**Liquidity
and Capital Resources**




Our
sources and uses of funds during 2004 and our cash balances on January 1 and
December 31, 2004 are summarized below:




**Sources:**
    
    ******2004**Cash
      collections from operations
    
    $
    35,263,000Private
      placement
    
    
    9,350,000Exercises
      of options and warrants
    
    
    870,00045,483,000**Uses:**Payment
      of operating expenses
    
    
    30,183,000Payment
      of principle on notes payable
    
    
    840,000Payment
      of principal portion of capital leases
    
    
    1,076,000Purchases
      of property and equipment
    
    
    2,492,000Payment
      of purchase price for Interboro
    
    
    2,910,00037,501,000Net
      increase in cash
    
    
    7,982,000Cash
      at beginning of year
    
    
    2,522,000Cash
      at end of year
    
    $
    10,504,000





We expect
that our cash generated from operations will be sufficient to pay our operating
expenses in 2005. This assumes that we will not require significant additional
capital for one or more of the following:




·
    relocating,
      consolidating and expanding Interboro’s sites, including costs of
      leasehold improvements and perhaps also purchasing one or more
      buildings




·
    acquisitions




It is
difficult for us to budget our expansion before we are able to secure an
appropriate site because the kind and cost of leasehold improvements may vary
substantially from location to location depending on the location’s suitability
for Interboro’s operations. Furthermore, delays in completing construction and
becoming fully operational could delay our ability to generate revenue from the
same-site annexes.




With the
improvement in our financial condition, net income and cash flow, we have been
able to secure financing more easily. While optimistic about the continuation of
this trend, we do not assume we will be able to raise the necessary cash when
and if we need it.




37







**Item
7.**   **Financial
Statements.**




The
financial information required by this item is set forth beginning on page
F-1.


****


**Item
8.** **Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures.**




Not
applicable.




**Item
8A.** **Controls
and Procedures.**




Our
management, including our chief executive officer and president and our chief
financial officer, have conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities and Exchange Act of 1934) as of December 31, 2004. Based upon that
evaluation, our chief executive officer and president and our chief financial
officer have concluded that our disclosure controls and procedures are effective
for timely gathering, analyzing and disclosing the information we are required
to disclose in our reports filed under the Exchange Act. Management plans,
however, to improve the segregation of duties within our financial and
administrative functions.




There
have been no significant changes made in our internal controls or in other
factors that could significantly affect our internal controls subsequent to that
evaluation date. We are continuing to evaluate the employees involved and the
control procedures in place as well as the costs and benefits of making changes
in the number and duties of employees. We are also working to document controls
this year and to identify other items that might require remediation in
connection with our compliance with Section 404 of the Sarbanes-Oxley Act of
2002.





38


**PART
III**




Items 9,
10, 11, 12 and 14 are incorporated by reference to our definitive proxy
statement for our 2005 annual meeting of stockholders.




**Item
13.** **Exhibits,
List and Reports on Form 8-K.**





(a) The
following exhibits are filed as part of this report.




Exhibit
      No.*
    
    Description
      of Exhibit3.1[1]
    --
    Certificate
      of Incorporation of the Registrant.3.2[1]
    --
    Certificate
      of Merger of Educational Video Conferencing, Inc. (a New York Corporation)
      into the Registrant (a Delaware Corporation).3.3[1]
    --
    Certificate
      of Correction of the Certificate of Incorporation of the
      Registrant.3.4[3]
    --
    Certificate
      of Amendment, dated February 22, 1999, to Certificate of Incorporation of
      the Registrant.3.5[10]
    --
    Amended
      and Restated By-Laws of the Registrant.3.6[5]
    --
    Certificate
      Eliminating Reference to Series A 7.5% Convertible Preferred Stock from
      the Certificate of Incorporation of the Registrant.3.7[17]
    --
    Certificate
      of Amendment, dated May 23, 2002, to Certificate of Incorporation of the
      Registrant.3.8[5]
    --
    Certificate
      Eliminating Reference to Series B 7% Convertible Preferred stock from the
      Certificate of Incorporation of the Registrant.3.9[5]
    --
    Certificate
      Eliminating Reference to Series C 8% Convertible Preferred stock from the
      Certificate of Incorporation of the Registrant.3.10[21]
    --
    Certificate
      of Amendment, filed August 9, 2004, to Certificate of Incorporation of the
      Registrant.4.2[2]
    --
    Form
      of Common Stock certificate.4.3[4]
    --
    Warrant
      Agreement, dated January 14, 2000, between the Registrant and Bruce. R.
      Kalisch.4.4[6]
    --
    Warrant
      Agreement, dated April 18, 2000, between the Registrant and Peter J.
      Solomon Company Limited.
   39
 Exhibit
      No.*
    
    Description
      of Exhibit
 4.5[7]
    --
    Form
      of Warrant issued to each seller of shares of ICTS,
Inc.4.6[8]
    --
    Warrant
      to purchase 50,000 shares of common stock of the Registrant issued to
      Rosenthal & Rosenthal, Inc. on July 12, 2002.4.7[9]
    --
    Form
      of Registrant’s Common Stock Purchase Warrant issued to three
      institutional investors on August 1, 2003.4.8[15]
    --
    Common
      Stock Purchase Warrant issued in September 2003, to purchase 45,000 shares
      of the Registrant’s common stock.4.9[18]
    --
    Common
      Stock Purchase Warrant issued to placement agent on March 29,
      2004.10.1[10]
    --
    Employment
      Agreement between the Registrant and Dr. Arol I. Buntzman, dated January
      1, 2003.10.2[10]
    --
    Employment
      Agreement between the Registrant and Dr. John J. McGrath, Dated January 1,
      2003.10.3[10]
    --
    Employment
      Agreement between the Registrant and Richard Goldenberg, dated January 1,
      2003.10.4[11]
    --
    Amended
      and Restated 1998 Incentive Stock Option Plan of the
      Registrant.10.5[12]
    --
    2001
      Non-Qualified Stock Option Plan.10.6[10]
    --
    Form
      of Change in Control Agreement used for agreements the Registrant has with
      each of Dr. Arol I. Buntzman, Dr. John J. McGrath, and Richard Goldenberg,
      dated February 11, 2003.10.7[1]
    --
    Form
      of Indemnification Agreement.10.8[4]
    --
    Stock
      Purchase Agreement, dated January 14, 2000, among Bruce R. Kalisch,
      Interboro Holding, Inc. and Interboro Institute, Inc.10.9[13]
    --
    Lease
      Agreement between 444 Realty Company and Interboro Institute, Inc. dated
      July 27, 1983, as amended by agreements dated September 20, 1988,
      September 1, 1992, and February 1, 1993.10.10[13]
    --
    Lease
      Agreement between Interboro Institute, Inc. JUYI, Inc., dated January 26,
      2001.10.11[9]
    --
    Promissory
      Note for $1,000,000, dated August 4, 2003, payable by Interboro Institute,
      Inc. to North Fork Bank.
  40
  Exhibit
      No.*
    
    Description
      of Exhibit
 10.12[9]
    --
    Form
      of the Registrant’s Subscription and Registration Rights Agreement
      relating to the Registrant’s August 1, 2003, issuance of common stock and
      warrants.10.13[14]
    --
    Settlement
      Agreement made October 3, 2003, between Amaranth Trading L.L.C. and the
      Registrant.10.14[14]
    --
    Form
      of Share Claim Purchase and Registration Rights Agreement between the
      Registrant and each investor acquiring a portion of the Amaranth Trading
      L.L.C.’s rights to claims to shares of EVCI’s common stock upon conversion
      of Series B Preferred shares.10.15[15]
    --
    Third
      Amendment and Lease Extension Agreement, made as of August 1, 2003,
      between 444 Realty Company, L.L.C. and Interboro Institute,
      Inc.10.16[16]
    --
    Ownership
      and Registration Rights Agreement, dated November 11, 2003, between the
      Registrant and JLF Partners I, L.P., JLF Partners II, L.P. and JLF
      Offshore Fund.10.17[17]
    --
    Employment
      Agreement between the Registrant and Joseph D. Alperin dated January 1,
      2004.10.18[17]
    --
    Option
      Agreement between the Registrant and Joseph D. Alperin dated January 1,
      2004.10.19[17]
    --
    Change
      of control letter agreement between the Registrant and Joseph D. Alperin
      dated January 1, 2004.10.20[17]
    --
    Agreement,
      made February 28, 2004, between Interboro Institute, Inc. and OPEIU Local
      153, AFL-CIO.10.21[18]
    --
    Securities
      Purchase Agreement, dated March 29, 2004, by and among the Registrant and
      each buyer named in the Schedule of Buyers.10.22[18]
    --
    Registration
      Rights Agreement, dated March 29, 2004, by and among the Registrant and
      each buyer named in the Schedule of Buyers.10.23[19]
    --
    Ownership
      and Registration Rights Agreement, dated April 2, 2004, by and among the
      Registrant and six funds managed by Wellington Management Company,
      LLP.10.24[20]
    --
    2004
      Amended and Restated Incentive Stock Plan10.25[21]
    --
    Form
      of Stock Option Agreement (Nonqualified Stock Option)10.26[21]
    --
    Form
      of Stock Option Agreement (Nonqualified Stock Option) covering option
      grants to executive officers that were approved at the Registrant’s July
      27, 2004 stockholders meeting.
  41
  Exhibit
      No.*
    
