<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                                   FORM 10-K

               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
       FOR THE TRANSITION PERIOD FROM JUNE 1, 1998 TO DECEMBER 31, 1998

                        COMMISSION FILE NUMBER: 0-23021

                          EDUTREK INTERNATIONAL, INC.
                             A GEORGIA CORPORATION


                    500 EMBASSY ROW                      58-2255472
             6600 PEACHTREE DUNWOODY ROAD      (IRS Employer Identification No.)
                ATLANTA, GEORGIA 30328
                     404-965-8000


                Securities Registered Pursuant to Section 12(b)
                    of the Securities Exchange Act of 1934:
                                     NONE

                Securities Registered Pursuant to Section 12(g)
                    of the Securities Exchange Act of 1934:
                    CLASS A COMMON STOCK, WITHOUT PAR VALUE


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

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

     The aggregate market value of the Class A Common Stock of the registrant
held by nonaffiliates of the registrant (4,302,155) on March 1, 1999 was
$27,426,238.  For the purposes of this response, officers, directors, and
holders of 5% or more of the registrant's Class A Common Stock are considered
the affiliates of the registrant at that date.

     The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999: 4,371,005 Class A and 6,293,000 Class B.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held in 1999 are incorporated by reference into
Part III of this Report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.

                                   FORM 10-K

                                     INDEX

                                        
<TABLE>
<CAPTION>
PART I                                                                                                      PAGE
                                                                                                            ----   
<S>                                                                                                         <C> 
Item 1.   Business                                                                                          1
Item 2.   Properties                                                                                        19
Item 3.   Legal Proceedings                                                                                 20
Item 4.   Submission of Matters to a Vote of Security Holders                                               20
PART II
Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters                             20
Item 6.   Selected Consolidated Financial Data                                                              21
Item 7.   Management's Discussion and Analysis of Financial Condition and                                   
          Results of Operations                                                                             23
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                                        31
Item 8.   Financial Statements and Supplementary Data                                                       31
Item 9.   Changes in and Disagreements With Accountants on Accounting and
          Financial Disclosure                                                                              52
PART III
Item 10.  Directors and Executive Officers of the Registrant                                                52
Item 11.  Executive Compensation                                                                            52
Item 12.  Security Ownership of Certain Beneficial Owners and Management                                    52
Item 13.  Certain Relationships and Related Transactions                                                    52
PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                  52
SIGNATURES                                                                                                  55
EXHIBIT INDEX                                                                                               57
</TABLE>

                                       i
<PAGE>
 
                                     PART I
ITEM 1.  BUSINESS

     This Transition Report on Form 10-K contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise.  The words "believe," "plan," expect," "anticipate," "project," and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made.  Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.  Such
statements may include, but are not limited to, projections of revenues, income
or loss, expenses, capital expenditures, plans for future operations, financing
needs or plans, the impact of inflation, and plans relating to products or
services of the Company, as well as assumptions relating to the foregoing.  The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events, or
otherwise.

     Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified.  Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements.  Statements in this Transition
Report, including Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe factors, among others, that could contribute to or cause such
differences.  Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements include,
without limitation, new or revised interpretations of other applicable laws,
rules and regulations, failure to maintain or renew required regulatory
approvals, accreditation or state authorizations, failure to obtain the Southern
Association of Colleges and Schools' ("SACS") approval to operate in new
locations, changes in student enrollment, and other factors set forth in this
Transition Report on Form 10-K and other reports or materials filed or to be
filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management).

OVERVIEW

     EduTrek International, Inc. ("EduTrek" or the "Company"), through its
subsidiary American InterContinental University, Inc. ("AIU"), is a leading
provider of global, career-oriented higher education programs.  AIU offers
accredited associate's, bachelor's, and master's degree programs in information
technology ("IT"), international business, digital media communications, and
design to over 3,800 students from over 100 countries.  AIU maintains seven
campuses located in Atlanta (Buckhead and Dunwoody), Los Angeles, Miami,
Washington, D.C., London, and Dubai, United Arab Emirates.  In 1987, AIU became
the first for-profit four-year university to be accredited by the Commission on
Colleges of the Southern Association of Colleges and Schools ("SACS"), one of
the six regional accrediting agencies recognized by the U.S. Department of
Education.  The education programs are designed to help graduates prepare for
careers.  AIU offers an authentic international education environment with over
half of its students from outside the United States.  Through its Study Abroad
program, AIU enrolled approximately 629 students from U.S. universities in
calendar 1998 to study at AIU's London and Dubai campuses while earning academic
credit toward a degree from their home university.  AIU intends to become the
high-quality, low-cost leader in the for-profit education industry by offering
market-driven programs in state-of-the-art facilities.

     Established as a two-year institution in 1970, AIU has grown significantly,
establishing four new campuses in calendar 1998.  The number of students
attending AIU has increased 32.2% to 3,839 students at January 31, 1999 from
2,903 students at January 31, 1998.  The Company intends to continue expanding
by opening new campuses (including new campuses in northern Virginia and Dubai
in calendar 1999).   Each new campus will be a fully-wired university, utilizing
state-of-the-art educational technology specifically designed to accommodate the
collaborative, team-based learning model.  AIU offers four new business and
information technology programs designed to equip students with skills that are
in strong demand by employers:  Master of Information Technology ("MIT"),
Bachelor of Information Technology ("BIT"), Master of Business Administration
("MBA") in International Business, and Bachelor of Business Administration
("BBA") in International Business.  Each program is offered during the day for
full-time

                                      -1-
<PAGE>
 
students and in the evenings for working adults in order to provide flexibility
for students and to maximize capacity utilization. Enrollment at AIU's "Power
Campuses" (students enrolled in the four new business and information technology
programs) at January 31, 1999 was 1,008 students, as compared to 80 students at
the same time last year. The average annual tuition revenue per student for
these programs is approximately $16,000, and the retention rate for these
students is in excess of 92%.

     In July 1997, the Company licensed the core IT curriculum from ITI
Education Corporation ("ITI").  This licensing arrangement was expanded in March
1998, and EduTrek acquired rights to ITI's information technology education
system for 11 major markets in the U.S. and internationally.  During 1998, the
Company decided to phase out the licensed ITI curriculum in favor of its own
internally developed IT curriculum, and in December 1998, EduTrek and ITI began
negotiations relating to the termination of the licensing agreement.  AIU is
currently working with Oracle and Microsoft to develop state-of-the-art
university curricula for bachelor's and master's degrees.  In conjunction with
this effort, AIU was selected as a charter member of the Oracle Academic
Initiative ("OAI").  The OAI partnership will provide AIU with software,
support, and instructor education and certification to develop cutting edge
technology courses and programs.  Other OAI institutions include Rochester
Institute of Technology, Washington State University, and San Francisco State
University.  AIU has also been named to the Microsoft Authorized Academic
Training Program, which allows students to prepare for industry-recognized
certification through AIU's new curriculum.

     AIU has centralized at its Atlanta headquarters the administrative
functions of the various campuses, including marketing, accounting, recruiting,
human resources, program and curriculum development, information systems,
financial aid, and regulatory compliance.  A campus president, supported by a
team of human resources, academic, marketing, and administrative staff members,
manages local campuses.  AIU is in the process of implementing a new centralized
campus management information system to integrate its operations and financial
data including admissions, financial aid, student services, placement services,
and default management.  AIU is also implementing a total quality management
program aimed at assessing and improving the quality of academic and
administrative services for AIU's students.

     The United States education market may be divided into distinct segments:
kindergarten through twelfth grade schools ("K-12"), vocational and technical
training schools, workplace and consumer training, and degree-granting colleges
and universities ("higher education").  The Company operates primarily in the
higher education segment.  The Company expects that the international demand for
postsecondary education will continue to increase over the next several years as
a result of certain projected demographic, economic, and social trends.  The
Company believes that it is well positioned to take advantage of the increasing
demand for postsecondary education programs for the following reasons:

     Better Quality Educational Programs.  AIU's primary goal is to deliver
better quality educational programs at a fast pace, resulting in a greater
return on students' investment.  Quality educational programs provide students
with the learning skills to compete successfully for high potential employment
opportunities.  In AIU's new programs in business and information technology,
students solve real-world problems in a collaborative, team-based environment,
which simulates the work environment.  In addition, the new program curriculum
maximizes contact hours with faculty to accelerate the student learning process.
Therefore, students can earn a degree at AIU much more rapidly than at a
traditional university and begin their careers sooner.  By reducing the
opportunity cost of foregone income while in school, AIU graduates can increase
the return on their educational investment.

     AIU's new programs are targeted to careers with high growth potential.  The
MIT and BIT degree programs educate students to become IT professionals.
Nationwide, wages for IT positions are over 70% higher than other jobs in
private industry, according to the Information Technology Association of
America.  The average salary of AIU's first MIT graduating class (October 1998)
was approximately $42,000.  AIU also offers advanced business programs at the
undergraduate and graduate levels for full-time students and working adults.

                                      -2-
<PAGE>
 
     Better Quality Learning Environment.  AIU's new campuses are equipped with
state-of-the-art technologies which aid in accelerating student learning.  They
are "plug-and-play" environments, with hundreds of ports to give students easy
access to the Internet and electronic learning resources.  The interiors are
also configured with classroom/team room modules to complement student learning.

     Working Adult Programs.  AIU's programs for working adults in business and
information technology are designed to meet the unique needs of this market
segment.  They are offered in the evenings and during the day at convenient
times, can be completed at a faster pace, and provide practical education based
upon solving problems likely to be encountered in the workplace.

     International Programs.  AIU's Global Studies program is composed of the
Study Abroad and Study in America programs.  The Study in America program
recruits international students to attend AIU's U.S. campuses.  Marketing
efforts are targeted to those countries most likely to send students to U.S.
universities. The Study Abroad program provides students from U.S. universities
the opportunity to earn a degree from their home university while studying at
AIU's international campuses.  Program advisors for both programs ensure a
smooth transition for students studying at an international campus.

BUSINESS STRATEGY

     EduTrek's strategic goal is to become the high quality, low cost producer
of higher education programs for traditional students, working adults, and
international students by opening additional campus locations, developing or
acquiring new programs, and increasing enrollment at existing campuses through
targeted marketing programs.

     Opening New Campuses

     The Company opened four new campuses during 1998:  Atlanta (Dunwoody) in
July, Los Angeles and Washington, D.C. in October, and Miami in November.
EduTrek plans to add campuses in high-growth markets throughout the United
States and worldwide.  New locations are selected based on an analysis of a
variety of factors:  the population of working adults, the number of university
graduates, the number of IT employers and their educational reimbursement
policies, the number of and projected growth in IT jobs, the availability of
similar programs offered by other institutions, and the timing of attaining
state licenses to do business in the area.  EduTrek plans to open two new
campuses in calendar 1999:  northern Virginia (October) and Dubai (October).  In
calendar 2000, EduTrek plans to open two to four additional campuses.  Given
sufficient market demand, EduTrek will open campuses in markets where the
Company currently has campuses in order to enhance operating and marketing
efficiencies.

     Developing or Acquiring Additional Degree Programs

     EduTrek plans to introduce degree programs in additional fields of study
and at different degree levels. In calendar 1998, AIU introduced four new
programs, including the MIT (day and evening), BIT, BBA in International
Business for working adults, and MBA in International Business (day and
evening). A total of 1,008 students were enrolled in these programs on January
31, 1999. The average annual tuition revenue per student for these new programs
is $16,230, as compared to $11,520 for students enrolled in AIU's traditional
programs. The retention rate for students in new programs is in excess of 92% as
of December 31, 1998. EduTrek believes that the development and introduction of
new high quality programs will result in higher retention rates and higher
revenues and operating profits per student.

     Increasing Enrollment at Existing Campuses

     In an effort to increase enrollment at existing campuses, EduTrek has
implemented an integrated marketing program which utilizes direct mail, print
and radio advertising, television, Internet advertising, direct sales to high
school counselors and other referral sources, and a public relations program to
build enrollment of students from local markets.  Management believes that the
existing campuses will also benefit from greater brand awareness resulting from
increased advertising for AIU's new programs in

                                      -3-
<PAGE>
 
information technology and business. In addition, EduTrek, through its Study in
America program, markets to students from countries outside of the United
States.

PROGRAMS OF STUDY

     AIU offers the following degree programs and related areas of
specialization.  Unless otherwise noted, each of the degree programs is offered
at all of AIU's campuses.



TRADITIONAL CAMPUSES (ATLANTA (BUCKHEAD), LOS ANGELES, LONDON, AND DUBAI)
-------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------- 
ACADEMIC DISCIPLINE                                    DEGREE                         DEGREE PROGRAMS
(Winter 1999 enrollment)                              OFFERED                    (WINTER 1999 ENROLLMENT)
---------------------------------------------         -------                  ------------------------------------
<S>                                                  <C>                       <C> 
International Business (934 students)                A.A., B.S.                International Business (861)
                                                     M.B.A. *                  International Business (73)
 
International Design (1,529 students)                A.A., B.A.                Fashion Design (153)
                                                                               Fashion Marketing (207)
                                                                               Fashion Design and Marketing (239)        
                                                                               Interior Design (365)                     
                                                                               Visual Communications (390)               
                                                                               Video Production ** (175)                 
 
Other (368)                                                                    Study Abroad Program (237)           
                                                                               English as a Second Language (73)    
                                                                               Undecided (58)                        
--------------------------------------------- 
Total Students - 2,831
-------------------------------------------------------------------------------------------------------------------
</TABLE>

*   Offered at London and Dubai campuses only
** Offered at Atlanta (Buckhead) and London campuses only

POWER CAMPUSES (ATLANTA (DUNWOODY), LOS ANGELES, MIAMI, AND WASHINGTON, D.C.)
-----------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------------------------------
ACADEMIC DISCIPLINE                                 DEGREE              DEGREE PROGRAMS
(Winter 1999 enrollment)                            OFFERED             (WINTER 1999 ENROLLMENT)
---------------------------------------------     --------------        --------------------------------------
<S>                                               <CAPTION>             <C> 
Information Technology (715 students)               B.I.T.              Information Technology (41)
                                                    M.I.T.              Information Technology (674)
 
International Business (293 students)               A.A., B.S.          International Business (279)
                                                    M.B.A.              International Business (14)
 
---------------------------------------------
Total Students - 1,008
--------------------------------------------------------------------------------------------------------------
</TABLE>

     SACS accredits all of AIU's degree programs.  AIU's interior design program
at the Atlanta (Buckhead) and Los Angeles campuses is accredited by the
Foundation for Interior Design Education Research ("FIDER").