    Description
      of Exhibit
 10.27**
    --
    Lease
      made November 17, 2003 between Spruce Spires Associates, LP, and Interboro
      Institute, Inc.31.1**
    --
    Certification
      of Chief Executive Officer required by Rule 13a-14(a) under the Exchange
      Act.31.2**
    --
    Certification
      of Chief Financial Officer required by Rule 13a-14(a) under the Exchange
      Act.32.1**
    --
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of 2002.32.2**
    --
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of 2002.99.1**
    --
    Text
      of final report, dated March 7, 2005, detailing the calculation of the TAP
      disallowances resulting from the TAP audit of the 2000-01 through 2002-03
      academic years of Interboro Institute,
Inc.


___________________


* Numbers
inside brackets indicate documents from which exhibits have been incorporated by
reference.


** Filed
herewith.





[1]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form SB-2,
      filed October 23, 1998, Registration No.
333-66085.





[2]
    Incorporated
      by reference to Amendment No. 4, dated February 10, 1999, to the
      Registrant’s Form SB-2, Registration No.
333-66085.





[3]
    Incorporated
      by reference to Registrant’s Form 10-QSB for the quarter ended September
      30, 1999.





[4]
    Incorporated
      by reference to the Registrant’s Form 8-K dated January 14,
      2000.





[5]
    Incorporated
      by reference to the Registrant’s Form 8-K dated October 6,
      2000.





[6]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2000.





[7]
    Incorporated
      by reference to the Registrant’s Form 8-K dated July 1,
    2001.





[8]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2002.





[9]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.





[10]
    Incorporated
      by reference to the Registrant’s Form 10-KSB for the year ended December
      31, 2002.






42


[11]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form S-8 filed
      December 31, 2002, Registration No.
333-102310.





[12]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form S-8 filed
      October 23, 2001, Registration No.
333-72080.




[13]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.





[14]
    Incorporated
      by reference to the Registrant’s Form 8-K dated October 10,
      2003.





[15]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.





[16]
    Incorporated
      by reference to Amendment No. 1 to the Registrant’s Registration Statement
      on Form S-3, filed December 4, 2003, Registration No.
      333-110567.





[17]
    Incorporated
      by reference to the Registrant’s Form 10-KSB/A for the year ended December
      31, 2003.


[18]
    Incorporated
      by reference to the Registrant’s Form 8-K dated March 29,
      2004.





[19]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended March
      31, 2004.





[20]
    Incorporated
      by reference to the Registrant’s Form 8-K dated September 17,
      2004.





[21]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2004.








43


**SIGNATURES**







In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




EVCI CAREER COLLEGES
      HOLDING CORP.Date: March 23, 2005
    By:
    /s/ Dr. John J. McGrathDr. John J. McGrathChief Executive Officer and
      President




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.







Signature
    
    Date/s/ Dr. Arol I. Buntzman
    
    March
      23, 2005Dr. Arol I. BuntzmanChairman of the Board/s/ Dr. John J. McGrath
    
    March
      23, 2005Dr. John J. McGrathChief Executive Officer and President and
      Director/s/ Richard Goldenberg
    
    March
      23, 2005Richard GoldenbergChief Financial Officer and
      Director(Principal Financial and Accounting
      Officer)/s/ Royce Flippin, Jr.
    
    March
      23, 2005Royce N. Flippin, Jr.Director/s/ Philip M. Getter
    
    March
      23, 2005Philip M. GetterDirector/s/ Donald Grunewald
    
    March
      23, 2005Donald GrunewaldDirector/s/ Elie Housman
    
    March
      23, 2005Elie HousmanDirector








44




**EVCI
CAREER COLLEGES HOLDING CORP.**
 **AND
SUBSIDIARIES**
  **CONSOLIDATED
FINANCIAL STATEMENTS**
 **DECEMBER
31, 2004**
    
 **EVCI CAREER COLLEGES HOLDING
      CORP. AND SUBSIDIARIES****INDEX
      TO CONSOLIDATED FINANCIAL
STATEMENTS**
 ****
 
 ****
 **Report
      of Independent Registered Public Accounting Firm**
    F-2**Consolidated
      Financial Statements:**Balance
      Sheet as of December 31, 2004 and 2003
    F-3Statement
      of Income for the Years Ended December 31, 2004 and 2003
    F-4Statement
      of Stockholders' Equity for the Years Ended December 31, 2004 and
      2003
    F-5Statement
      of Cash Flows for the Years Ended December 31, 2004 and
    2003
    F-6Notes
      to Consolidated Financial Statements
    F-7
      - F-20
 
   F-1
   **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 To the
Board of Directors
 EVCI
Career Colleges Holding Corp.
 
 
 We have
audited the accompanying consolidated balance sheets of EVCI Career Colleges
Holding Corp. ("EVCI") (formerly EVCI Career Colleges Incorporated) and
Subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of EVCI's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
 We
conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of EVCI Career Colleges Holding
Corp. and Subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with United States generally accepted accounting principles.
 
 
 GOLDSTEIN
GOLUB KESSLER LLP
 **GOLDSTEIN
GOLUB KESSLER LLP**
 New York,
New York
 
 February
10, 2005
  F-2
 
 **EVCI
      CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES****CONSOLIDATED
      BALANCE SHEET****December
      31,**
    
    **2004**
    
    **2003****ASSETS**Current
      Assets:Cash
      and cash equivalents
    
    $
    10,504,308
    
    $
    2,522,107Student
      accounts receivable, less allowance for doubtful accounts of $105,000 and
      $50,000, respectively
    
    
    6,015,719
    
    
    2,715,418Note
      receivable
    
    
    —
    
    
    90,000Prepaid
      expenses and other current assets
    
    
    137,410
    
    
    103,367**Total
      current assets**
    
    
    16,657,437
    
    
    5,430,892Property
      and Equipment - net
    
    
    4,733,185
    
    
    1,714,606Restricted
      Certificates of Deposit
    
    
    32,142
    
    
    291,352Goodwill
    
    
    3,914,624
    
    
    3,600,522Deferred
      Income Tax Asset, net of valuation allowance of $1,827,500and
      $6,259,000, respectively
    
    
    5,557,500
    
    
    2,000,000Other
      Assets
    
    
    443,084
    
    
    271,956**Total
      Assets**
    
    $
    31,337,972
    
    $
    13,309,328**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Current
      Liabilities:Accounts
      payable and accrued expenses
    
    $
    3,046,707
    
    $
    775,727Income
      taxes payable
    
    
    329,729
    
    
    72,450Accrued
      purchase price payable for Interboro Institute, Inc.
    