     Information Technology.  AIU offers the MIT program for both full-time
students during the day and working adults in the evening. The full-time program
is 10 1/2 months in length, and the evening program is 21 months. Both programs
educate university graduates from a variety of backgrounds to become IT
professionals. The IT curriculum is market-driven and changes frequently in
response to

                                      -4-
<PAGE>
 
advances in technology. The technical portion of the curriculum includes
Microsoft Access(R), Oracle(R), Visual Basic(R), JAVA(TM) plus network
administration for Windows 95(TM), Windows NT(TM), network and hardware support,
and Windows NT(TM) Internet Information Server. Students also learn professional
development skills and business strategy, including financial accounting,
marketing, and professional sales. The program features a method of delivery
that emphasizes problem-based, collaborative learning. Class size is limited to
cohorts, or groups, of 24 students to ensure interactive learning and one-on-one
attention from the faculty. MIT students enjoy new, state-of-the-art facilities,
including classrooms and team rooms designed specifically for the MIT program.
AIU also offers an undergraduate BIT program for full-time students and working
adults.

     International Business.  AIU offers associate's, bachelor's, and master's
degrees in international business. The associate's and bachelor's degree
programs for working adults are focused on the unique needs of the adult
learner. Working adults can earn an accelerated BBA degree in about four years
or less, depending upon previously earned transfer credits. Classes meet one
evening per week, and class size is limited to 24 students to encourage group
discussion and the exchange of information and ideas. In addition to the regular
class meetings, students participate in weekly project team sessions. These
sessions give students the opportunity to find solutions to real-life problems,
applying their business knowledge in a collaborative learning environment. AIU
also offers a master's degree program in international business for working
adults.

     The international business programs for traditional students provide
students with a broad exposure to international business from the basic elements
through technical and functional areas.  Students may follow a general business
track or choose advanced classes leading to a concentration in areas such as
marketing and management.  The master's degree program in international business
was introduced at AIU's London campus in 1994 and the Dubai campus in 1995.
Students learn about the business environment on a global scale, focusing on
areas such as international banking, business ethics, and international law, as
well as accounting, information technology, management, marketing, and business
strategy.

     International Design.  The international design program educates students
in the fields of fashion design and marketing, commercial and residential
interior design, and multimedia communications, including advertising art,
graphic design, photography, illustration, and video production.  The fashion
design program offers students a solid foundation in designing and the
opportunity to develop their own design collection.  The fashion marketing
program prepares students for executive careers in the retail and wholesale
fashion industry and related businesses.  The interior design programs, which at
the Atlanta (Buckhead) and Los Angeles campuses are accredited by FIDER, provide
students with a thorough understanding of the fundamentals and advanced
principles of interior design. Taught by working professionals, the multimedia
communications programs offer a balance of practical experience and theoretical
concepts, providing a firm grounding in the business aspects of the multimedia
communications industry.

TUITION AND FEES

     AIU's undergraduate tuition is priced between the tuition levels of non-
profit private universities and the comparatively lower tuition charged to
resident students at public universities.  The tuition is comparable to the
tuition of public universities for non-resident and international students.  For
traditional programs, the tuition ranges from $3,625 to $4,675 per academic
term, or $10,875 to $14,025 for the full academic year, depending upon campus
location.

     The tuition for the Power Campus programs is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------- 
                                                          ANNUAL TUITION
                                                 ------------------------------
Program                                                DAY          EVENING
-------------------------------------------------  ------------  --------------
<S>                                                <C>           <C>
Master's in Information Technology (MIT)                $24,950         $12,925
Master's in Business Administration (MBA)               $19,800         $10,350
Bachelor's in Information Technology (BIT)              $18,850         $ 9,875
</TABLE> 

                                      -5-
<PAGE>
 
Bachelor's of Business Administration (BBA)             $17,850         $ 9,375
-------------------------------------------------------------------------------

     AIU offers a number of institutional scholarships for selected students who
meet specific eligibility requirements, ranging from $500 to full tuition
scholarships.  For the seven months ended December 31, 1998, institutional
scholarships had a value of approximately $471,000, or 2.0% of EduTrek's net
revenues.

     Historically, AIU has increased tuition and fees without consumer
resistance.  AIU increased tuition and fees by approximately 5% for both the
1997-98 and 1998-99 academic years.  EduTrek anticipates that future tuition
increases will at least keep pace with inflation.

FACULTY

     Faculty members are hired in accordance with criteria established by AIU,
accrediting bodies, and applicable federal and state regulatory authorities.
The critical measures of faculty competence are teaching excellence, academic
background, prior education, and the degree and relevance of prior work
experience to the curriculum.  AIU has developed a competency-based hiring model
designed to target and screen qualified faculty members.  AIU has implemented a
faculty development program to ensure that the skills and knowledge base of all
IT faculty are continually updated as new technologies are introduced into the
marketplace.  In addition, faculty are trained in collaborative learning
techniques so that student learning in the team environment is optimized.

     AIU faculty members are typically working professionals who are experts in
their fields, rather than professional educators.  For this reason, management
believes that the AIU faculty provides students with a practical education that
can be directly applied to their chosen careers.

     Most faculty members are employed on a contract basis and are compensated
based on the number of courses taught.  All IT faculty members are employed on a
full-time basis.  Low student-teacher ratios (approximately 14:1, 15:1, 14:1,
and 18:1 in fall 1998 for AIU's campuses in Atlanta, Los Angeles, London, and
Dubai, respectively) and the absence of a faculty tenure track promote a
student-focused environment.  In AIU's Power Campus programs, students rotate
from classroom instruction with a maximum of 24 students to team problem-solving
sessions with six students.  Students and administrative staff evaluate faculty
members each academic term on the basis of teaching abilities and demonstrated
technical knowledge.

STUDENT RECRUITMENT

     To generate interest in AIU's academic programs, EduTrek engages in a broad
range of marketing activities, including print and radio advertising, Internet
advertising, direct mail, and direct contact with targeted corporations, high
schools, and community colleges.  EduTrek also attempts to locate its campuses
near major highways to provide high visibility and easy access.  Alumni,
employers, embassies, and currently enrolled students refer a substantial
portion of new students.  EduTrek also has Web sites (www.edutrek.com,
www.aiuniv.edu) that allow electronic access to company and program information.

     AIU's advertising is controlled centrally and is targeted at local markets
where the campuses are located, U.S. universities (for the Study Abroad
program), and international markets to attract students from other countries.
Direct responses to advertising and direct mail are received, tracked, and
forwarded promptly to the appropriate admissions officers.  All responses are
analyzed in order to improve AIU's marketing efforts continually.

     EduTrek employs over 40 admissions representatives who make visits and
presentations at various organizations and who follow up on leads generated by
EduTrek's advertising and marketing efforts and referrals. Representatives
pursue leads by arranging interviews with prospective students at the campus and
generally assist students with clarifying their career goals and completing the
application process.  The interview is designed to establish the student's
qualifications, academic background, and goals, to determine his or her
suitability for specific programs, and to administer any required tests.
Recruiting

                                      -6-
<PAGE>
 
policies and processes are established centrally but implemented at the campus
level through a director of admissions.

     To supplement its advertising efforts, AIU employs personnel who recruit
students at high schools, community colleges, universities, embassies, college
fairs, and corporations.  AIU's international student recruiters visit
international high schools, college fairs, embassies, and consulates.  Study
Abroad recruiters visit selected university professors and study abroad
advisors, who most directly influence a student's decision to study abroad.

STUDENT RETENTION

     The ability to retain students until graduation is a critical indicator of
AIU's success and early academic intervention is crucial to improving student
completion rates.  To minimize student withdrawals, AIU devotes staff and other
resources to assist and advise students regarding academic and financial
matters, part-time employment, and housing.  AIU employs guidance counselors at
all its campuses to advise students.

     Students must pass special examinations and successfully complete an
admissions interview in order to gain admittance to AIU's Power Campus programs.
As a result of these careful screening efforts, retention in AIU's Power Campus
programs was approximately 92% at December 31, 1998.

GRADUATE PLACEMENT

     The successful placement of graduates in occupations related to their
fields of study is critical to AIU's ability to continue to recruit students
successfully.  Based on the information received from recent alumni and
employers, 83% of U.S. graduates from AIU's traditional programs in 1997,
excluding those who continued their education, obtained employment within
approximately six months of graduation, as compared to 71% in 1996.  The
approximate average starting salary of 1997 bachelor's degree graduates from
AIU's traditional programs was $27,900, as compared to $24,000 in 1996.

     Over 80% of AIU's first MIT graduating class have obtained employment in
the IT field since graduating in October 1998, with an average starting salary
of $42,000.

     To increase placement rates and starting salaries, AIU increased its
placement staff in calendar 1998.  As a standard component of AIU's curriculum
in all programs, placement personnel assist students in developing
individualized career plans, selecting classes to further these plans, obtaining
internships, and formulating job search strategies.  Students also receive
instruction during their program of study on basic job search skills, including
identifying potential employment opportunities, writing resumes and letters of
introduction, and preparing for interviews.

COMPETITION

     The higher education market is highly fragmented and competitive, with no
private or public institution having a significant market share.  In the U.S.
and London, EduTrek competes primarily with four-year and two-year degree
granting public and private regionally accredited colleges and universities.
Many of these institutions have far greater financial resources than EduTrek.
The American University in Dubai is currently the only U.S.-accredited
postsecondary institution offering degree programs in the United Arab Emirates
and competes with numerous institutions in the Persian Gulf region.  Some of
these institutions are government sponsored and charge a lower tuition than AIU.

     AIU competes primarily at a local and regional level with other regionally
accredited colleges and universities based on the quality of the academic
programs, the accessibility of the programs and learning resources, the cost of
the program, the perceived quality of the instruction, the employability of its
graduates, and the time necessary to earn a degree.

                                      -7-
<PAGE>
 
Supervision and Regulation

ACCREDITATION

     Accreditation is a process for evaluating the quality of educational
institutions and their programs against established criteria and standards.
This process entitles institutions of higher education to the confidence of the
educational community and the public.  In the United States, an institution
submits itself to qualitative review by an organization of peer institutions to
obtain accreditation.  There are three types of accrediting agencies in the
United States:  (i) regional accrediting associations, of which there are six,
which accredit degree-granting institutions located within their geographic
areas, (ii) national accrediting agencies, which accredit institutions without
regard to their locations, and (iii) specialized accrediting agencies, which
accredit specific programs within an institution.  Accrediting agencies
primarily examine the institutional and programmatic operations and the academic
quality of the instructional programs.  A grant of accreditation is generally
viewed as certification that the institution's programs meet generally accepted
or specific academic standards.  Accrediting agencies also review the
administrative, service, and financial operations of institutions to ensure that
each has the resources to accomplish its educational mission.

     The accreditation of AIU provides significant advantages over most other
for-profit educational institutions.  College and university administrators
depend on accreditation to evaluate transfers of credit and applications to
graduate schools.  Employers rely on the accreditation when evaluating a
candidate's credentials, and parents and high school counselors look to
accreditation for assurance that an institution meets quality educational
standards.  Moreover, accreditation is necessary for students to qualify for
eligibility for federal financial assistance.  Also, most scholarship
commissions restrict their awards to students attending accredited institutions.

     Pursuant to provisions of the Higher Education Act of 1965, as amended (the
"HEA"), the Department of Education relies on accrediting agencies to determine
whether institutions' educational programs qualify them to participate in Title
IV Programs.  The HEA specifies certain standards that all recognized
accrediting agencies must adopt in connection with their review of postsecondary
institutions.  Accrediting agencies that meet Department of Education standards
are recognized as the arbiters of the quality of the education or training
offered by an institution.  Each of AIU's campuses is accredited by SACS, an
accrediting agency recognized by the Department of Education.  In addition,
AIU's interior design programs in Atlanta (Buckhead) and Los Angeles are
accredited by FIDER, and the advertising program in Dubai is accredited by the
International Advertising Association.

     The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the Department of Education as a
condition of its continued recognition.  SACS, AIU's regional accreditor for
purposes of participation in Title IV Programs, has been reviewed within the
last three years and has had its recognition extended.

     An accrediting agency may place an institution on private or public
"reporting" status in order to monitor one or more specified areas of a school's
performance.  An institution placed on reporting status is required to report
periodically to its accrediting agency on that school's performance in the
specified areas.  While on reporting status, an institution may not open and
commence teaching at new locations without first receiving a waiver from its
accrediting agency.  Frequently, sanctions may be attached to this "reporting"
status.  Failure to demonstrate compliance with accrediting standards could
result in the loss of accreditation.  None of AIU's campuses has been placed on
reporting status by its respective accrediting agencies.

STUDENT FINANCIAL ASSISTANCE

     Students attending AIU finance their education through a combination of
family contributions, individual resources, financial aid, and employer tuition
reimbursement.  As at most other postsecondary institutions, many students
enrolled at AIU must rely, at least in part, on financial assistance to pay the
cost

                                      -8-
<PAGE>
 
of their education. The largest source of such support for AIU's U.S. students
is the federal programs of student financial assistance under Title IV of the
HEA.

     Additional sources of funds include other federal grant programs, state
grant and loan programs, private loan programs, and institutional grants and
scholarships.  Because international students attending AIU are not eligible to
participate in U.S. government-sponsored student loan programs, the majority of
their funding is derived from personal and family resources.  Less than 1% of
the international students enrolled at AIU receive funding from their home
government.

     To provide students access to Title IV Programs, a school must be (i)
authorized to offer its programs of instruction by the relevant agency of the
state in which it is located, (ii) accredited by an agency recognized by the
Department of Education, and (iii) certified as an eligible institution to
participate in the Title IV Programs by the Department of Education.  In
addition, that school must ensure that Title IV Program funds are properly
accounted for and disbursed in the correct amounts to eligible students.

     Under the HEA and its implementing regulations, AIU must comply with
certain standards on an institutional basis.  For purposes of these standards,
the Regulations define an institution as a main campus with additional locations
(formerly called branch campuses), if any.  Under this definition, all of AIU's
campuses are treated as one institution for purposes of complying with the HEA
with the main campus located in Atlanta (Buckhead), GA.

NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION

     While states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students enrolled at eligible institutions.  Title IV Programs have provided aid
to students for more than 30 years and, since the enactment of the HEA in 1965,
the scope and size of such programs have steadily increased.  Since 1972,
Congress has expanded the scope of the HEA to provide for the needs of the
changing national student population.  Among other things, the amended HEA
provides that students at proprietary schools are eligible for assistance under
Title IV Programs, establishes a program for loans to parents of eligible
students, opens Title IV Programs to part-time students, increases maximum loan
limits, and eliminates the requirement that students demonstrate financial need
to obtain unsubsidized federally guaranteed student loans.  Most recently, the
Direct Loan program was enacted, enabling students to obtain loans from the
federal government rather than from commercial lenders.