    
    —
    
    
    973,337Deferred
      tuition revenue
    
    
    1,834,510
    
    
    1,007,621Current
      portion of capital lease obligation
    
    
    275,329
    
    
    161,805Current
      portion of notes payable
    
    
    318,907
    
    
    480,235**Total
      current liabilities**
    
    
    5,805,182
    
    
    3,471,175Capital
      lease obligation, net of current portion
    
    
    585,337
    
    
    236,194Accrued
      purchase price payable for Interboro Institute, Inc., net of current
      portion
    
    
    —
    
    
    1,622,227Notes
      Payable, net of current portion
    
    
    286,518
    
    
    964,968Deferred
      rent
    
    
    766,710
    
    
    —**Total
      liabilities**
    
    
    7,443,747
    
    
    6,294,564Commitments
      and ContingenciesStockholders'
      Equity:Preferred
      stock - $.0001 par value; authorized 1,000,000 shares; none
      issued and outstanding
    
    
    —
    
    
    —Common
      stock - $.0001 par value; authorized 20,000,000 shares; issued
      andoutstanding
      12,329,603 and 10,862,452 shares, respectively
    
    
    1,254
    
    
    1,090Additional
      paid-in capital
    
    
    49,922,445
    
    
    39,296,760Accumulated
      deficit
    
    
    (26,029,474
    )
    
    (32,283,086
    )**Stockholders'
      equity**
    
    
    23,894,225
    
    
    7,014,764**Total
      Liabilities and Stockholders' Equity**
    
    $
    31,337,972
    
    $
    13,309,328
  
 See Notes to Consolidated Financial
Statements
 F-3
  **EVCI
      CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENT OF INCOME******Year
      ended****December
      31,****
    
    **2004**
    
    **2003**Net
      revenue
    
    $
    32,718,087
    
    $
    19,912,423Other
      income
    
    
    351,886
    
    
    325,305Total
      revenue
    
    
    33,069,973
    
    
    20,237,728Operating
      expenses:Cost
      of revenue
    
    
    7,313,643
    
    
    4,928,275Selling,
      general and administrative
    
    
    21,134,039
    
    
    13,674,927Total
      operating expenses
    
    
    28,447,682
    
    
    18,603,202Income
      from operations
    
    
    4,622,291
    
    
    1,634,526Other
      income (expense):Loss
      on settlement of tuition disallowance
    
    
    (978,200
    )
    
    —Interest
      and financing costs
    
    
    (225,992
    )
    
    (138,038
    )Interest
      income
    
    
    73,513
    
    
    23,412Income
      before benefit for income taxes
    
    
    3,491,612
    
    
    1,519,900Benefit
      for income taxes
    
    
    (2,762,000
    )
    
    (1,860,000
    )Net
      income
    
    
    6,253,612
    
    
    3,379,900Accreted
      value of warrants and transaction costs - Series B
    
    
    —
    
    
    (179,382
    )Dividends
      on preferred stock - Series B
    
    
    —
    
    
    (630,333
    )Net
      income available to common stockholders
    
    $
    6,253,612
    
    $
    2,570,185Income
      per common share:Basic:
    
    $
    0.53
    
    $
    0.35Diluted:
    
    $
    0.50
    
    $
    0.31Weighted-average
      number of common shares outstanding:Basic
    
    
    11,883,695
    
    
    7,360,649Diluted
    
    
    12,518,450
    
    
    8,265,176
 
 See Notes to Consolidated Financial
Statements
 
 
 F-4
   **EVCI
      CAREER COLLEGES HOLDING CORP. AND
    SUBSIDIARIES****CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY****Common
      Stock**
    
    ****Preferred
      Stock**Series
      B****Number

      **of
       Shares****
    
    **Amount**
    
    **Number

      **of
       Shares****
    
    **Amount**
    
    **Additional Paid-in
      Capital**
    
    **Accumulated

      **Deficit****
    
    **Stockholders'

      **Equity****Balance
      at December 31, 2002
    
    
    5,308,826
    
    $
    532
    
    
    130,000
    
    $
    12,820,618
    
    $
    23,432,295
    
    $
    (33,731,482
    )
    $
    2,521,963Accreted
      value of warrants and transaction costs - Series B
    
    
    —
    
    
    —
    
    
    —
    
    
    179,382
    
    
    —
    
    
    (179,382
    )
    
    —Exercise
      of warrants and options
    
    
    709,012
    
    
    73
    
    
    —
    
    
    —
    
    
    874,698
    
    
    —
    
    
    874,771Conversion
      of preferred stock Series B into common stock
    
    
    3,550,244
    
    
    355
    
    
    (130,000
    )
    
    (13,000,000
    )
    
    12,999,645
    
    
    —
    
    
    —Issuance
      of common stock
    
    
    943,396
    
    
    94
    
    
    —
    
    
    —
    
    
    1,999,906
    
    
    —
    
    
    2,000,000Series
      B settlement received net of expenses incurred in
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (9,748
    )
    
    —
    
    
    (9,748
    )connection
      with the Series B conversionCashless
      exercise of warrants
    
    
    350,974
    
    
    36
    
    
    —
    
    
    —
    
    
    (36
    )
    
    —
    
    
    —Dividends
      declared and paid on preferred stock Series B
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,752,122
    )
    
    (1,752,122
    )Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    3,379,900
    
    
    3,379,900Balance
      at December 31, 2003
    
    
    10,862,452
    
    $
    1,090
    
    
    —
    
    
    —
    
    $
    39,296,760
    
    $
    (32,283,086
    )
    $
    7,014,764Issuance
      of common stock
    
    
    1,038,962
    
    
    104
    
    
    —
    
    
    —
    
    
    9,349,481
    
    
    —
    
    
    9,349,585Exercise
      of options and warrants
    
    
    353,859
    
    
    53
    
    
    —
    
    
    —
    
    
    869,843
    
    
    —
    
    
    869,896Cashless
      exercise of warrants
    
    
    74,330
    
    
    7
    
    
    —
    
    
    —
    
    
    (7
    )
    
    —
    
    
    —Non
      cash compensation charges
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    406,368
    
    
    —
    
    
    406,368Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    6,253,612
    
    
    6,253,612Balance
      at December 31, 2004
    
    
    12,329,603
    
    $
    1,254
    
    
    —
    
    
    —
    
    $
    49,922,445
    
    $
    (26,029,474
    )
    $
    23,894,225
 See Notes
to Consolidated Financial Statements
  F-5
  **EVCI
      CAREER COLLEGES HOLDING CORP AND SUBSIDIARIES****CONSOLIDATED
      STATEMENT OF CASH FLOWS****Year
      ended December 31,**
    
    **2004**
    
    **2003**Cash
      flows from operating activities:Net
      income
    
    $
    6,253,612
    
    $
    3,379,900Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
    
    
    1,011,866
    
    
    877,349Allowance
      for doubtful accounts
    
    
    55,000
    
    
    —Non
      cash compensation expense
    
    
    406,368
    
    
    —Deferred
      income taxes
    
    
    (3,557,500
    )
    
    (2,000,000
    )Changes
      in operating assets and liabilities:Increase
      in student accounts receivable
    
    
    (3,355,301
    )
    
    (1,071,054
    )Increase
      in prepaid expenses and other current assets
    
    
    (34,043
    )
    
    (21,363
    )Decrease
      (increase) in other assets
    
    
    (171,128
    )
    
    25,333(Decrease)
      increase in accounts payable and accrued expenses
    
    
    2,270,980
    
    
    (346,627
    )Increase
      in income taxes payable
    
    
    257,279
    
    
    —(Decrease)
      increase in deferred tuition revenue
    
    
    826,889
    
    
    (867,886
    )Increase
      in deferred rent
    
    
    766,710
    
    
    —Decrease
      in assets and liabilities from discontinued operations
    
    
    —
    
    
    (64,956
    )**Net
      cash provided by (used in) operating activities**
    
    
    4,730,732
    
    
    (89,304
    )Cash
      flows from investing activities:Purchases
      of property and equipment
    
    
    (2,492,059
    )
    
    (649,410
    )Release
      of restricted funds
    
    
    259,210
    
    
    —Investment
      in restricted certificates of deposit
    
    
    —
    
    
    (3,177
    )Repayment
      of notes receivable
    
    
    90,000
    
    
    10,000Payments
      on accrued purchase price payable
    
    
    (2,909,666
    )
    
    (345,000
    )**Net
      cash used in investing activities**
    
    
    (5,052,515
    )
    
    (987,587
    )Cash
      flows from financing activities:Principal
      payments on capital lease obligation
    
    
    (1,075,719
    )
    
    (121,591
    )Principal
      payment on notes payable
    
    
    (839,778
    )
    
    —Repayment
      of promissory note payable
    
    
    —
    
    
    (28,261
    )Net
      proceeds from note payable - bank
    
    
    —
    
    
    923,464Repayment
      of note payable - Series B holders
    
    
    —
    
    
    (910,000
    )Proceeds
      from issuance of common stock and warrants
    
    
    9,349,585
    
    
    2,000,000Proceeds
      from exercise of options and warrants
    
    
    869,896
    
    
    874,771Dividends
      paid on Series B preferred stock
    
    
    —
    
    
    (1,752,122
    )Expense
      incurred upon conversion of series B preferred stock
    
    
    —
    
    
    (9,748
    )**Net
      cash provided by financing activities**
    
    
    8,303,984
    
    
    976,513Net
      increase (decrease) in cash and cash equivalents
    
    
    7,982,201
    
    
    (100,378
    )Cash
      and cash equivalents at beginning of year
    
    
    2,522,107
    
    
    2,622,485Cash
      and cash equivalents at end of year
    
    $
    10,504,308
    
    $
    2,522,107**Supplemental
      disclosures of cash flow information:**Cash
      paid during the year for:Interest
    
    $
    225,992
    
    $
    143,239Income
      taxes
    
    $
    604,546
    
    $
    146,445**Supplemental
      schedule of noncash investing and financing
      activities:**Capital
      lease obligations incurred in the acquisition of equipment
    
    $
    1,538,387
    
    $
    299,843Increase
      in goodwill
    
    $
    314,102
    
    $
    1,343,233Increase
      in accrued purchase price payable
    
    $
    314,102
    
    $
    1,343,233
 
 F-6
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  
 1.
    **PRINCIPAL
      BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES:**
    
    EVCI
      Career Colleges Holding Corp. provides on-campus education through the
      operations of Interboro Institute, Inc. (“Interboro”), a two-year college
      with sites in mid-town Manhattan, Flushing, the Washington Heights section
      of Manhattan and Yonkers, New York.
      
      In
      August 2004, EVCI changed its name to EVCI Career Colleges Holding Corp.The
      accompanying consolidated financial statements include the accounts of
      EVCI and its wholly owned subsidiaries Interboro and Interboro Holding,
      Inc. (collectively referred to as the “Company”). All intercompany
      accounts and transactions have been eliminated in
      consolidation.The
      Company considers all highly liquid instruments purchased with a maturity
      of three months or less to be cash equivalents.The
      Company maintains its cash in bank deposit accounts which, at times, may
      exceed federally insured limits. It has not experienced any losses in such
      accounts.The
      Company reviews long-lived assets and identified intangibles for
      impairment whenever events or changes in circumstances indicate that the
      carrying value of an asset may not be fully recoverable. The Company
      performs nondiscounted cash flow analyses to determine if an impairment
      exists.The
      Company recognizes revenue ratably over each semester on a daily basis.
      Each semester has 14 weeks, or 70 days, of classroom instruction. Final
      examinations are given in the 15th week of the semester. Each week of
      classroom instruction during the semester includes five days of revenue
      recognition (including holidays).Almost
      all of Interboro’s students fund their tuition through Pell grants,
      pursuant to the Title IV of the Higher Education Act, and New York State
      Tuition Assistance Program (TAP) grants. In addition, Interboro
      participates in the Title IV College Work Study program, which allows a
      limited number of students to receive additional aid by working in
      college. Interboro also receives funds from the Title IV Supplemental
      Education Opportunity Grant program, which provides some Interboro
      students additional grants to meet college costs. Interboro allows its
      students to pay over time the portion, if any, of tuition, that is not
      covered by grants. Students who cannot afford to pay over time are
      sometimes given tuition grants by Interboro. Interboro has chosen not to
      participate in any Title IV loan programs that would subject it to
      liability or scrutiny as a result of defaults by its students. Changes in
      Title IV or TAP programs may have a direct impact on
      Interboro.Accounts
      receivable are reported at their outstanding unpaid principal balances
      reduced by an allowance for doubtful accounts. The Company estimates
      doubtful accounts based on historical bad debts and factors related to
      specific students. The
      Company writes off accounts receivable against the allowance when a
      balance is determined to be uncollectible.Property
      and equipment is recorded at cost. Depreciation is provided for by the
      straight-line method over the estimated useful lives of the property and
      equipment. Amortization of leasehold improvements is provided for by the
      straight-line method over the lesser of the life of the asset or term of
      the lease.
  F-7
 **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 
 Based
      on the borrowing rates currently available to the Company for loans with
      similar terms and average maturities, the fair value of the notes
      receivable and payable approximate the carrying
amounts.The
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America requires the
      use of estimates by management. Actual results could differ from these
      estimates.Costs
      incurred for producing and communicating advertising are expensed as
      incurred and included in selling, general and administrative expenses.
      Advertising expenses approximated $2,987,000 and $1,894,000 for the years
      ended December 31, 2004 and 2003, respectively.The
      Company employs the liability method of accounting for income taxes
      pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109.
      Under this method, recorded deferred income taxes reflect the tax
      consequences on future years of temporary differences (differences between
      the tax basis of assets and liabilities and their financial amounts at
      year-end). The Company provides a valuation allowance that reduces
      deferred tax assets to their net realizable value.SFAS
      No. 128, *Earnings per Share*, requires dual presentation of basic
      earnings per share (“EPS”) and diluted EPS on the face of all statements
      for all entities with complex capital structures. Basic EPS is computed as
      net earnings divided by the weighted-average number of common shares
      outstanding for the period. Diluted EPS reflects the potential dilution
      that could occur from common shares issuable through stock-based
      compensation including stock options, restricted stock awards, warrants
      and other convertible securities.The
      Company has elected, in accordance with the provisions of SFAS No. 123, to
      apply the current accounting rules under APB Opinion No. 25 and related
      interpretations in accounting for stock options and, accordingly, is
      presenting the disclosure-only information as required by SFAS No. 123. If
      the Company had elected to recognize compensation cost based on the fair
      value of the options granted at the grant date as prescribed by SFAS No.
      123, the Company’s net income and net income per common share would
      approximate the pro forma amounts shown in the following
      table:
  F-8
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  Year
      ended December 31,
    
    2004
    
    2003Reported
      net income
    
    $
    6,253,612
    
    $
    3,379,900Add:
      Stock-based employee compensation expense included in recorded net income,
      net of related tax effects
    
    
    406,368
    
    
    —Deduct:
      Total stock-based employee compensation expense determined under
      fair-value-based method for all awards, net of related tax
      effects
    
    
    1,723,883
    
    
    106,422Pro
      forma net income
    
    $
    4,936,097
    
    $
    3,273,478Reported
      net income per common share:Basic
    
    $
    0.53
    
    $
    0.35Diluted
    
    
    0.50
    
    
    0.32Pro
      forma net income per common share:Basic
    
    $
    0.42
    
    $
    0.33Diluted
    
    
    0.39
    
    
    0.30
 The
      fair value of options granted (which is amortized over the option vesting
      period in determining the pro forma impact) is estimated on the date of
      grant using the Black-Scholes option-pricing model with the following
      assumptions: no dividend yield, volatility of 136% in 2004 and 2003,
      risk-free interest rates ranging from 3.08% to 4.14% and an expected life
      of three to five years from the date of vesting.In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123R,
      “Share-Based Payment,” which establishes standards for the accounting for
      transactions in which an entity exchanges its equity instruments for goods
      or services. A key provision of this statement is the requirement of a
      public entity to measure the cost of employee services received in
      exchange for an award of equity instruments (including stock options)
      based on the grant-date fair value of the award. That cost will be
      recognized over the period during which an employee is required to provide
      service in exchange for the award (i.e., the requisite service period or
      vesting period). This standard becomes effective for the Company on July
      1, 2005. The Company will adopt SFAS No. 123R beginning in the third
      quarter of 2005. The table above reflects the estimated impact that such a
      change in accounting treatment would have had on the Company’s net income
      and net income per share if it had been in effect during the years ended
      December 31, 2004 and 2003.Management
      does not believe that any other recently issued, but not yet effective,
      accounting standards if currently adopted would have a material effect on
      the accompanying consolidated financial statements.
 F-9
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 Certain
      2003 amounts have reclassified, where appropriate, to conform to the 2004
      presentation.**2.**
    **ACQUISITION:**
    