     Students at AIU participate in the following Title IV Programs.

     Pell.  The Federal Pell Grant ("Pell") program is the principle means by
which the Department of Education makes grants to students who demonstrate
financial need.  Every eligible student is entitled to receive a Pell grant;
there is no institutional allocation or limit.  Grants presently range from $400
to $3,000 per year.  Amounts received by students enrolled in AIU for the seven
months ended December 31, 1998 under the Pell program equaled approximately
$464,000 or 1.9% of the Company's net revenues.

     FSEOG.  Federal Supplemental Educational Opportunity Grant ("FSEOG")
program awards are designed to supplement Pell grants for the neediest students.
FSEOG grants generally range in amount from $100 to $4,000 per year.  The
maximum amount of FSEOG grants may be increased to as much as $4,400 for a
student participating in a program of study abroad that is approved for credit
by the student's home educational institution.  The availability of FSEOG
awards, however, is limited by the amount of those funds allocated to an
institution under a formula that is based upon the size of the institution, its
costs, and the income levels of its students.  FSEOG awards at AIU generally do
not exceed $1,500 per eligible student per year.  The Company is required to
make, at a minimum, a 25% matching contribution for all FSEOG program funds
disbursed.  Resources for this institutional contribution may include
institutional grants and scholarships and, in certain states, portions of state
scholarships.  Amounts received by students enrolled in AIU under the FSEOG
program for the seven months ended December 31, 1998 equaled approximately
$39,000 or 0.2% of the Company's net revenues.

                                      -9-
<PAGE>
 
     FFEL and Federal Direct Student Loans.  The Federal Family Education Loans
("FFEL") programs include the Federal Stafford Loan Program ("Stafford Loan")
and the Federal PLUS Loan Program ("PLUS"), whereby private lenders make loans
to a student or his or her parents to pay the cost of attendance at a
postsecondary school.

     The FFEL Program is administered through state and private non-profit
guarantee agencies that insure loans directly, collect loans in default, and
provide various services to lenders.  The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability, and bankruptcy.

     The Direct Loan program is substantially the same as the FFEL program in
providing Stafford and PLUS loans. Under the Direct Loan program, however, funds
are provided directly by the federal government to the students, and the loans
are administered through the school.  For schools electing to participate, the
Direct Loan program replaces the FFEL program (unless participation in both
programs is permitted by the Department of Education), although loans are made
on the same general terms and conditions.

     Direct and FFEL Stafford Loan Program.  Undergraduate students may borrow
an aggregate of $2,625 for their first undergraduate academic year, $3,500 for
their second academic year, and $5,500 for their third and fourth academic years
under the FFEL Stafford Loan or Direct Stafford Loan program.  Graduate students
may borrow up to $8,500 each academic year.  If the student qualifies for a
subsidized loan, based on financial need, the federal government pays interest
on the loan while the student is attending school and during certain grace and
deferment periods.  If the student does not qualify for a subsidized loan, the
interest accruing on the loans must be paid by the student.  In addition,
independent students may qualify for an additional $4,000 to $10,000 a year in
unsubsidized Stafford loans.

     For the seven months ended December 31, 1998, AIU participated in both the
FFEL and Direct Stafford Loan programs.  FFEL and Direct Stafford loans amounted
to approximately $6.9 million and $1.7 million, respectively, or approximately
28.9% and 7.1%, respectively, of the Company's net revenues for the seven months
ended December 31, 1998.

     Direct and FFEL PLUS Loan Program.  Parents of dependent students may
receive loans under the FFEL PLUS Loan Program or the Direct PLUS Loan Program
on an academic year basis.  The maximum amount of any PLUS loan is the total
cost of a student's education for each relevant academic year less other
financial aid received by the student attributable to such year.  These loans
are repayable commencing 60 days following the last disbursement, with flexible
payment schedules over a ten year period.  The FFEL PLUS loans are made by
lending institutions and guaranteed by the federal government.  The Direct PLUS
Loan Program provides PLUS loans issued directly by the federal government on
the same general terms as the FFEL PLUS loans.  FFEL PLUS loans and Direct PLUS
loans amounted to approximately $547,000 and $6,000, respectively, or
approximately 2.3% and 0.03%, respectively, of the Company's net revenues for
the seven months ended December 31, 1998.

     Federal Work-Study.  Under the Federal Work-Study ("FWS") program, federal
funds are made available to pay up to 75% of the cost of part-time employment of
eligible students, based on their financial need, to perform work for the
institution or for off-campus public or non-profit organizations.  At least 5%
of an institution's FWS allocation must be used to fund student employment in
community service positions.  For the seven months ended December 31, 1998, FWS
funds amounted to approximately $37,000 or 0.2% of the Company's net revenues.

AVAILABILITY OF LENDERS

     Five lending institutions currently provide over 85% of all federally
guaranteed loans to students attending AIU.  While the Company believes that
other lenders would be willing to make federally guaranteed student loans to its
students if loans were no longer available from its current lenders, there can
be no assurance in this regard.  In addition, the HEA requires the establishment
of lenders of last resort in every state to make loans to students at any school
that cannot otherwise identify lenders willing to make

                                      -10-
<PAGE>
 
federally guaranteed loans to its students. Moreover, because AIU is a
participant in the Direct Loan program, students are able to obtain loans
directly from the federal government.

FOREIGN SOURCES OF FINANCIAL AID

     For the seven months ended December 31, 1998, 43 international students, or
less than 2% of total enrollment, received financial assistance from their
respective foreign governments in the form of either loans or grants.  The
foreign governments providing loans to AIU's students were Iceland and Sweden
and the foreign governments awarding grants to AIU's students were Bahrain,
Botswana, Saudi Arabia, and the United Arab Emirates.

OTHER FINANCIAL ASSISTANCE SOURCES

     Students at AIU participate in state grant programs, including most
recently Georgia's HOPE Scholarship and Tuition Equalization Grant programs.
For the seven months ended December 31, 1998, approximately $223,000 or 0.9% of
the Company's net revenues was derived from state grant programs.  In addition,
certain students attending AIU receive financial aid provided by the United
States Department of Veterans Affairs, the United States Department of the
Interior (Bureau of Indian Affairs), and the Rehabilitative Services
Administration of the Department of Education (vocational rehabilitation
funding).  For the seven months ended December 31, 1998, financial assistance
from such federal programs equaled less than 0.2% of the Company's net revenues.
AIU also provides institutional scholarships to qualified students.  For the
seven months ended December 31, 1998, institutional scholarships had a value
equal to approximately $471,000 or 2.0% of the Company's net revenues.

FEDERAL OVERSIGHT OF TITLE IV PROGRAMS

     The substantial amount of federal funds disbursed through Title IV Programs
and the large numbers of participating students and institutions have led to
instances of fraud, waste, and abuse.  As a result, the United States Congress
has required the Department of Education to increase its level of regulatory
oversight of schools to ensure that public funds are properly used.  Therefore,
to obtain and maintain eligibility to participate in the Title IV Programs, AIU
must comply with the rules and regulations set forth in the HEA and the
Regulations thereunder.  An institution must obtain certification by the
Department of Education as an "eligible institution" to participate in Title IV
Programs.  Certification as an "eligible institution" to participate in Title IV
Programs requires, among other things, that the institution be authorized to
offer its educational programs by the state in which it operates.  It must also
be accredited by an accrediting agency recognized by the Department of
Education.

     The HEA provides standards for institutional eligibility to participate in
the Title IV Programs.  The standards are designed, among other things, to limit
dependence on Title IV Program funds, prevent schools with unacceptable student
loan default rates from participating in Title IV Programs, and, in general,
require institutions to satisfy certain criteria intended to protect the
integrity of the federal programs, including criteria regarding administrative
capability and financial responsibility.  A school that has been certified as
eligible to participate in the Title IV Programs continues to remain eligible
for the period of its certification, which is generally up to six years.  A
school must apply for a renewal of its certification prior to its expiration,
and must demonstrate compliance with the eligibility requirements in its
application.

     Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV Programs.  Provisional certification
may be imposed when a school undergoes a change in ownership resulting in a
change of control or when a school is reapplying for certification, if the
school (i) does not satisfy all the financial responsibility standards, (ii) has
a cohort default rate of 25% or more in any single fiscal year of the three most
recent federal fiscal years for which data is available, and (iii) under other
circumstances determined by the Secretary of Education.  Provisional
certification may last no longer than three years.  Provisional certification
differs from certification in that a provisionally certified school may be
terminated from eligibility to participate in the Title IV Programs without the
same opportunity for a hearing before an independent hearing officer and an
appeal to the Secretary of Education

                                     -11-
<PAGE>
 
as is afforded to a fully certified school faced with termination, suspension,
or limitation of eligibility prior to expiration of its certification.
Additionally, the Department of Education may impose such further conditions on
a provisionally certified institution's eligibility to continue participating in
the Title IV Programs as the Department of Education deems necessary. In
connection with the Company's acquisition of American European Corporation in
October 1996 which resulted in a change of control of AIU, the Company has been
provisionally certified to participate in Title IV Programs.

     Cohort Default Rates.  A significant component of the Congressional
initiative aimed at reducing fraud, waste, and abuse was the imposition of
limitations on participation in Title IV Programs by institutions whose former
students defaulted on the repayment of federally guaranteed student loans at an
"excessive" rate.  Since the Department of Education began to impose sanctions
on institutions with cohort default rates above certain levels, more than 600
institutions have lost their eligibility to participate in some or all Title IV
Programs.  However, many institutions, including AIU, have responded by
implementing aggressive student loan default management programs aimed at
reducing the likelihood of student defaults.

     A school's cohort default rate under the FFEL and Direct Loan program is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year.  Any institution whose FFEL
and Direct Loan cohort default rates equal or exceed 25% for three consecutive
years will no longer be eligible to participate in that program or the Direct
Loan program for the remainder of the federal fiscal year in which the
Department of Education determines that such institution has lost its
eligibility and for the two subsequent federal fiscal years.  In addition, an
institution whose FFEL and Direct Loan cohort default rate for any federal
fiscal year exceeds 40% may have its eligibility to participate in all Title IV
Programs limited, suspended, or terminated.  Since the calculation of FFEL and
Direct Loan cohort default rates involves the collection of data from many non-
governmental agencies (i.e., lenders and private guarantors), as well as the
Department of Education, the HEA provides a formal process for the review and
appeal of the accuracy of FFEL and Direct Loan cohort default rates before the
Department of Education takes any action against an institution based on its
FFEL and Direct Loan cohort default rates.  An institution may continue to
participate in the FFEL and Direct Loan programs during the pendency of the
appeal process.

     AIU has had average FFEL and Direct Loan cohort default rates of less than
25% for three consecutive federal fiscal years.  AIU had a published 1995 FFEL
and Direct Loan cohort default rate and a 1994 rate below 25%.  For federal
fiscal 1993 and 1994, the FFEL and Direct Loan cohort default rate for all
borrowers at AIU was 14.3% and 14.0%, respectively.  The average FFEL and Direct
Loan cohort default rate for all proprietary institutions for federal fiscal
1993 and 1994 was 26.5% and 21.1%, respectively.  For federal fiscal year 1995,
the preliminary FFEL and Direct Loan cohort default rate for all borrowers at
AIU was 18.5%.  Preliminary cohort default rates are subject to revision by the
Department of Education based on information that schools and guaranty agencies
identify and submit to the Department of Education for review, in order to
correct errors.  Any such adjustment will be made by the Department of Education
at the time that final rates are officially published.  In connection with AIU's
preliminary default rate issued for the federal fiscal year 1995, AIU received a
preliminary default rate of 18.5%.  However, after submitting corrections, AIU's
default rate was adjusted to a final rate of 16.7%.  AIU submitted corrections
for its preliminary cohort default rate for 1996 and the Department of Education
reduced AIU's cohort default rate from a preliminary rate of 14.1% to a final
rate of 13.1%.  AIU expects preliminary federal fiscal year 1997 FFEL and Direct
Loan cohort default rates to be issued in early April of 1999.

     If an institution's FFEL and Direct Loan cohort default rate equals or
exceeds 25% in any of the three most recent federal fiscal years, that
institution may be placed on provisional certification status for up to six
years.  Provisional certification does not limit an institution's access to
Title IV Program funds; however, an institution with provisional status is under
closer review by the Department of Education and may be subject to summary
adverse action if it commits violations of Title IV Program requirements.  To
the Company's knowledge, the Department of Education reviews an institution's
compliance with the cohort default rate thresholds only when that school is
otherwise subject to a Department of Education certification review.  AIU has
not had a FFEL and Direct Loan cohort default rate of 25% or greater during any
of the last three fiscal years.

                                     -12-
<PAGE>
 
     Increased Regulatory Scrutiny.  The 1992 reauthorization of the HEA
contained a three-part initiative, referred to as the Program Integrity Triad,
intended to increase regulatory scrutiny of postsecondary education
institutions.  Part one of that initiative required each state to establish a
State Postsecondary Review Entity ("SPRE") to review certain institutions to
determine their eligibility to continue participating in Title IV Programs.
However, the United States Congress has declined to provide funding for SPREs in
appropriations legislation that has been signed into law, and the Department of
Education has not requested any future funding for SPREs.  With the enactment of
the Higher Education Amendments of 1998, the provision for SPREs has been
repealed and the statute renames the Title, Program Integrity.  While there
continues to be a role for the State as a member of the Triad, it is less
encompassing than the provisions which had existed under the SPREs.

     Part two of the Program Integrity Triad, now Program Integrity, expanded
the role of accrediting agencies in the oversight of institutions participating
in Title IV Programs.  As a result, the accrediting agencies that accredit AIU
have increased the depth and intensity of reviews and have expanded examinations
in such areas as financial responsibility and timeliness of student refunds.
The Program Integrity provisions also require each accrediting agency recognized
by the Department of Education to undergo comprehensive periodic reviews to
ascertain whether such accrediting agency is adhering to required standards.  No
accrediting agency or association may be approved by the Department of Education
for a period of more than five years.  SACS, AIU's primary accrediting agency,
has been reviewed by the Department of Education under the Program Integrity
provisions and reapproved for continued recognition by the Department of
Education.

     Part three of the Program Integrity tightened the standards to be applied
by the Department of Education in evaluating the financial responsibility and
administrative capability of institutions participating in Title IV Programs,
and mandated that the Department of Education periodically review the
eligibility and certification to participate in Title IV Programs of every such
eligible institution.  The Higher Education Amendments of 1992 required all
institutions to undergo a recertification review by the Department of Education
by 1997 and every four years thereafter.  With the enactment of the Higher
Education Amendments of 1998, institutions may be recertified for up to six
years.  Under these standards, AIU would be evaluated by the Department of
Education more frequently than in the past.  A denial of recertification would
preclude AIU from continuing to participate in Title IV Programs.