    On
      January 14, 2000, the Company acquired the outstanding shares of Interboro
      for $672,500 plus 50% of earnings before interest, taxes, depreciation and
      amortization (“EBITDA”) for the three years ending December 31, 2001, 2002
      and 2003. See Note 5 for details on the related goodwill and Note 10 for
      information about the arbitration brought by the former owner of
      Interboro.After
      giving effect to the results of such arbitration, accrued purchase price
      payable for Interboro consists of the
following:
 December
      31,
    
    2004
    
    2003Accrued
      purchase price payable at beginning of year
    
    $
    2,595,564
    
    $
    1,597,331Additional
      purchase price based on 50% of EBITDA
    
    
    —
    
    
    1,343,233Adjustments
      to prior years, as a result of arbitration
    
    
    185,501
    
    
    —Interest,
      as a result of arbitration
    
    
    128,601
    
    
    —2,909,666
    
    
    2,940,564Less
      payments to previous shareholder
    
    
    1,957,412
    
    
    345,000Less
      portion held in escrow
    
    
    952,254
    
    
    —Accrued
      purchase price at end of year
    
    
    —
    
    
    2,595,564Less
      current portion
    
    
    —
    
    
    973,337Accrued
      purchase price payable, net of current portion
    
    $
    —
    
    $
    1,622,227
  **3.**
    **NOTE
      RECEIVABLE:**
    
    In
      September 2002, the Company advanced $100,000 to JAI, Inc. (“JAI”), a
      provider of an integrated suite of software solutions for global direct
      selling companies, in exchange for a promissory note bearing interest at
      8% per annum. The note was fully repaid during 2004.
 F-10
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  **4.**
    **PROPERTY
      AND**
      **EQUIPMENT:**
    
    Property
      and equipment, at cost, consists of the
following:
 EstimatedDecember
      31,
    
    2004
    
    2003
    
    Useful
      LifeFurniture
      and fixtures
    
    $
    837,618
    
    $
    497,918
    
    
    3
      to 5 yearsTelephone
      systems, office computers and software
    
    
    2,560,861
    
    
    1,056,769
    
    
    3
      to 5 yearsLibrary
    
    
    350,658
    
    
    —
    
    
    5
      yearsVideo
      teaching equipment
    
    
    —
    
    
    282,399
    
    
    5
      yearsAutomobile
    
    
    —
    
    
    21,533
    
    
    5
      yearsLeasehold
      improvements
    
    
    2,690,675
    
    
    1,314,582
    
    
    Term
      of leaseEquipment
      acquired under capital lease
    
    
    1,052,419
    
    
    629,761
    
    
    5
      years7,492,231
    
    
    3,802,962Less
      accumulated depreciation and amortization:Equipment
      acquired under capital lease
    
    
    256,472
    
    
    214,407Other
    
    
    2,502,574
    
    
    1,873,9492,759,046
    
    
    2,088,356$
    4,733,185
    
    $
    1,714,606
 **5.**
    **GOODWILL:**
    
    In
      July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS
      Nos. 141 and 142,*Business
      Combinations*and*Goodwill and Other Intangibles*,
      respectively. SFAS No. 141 requires all business combinations initiated
      afterJune
      30, 2001 to be accounted for using the purchase method. UnderSFAS
      No. 142, goodwill is no longer subject to amortization over its estimated
      useful life. Rather, goodwill is subject to at least an annual assessment
      for impairment by applying a fair-value-based test. Additionally, an
      acquired intangible asset should be separately recognized if the benefit
      of the intangible asset is obtained through contractual or other legal
      rights, or if the intangible asset can be sold, transferred, licensed,
      rented or exchanged, regardless of the acquirer’s intent to do so. The
      Company has adopted SFAS No. 142 as of January 2002.
  F-11
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  Presented
      below is a summary of goodwill activity relating to acquisition of
      Interboro:
 Balance
      at December 31, 2002
    
    $
    2,257,289Interboro
      EBITDA calculation
    
    
    1,343,233Balance
      at December 31, 2003
    
    
    3,600,522Arbitration
      adjustments and interest
    
    
    314,102**Balance
      at December 31, 2004**
    
    $
    3,914,624
  **6.**
    **ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES:**
    
    Accounts
      payable and accrued expenses consist of the
following:
 December
      31,
    
    2004
    
    2003Accounts
      payable
    
    $
    495,826
    
    $
    193,068Accrued
      salaries and benefits
    
    
    661,011
    
    
    310,692Accrued
      bonus payable
    
    
    550,000
    
    
    —Accrued
      marketing and advertising
    
    
    —
    
    
    84,160Accrued
      professional fees
    
    
    —
    
    
    35,000TAP
      and Pell audit refunds payable
    
    
    978,400
    
    
    —Student
      refunds payable
    
    
    251,470
    
    
    65,000Accrued
      other
    
    
    110,000
    
    
    87,807$
    3,046,707
    
    $
    775,727
  **7.**
    **OBLIGATIONS
      UNDER CAPITAL LEASES:**
    
    The
      Company leases office and computer equipment under capital leases expiring
      at various dates through 2009. The leases require monthly payments of
      principal and interest imputed at rates ranging from 6.7% to 13.0 % per
      annum.Minimum
      future obligations under these leases are as
follows:
  Year
      ending December 31,2005
    
    $
    340,0392006
    
    
    325,0692007
    
    
    224,9442008
    
    
    68,3062009
    
    
    25,554983,912Less
      amount representing interest
    
    
    (123,246
    )Less
      current portion
    
    
    (275,329
    )$
    585,337
 F-12
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  **8.**
    **INCOME
      TAXES:**
    
    The
      provison for income taxes consists of:
  Year
      ended December 31,
    
    2004
    
    2003Current:Federal
    
    $
    —
    
    $
    —State
      and local
    
    
    720,500
    
    
    140,000Total
      current
    
    $
    720,500
    
    $
    140,000Deferred
      income tax benefit
    
    
    (3,482,500
    )
    
    (2,000,000
    )$
    (2,762,000
    )
    $
    (1,860,000
    )
  ****
    ****
    
    The
      Company recorded a deferred income tax asset for the tax effect of net
      operating loss carryforwards and temporary differences. In recognition of
      the uncertainty regarding the ultimate amount of income tax benefits to be
      derived, the Company has recorded a valuation allowance as
      follows:
  Year
      ended December 31,
    
    2004
    
    2003Net
      operating losses and temporary differences
    
    $
    7,385,000
    
    $
    8,259,000Less
      valuation allowance
    
    
    (1,827,500
    )
    
    (6,259,000
    )$
    5,557,500
    
    $
    2,000,000
 ****
    ****
    
    The
      benefit for income taxes differs from the amount computed using the
      federal statutory rate of 34% as a result of the
  following:
  Year
      ended December 31,
    
    2004
    
    2003Federal
      statutory rate
    
    
    34
    %
    
    34
    %State
      and local income taxes of Interboro
    
    
    9
    
    
    9Prior
      year underaccrual
    
    
    5
    
    
    —Decrease
      in valuation allowance
    
    
    (127
    )
    
    (162
    )(79
    )%
    
    (119
    )%
 ****
    ****
    
    As
      of December 31, 2004, the Company had net operating loss carryforwards
      available to offset future taxable income of approximately $21,500,000,
      which expire in various years through 2022. Subsequent issuances of common
      stock in capital raising activities may effect an ownership change, as
      described under Section 382 of the Internal Revenue Code, that could
      limit, on an annual basis, the Company’s ability to utilize such net
      operating losses.
  F-13
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  **9.**
    **NOTES
      PAYABLE:**
    
    Notes
      payable consist of the following:
 December
      31,
    
    2004
    
    2003Note
      payable - bank (a)
    
    $
    605,425
    
    $
    923,464Promissory
      note payable (b)
    
    
    —
    
    $
    521,739$
    605,425
    
    $
    1,445,203
 ****
    ****
    
    (a)
    The
      note bears interest at the rate of 6% per annum and is payable in monthly
      installments of principal and interest aggregating $30,462 through
      September 1, 2006. The note is secured by the common stock of
      Interboro.
  ****
    ****
    