     Financial Responsibility Standards.  All institutions participating in
Title IV Programs must satisfy a series of specific standards of financial
responsibility.  Institutions are evaluated for compliance with those
requirements as part of the Department of Education's recertification process
and also annually as each institution submits its audited financial statements
to the Department of Education.

     In November 1997, the Department of Education published new regulations
regarding financial responsibility, which were effective on July 1, 1998.  The
new regulations took effect for audited financial statements submitted to the
Department of Education on or after July 1, 1998 and applied to the
institution's fiscal years commencing June 1, 1997 and thereafter.  The new
standards replace the acid test ratio, the tangible net worth standard, and the
net operating results test with three different ratios:  an equity ratio, a
primary reserve ratio, and a net income ratio.  The equity ratio measures an
institution's capital resources, ability to borrow, and financial viability.
The primary reserve ratio measures an institution's ability to support current
operations from expendable resources.  The net income ratio measures the ability
to operate at a profit.  The results of each ratio are assigned a strength
factor on a scale from negative 1.0 to positive 3.0, with negative 1.0
reflecting financial weakness and a positive 3.0 reflecting financial strength.
An institution's strength factors are then evaluated based on an assigned
weighting percentage for each ratio.  The weighted scores for the three ratios
are then added together to produce a composite score for the institution.  The
composite score must be at least 1.5 for the institution to be deemed
financially responsible by the Department of Education without the need for
further financial monitoring.  If the institution's composite score is less than
1.5, but equal to or greater than 1.0, the institution may continue in the Title
IV Programs for a maximum period of three years, subject to more rigorous
financial aid disbursement and financial monitoring requirements by the
Department of Education. While the Company is required to notify the Department
of Education of a change in fiscal years, the audited financial statements for
the

                                     -13-
<PAGE>
 
seven months ended December 31, 1998 are not required to be submitted until the
audited financial statements for the twelve months ended December 31, 1999 are
submitted, which must be submitted no later than June 30, 2000. The composite
score will be based on the audited financial statements for the twelve months
ended December 31, 1999. Based on the audited financial statements for the year
ended May 31, 1998, the Company's composite score met the minimum standard of
1.5.

     An institution that is determined by the Department of Education not to
meet the standards of financial responsibility on the basis of failing to meet
one or more of the specified numeric indicators is nonetheless entitled to
participate in Title IV Programs if it can demonstrate to the Department of
Education that it is financially responsible on an alternative basis.  An
institution may do so by demonstrating, with the support of a statement from a
certified public accountant, proof of prior compliance with the numeric
standards and other information specified in the regulations, and that its
continued operation is not jeopardized by its financial condition.
Alternatively, an institution may post surety either in an amount equal to one-
half of the total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% of such prior
year's funds and agree to disburse those funds only on an "as-earned" basis.
The Department of Education has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the Department of
Education.

     In addition to the financial responsibility standards, an institution is
required to make timely refunds when a student who receives Title IV Program
funds withdraws from an institution.  Depending on when during the academic term
the student withdraws, the institution is required to refund all or a portion of
the Title IV Program funds paid by the withdrawing student.  Beginning with the
1995-1996 award year, an institution that has failed to make all Title IV
Program refunds on a timely basis during the previous two years is required to
post a letter of credit in favor of the Department of Education equal to 25% of
the Title IV Program refunds that the institution was required to make for the
previous year.  During the past three years AIU has made all Title IV Program
refunds on a timely basis.

     Administrative Capability.  The Regulations set certain standards of
"administrative capability" which a school must satisfy to participate in the
Title IV Programs.  These criteria require, among other things, that the school
comply with all applicable Title IV Regulations, have capable and sufficient
personnel to administer the Title IV Programs, have acceptable methods of
defining and measuring the satisfactory academic progress of its students,
provide financial aid counseling to its students, timely submit all reports and
financial statements required by the Regulations, and have cohort default rates
not equal to or in excess of 25% for any one of the three most recent fiscal
years.  See "--Cohort Default Rates."

     Failure to satisfy any of the criteria may lead the Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension, or termination of its participation
in Title IV Programs.  Proceedings to fine, limit, suspend, or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect.  Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.

     Restrictions on Operating Additional Campuses.  The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs.  However,
under the HEA and the Regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location within a
state or selected territory of the United States (as identified in the
Regulations) and apply to participate in Title IV Programs at that location
without reference to the two-year requirement, if such additional location
satisfies all other applicable requirements.  In addition, a school which
undergoes a change in ownership resulting in a change of control must be
reviewed and recertified for participation in Title IV Programs under its new
ownership.  See "--Change of Control."  In the past, pending recertification,
the Department of Education has suspended Title IV Program funding to that
school's students.  If a school is recertified, it will be on a provisional
basis.  During the time a school is provisionally certified, it may be subject
to summary adverse

                                     -14-
<PAGE>
 
action for violations of Title IV Program requirements, but provisional
certification does not otherwise limit an institution's access to Title IV
Program funds. With the enactment of the Higher Education Amendments of 1998,
the Department of Education may grant provisional certification to an
institution seeking approval of a change in ownership based on the preliminary
review of a materially complete application and to extend that status on a month
by month basis as necessary. Thus, funding would not be suspended under this new
provision. The institution's expansion plans are based, in part, on its ability
to add additional locations and acquire schools that can be recertified.

     Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over AIU also have requirements that may, in certain instances,
limit the ability of the Company to open a new school, acquire an existing
school, or establish an additional location of an existing school.  The Company
does not believe that those standards will have a material adverse effect on the
Company or its expansion plans.

     Change of Control.  Upon a change in ownership resulting in a change of
control of the Company, as defined in the HEA and the Regulations, AIU could
lose its eligibility to participate in Title IV Programs for an indeterminate
period of time during which it applies to regain eligibility.  A change of
control also could have significant regulatory consequences for the Company at
the state level and could affect the accreditation of AIU's campuses.

     In connection with the Company's acquisition of American European in
October 1996, AIU was required to be recertified by the Department of Education
as well as obtain the reaccreditation of SACS.  In addition, AIU's campus in Los
Angeles was required to be reauthorized by the State of California.  The
Department of Education has granted AIU provisional certification to participate
in Title IV Programs which provisional certification will expire in December
1999.  Because the acquisition of American European was found to be an excluded
transaction under the Regulations, however, AIU's Title IV Program funding was
not suspended during the Department of Education's review of its recertification
application.  On August 5, 1996 the change of control was approved by SACS and
following a Substantive Change Visit to AIU in April 1997, as required to ensure
compliance with accreditation standards following a change of control, on April
18, 1997 SACS issued a final report on AIU with no recommendations.  On August
14, 1996, AIU's Los Angeles campus was reapproved by the State of California's
Council for Private Postsecondary and Vocational Education (the "California
Council").

     The Department of Education's regulations provide that after a Company
becomes publicly-traded, a change of control occurs when a report on Form 8-K is
required to be filed with the Commission disclosing a change of control.  Most
states and accrediting agencies have similar requirements, but they do not
provide a uniform definition of change of control.  If the Company were to lose
its eligibility to participate in Title IV Programs for a significant period of
time pending an application to regain eligibility, or if it were determined not
to be eligible, its operations would be materially adversely effected.  The
possible loss of Title IV eligibility resulting from a change of control may
also discourage or impede a tender offer, proxy contest, or other similar
transaction involving control of the Company.

     The "85/15 Rule."  With the enactment of the Higher Education Amendments of
1992, proprietary schools, such as AIU, would cease to be eligible to
participate in Title IV Programs if on a cash basis of accounting more than 85%
of its revenues from eligible programs for the prior fiscal year were derived
from Title IV funds.  This was known as the 85/15 Rule.  The percentages have
been changed to 90/10 with the enactment of the Higher Education Amendments of
1998 for any fiscal year containing the October 1, 1998 effective date.  Any
school that violates the 90/10 Rule immediately becomes ineligible to
participate in Title IV Programs and is unable to apply to regain its
eligibility until the following fiscal year.  Each year, every institution
participating in the Title IV Programs must submit consolidated financial
statements demonstrating compliance with this standard.  The Company has
calculated that, since this requirement took effect in fiscal 1995, AIU has not
derived more than 29% of its revenues from Title IV Programs for any fiscal
year, and for the year ended May 31, 1998, 29% of AIU's revenues were derived
from Title IV Programs.  The Company regularly monitors compliance with this
requirement in order to minimize the risk that AIU would derive more than 90% of
its revenues from Title IV Programs for any fiscal year.  If AIU appears likely
to approach the 90% threshold, the Company would evaluate the appropriateness of
making changes in student funding and financing to ensure compliance.

                                     -15-
<PAGE>
 
     Branching and Classroom Locations.  The Regulations contain specific
requirements governing the establishment of new main campuses, branch campuses,
and classroom locations at which any student receives not less than 50% of his
or her instruction.  In addition to classrooms at campuses, locations affected
by these requirements include the business facilities of client companies used
by AIU.  AIU has obtained approval for all locations required to be approved by
the Regulations.  Should the Department of Education change its regulations with
respect to this approval process, or delay approvals of new locations beyond the
current approval time rate, the Company's business strategy may be impacted
negatively.

     Restrictions on Payment of Bonuses, Commissions, or Other Incentives.
Schools participating in Title IV Programs are prohibited from providing any
commission, bonus, or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to persons engaged in any
student recruitment, admission, or financial aid awarding activity (the
"Incentive Compensation Rule").  If the Department of Education were to
determine that AIU's methods of compensation do not comply with the Incentive
Compensation Rule, AIU could be required to modify its compensation system,
repay certain previously disbursed Title IV Program funds, pay administrative
fines, or lose its eligibility to participate in Title IV Programs.  The Company
believes AIU's compensation policies do not violate the Incentive Compensation
Rule.

STATE AUTHORIZATION

     AIU's campuses in Atlanta and Los Angeles are authorized to offer education
programs and grant degrees or diplomas by the States of Georgia and California,
respectively.  In addition, because AIU's campuses located in London and Dubai
are operated by a corporation whose parent corporation is organized under the
laws of the District of Columbia, the London and Dubai campuses in addition to
the District of Columbia campus are authorized to offer education programs and
grant degrees or diplomas by the Education Licensure Commission of the District
of Columbia.  The level of regulatory oversight varies substantially from state
to state.  In some states, campuses are subject to licensure by the state
education agency and also by a separate higher education agency.  State laws
establish standards for instruction, qualifications of faculty, location and
nature of facilities, financial policies and responsibility, and other
operational matters.  State laws and regulations may limit the ability of the
Company to obtain authorization to operate in certain states or to award degrees
or diplomas or offer new degree programs.  As discussed below, California
prescribes standards of financial responsibility that are different from those
prescribed by the Department of Education.  The Company believes that AIU's
campuses in Atlanta, Los Angeles, Miami, London, Dubai, and the District of
Columbia are in substantial compliance with state authorizing and licensure
laws.

     California.  In January 1991, the State of California adopted legislation
that requires private, postsecondary educational institutions to meet certain
fiscal tests in order to continue operating in the state.  These fiscal tests
include three requirements:  (i) not having an operating loss in each of an
institution's two most recent fiscal years; (ii) having positive net worth in
its latest fiscal year; and (iii) maintaining a ratio of current assets to
current liabilities of 1.25:1 or greater.  For the seven months ended December
31, 1998, AIU's Los Angeles campus satisfied each of these tests.  The
California Council also has discretion under this statute to allow an
educational institution to continue operating if it does not satisfy the fiscal
tests, if the institution can demonstrate that it has maintained sufficient
financial resources to sustain all of its promised educational services.
Accordingly, if AIU's campus in Los Angeles fails to meet one of the above-
described tests, the Company has the opportunity to demonstrate to the
California Council its financial strength and ability to continue to operate.
In connection with granting authority for continued operations, California law
also requires an on-site visit to all postsecondary institutions having
accreditation from a regional accrediting association other than the Western
Association of Colleges and Schools.  The California Council conducted a visit
to AIU's campus in Los Angeles in June 1996 and recently issued its report,
granting approval for continued degree-granting operation for the maximum four-
year period.  In 1997, the state legislature transferred regulatory control of
out-of-state institutions from the California Council to the Bureau of Private
Postsecondary and Vocational Education, State of California Department of
Consumer Affairs as of January 1, 1998 (The New Private Postsecondary and
Vocational Education Reform Act).  As the name suggests, this new state agency
has a greater consumer protection

                                     -16-
<PAGE>
 
focus than the former Council, which treated out-of-state institutions in a
manner similar to an accreditation agency. The new Bureau is still in the
process of fully establishing itself and developing its regulatory relationship
with its institutions. In spite of this regulatory change, the Los Angeles
campus is in good standing with the Bureau and has received approval for its new
IT degree programs and the relocation of the campus to its new Playa Vista
location near the new Dream Works development. The University does not
anticipate any material change in its regulatory situation in this state as a
result of the shift in regulatory responsibility to the new state agency.

     Georgia.  Until May 1, 1997 AIU's campus in Atlanta was exempt from the
regulatory oversight of the State of Georgia. For the twelve months ended May
31, 1998 and the seven months ended December 31, 1998, AIU agreed, however, to
subject its operations to the oversight of the State of Georgia in order to
become eligible to participate in Georgia's HOPE Scholarship and Tuition
Equalization Grant programs as well as to use the term "University" as part of
its name. In the State of Georgia, for-profit institutions such as AIU are
reviewed by the Georgia Nonpublic Postsecondary Education Commission ("NPEC").
NPEC regulations require for-profit institutions to meet minimum standards
relating to educational quality, ethical business practices, health and safety,
and fiscal responsibility. These standards include, but are not limited to,
requirements that the institution demonstrate that it has adequate facilities
and equipment, that its instructors and administrators have the requisite
education and experience, and that the quality and content of each program meet
stated objectives. Other NPEC standards address such areas as the institution's
library resources, catalog disclosures, support services, student complaints,
advertising, admissions, recruitment, student refunds, and student records. In
order to demonstrate fiscal responsibility, NPEC requires that the institution
have sufficient resources to support its operation for at least the length of
its degree program, funds to operate which are not limited to current tuition,
and accounts receivable and funds available to operate the institution for at
least the quarter or semester, as the case may be. NPEC determined that AIU
satisfied its requirements and issued a certificate of authorization for the
period of September 19, 1997 through April 30, 1998. The Company must seek
renewal of this authorization on a yearly basis and has recently submitted its
annual report for authorization.

     District of Columbia.  AIU's campuses in London, Dubai, and the District of
Columbia are subject to the regulatory oversight of the District of Columbia
Education Licensure Commission (the "Licensure Commission").  The Licensure
Commission's standards governing degree granting institutions address such areas
as administration, the adequacy of the institution's finances, faculty
qualifications, curricula, admissions, procedures for assessing student
outcomes, student services, the adequacy of the library and equipment,
maintenance of student records, and advertising.  Additionally, in connection
with conferring degree-granting status, the Licensure Commission requires an on-
site visit to all post-secondary institutions with accreditation under the laws
of the District of Columbia.  The Licensure Commission conducted a visit to
AIU's campuses in London and Dubai in December 1997 and will conduct a visit to
AIU's campus in the District of Columbia in the Fall of 1999.  The Licensure
Commission granted AIU a license which will remain in effect until June 30,
2001.  These licenses are subject to periodic review under various circumstances
including a change in ownership and changes in accreditation status, location,
and degrees or certificates offered.

     Florida.  The State of Florida through its State Board of Independent
Colleges and Universities ("SBICU") regulates the establishment of in-state and
out-of-state higher educational enterprises within the territorial jurisdiction
of the state.  The SBICU utilizes a multi-stage process by which to grant
institutions permission to operate and move through a series of progressive
steps toward "full approval."  Each approval stage is accompanied by a mandated
report and an appearance before the SBICU in public session.  Two of the four
stages are preceded by visitations of staff or a peer review team to the Florida
location.  AIU was granted Temporary Licensure in April of 1998 and moved to
Level I Provisional Licensure in July of that same year.  A staff member visited
the parent campus for information collection purposes and further analysis of
the institution prior to the July action.  AIU is presently authorized to
advertise, admit students, and operate an institution of higher education in
Florida.  At the January 1999 meeting, AIU Level I Provisional Licensure was
extended for an additional six months at which time AIU will apply for Level II
Provisional Licensure.

                                     -17-
<PAGE>
 
     Virginia.  The Commonwealth of Virginia regulates both instate and out-of-
state institutions through the Council of Higher Education, commonly referred to
as the State Council of Higher Education of Virginia. This state agency requires
an extensive review of out-of-state institutions desiring to operate within the
Commonwealth. This review and application process follows criteria and standards
that are similar to those developed by the Commission on Colleges of SACS
relative to faculty, library resources, student services, degree program,
administration, physical plant, and credit hour requirements. In addition,
customary consumer protection requirements addressing truth in advertising,
student complaint, financial aid, tuition, academic advisement, and student
refund requirements are mandated by the state. The Council received the
application of AIU for the initial development of a northern Virginia campus in
the Dulles area in November 1998. The Council met and approved the operation of
the AIU campus on February 16, 1999. AIU is now in the process of developing and
staffing the campus and plans to open the facility later in 1999. AIU will file
mandatory annual reports that cover many of the same operational areas
identified above. Staff and peer review visitations to the campus are a part of
the ongoing review process in Virginia and will take place at a later date after
the campus becomes fully operational.

EXECUTIVE OFFICERS

     The following table sets forth information concerning the Company's
executive officers.

<TABLE>
<CAPTION>
     Name                       Age            POSITION
     ----
     <S>                        <C>            <C>
     Steve Bostic               55             Chairman of the Board and Chief
                                                 Executive Officer
     Stephen G. Franklin, Sr.   51             President, Chief Academic Officer
                                                 and Director
     Daniel D. Moore            47             Chief Financial Officer
     Barbara S. Butterfield     59             Senior Vice President, Human
                                                Resources
     Douglas C. Chait           35             Vice President, Corporate
                                                Development and Secretary
</TABLE>

     Steve Bostic has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception in July 1996.  Since October 1996,
Mr. Bostic has also served on AIU's Governing Board, and since June 1997, Mr.
Bostic has served as the President of  AIU.  Prior to founding the Company in
1996, from 1993 to 1996 Mr. Bostic was the Chairman of the Board of EduTrek
Systems, Inc. and, from 1989 to 1993, Mr. Bostic was the chairman of the Board
of Delphi Technology, Inc., a company specializing in the scientific development
and application of cognitive-based learning systems.  Mr. Bostic was the
principal owner and Chairman of American Photo Group, an operator of consumer
photo processing labs, from 1981 to 1987.  In addition, Mr. Bostic serves as a
member of the Board of Trustees of Presbyterian College, the Dean's Advisory
Council of the Indiana School of Business, and the Board of the School of Public
Policy at Georgia Institute of Technology.

     Stephen  G. Franklin, Sr. has  served as the President of the Company since
July 1997, Chief  Academic Officer since April 1997 and as a member of the Board
of Directors of the Company since June 1997.  Prior to his appointment as
President, Dr. Franklin served as Executive Vice President of the Company from
April to July 1997.  Since October 1996, Dr. Franklin has also served on AIU's
Governing Board. Prior to joining the Company, Dr. Franklin served as the
Associate Dean of Executive Education at the Goizueta Business School of Emory
University from 1995 to 1997 where he developed and delivered executive
education programs for companies. Prior to serving as Associate Dean, Dr.
Franklin was a tenured professor of Business Administration of the Goizueta
Business School of Emory University from 1978 to 1984. At Emory, Dr. Franklin
focused his academic research on change management, team-based anticipating
learning strategies, and entrepreneurship in organizations and has co-authored
two management textbooks. Dr. Franklin established and, from March 1988 to 1995,
owned Global Access Learning, Inc., an international executive education and
management development firm specializing in developing custom management
programs for global companies.

                                     -18-
<PAGE>
 
     Daniel D. Moore has served as the Chief Financial Officer of the Company
since September 1998.  Prior to joining the Company, Mr. Moore was Executive
Vice President and Chief Financial Officer for GeoLogistics Americas, a
logistics organization based in Atlanta specializing in global freight
forwarding. From January 1992 to January 1997, Mr. Moore was Senior Vice
President and Chief Financial Officer for GATX Logistics, Inc. of Jacksonville,
Florida. GATX Logistics is a company focused on third-party logistics and supply
chain management. Mr. Moore also worked for Harris Corporation for twelve years,
ultimately as Vice President of Accounting and Administration for Lanier
Worldwide in Atlanta. Mr. Moore is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants and the Financial
Executives Institute.

     Barbara S. Butterfield has served as Senior Vice President of Human
Resources since March 1997.  Prior to joining the Company, from 1991 to 1997,
Dr. Butterfield was the Vice President of Human Resources and Vice President of
Faculty and Staff Services at Stanford University, Palo Alto, California where
she provided long-range planning, analysis, and strategies in such areas as risk
management, environmental health and safety, faculty/staff housing, and human
resources.  Dr. Butterfield was the Vice President of Human Resources at the
University of Pennsylvania from 1987 to 1991.  From 1986 to 1987, Dr.
Butterfield was the Director of Human Resources Administration at Duke
University and from 1983 to 1986, was the Director of Personnel Administration
at Michigan State University.

     Douglas C. Chait has served as the Vice President, Corporate Development,
and Secretary since October 1996. Prior to joining the Company, Mr. Chait was
the Director of Corporate Development for EduTrek Systems, Inc. from May 1994 to
October 1996 where he was responsible for identifying and pursuing joint venture
and acquisition opportunities in the corporate training and education
industries. From September 1992 to May 1994, Mr. Chait attended the Goizueta
Business School of Emory University where he graduated with an M.B.A. in finance
and strategy.

EMPLOYEES

     As of December 31, 1998, the Company employed 394 persons on a full-time
basis and 224 persons on a part-time basis, including 92 full-time and 174 part-
time faculty members.

ITEM 2.  PROPERTIES

     AIU maintains well-equipped campuses and facilities that support the
university's focus on technology in education.  Classrooms and team rooms
provide a comfortable but professional environment to facilitate collaborative
learning and better prepare students for the workplace.  An advanced technical
infrastructure allows students to work on-line from thousands of data ports,
communicating with each other, instructors, and the world via the Internet.  In
the undergraduate areas of study, fashion and interior design studios feature
sophisticated equipment.  The visual communication facilities include
professionally equipped darkrooms and photography studios as well as classrooms
with drafting tables and other studio supplies.  Video production studios house
advanced sound and video equipment.  Macintosh and PC labs feature computers,
printers, and the latest software available, including programs for computer-
aided design.  The Library Resource Center on each campus includes audio visual
and interior design resources.

     The Company leases all of its administrative and educational facilities.
The table below sets forth certain information regarding the Company's
facilities as of December 31, 1998:

<TABLE>
<CAPTION>
                                              APPROXIMATE                                     
          LOCATION                          SQUARE FOOTAGE              EXPIRATION            
          --------                       ---------------------  ------------------------      
          <S>                            <C>                    <C>                           
          Atlanta, GA                                                                         
               AIU - Buckhead                  60,800               January 31, 2009          
               AIU - Dunwoody                  50,500               December 31, 2009         
               Administration                  25,200               December 31, 2009         
               Administration                  11,400               December 31, 1999         
               Administration                   2,200               March 31, 2001            
          Los Angeles, California              82,100               June 30, 2009              
</TABLE> 

                                     -19-
<PAGE>
 
<TABLE> 
     <S>                             <C>       <C>  
     Miami, Florida                  13,400    September 30, 1999             
     Washington, DC                  36,300    January 31, 2009               
     London, England                 46,000    November 27, 2005              
     Dubai, United Arab Emirates     34,300    Leased by Middle East          
                                               Colleges, Ltd.                  
</TABLE> 

     Typically, AIU's facilities occupy an entire building or several floors or
portions of floors in a building.  Leases typically have terms of six months to
ten years, with up to five year renewal options.  The Company also leases
facilities for student parking and housing.

     The Company entered into a ten year lease commencing June 1999 for a 17,800
square foot space in northern Virginia for a new campus.  The Company also
entered into a ten year lease commencing September 1999 for a 21,000 square foot
space in Miami, Florida for its permanent facility.

     The Company actively monitors facility capacity in light of current
utilization and projected enrollment growth.  Management believes that in order
to accommodate projected increases in student enrollment at each of its campuses
over the next two years, AIU may be required to acquire additional space.  The
Company believes that it can acquire additional capacity on acceptable terms.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any legal proceedings, the adverse outcome of
which, in management's opinion, would have a material adverse effect on the
Company's operating results.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders of the Company during
the month of December 1998.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Class A Common Stock began trading on the Nasdaq National
Market ("Nasdaq") under the symbol "EDUT" on September 24, 1997.  Prior to that
time, the Company's Class A Common Stock was not listed or traded on any
organized market.  The Company's Class B Common Stock, which does not trade on
any market and which is held entirely by the Company's Chairman and Chief
Executive Officer and his affiliates, may be converted into Class A Common
Stock, in whole or in part, at any time on the basis of one share of Class A
Common Stock for each share of Class B Common Stock.

     The following table sets forth, for the periods indicated, the reported
high and low bid prices of the Company's Class A Common Stock, as reported by
The Nasdaq Stock Market:

<TABLE>
<CAPTION>
                                                                                        HIGH              LOW          
                                                                                    --------------  ----------------   
          <S>                                                                       <C>             <C>                
          YEAR ENDED MAY 31, 1998                                                                                      
          -----------------------                                                                                      
          Second Quarter (September 24, 1997 through November 30, 1997)                   $28.75            $18.00     
          Third Quarter ended February 28, 1998                                            26.00             20.75     
          Fourth Quarter ended May 31, 1998                                                28.25             18.50     
                                                                                                                       
          SEVEN MONTHS ENDED DECEMBER 31, 1998                                                                         
          ------------------------------------                                                                         
          First Quarter ended August 31, 1998                                             $27.00            $ 7.00     
          Second Quarter ended November 30, 1998                                            9.38              3.94     
          Month ended December 31, 1998                                                     6.88              5.38      
</TABLE>

                                     -20-
<PAGE>
 
     According to the records of the Company's transfer agent, the Company had
106 and 3 holders of record of Class A and Class B Common Stock, respectively,
at March 1, 1999.  The Company believes that a substantially larger number of
beneficial owners hold Class A shares in depository or nominee form.  The
Company has never declared nor paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the near future.
It is the current policy of the Company's Board of Directors to retain earnings
to finance the operations and expansion of the Company's business.  Holders of
Class A Common Stock are entitled to receive cash dividends on at least an equal
per share basis as holders of Class B Common Stock if and when such dividends
are declared by the Board of Directors of the Company.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following table sets forth certain consolidated financial and other
operating data for the Company and American European Corporation and
Subsidiaries (the "Predecessor").  This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 of this Form 10-K and the
Company's and Predecessor's Consolidated Financial Statements and Notes thereto
included in Item 8 of this Form 10-K.