    (b)
    In
      July 2002, the Company borrowed $550,000, for which it issued a secured
      promissory note due July 12, 2005, bearing interest at 10% per annum and
      warrants to purchase 50,000 shares of the Company’s common stock at $1.50
      per share. The note was secured by a $250,000 standby letter of credit,
      which was collateralized by a $250,000 restricted certificate of deposit
      and guaranteed by Interboro. In August 2003, an additional $50,000 was
      borrowed and added to the principle of the note. The note was payable in
      23 monthly installments of principal of $13,043 plus interest commencing
      July 2003 with the final payment of the outstanding principal balance and
      accrued interest due June 2004. The note was prepaid in full in April
      2004, without penalty or premium, and the letter of credit and restricted
      certificate of deposit were
extinguished.
  ****
    ****
    
    Aggregate
      maturities of long-term debt are as
  follows:
 Year
      ending December 31,2005
    
    $
    318,9072006
    
    
    286,518605,425Less
      current portion
    
    
    (318,907
    )$
    286,518
 **10.**
    **COMMITMENTS
      AND CONTINGENCIES:**
    
    The
      Company leases office space and classrooms under noncancelable operating
      leases which expire at varying times through August 2015. Renewal options
      have not been included in the table below. The leases are subject to
      escalations for increases in the Company’s share of increases in real
      estate taxes and other
expenses.
  F-14
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  ****
    ****
    
    Minimum
      future obligations under these leases are as
      follows:
  Year
      ending December 31,2005
    
    $
    2,408,6102006
    
    
    1,797,7892007
    
    
    1,723,3912008
    
    
    1,675,3312009
    
    
    1,705,977Thereafter
    
    
    7,576,928$
    16,888,026
  Rent
      expenses charged to operations for the years ended December 31, 2004 and
      2003 amounted to approximately $2,398,000 and $1,620,000, respectively.The
      leases provide for rent abatements and/or scheduled increases in base
      rent. Rent expense is charged to operations ratably over the term of the
      leases. This results in deferred rent payable which represents cumulative
      rent expense charged to operations from inception of these leases in
      excess of required lease payments.The
      Company has employment agreements with the four executive officers of the
      Company and an officer of Interboro. The agreements expire at various
      dates through December 2006 and provide foraggregateannual base compensation of approximately $1,049,000 for the year ended
      December 31, 2005 and approximately $584,620 for the year ended December
      31, 2006. Aggregate compensation under these agreements, including
      discretionary bonuses, was approximately $1,692,000 and $1,120,000 for the
      years ended December 31, 2004 and 2003, respectively.The
      entitlement to grants under Pell and TAP programs is routinely audited.
      During 2004, Interboro had a TAP audit that covered the three academic
      years ended June 30, 2001, 2002 and 2003. Based on oral advice from the
      TAP auditors, the Company has accrued approximately $903,000 for TAP
      disallowances. The Company also accrued an additional $75,000 for PELL
      refunds that relate to certain causes for the TAP disallowances.
      Subsequent periods are still subject to audit.Between
      July 2002 and August 2004 the Company was a defendant in an arbitration
      brought by the former owner of Interboro. The Company prevailed in full on
      the central issue of the arbitration. This was a claim that EVCI’s
      excessive and improper allocations of its overhead to Interboro during
      2002 resulted in EVCI’s calculation of a lower EBITDA for those years and,
      therefore, a lower purchase price for Interboro. The arbitrator also ruled
      that 2003 EBITDA was outside the scope of the arbitration.On
      a collateral issue, the arbitrator held the Company was not entitled to
      reduce the purchase price by approximately $138,000 for its claimed breach
      of representation and warranty. The arbitrator also awarded attorneys fees
      of approximately $46,000 to the plaintiff’s attorney and $128,000 of
      interest.
  F-15
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
  ****
    ****
    
    The
      Company has paid the former owner of Interboro in full with the exception
      of approximately $952,000 which it delivered into escrow. This escrowed
      amount secures the Company’s claim that TAP and Pell audit disallowances
      for 2001, 2002 and 2003 should result in a reduction of the purchase price
      payable to the former owner by 50% of those disallowances. Any escrowed
      portion of the purchase price that is ultimately released to the former
      owner of Interboro will include interest at 9% per
      annum.
 **11.**
    **STOCKHOLDERS’
      EQUITY:**
    
    In
      October 1998, the board of directors of EVCI adopted an incentive stock
      plan, amended in December 2002, under which 844,500 shares of common stock
      have been reserved for future issuance through September 30, 2008. The
      plan provides for grants of incentive stock options, nonqualified stock
      options and shares of common stock to employees, nonemployee directors and
      others. The option price is determined by the administrator of the plan
      but cannot be less than the fair market value at the date of grant of the
      shares underlying incentive stock options. Vesting of options and stock
      awards and certain other conditions are determined by the plan
      administrator, which is EVCI’s board of directors or a committee of the
      board. At December 31, 2004, there are 842,667 options outstanding under
      this plan.As
      an inducement to become an officer and employee of EVCI, in January 2004,
      the Board of Directors granted to EVCI’s general counsel and vice
      president for corporate affairs five-year nonqualified stock options to
      purchase 90,000 shares of EVCI’s common stock at $4.70 per share. The
      options vest in two equal annual installments commencing December 31,
      2004. The market value of EVCI’s common stock on the grant date was $5.66.
      Accordingly, the Company will be recording a charge to operations for
      $86,400 over the vesting period, of which $43,200 was changed to
      operations in 2004.In
      July 2004, stockholders of EVCI adopted the 2004 incentive stock plan,
      under which 1,200,000 shares of common stock have been reserved for future
      issuance, except that no incentive stock option may be granted after July
      27, 2014. The plan provides for grants of incentive stock options,
      nonqualified stock options, shares of common stock and awards based on the
      value of EVCI’s common stock to employees, nonemployee directors and
      consultants. The option price cannot be less than the fair market value of
      EVCI’s shares at the date of grant. Vesting of options and stock awards
      and certain other conditions are determined by, or a committee appointed
      by, the board of directors. At December 31, 2004, there are 548,570
      options outstanding under this plan.In
      July 2004, EVCI’s stockholders approved the grant of five-year
      nonqualified stock options to EVCI’s chairman, chief executive officer and
      president and chief financial officer to purchase a total of 181,131
      shares of common stock at $4.70 per share. The options vest in three equal
      annual installments commencing November 11, 2004. The market value of
      EVCI’s common stock on the grant date was $10.70. Accordingly, the Company
      will be recording a charge to operations for $1,089,504 over the vesting
      period, of which $363,368 was changed to operations in 2004.In
      September 2000, the Company designated 200,000 shares of authorized
      preferred stock as Series B 7% Convertible Preferred Stock and received
      gross proceeds of $13,000,000 from the issuance of 130,000 shares of
      Series B preferred stock and three-year warrants to purchase 722,223
      shares of common stock at $20.25 per share, subject to adjustment. A value
      of $400,000was
      assigned to the warrants. The transaction costs of this private placement
      were approximately $320,000. The $400,000 assigned value to the warrants
      and the transaction costs of approximately $320,000 were recognized as a
      deemed dividend to the preferred shareholders over three years.
 F-16
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 The
      Series B preferred stock was initially convertible into shares of common
      stock at $13.50 per share, subject to adjustment and reset provisions. The
      conversion price was reset to $3.375 in September 2003.The
      Series B preferred shares were converted into common stock as
      follows:
   Face
    
    Preferred
    
    Common
    
    ConversionDate
    
    Amount
    
    Shares
    
    Shares
    
    PriceMay
      13, 2003
    
    $
    2,500,000
    
    
    25,000
    
    
    477,100
    
    $
    5.240July
      1, 2003
    
    
    360,000
    
    
    3,600
    
    
    68,700
    
    
    5.240September
      27, 2003
    
    
    2,000,000
    
    
    20,000
    
    
    592,593
    
    
    3.375September
      29, 2003
    
    
    1,000,000
    
    
    10,000
    
    
    296,297
    
    
    3.375October
      2003
    
    
    7,140,000
    
    
    71,400
    
    
    2,115,554
    
    
    3.375$
    13,000,000
    
    
    130,000
    
    
    3,550,244
 ****
    ****
    
    In
      August 2003, EVCI received proceeds of $2,000,000 from the issuance to
      institutional investors of 943,396 shares of its common stock and warrants
      to purchase 235,850 shares of EVCI’s common stock at an exercise price of
      $2.12.In
      March 2004, EVCI issued 1,038,962 shares of its common stock to
      institutional investors for $10 million, or $9.625 per share. The
      transaction costs were approximately $650,000, which includes fees paid to
      a placement agent of $600,000 in cash and five-year warrants to purchase
      62,338 shares of EVCI’s common stock at $14.338 per share.
 F-17
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 ****
    ****
    
    The
      following table represents warrants outstanding as of December 31, 2004
      and 2003:
  Shares
      Underlying
      Warrants
      OutstandingDecember 31,Expiration
      Date
    
    Exercise
      Price
      per share
    
    2004
    
    2003February
      2004
    
    
    17.50
    
    
    —
    
    
    5,000February
      2004
    
    
    19.80
    
    
    —
    
    
    120,000February
      2004
    
    
    20.00
    
    
    —
    
    
    10,000February
      2004
    
    
    22.50
    
    
    —
    
    
    7,500February
      2004
    
    
    25.00
    
    
    —
    
    
    7,500February
      2005
    
    
    2.12
    
    
    —
    
    
    235,850February
      2005
    
    
    5.44
    
    
    —
    
    
    37,500July
      2005
    
    
    1.50
    
    
    —
    
    
    50,000January
      2006
    
    
    25.00
    
    
    25,000
    
    
    25,000May
      2006
    
    
    12.00
    
    
    50,000
    
    
    50,000June
      2006
    
    
    3.00
    
    
    93,333
    
    
    195,000April
      2007
    
    
    16.09
    
    
    25,000
    
    
    25,000September
      2008
    
    
    2.25
    
    
    45,000
    
    
    —March
      2009
    
    
    14.338
    
    
    62,338
    
    
    —300,671
    
    
    768,350
 ****
    ****
    
    Presented
      below is a summary of stock option activity for the periods
      shown:
  Exercise
      Price Range
    
    SharesUnderlying                       Options
    
    Weighted-average
      Exercise Price
    
    Underlying Exercisable                  
       Options
    
    Weighted-average
      Exercise
      PriceBalance
      at January 1, 2002
    
    
    754,940
    
    $
    1.82
    
    
    675,000
    
    $
    1.89Granted
    
    
    265,500
    
    
    1.63
    
    
    —
    
    
    —Exercised
    
    
    (983
    )
    
    1.20
    
    
    —
    
    
    —Canceled
    
    
    (76,790
    )
    
    1.03
    
    
    —
    
    
    —Balance
      at December 31, 2003
    
    
    942,667
    
    
    1.83
    
    
    632,325
    
    
    1.96Granted
    
    
    594,037
    
    
    7.18
    
    
    —
    
    
    —Exercised
    
    
    (40,516
    )
    
    1.16
    
    
    —
    
    
    —Canceled
    
    
    (5,001
    )
    
    1.20
    
    
    —
    
    
    —Balance
      at December 31, 2004
    
    
    1,491,187
    
    $
    3.96
    
    
    1,042,420
    
    $
    3.84
 F-18
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 ****
    ****
    
    The
      following table summarizes information for options currently outstanding
      and exercisable at December 31, 2004:
  Options
      Outstanding
    
    Options
      ExercisableWeighted-
    
    Weighted-
    
    
    
    Weighted-Shares
    
    average
    
    average
    
    Shares
    
    averageExercise
    
    Underlying
    
    Remaining
    
    Exercise
    
    Underlying
    
    ExercisePrice
      Range
    
    Options
    
    Life
    
    Price
    
    Options
    
    Price$0.70
      - $1.06
    
    
    726,167
    
    
    3.32
      years
    
    $
    .99
    
    
    594,085
    
    $
    0.991.20
      - 1.57
    
    
    43,484
    
    
    3.79
      years
    
    
    1.30
    
    
    32,876
    
    
    1.334.70
    
    
    307,964
    
    
    4.63
      years
    
    
    4.70
    
    
    117,655
    
    
    4.706.93
      - 7.00
    
    
    200,000
    
    
    2.50
      years
    
    
    6.97
    
    
    100,000
    
    
    7.0010.715
    
    
    213,572
    
    
    5.32
      years
    
    
    10.715
    
    
    197,804
    
    
    10.715$.70
      - $10.715
    
    
    1,491,187
    
    
    3.78
      years
    
    $
    3.96
    
    
    1,042,420
    
    $
    3.84
 ****
    ****
    
    The
      weighted-average fair value of options granted is as
      follows:
 Year
      ended December 31,
    
    2004
    
    2003Fair
      value of each option granted
    
    $
    7.28
    
    $
    1.08Total
      shares underlying options granted
    
    
    584,703
    
    
    265,500Total
      fair value of all options granted
    
    $
    4,256,240
    
    $
    287,091
 ****
    ****
    
    In
      accordance with SFAS No. 123, the weighted-average fair value of stock
      options granted is required to be based on a theoretical statistical model
      using the preceding Black-Scholes assumptions. In actuality, because
      EVCI’s stock options do not trade on a secondary exchange, employees can
      receive no value or derive any benefit from holding stock options under
      these plans without an increase in the market price of EVCI. Such an
      increase in stock price would benefit all stockholders
      commensurately.
  ****12.****
    **EARNINGS
      PER SHARE:**
    
    A
      reconciliation of shares used in calculating basic and diluted earnings
      per share is as follows:
  Year
      ended December 31,
    
    2004
    
    2003Basic
    
    
    11,883,695
    
    
    7,360,649Effect
      of assumed exercise of employeestock
      options, net of tax effects
    
    
    425,370
    
    
    275,454Effect
      of assumed exercise of warrants
    
    
    209,385
    
    
    629,073Diluted
    
    
    12,518,450
    
    
    8,265,176
 F-19
  **EVCI
CAREER COLLEGES HOLDING CORP. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS**
 ****
    ****
    
    Outstanding
      options and warrants to purchase common stock that were antidilutive were
      not included in the computation of diluted earnings per share were as
      follows:
  Year
      ended December 31,
    
    2004
    
    2003Number
      of options
    
    
    534,896
    
    
    145,000Number
      of warrants
    
    
    162,338
    
    
    482,500697,234
    
    
    627,500
 **13.**
    **SUBSEQUENT
      EVENT:**
    
    ****In
      January 2005, Interboro Holding, Inc. acquired, for $600,000, the
      outstanding shares of****Information
      Computer Systems, Inc., a company that is authorized to operate a school
      in Allentown Pennsylvania and that changed its name to Pennsylvania School
      of Business, Inc. (“PBS”) in February 2005. Included in other assets as of
      December 31, 2004 as a note receivable is $70,000 that was advanced by
      EVCI prior to the acquisition and capitalized upon closing. The
      acquisition will be accounted for under the purchase method of accounting.
      Pending a planned relocation to downtown Allentown, PBS is conducting
      limited operations. Accordingly, a substantial portion of the purchase
      price will be allocated to the cost of a license and accreditation. PBS
      plans to recommence full operations on or before January 2006.
   F-20





**EXHIBIT
INDEX**








Exhibit
      No.*
    
    Description
      of Exhibit3.1[1]
    --
    Certificate
      of Incorporation of the Registrant.3.2[1]
    --
    Certificate
      of Merger of Educational Video Conferencing, Inc. (a New York Corporation)
      into the Registrant (a Delaware Corporation).3.3[1]
    --
    Certificate
      of Correction of the Certificate of Incorporation of the
      Registrant.3.4[3]
    --
    Certificate
      of Amendment, dated February 22, 1999, to Certificate of Incorporation of
      the Registrant.3.5[10]
    --
    Amended
      and Restated By-Laws of the Registrant.3.6[5]
    --
    Certificate
      Eliminating Reference to Series A 7.5% Convertible Preferred Stock from
      the Certificate of Incorporation of the Registrant.3.7[17]
    --
    Certificate
      of Amendment, dated May 23, 2002, to Certificate of Incorporation of the
      Registrant.3.8[5]
    --
    Certificate
      Eliminating Reference to Series B 7% Convertible Preferred stock from the
      Certificate of Incorporation of the Registrant.3.9[5]
    --
    Certificate
      Eliminating Reference to Series C 8% Convertible Preferred stock from the
      Certificate of Incorporation of the Registrant.3.10[21]
    --
    Certificate
      of Amendment, filed August 9, 2004, to Certificate of Incorporation of the
      Registrant.4.2[2]
    --
    Form
      of Common Stock certificate.4.3[4]
    --
    Warrant
      Agreement, dated January 14, 2000, between the Registrant and Bruce. R.
      Kalisch.4.4[6]
    --
    Warrant
      Agreement, dated April 18, 2000, between the Registrant and Peter J.
      Solomon Company Limited.