<PAGE>
 
                     SELECTED CONSOLIDATED FINANCIAL DATA
       (IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE, AND ENROLLMENT DATA)

<TABLE>
<CAPTION>
                                                                                   The Company (1)         
                                                            ------------------------------------------------------------           
                                                                                                       Fiscal Year                 
                                                            Seven Months Ended December 31,            Ended May 31,               
                                                            -------------------------------       ----------------------           
                                                                   1998            1997              1998         1997             
                                                            --------------    ------------        ----------  ----------           
<S>                                                         <C>               <C>                 <C>         <C>                  
STATEMENT OF OPERATIONS DATA (3): 
                                                                                                                                   
Net revenues                                                     $ 23,848        $ 19,174           $41,914     $ 23,590           
    Cost of education and facilities                               12,775           8,263            16,927        9,014           
    Selling and promotional expenses                                5,770           3,280             6,321        2,428           
    General and administrative expenses                             9,189           5,948            10,516        5,468           
    Acquisition costs                                                   -               -               487            -           
    Write-off of license fees and accrual of                        
      termination costs                                             3,533               -                 -            -            

    Rents paid to majority shareholder                                  -               -                 -            -           
    Amortization of goodwill                                          588             588             1,008          696           
                                                            --------------    ------------        ----------  ----------  
    Total costs and expenses                                       31,855          18,079            35,259       17,606           
                                                            --------------    ------------        ----------  ----------  
Income (loss) from campus operations                               (8,007)          1,095             6,655        5,984           
Income (loss) from management agreement                                 -              23                23          479           
                                                            --------------    ------------        ----------  ----------  
Income (loss) from operations                                      (8,007)          1,118             6,678        6,463           
Interest expense                                                      234           1,232             1,328        2,499           
Interest income -- shareholder notes                                    -               -                 -            -           
Other income -- net                                                    64              83             1,539           20           
                                                            --------------    ------------        ----------  ----------  
Income (loss) before income taxes, minority interest,                                                                              
    and extraordinary item                                         (8,177)            (31)            6,889        3,984           
                                                                                                                                   
Provision for income taxes (4)                                      3,280             (60)           (2,581)      (1,981)          
                                                            --------------    ------------        ----------  ----------  
Income (loss) before minority interest                                                                                             
    and extraordinary item                                         (4,897)            (91)            4,308        2,003           
Minority interest in earnings of American University                                                                               
    in Dubai                                                         (619)           (463)           (1,445)           -           
                                                            --------------    ------------        ----------  ----------  
Income (loss) before extraordinary item                            (5,516)           (554)            2,863        2,003           
Extraordinary loss less applicable income taxes                         -            (960)             (960)           -           
                                                            --------------    ------------        ----------  ----------  
Net income (loss)                                                $ (5,516)        $(1,514)          $ 1,903     $  2,003           
                                                            ==============    ============        ==========  ==========

Basic income (loss) per share before extraordinary 
  item (5)                                                       $  (0.52)        $ (0.06)          $  0.30     $   0.29           
Basic income (loss) per share (5)                                $  (0.52)        $ (0.17)          $  0.20     $   0.29           
Diluted income (loss) per share before extraordinary 
  item (5)                                                       $  (0.52)        $ (0.06)          $  0.28     $   0.26           
Diluted income (loss) per share (5)                              $  (0.52)        $ (0.17)          $  0.19     $   0.26           
Average shares outstanding                                         10,639           8,742             9,527        7,000           
Dilutive effect of stock options and warrants                           -               -               681          569           
                                                            --------------    ------------        ----------  ----------           
Average shares outstanding assuming dilution                       10,639           8,742            10,208        7,569           
                              
PRO FORMA DATA:                                                                                                                    
Income before income taxes, as reported
Pro forma provision for income taxes (6)
Pro forma net income (loss) 
                                                                                                                                   
                                                                                                                                   
SELECTED OPERATING DATA:
Net cash provided by operating activities                           2,694           2,726             2,686        1,356           
Net cash used in investing activities                              (7,203)         (2,164)           (2,045)     (31,428)          
Net cash provided by (used in) financing activities                 1,460           6,471             4,510       30,780           
AIU fall term enrollment (7)                                        3,610           3,045             3,045        2,822           
                                                                                                                                   
                                                                                                                                   
BALANCE SHEET DATA:
Working capital deficiency                                        (11,309)                             (281)      (9,772)          
Total assets                                                      (64,534)                           55,769       47,671           
Long-term debt, including current portion                           7,507                             1,241       30,075           
Shareholders' equity                                               38,761                            44,294        7,877            


<CAPTION>
                                                                                     The Predecessor (1) (2)                 
                                                                 -------------------------------------------------------------
                                                                 Period from June 1,          Fiscal Year Ended May 31,      
                                                                     1996 through      ---------------------------------------
                                                                   October 8, 1996        1996           1995         1994   
                                                                 --------------------  ----------     ----------    ---------- 
<S>                                                              <C>                   <C>            <C>           <C>      
STATEMENT OF OPERATIONS DATA (3):                                        
                                                                         
Net revenues                                                     $  6,189                 $26,493        $23,696      $20,654 
    Cost of education and facilities                                3,256                  11,144         10,051        8,611 
    Selling and promotional expenses                                1,335                   3,614          3,083        3,165  
    General and administrative expenses                             2,739                   6,677          6,115        6,264  
    Acquisition costs                                                   -                       -              -            -  
    Write-off of license fees and accrual of                                                                                  
      termination costs                                                 -                       -              -            -  
    Rents paid to majority shareholder                                 49                     150            145          146 
    Amortization of goodwill                                            -                       -              -            - 
                                                                 --------------------  ----------     ----------    ---------- 
    Total costs and expenses                                        7,379                  21,585         19,394       18,186  
                                                                 --------------------  ----------     ----------    ---------- 
Income (loss) from campus operations                               (1,190)                  4,908          4,302        2,468 
Income (loss) from management agreement                               (21)                    127              -            -  
                                                                 --------------------  ----------     ----------    ---------- 
Income (loss) from operations                                      (1,211)                  5,035          4,302        2,468   
Interest expense                                                      258                     730            607          440 
Interest income -- shareholder notes                                   98                     361            153          183  
Other income -- net                                                    66                      72             25          483  
                                                                 --------------------  ----------     ----------    ---------- 
Income (loss) before income taxes, minority interest,                                                                          
    and extraordinary item                                         (1,305)                  4,738          3,873        2,694  
Provision for income taxes (4)                                          -                    (107)          (124)        (148) 
                                                                 --------------------  ----------     ----------    ---------- 
Income (loss) before minority interest                                                                                         
    and extraordinary item                                         (1,305)                  4,631          3,749        2,546  
Minority interest in earnings of American University                                                                           
    in Dubai                                                            -                       -              -            -  
                                                                 --------------------  ----------     ----------    ---------- 
Income (loss) before extraordinary item                            (1,305)                  4,631          3,749        2,546  
Extraordinary loss less applicable income taxes                         -                       -              -            -  
                                                                 --------------------  ----------     ----------    ---------- 
Net income (loss)                                                $ (1,305)                $ 4,631        $ 3,749      $ 2,546  
                                                                 ====================  ==========     ==========    ========== 
                                                                                                                               
Basic income per share before extraordinary item (5)                                                                           
Basic income per share (5)                                                                                                     
Diluted income per share before extraordinary item (5)                                                                         
Diluted income per share (5)                                                                                                   
Average shares outstanding                                                                                                     
Dilutive effect of stock options and warrants                                                                                  
                                                                                                                               
Average shares outstanding assuming dilution                                                                                   
                                                                                                                               
PRO FORMA DATA:                                                                                                                
Income before income taxes, as reported                          $ (1,305)                $ 4,738        $ 3,873      $ 2,694  
Pro forma provision for income taxes (6)                               509                  1,848          1,510        1,051  
                                                                 --------------------  ----------     ----------    ---------- 
Pro forma net income (loss)                                      $    (796)               $ 2,890        $ 2,363      $ 1,643  
                                                                 ====================  ==========     ==========    ========== 
                                                                                                                               
SELECTED OPERATING DATA:                                                                                                       
Net cash provided by operating activities                            1,413                  5,798          5,522        4,375  
Net cash used in investing activities                                 (288)                (2,662)        (1,507)         725  
Net cash provided by (used in) financing activities                 (1,197)                (3,442)        (3,916)      (5,030) 
AIU fall term enrollment (7)                                         2,822                  2,441          2,200        2,000  
                                                                                                                               
                                                                                                                               
BALANCE SHEET DATA:
Working capital deficiency                                                                 (8,696)        (8,355)      (8,467) 
Total assets                                                                                7,253          6,682        7,190  
Long-term debt, including current portion                                                   4,756          2,874        2,333  
Shareholders' equity                                                                       (7,287)        (6,166)      (4,877) 
</TABLE>

                                     -21-
<PAGE>
 
(1)  The Company was organized on July 1, 1996 for the purpose of acquiring the
     Predecessor.  On October 8, 1996, the Company acquired the Predecessor and
     EduTrek Systems.  See note 1 of notes to consolidated financial statements.
(2)  Because the Company did not acquire the Predecessor until October 8, 1996,
     the financial information with respect to the Company for the period from
     July 1, 1996 through October 8, 1996 does not include the Predecessor.
     EduTrek Systems is included in the financial information of the Company in
     a manner similar to a pooling of interests because the Company and EduTrek
     Systems were under common control.  Financial information for EduTrek
     Systems is not included in the Selected Consolidated Financial Data prior
     to July 1, 1996 because, since its formation in 1992, EduTrek Systems has
     not generated revenues and in the years ended December 31, 1992, 1993,
     1994, and 1995 and for the period ended October 8, 1996, EduTrek Systems
     incurred losses of $321,000, $90,911, $312,954, $584,627, and $819,430,
     respectively.  Such amounts are not considered to be relevant to the
     Company and the Predecessor because, in prior years, EduTrek Systems had no
     revenues and existed solely to provide a corporate structure through which
     its controlling shareholder could pursue a variety of opportunities and
     activities.
(3)  The Company experiences seasonality in its results of operations primarily
     as a result of changes in the level of student enrollments.  See
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations - Seasonality."
(4)  As a result of its election to be treated as an S Corporation for income
     tax purposes, the Predecessor has not been subject to federal and most
     state income taxes.  Accordingly, the historical provision for income taxes
     includes income taxes only for those jurisdictions that do not recognize S
     Corporation status.
(5)  Income per share information for the Predecessor is not presented as the
     amounts are not considered meaningful due to the minimal number of
     outstanding shares and the S Corporation election of the Predecessor.
(6)  As a result of its election to be treated as an S Corporation for income
     tax purposes, the Predecessor has not been subject to federal and most
     state income taxes.  Accordingly, the historical provision for income taxes
     includes income taxes only for those jurisdictions that do not recognize S
     Corporation status.  The pro forma provision for income taxes (computed
     under the provisions of Statement of Financial Accounting Standards No.
     109) reflects provisions that would have been recorded had the Predecessor
     been a C Corporation for income tax purposes during the periods shown using
     an estimated income tax rate of 40.0%.  Prior to the initial public
     offering, distributions in the form of cash dividends were made principally
     to assist the shareholders with their income tax obligations arising from
     the Predecessor's S Corporation status.  Such distributions amounted to
     $4,068,962, $3,800,000, $4,500,000, and $1,889,694 for the fiscal years
     ended May 31, 1994, 1995, and 1996 and for the period from June 1, 1996
     through October 8, 1996, respectively.
 
                                     -22-
<PAGE>
 
(7)  Represents enrollment data as measured on the first day of each Fall term.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's and Predecessor's Consolidated
Financial Statements and Notes thereto.

OVERVIEW

     EduTrek acquired AIU (formerly The American College) through its
acquisition of the American European Corporation (the "Predecessor") on October
8, 1996. EduTrek's principal sources of revenue are tuition, related fees, and
payments for student housing collected from students. Other sources of revenue
include sales of textbooks, application fees, other student fees, consulting,
and other income. Net revenues are calculated by deducting AIU awarded
scholarships from gross revenues.

     AIU's academic year for the traditional programs is divided into three 10-
week terms (Fall, Winter, Spring) and two eight-week summer terms (Summer I and
Summer II). Summer terms are shorter and more concentrated, and the two terms
combined equal a 10-week term in terms of their contribution to net revenues.
The average term enrollment levels for Winter, Spring and Summer terms are
approximately 95%, 90% and 85%, respectively, of the Fall term benchmark. The
following table correlates AIU's academic terms to EduTrek's fiscal quarters as
of January 1, 1999.

FISCAL QUARTERS              ACADEMIC TERMS                                    
---------------              --------------                                    
                                                                               
First (January- March)       Winter; one-fifth of Spring                       
Second (April-June)          Last four-fifths of Spring; one-half of Summer I  
Third (July-September)       Last half of Summer I; Summer II                  
Fourth (October-December)    Fall                                               

     AIU's Power Campus programs (MIT, BIT, MBA, and BBA) have four enrollment
periods per year, which correspond with EduTrek's fiscal quarters:  January,
April, July, and October.  The full-time day programs are divided into four 10-
week terms, and the evening programs are divided into seven 10-week terms.  In
addition, enrollment periods for AIU's BBA evening programs occur approximately
once per month.  Net revenues from these programs vary from period to period
based on several factors that include (1) the aggregate number of students
attending classes; (2) the number of classes held during the period; and (3) the
average tuition per credit hour.

     Tuition and fees are payable prior to the start of each term.  A portion of
the funds is received in advance of the term's start date.  The balance is
collected through financial aid and under payment schedules established on a
student by student basis.  Uncollectible receivables are written off once a year
and did not exceed 2.0% of net revenues during the twelve months ended May 31,
1998 and 1997 or the seven months ended December 31, 1998 and 1997.

     Each of AIU's campuses is 100% controlled by EduTrek except the campus in
Dubai, which is controlled by EduTrek under a management agreement with an
investment group based in the United Arab Emirates.  Under the terms of that
agreement, the investment group provided all the start-up capital required to
open the campus in Dubai and is responsible for ongoing capital expenditures in
exchange for 65% of the net operating cash flow from that campus.  In exchange
for its management services, EduTrek receives 35% of the net operating cash
flow.

     As tuition is received, it is recorded as deferred tuition income, a
current liability. During the term, the applicable portion of the deferred
tuition income is recognized as revenue each month based on the aggregate number
of credit hours taken by students during the term. Deferred tuition income
historically has been at its highest level at the end of September before the
start of the academic year and

                                     -23-
<PAGE>
 
the Fall term for two reasons: (1) the Fall term represents the highest
enrollment level in the year, and (2) some students, principally non-U.S.
students in London, pay a full year's tuition in advance.

     EduTrek's expenses consist of cost of education and facilities, selling and
promotional expenses, general and administrative expenses, and the amortization
of goodwill.

     Education costs include salaries of full-time and adjunct faculty,
instructional support, academic administrators, student development and support
costs relating to library and classroom expenses, curriculum costs, and royalty
payments to ITI.  Facility costs consist of leasing, maintenance, and other
occupancy costs relating to campus facilities.  Student housing costs are also
included.

     Selling and promotional expenses include salaries of personnel involved in
recruitment, admissions and marketing at the campus and corporate office level,
their related costs, advertising costs, and the cost of producing marketing
materials.

     General and administrative expenses include the salaries of personnel
engaged in general administration, accounting, financial aid, personnel and
compliance at the campus level, all corporate personnel, and their related
expenses. These expenses also include depreciation and amortization of related
fixed assets, deferred costs, and benefits relating to personnel at the campus
and corporate levels.

     The amortization of goodwill is the result of the October 1996 acquisition
of the Predecessor. Goodwill costs are amortized over a 40-year period.

     EduTrek's income tax provision is provided at rates approximating statutory
federal and state rates (approximately 40%).

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to net revenues for the
Company and Predecessor:

<TABLE>
<CAPTION>
                                                          THE PREDECESSOR
                                             -----------------------------------------
                                                                  PERIOD FROM JUNE 1,
                                             FISCAL YEAR ENDED       1996 THROUGH
                                                May 31, 1996        October 8, 1996
                                             ------------------  ---------------------
<S>                                          <C>                 <C>
STATEMENT OF OPERATIONS DATA:
Net revenues                                             100.0%                 100.0%
Cost of education and facilities                          42.1                   52.6
Selling and promotional expenses                          13.6                   21.6
General and administrative expenses                       25.2                   44.3
Rents paid to majority shareholder                         0.6                    0.8
Income (loss) from campus operations                      18.5                  (19.3)
Income (loss) from management agreement                    0.5                   (0.3)
                                                         -----                 ------
Income (loss) from operations                             19.0                  (19.6)
Interest expense                                           2.8                    4.2
Interest income - shareholder notes                        1.4                    1.6
Other income - net                                         0.3                    1.1
                                                         -----                 ------
Income (loss) before income taxes,
      minority interest, and extraordinary                17.9                  (21.1)
       item
Provision for income taxes                                (0.4)                   0.0
                                                         -----                 ------
Net income (loss)                                         17.5%                (21.1)%
                                                         =====                 ======
</TABLE>
                                                                                

<TABLE>
<CAPTION>
                                                                      THE COMPANY
                                             --------------------------------------------------------------
                                              SEVEN MONTHS ENDED DECEMBER 31,    FISCAL YEAR ENDED MAY 31,
                                             ---------------------------------  ---------------------------
<S>                                          <C>                                <C> 
</TABLE> 

                                     -24-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                  1997              1998            1997           1998
                                             ---------------  ----------------  -------------  ------------
<S>                                          <C>              <C>               <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net revenues                                          100.0%            100.0%         100.0%        100.0%
Cost of education and facilities                       43.1              53.6           38.2          40.4
Selling and promotional expenses                       17.1              24.2           10.3          15.1
General and administrative expenses                    31.0              38.5           23.2          25.1
Acquisition costs                                       0.0               0.0            0.0           1.2
Write-off of license fees and accrual of
     termination costs                                  0.0              14.8            0.0           0.0
Amortization of goodwill                                3.1               2.5            2.9           2.4
                                                      -----            ------          -----         -----
Income (loss) from campus operations                    5.7             (33.6)          25.3          15.8
Income (loss) from management agreement                 0.1               0.0            2.0           0.1
                                                      -----            ------          -----         -----
Income (loss) from operations                           5.8             (33.6)          27.3          15.9
Interest expense                                        6.4               1.0           10.6           3.2
Other income - net                                      0.4               0.3            0.1           3.7
                                                      -----            ------          -----         -----
Income (loss) before income taxes,
      minority interest, and extraordinary             
       item                                            (0.2)            (34.3)          16.8          16.4    
Provision for income taxes                             (0.3)             13.8           (8.4)         (6.2)
                                                      -----            ------          -----         -----
Income (loss) before minority interest and
      and extraordinary item                           (0.5)            (20.5)          (8.4)         10.2
Minority interest in earnings of American
      University in Dubai                              (2.4)             (2.6)           0.0          (3.4)
                                                      -----            ------          -----         ----- 
Income (loss) before extraordinary item                (2.9)            (23.1)           8.4           6.8
Extraordinary loss less applicable income
     taxes                                             (5.0)              0.0            0.0          (2.3)       
                                                      -----            ------          -----         ----- 
Net income (loss)                                     (7.9)%           (23.1)%           8.4%          4.5%
                                                      =====            ======          =====         =====
</TABLE>
                                                                                
SEVEN MONTHS ENDED DECEMBER 31, 1998 (TRANSITION PERIOD) COMPARED TO SEVEN
MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)

  The following discussion compares the Company's results for the seven months
ended December 31, 1998 ("seven month 1998 period") to the seven months ended
December 31, 1997 ("seven month 1997 period").

  Net revenues.  Net revenues increased approximately $4.6 million or 24.4% from
$19.2 million in the seven month 1997 period to $23.8 million in the seven month
1998 period.  This increase was primarily due to an increase in student
enrollments and a tuition increase, and, to a lesser extent, the consolidation
of the American University in Dubai ("Dubai") (see note 2 of notes to
consolidated financial statements).

  Cost of education and facilities.  Cost of education and facilities increased
approximately $4.5 million or 54.6% from $8.3 million in the seven month 1997
period to $12.8 million in the seven month 1998 period.  Education costs
increased approximately $3.9 million or 82.3% from $4.7 million in the seven
month 1997 period to $8.6 million in the seven month 1998 period due to salary
and other cost increases and, to a lesser extent, the consolidation of Dubai.
Facility costs increased approximately $626,000 or 17.7% from $3.5 million in
the seven month 1997 period to $4.2 million in the seven month 1998 period due
to the consolidation of Dubai and additional rent increases, including new
campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C.  Cost
of education and facilities increased as a percentage of net revenues from 43.1%
in the seven month 1997 period to 53.6% in the seven month 1998 period for the
reasons set forth above.

  Selling and promotional expenses.  Selling and promotional expenses increased
by approximately $2.5 million or 75.9% from $3.3 million in the seven month 1997
period to $5.8 million in the seven month 1998 period due to increases in salary
and other selling and promotional expenses related to new educational programs
and to new campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington,

                                     -25-
<PAGE>
 
D.C.  Selling and promotional expenses increased as a percentage of net revenues
from 17.1% in the seven month 1997 period to 24.2% in the seven month 1998
period.

  General and administrative expenses.  General and administrative expenses
increased approximately $3.3 million or 54.5% from $5.9 million in the seven
month 1997 period to $9.2 million in the seven month 1998 period.  This increase
was primarily due to additions of personnel at the home office to support the
Company's growth, particularly the opening of new campuses in Atlanta
(Dunwoody), Los Angeles, Miami, and Washington, D.C.  The remaining increase was
due to the consolidation of Dubai.  As a percentage of net revenues, general and
administrative expenses increased from 31.0% in the seven month 1997 period to
38.5% in the seven month 1998 period.

  Write-off of license fees and accrual of termination costs.  The Company has
historically capitalized and then amortized over ten years license fees paid to
ITI for IT curriculum.  The Company has decided to phase out the licensed ITI
curriculum in favor of its own internally developed IT curriculum and to
negotiate the termination of the licensing agreement.  As a result, the Company
has elected to write-off related license fees of $3,333,000 during the 1998
period. The Company has also accrued $200,000 to cover certain expenses in
connection with the phase out of this curriculum; however, actual expenses in
connection with this phase out may exceed $200,000. The estimated phase-out
costs range between $200,000 to $500,000 of which management believes the
ultimate cost to phase-out this curriculum agreement will be $200,000 (see note
8 of notes to consolidated financial statements).

  Amortization of goodwill.  Amortization of goodwill of approximately $588,000
in the seven month 1997 and 1998 periods were the result of the October 1996
acquisition of the Predecessor with goodwill costs being amortized over a 40-
year period.

  Income from management agreement.  Income from the Dubai campus management
agreement decreased from $23,000 in the seven month 1997 period to zero in the
seven month 1998 period due to the consolidation of Dubai effective September 1,
1997.

  Interest expense.  Interest expense decreased approximately $998,000 or 81.0%
in the seven month 1998 period compared to the seven month 1997 period as a
result of the application of the proceeds of the Company's September 1997
initial public offering to retire debt.

  Other income - net.  Other income - net remained relatively constant during
the seven month 1997 and 1998 periods.

  Minority interest in earnings of American University in Dubai.  Minority
interest in earnings increased approximately $156,000 or 33.7% due to the
consolidation of Dubai effective September 1, 1997 and the increase in Dubai's
operating income.

YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997

  Prior to the Company's acquisition of the Predecessor in October 1996, the
Company's operations were de minimis as its principal operations primarily
related to the acquisition of the Predecessor.  The following discussion
compares the Company's results for the twelve months ended May 31, 1998 to the
eleven month period from July 1, 1996 through May 31, 1997 which, because the
operations of the Company were de minimis prior to October 1996, essentially
presents the operations of the Company for the eight month period ended May 31,
1997.

  Net revenues.  Net revenues increased approximately $18.3 million or 77.7%
from $23.6 million for the eleven months ended May 31, 1997 (the "1997 period")
to $41.9 million for the year ended May 31, 1998 (the "1998 period").  Of this
77.7% increase, 26.6% or approximately $4.9 million was due to the consolidation
of the American University in Dubai ("Dubai") (see note 2 of notes to
consolidated financial statements).  The remaining increase in net revenues was
due to an increase in student enrollments and a tuition increase.

                                      -26-
<PAGE>
 
  Cost of education and facilities.  Cost of education and facilities increased
approximately $7.9 million or 88.1% from $9.0 million in the 1997 period to
$16.9 million in the 1998 period.  Education costs increased approximately $4.8
million or 89.3% from $5.4 million in the 1997 period to $10.2 million in the
1998 period due to the consolidation of Dubai and salary and other cost
increases.  Facility costs increased approximately $3.1 million or 86.2% from
$3.6 million in the 1997 period to $6.7 million in the 1998 period due to the
consolidation of Dubai, rent increases, and an increase in the number of housing
students.  Cost of education and facilities increased as a percentage of net
revenues from 38.2% in the 1997 period to 40.4% in the 1998 period.

  Selling and promotional expenses.  Selling and promotional expenses increased
by approximately $3.9 million or 160.3% from $2.4 million in the 1997 period to
$6.3 million in the 1998 period.  Of the 160.3% increase, 9.2% or approximately
$223,000 was due to the consolidation of Dubai.  The remaining increase was due
to increases in salary and other selling and promotional expenses related to new
educational programs such as the Master's in Information Technology and the
Bachelor's in Business Administration for adult evening students.  As a
percentage of net revenues, selling and promotional expenses increased from
10.3% in the 1997 period to 15.1% in the 1998 period.

  General and administrative expenses.  General and administrative expenses
increased approximately $5.0 million or 92.3% from $5.5 million in the 1997
period to $10.5 million in the 1998 period.  Of the 92.3% increase, 20.4% or
approximately $1.1 million was due to the consolidation of Dubai.  The remaining
increase was primarily due to additions of personnel at the home office to
support the Company's growth.  As a percentage of net revenues, general and
administrative expenses increased from 23.2% in the 1997 period to 25.1% in the
1998 period.

  Acquisition costs.  Acquisition costs include $487,000 of accounting, legal,
and other costs in the 1998 period associated with the planned combination with
ITI Education Corporation ("ITI").  In March 1998, the Company and ITI announced
that their planned combination was terminated in favor of amended and expanded
licensing arrangements under which the Company acquired rights to ITI's
information technology system.

  Amortization of goodwill.  Amortization expenses, principally goodwill
expenses, of approximately $1.0 million in the 1998 period and approximately
$696,000 in the 1997 period were the result of the October 1996 acquisition of
the Predecessor with goodwill costs being amortized over a 40-year period.

  Income from management agreement.  Income from the Dubai campus management
agreement decreased approximately $456,000 or 95.2% from approximately $479,000
in the 1997 period to approximately $23,000 in the 1998 period due to the
consolidation of Dubai effective September 1, 1997.  The portion of income from
operations related to Dubai was approximately $789,000 for the 1998 period,
which represents an increase of 64.7% primarily due to an increase in
enrollment.

  Interest expense.  Interest expense decreased approximately $1.2 million or
46.9% in the 1998 period compared to the 1997 period as a result of the
application of the proceeds of the Company's September 1997 initial public
offering to retire debt.

  Other income - net.  Other income - net increased from $20,000 in the 1997
period to approximately $1.5 million in the 1998 period primarily due to a
$991,000 gain on the sale of aircraft, which offset $481,000 of related net
operating costs during the 1998 period.  The remaining increase is related to
interest income after the initial public offering and a one-time sales tax
recovery.

  Minority interest in earnings of American University in Dubai.  Effective
September 1, 1997, the Company modified its joint venture agreement relating to
Dubai, which resulted in the change in presentation of income from management
agreement and minority interest in earnings (see note 2 of notes to consolidated
financial statements).

                                      -27-
<PAGE>
 
  Extraordinary loss less applicable income taxes.  The extraordinary loss of
$960,000 is the result of the early retirement of debt after the Company's
initial public offering.

YEAR ENDED MAY 31, 1997 (COMPANY) COMPARED TO EIGHT MONTHS ENDED MAY 31, 1996
(UNAUDITED) (PREDECESSOR)

  The Company was organized on July 1, 1996 for the purpose of acquiring the
Predecessor and all of the capital stock of EduTrek Systems.  Prior to the
Company's acquisition of the Predecessor in October 1996, the Company's
operations were de minimis as its principal operations primarily related to the
acquisition of the Predecessor.  The following discussion compares the Company's
results for the eleven month period from July 1, 1996 through May 31, 1997 to
the Predecessor's results for the eight month period from October 8, 1995
through May 31, 1996 which, because the operations of the Company were de
minimis prior to October 1996, essentially presents a comparison of the
operations of the Company for the eight month period ended May 31, 1997 to the
comparable eight months of the prior year.  The results of the Company during
the period from July 1996 through October 1996 related primarily to the
Company's acquisition activities, were non-operational in nature and immaterial
in amount.  The period from October through May is comprised of AIU's Fall,
Winter, and Spring terms.

  Net revenues.  Net revenues increased approximately $2.7 million or 13.0% from
$20.9 million for the eight months ended May 31, 1996 (the "1996 period") to
$23.6 million for the 1997 period. Of this 13.0% increase, 6.2% or approximately
$1.3 million was due to an increase in student enrollment and 6.8% or
approximately $1.4 million was the result of an effective price increase.

  Cost of education and facilities.  Cost of education and facilities increased
approximately $1.4 million or 18.1% from $7.6 million in the 1996 period to $9.0
million in the 1997 period.  Education costs increased approximately $946,000 or
21.2% from $4.5 million in the 1996 period to $5.4 million in the 1997 period
due to salary and other cost increases.  Facility costs increased approximately
$433,000 or 13.6% from $3.2 million in the 1996 period to $3.6 million in the
1997 period due to rent increases and an increase in the number of housing
students.  Cost of education and facilities increased as a percentage of net
revenues from 36.6% in the 1996 period to 38.2% in the 1997 period.

  Selling and promotional expenses.  Selling and promotional expenses remained
constant at approximately $2.4 million in the 1997 period.  Decreases in
advertising of approximately $267,000 were offset by increases in salary and
other selling and promotional expenses.  As a percentage of net revenues,
selling and promotional expenses decreased from 11.4% in the 1996 period to
10.3% in the 1997 period.

  General and administrative expenses.  General and administrative expenses
increased approximately $881,000 or 19.2% from $4.6 million in the 1996 period
to $5.5 million in the 1997 period.  The increase was due to costs incurred
prior to the acquisition of the Predecessor and to additions of personnel at the
home office after the acquisition, which expenses were offset in part by a
reduction in costs relating to assets purchased by one of the selling
shareholders in the acquisition of The American College.  As a percentage of net
revenues, general and administrative expenses increased from 22.0% in the 1996
period to 23.2% in the 1997 period.