E-1
Exhibit
      No.*
    
    Description
      of Exhibit
4.5[7]
    --
    Form
      of Warrant issued to each seller of shares of ICTS,
Inc.4.6[8]
    --
    Warrant
      to purchase 50,000 shares of common stock of the Registrant issued to
      Rosenthal & Rosenthal, Inc. on July 12, 2002.4.7[9]
    --
    Form
      of Registrant’s Common Stock Purchase Warrant issued to three
      institutional investors on August 1, 2003.4.8[15]
    --
    Common
      Stock Purchase Warrant issued in September 2003, to purchase 45,000 shares
      of the Registrant’s common stock.4.9[18]
    --
    Common
      Stock Purchase Warrant issued to placement agent on March 29,
      2004.10.1[10]
    --
    Employment
      Agreement between the Registrant and Dr. Arol I. Buntzman, dated January
      1, 2003.10.2[10]
    --
    Employment
      Agreement between the Registrant and Dr. John J. McGrath, Dated January 1,
      2003.10.3[10]
    --
    Employment
      Agreement between the Registrant and Richard Goldenberg, dated January 1,
      2003.10.4[11]
    --
    Amended
      and Restated 1998 Incentive Stock Option Plan of the
      Registrant.10.5[12]
    --
    2001
      Non-Qualified Stock Option Plan.10.6[10]
    --
    Form
      of Change in Control Agreement used for agreements the Registrant has with
      each of Dr. Arol I. Buntzman, Dr. John J. McGrath, and Richard Goldenberg,
      dated February 11, 2003.10.7[1]
    --
    Form
      of Indemnification Agreement.10.8[4]
    --
    Stock
      Purchase Agreement, dated January 14, 2000, among Bruce R. Kalisch,
      Interboro Holding, Inc. and Interboro Institute, Inc.10.9[13]
    --
    Lease
      Agreement between 444 Realty Company and Interboro Institute, Inc. dated
      July 27, 1983, as amended by agreements dated September 20, 1988,
      September 1, 1992, and February 1, 1993.10.10[13]
    --
    Lease
      Agreement between Interboro Institute, Inc. JUYI, Inc., dated January 26,
      2001.10.11[9]
    --
    Promissory
      Note for $1,000,000, dated August 4, 2003, payable by Interboro Institute,
      Inc. to North Fork Bank.

E-2

Exhibit
      No.*
    
    Description
      of Exhibit
10.12[9]
    --
    Form
      of the Registrant’s Subscription and Registration Rights Agreement
      relating to the Registrant’s August 1, 2003, issuance of common stock and
      warrants.10.13[14]
    --
    Settlement
      Agreement made October 3, 2003, between Amaranth Trading L.L.C. and the
      Registrant.10.14[14]
    --
    Form
      of Share Claim Purchase and Registration Rights Agreement between the
      Registrant and each investor acquiring a portion of the Amaranth Trading
      L.L.C.’s rights to claims to shares of EVCI’s common stock upon conversion
      of Series B Preferred shares.10.15[15]
    --
    Third
      Amendment and Lease Extension Agreement, made as of August 1, 2003,
      between 444 Realty Company, L.L.C. and Interboro Institute,
      Inc.10.16[16]
    --
    Ownership
      and Registration Rights Agreement, dated November 11, 2003, between the
      Registrant and JLF Partners I, L.P., JLF Partners II, L.P. and JLF
      Offshore Fund.10.17[17]
    --
    Employment
      Agreement between the Registrant and Joseph D. Alperin dated January 1,
      2004.10.18[17]
    --
    Option
      Agreement between the Registrant and Joseph D. Alperin dated January 1,
      2004.10.19[17]
    --
    Change
      of control letter agreement between the Registrant and Joseph D. Alperin
      dated January 1, 2004.10.20[17]
    --
    Agreement,
      made February 28, 2004, between Interboro Institute, Inc. and OPEIU Local
      153, AFL-CIO.10.21[18]
    --
    Securities
      Purchase Agreement, dated March 29, 2004, by and among the Registrant and
      each buyer named in the Schedule of Buyers.10.22[18]
    --
    Registration
      Rights Agreement, dated March 29, 2004, by and among the Registrant and
      each buyer named in the Schedule of Buyers.10.23[19]
    --
    Ownership
      and Registration Rights Agreement, dated April 2, 2004, by and among the
      Registrant and six funds managed by Wellington Management Company,
      LLP.10.24[20]
    --
    2004
      Amended and Restated Incentive Stock Plan10.25[21]
    --
    Form
      of Stock Option Agreement (Nonqualified Stock Option)10.26[21]
    --
    Form
      of Stock Option Agreement (Nonqualified Stock Option) covering option
      grants to executive officers that were approved at the Registrant’s July
      27, 2004 stockholders meeting.

E-3

Exhibit
      No.*
    
    Description
      of Exhibit
10.27**
    --
    Lease
      made November 17, 2003 between Spruce Spires Associates, LP, and Interboro
      Institute, Inc.31.1**
    --
    Certification
      of Chief Executive Officer required by Rule 13a-14(a) under the Exchange
      Act.31.2**
    --
    Certification
      of Chief Financial Officer required by Rule 13a-14(a) under the Exchange
      Act.32.1**
    --
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of 2002.32.2**
    --
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of 2002.99.1**
    --
    Text
      of final report, dated March 7, 2005, detailing the calculation of the TAP
      disallowances resulting from the TAP audit of the 2000-01 through 2002-03
      academic years of Interboro Institute,
Inc.
___________________
* Numbers
inside brackets indicate documents from which exhibits have been incorporated by
reference.
** Filed
herewith.

[1]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form SB-2,
      filed October 23, 1998, Registration No.
333-66085.

[2]
    Incorporated
      by reference to Amendment No. 4, dated February 10, 1999, to the
      Registrant’s Form SB-2, Registration No.
333-66085.

[3]
    Incorporated
      by reference to Registrant’s Form 10-QSB for the quarter ended September
      30, 1999.

[4]
    Incorporated
      by reference to the Registrant’s Form 8-K dated January 14,
      2000.

[5]
    Incorporated
      by reference to the Registrant’s Form 8-K dated October 6,
      2000.

[6]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2000.

[7]
    Incorporated
      by reference to the Registrant’s Form 8-K dated July 1,
    2001.

[8]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2002.

[9]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.

[10]
    Incorporated
      by reference to the Registrant’s Form 10-KSB for the year ended December
      31, 2002.


E-4
[11]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form S-8 filed
      December 31, 2002, Registration No.
333-102310.

[12]
    Incorporated
      by reference to the Registrant’s Registration Statement on Form S-8 filed
      October 23, 2001, Registration No.
333-72080.

[13]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.

[14]
    Incorporated
      by reference to the Registrant’s Form 8-K dated October 10,
      2003.

[15]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2003.

[16]
    Incorporated
      by reference to Amendment No. 1 to the Registrant’s Registration Statement
      on Form S-3, filed December 4, 2003, Registration No.
      333-110567.

[17]
    Incorporated
      by reference to the Registrant’s Form 10-KSB/A for the year ended December
      31, 2003.
[18]
    Incorporated
      by reference to the Registrant’s Form 8-K dated March 29,
      2004.

[19]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended March
      31, 2004.

[20]
    Incorporated
      by reference to the Registrant’s Form 8-K dated September 17,
      2004.

[21]
    Incorporated
      by reference to the Registrant’s Form 10-QSB for the quarter ended
      September 30, 2004.

E-5