  Amortization of goodwill.  Amortization expenses, principally goodwill
expenses, of approximately $696,000 in the 1997 period were the result of the
October 1996 acquisition of the Predecessor with goodwill costs being amortized
over a 40-year period.

  Income from management agreement.  Income from the Dubai campus management
agreement increased approximately $393,000 or 457.0% from its start-up level of
approximately $86,000 in the 1996 period to approximately $479,000 in the 1997
period.

  Interest expense.  Interest expense increased approximately $2.2 million or
753.4% from approximately $292,000 in the 1996 period to $2.5 million in the
1997 period due to an increase in borrowing associated with the acquisition of
the Predecessor in October 1996.

                                      -28-
<PAGE>
 
     Other income - net.  Other income decreased approximately $198,000 or 91.2%
from approximately $217,000 in the 1996 period to approximately $19,000 in the
1997 period due to a decrease in interest income.

QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth unaudited quarterly financial data for each
of the two fiscal quarters and month ended December 31, 1998 and 1997,
respectively, and for each of the eight fiscal quarters in the two years ended
May 31, 1998. The Company believes that this information includes all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of such quarterly information when read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto. The operating
results for any quarter are not necessarily indicative of the results for any
future period.

                                QUARTERLY DATA
                     (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                          Fiscal Year Ended May 31, 1997                       
                                                  --------------------------------------------------
                                                    1st Qtr (1)   2nd Qtr (1)   3rd Qtr    4th Qtr  
                                                  --------------------------------------------------
<S>                                               <C>             <C>          <C>        <C>       
Net revenues                                       $  4,842       $  6,718     $  8,803   $  9,416             
Income (loss) from operations                          (284)           371        2,699      2,466             
Income (loss) before extraordinary item                (383)          (714)         935        810             
Net income (loss)                                  $   (333)      $   (714)    $    935   $    810             
Basic income (loss) per share before                                                                           
   extraordinary item (2)                                                      $   0.13   $   0.12             
Basic income (loss) per share (2)                                              $   0.13   $   0.12             
Diluted income (loss) per share before                                                                         
   extraordinary item (2)                                                      $   0.12   $   0.10             
Diluted income (loss) per share (2)                                            $   0.12   $   0.10             

<CAPTION> 
                                                           Fiscal Year Ended May 31, 1998                     
                                                  ----------------------------------------------          
                                                   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr  
                                                  ----------------------------------------------
<S>                                               <C>          <C>         <C>         <C> 
Net revenues                                       $ 6,228      $ 9,312      $12,701     $13,673      
Income (loss) from operations                         (526)         768        3,115       3,321      
Income (loss) before extraordinary item               (962)         214        1,778       1,833      
Net income (loss)                                  $  (962)     $  (746)     $ 1,778     $ 1,833      
Basic income (loss) per share before                                                                 
   extraordinary item (2)                          $ (0.13)     $  0.02      $  0.17     $  0.17      
Basic income (loss) per share (2)                  $ (0.13)     $ (0.08)     $  0.17     $  0.17      
Diluted income (loss) per share before                                                                
   extraordinary item (2)                          $ (0.13)     $  0.02      $  0.16     $  0.17      
Diluted income (loss) per share (2)                $ (0.13)     $ (0.07)     $  0.16     $  0.17       
</TABLE> 

<TABLE> 
<CAPTION> 
                                                  
                                                 Seven Months Ended December 31, 1997      Seven Months Ended December 31, 1998
                                             -----------------------------------------   ----------------------------------------
                                                   1st Qtr      2nd Qtr     December         1st Qtr     2nd Qtr     December
                                             -----------------------------------------   ----------------------------------------
<S>                                          <C>              <C>          <C>           <C>             <C>         <C>  
Net revenues                                   $  6,228       $  9,312     $  3,634        $  7,825      $ 11,642     $   4,381 
Income (loss) from operations                      (526)           768          876          (1,462)       (3,701)       (2,844)
Income (loss) before extraordinary item            (962)           214          194            (985)       (2,596)       (1,935)
Net income (loss)                              $   (962)      $   (746)    $    194        $   (985)     $ (2,596)    $  (1,935)
Basic income (loss) per share before                                                                                            
   extraordinary item                          $  (0.13)      $   0.02     $   0.05        $  (0.09)     $  (0.24)    $   (0.19)
Basic income (loss) per share                  $  (0.13)      $  (0.08)    $   0.04        $  (0.09)     $  (0.24)    $   (0.19)
Diluted income (loss) per share before                                                                                          
   extraordinary item                          $  (0.13)      $   0.02     $   0.05        $  (0.09)     $  (0.24)    $   (0.19)
Diluted income (loss) per share                $  (0.13)      $  (0.07)    $   0.03        $  (0.09)     $  (0.24)    $   (0.19)
</TABLE>


(1)  Includes financial data of the Predecessor from June 1, 1996 through
     October 8, 1996, the date the Company acquired the Predecessor.

(2)  Income per share information is not presented for first and second quarter
     1997 as the amounts are not considered meaningful due to the minimal number
     of outstanding shares and the S Corporation election of the Predecessor.

SEASONALITY IN RESULTS OF OPERATIONS

     The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, with a fiscal year that historically ended
on May 31, the Company's first and second fiscal quarter enrollments and related
revenues generally were lower than the third and fourth quarter fiscal quarters
due to traditionally lower student enrollment levels in the summer terms. In
addition, first and second fiscal quarter costs and expenses historically were
higher as a percentage of net revenues as a result of certain fixed costs which
are not significantly affected by the seasonal first and second fiscal quarter
declines in net revenues. Under the new fiscal year ending December 31, the
second and third fiscal quarter revenues will be lower than the first and fourth
fiscal quarters, and the second and third fiscal quarter costs and expenses will
be higher as a percentage of net revenues than the first and fourth fiscal
quarters. This seasonality will be mitigated by new educational programs which
are offered throughout the year in new campuses in California, Georgia, Florida,
northern Virginia, and the District of Columbia.

LIQUIDITY AND CAPITAL RESOURCES

     The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings under bank credit facilities.  The Company executed a
new $10 million revolving line of credit with a bank (the "Credit Agreement") on
March 25, 1999.   The Credit Agreement matures on April 30, 2001 but can be
extended beyond that date.  Amounts outstanding bear interest at LIBOR plus
2.75%.  The Credit Agreement replaced an existing $4.0 million bank credit
facility.  As a result of the addition of four new campuses in the seven months
ended December 31, 1998, the Company experienced a decrease in cash and cash
equivalents of approximately $3.1 million as compared to May 31, 1998.

     The increase in investing activities for the seven months ended December
31, 1998 compared to the seven months ended December 31, 1997 was principally
due to the increase in the number of locations and curriculum licensing costs
associated with the Company's expansion. Purchases of property, plant, and
equipment for the seven months ended December 31, 1998 were approximately $3.7
million. Total purchases of property, plant, and equipment for the year ended
December 31, 1999 are expected to range from $4.5 to $5.5 million. The increase
from the seven months ended December 31, 1997 is due to: (1) the opening of four
new campuses; (2) hardware and software costs related to the installation of a
new management information system; (3) improvements to the Company's computer
facilities and


                                     -29-
<PAGE>
 
telecommunications equipment at the corporate level; (4) investments in computer
technology to support information technology curriculum; and (5) increases in
normal recurring capital expenditures due to the overall increases in student
and employment levels resulting from the Company's growth. For the seven months
ended December 31, 1998, curriculum development costs totaled approximately
$600,000. Curriculum development costs for the year ended December 31, 1999 are
expected to be in the range of $500,000 to $1.0 million. The Company expects to
fund capital expenditures for existing and new campuses through cash from
operations and proceeds from the Credit Agreement, which has increased the
Company's borrowing capacity.

     The Company's ability to fund its working capital and capital expenditure
requirements, implement new programs, make interest payments, fund future
acquisitions, and meet its other cash requirements, depends on, among other
things, current cash and cash equivalents, internally generated funds, and the
Company's Credit Agreement.  Management believes that such sources will be
sufficient to meet the Company's capital requirements and operating needs for
the next fiscal year.  However, if there is a significant reduction of
internally generated funds, the Company may require additional funds from
outside sources.  In such event, there can be no assurance that the Company will
be able to obtain such funding as and when required or on acceptable terms.

     The Department of Education requires that Title IV program funds collected
by an institution for unbilled tuition be kept in a separate cash or cash
equivalent account until the students are billed for the portion of their
program related to these funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of December 31, 1998, the
Company had approximately $474,000 in these separate accounts to comply with
these requirements. These funds generally remain in these separate accounts for
an average of 60 to 75 days from the date of collection. These restrictions on
cash have not affected the Company's ability to fund daily operations.

YEAR 2000 READINESS

     The year 2000 problem arises from the fact that many existing information
technology hardware and software systems and non-information technology products
containing embedded microchip processors may not recognize the year 2000.
Accordingly, problems may arise for such products and systems when processing
information containing dates that fall after December 31, 1999.

     Some of the Company's computer information systems are not currently
configured to recognize the year 2000.  The Company has developed an assessment
team, which has established testing procedures, has begun the testing of its
computer information systems, and expects completion of this project by June of
1999.

     The Company is currently implementing a new centralized information system
to integrate its operations and financial data including admissions, financial
aid, student services, placement services, and default management.  The new
system is designed to properly recognize the year 2000 in the two digit date
field.  The Company anticipates that the information system will be fully
operational before the year 2000 and that it will require a total of $2 million
to develop and implement this integrated information system, although there can
be no assurance that the new system will be implemented on a timely basis or
that total expenditures will not exceed $2 million.  Management does not
anticipate that the expenditure of such funds to implement the new computer
system will have a material impact on the Company's results of operations,
liquidity, or capital resources.  In the event this information system is not
implemented in a timely fashion, management will evaluate other available
options to revise its computer programs, as necessary, for the effect on the
year 2000 problem including, in a worst case scenario, relying on manual record
keeping, until full compliance is achieved.

     The Company has reviewed its material relationships with third parties such
as vendors and evaluated the consequences of third party year 2000 problems on
the Company.  The Company is requiring contract letters of compliance from all
vendors.  The Company does not believe year 2000 problems of these third parties
pose a material risk to the Company.  However, because the Company is in a
regulated

                                     -30-
<PAGE>
 
industry and indirectly relies on only a few sources for a substantial portion
of its revenues, the Company is dependent upon those entities' efforts to
address their own year 2000 issues. Should any such third parties experience
year 2000 related disruptions, it could have a material adverse impact on the
Company's business, results of operations, liquidity, or financial condition.
For example, as with all postsecondary education-oriented businesses whose
students receive governmental financial aid, the Company's operations and
liquidity depend upon the student funding provided by Title IV Programs for its
students. Processing of applications for this funding is handled by the
Department of Education's computer systems. The Department of Education has
stated that its systems will be year 2000 compliant in early calendar year 1999
and has set forth a calendar of when schools can test their systems for year
2000 compliance.

EFFECT OF INFLATION

     The Company does not believe its operations have been materially affected
by inflation.

ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for the Company for the seven months ended
December 31, 1998.  SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements.  The Company
has adopted SFAS No. 130 in the current year as required.

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is also effective for the Company for the seven months ended
December 31, 1998.  SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and related
information in financial statements.  This statement did not affect the
disclosures the Company provides.

     The Company adopted SFAS No. 128, "Earnings per Share," during the year
ended May 31, 1998. In accordance with SFAS 128, the Company has presented both
basic and diluted per share amounts in the 1998 and 1997 statements of
operations presented.

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 will
be effective for the Company's fiscal year ending December 31, 2000. The Company
does not currently have any derivative instruments nor is it involved in hedging
activities.

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
(SOP 98-5) which requires costs of start-up activities and organization costs to
be expensed as incurred. The Company wrote-off all pre-opening costs in December
1998.

ITEM 7-A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     No response is required to this item.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements are filed with this Report:

                                                                      PAGE
                                                                      ----

Independent Auditors' Report                                            33
Consolidated Balance Sheets                                             34
Consolidated Statements of Operations                                   35
Consolidated Statements of Changes in Shareholders' Equity              37

                                     -31-
<PAGE>
 
Consolidated Statements of Cash Flows                                    38
Notes to Consolidated Financial Statements                               40

                                     -32-
<PAGE>
 
INDEPENDENT AUDITORS' REPORT

Board of Directors of EduTrek International, Inc.:

We have audited the accompanying consolidated balance sheets of EduTrek
International, Inc. (the "Company") and its subsidiaries as of December 31, 1998
and May 31, 1998, and the related consolidated statements of operations, changes
in shareholders' equity, and cash flows for the seven months ended December 31,
1998, the year ended May 31, 1998, and the period from July 1, 1996 (date of
formation) to May 31, 1997.  We also audited the accompanying consolidated
statements of operations, changes in shareholders' equity, and cash flows of
American European Corporation and subsidiaries (the Predecessor) for the period
from June 1, 1996 to October 8, 1996 and for the year ended May 31, 1996.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries as
of December 31, 1998 and May 31, 1998 and the results of its operations and its
cash flows for the seven months ended December 31, 1998, the year ended May 31,
1998, and the period from July 1, 1996 (date of formation) to May 31, 1997, and
the results of operations and cash flows of the Predecessor for the period from
June 1, 1996 to October 8, 1996 and for the year ended May 31, 1996 in
conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 25, 1999

                                     -33-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION> 
                                                                               DECEMBER 31,                        MAY 31,
                                                                                  1998                              1998  
                                                                              -------------                       ----------
<S>                                                                           <C>                                 <C> 
ASSETS                                                                                                            
                                                                                                                  
Current assets                                                                                                    
  Cash and cash equivalents                                                         $ 2,779                          $ 5,843
  Accounts receivable -- net of allowance of $277 and $190,                                                                  
  respectively                                                                        3,054                            2,886 
  Deferred income taxes                                                                 308                              130
  Income taxes receivable                                                               166
  Other                                                                               1,288                              759
                                                                              -------------                       ----------
Total current assets                                                                  7,595                            9,618
Property, plant, and equipment -- net of accumulated depreciation                    14,971                            5,729
Goodwill -- net of accumulated amortization of $2,292                                                             
  and $1,704, respectively                                                           38,369                           38,957
Deferred income taxes                                                                 2,496                              497
Other                                                                                 1,103                              968
                                                                              -------------                       ----------
                                                                                    $64,534                          $55,769
                                                                               ============                       ==========
                                                                                                                  
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                              
                                                                                                                  
Current liabilities                                                                                               
  Accounts payable                                                                  $ 4,816                          $ 2,508
  Accrued expenses                                                                    1,632                              721
  Value-added tax payable                                                               473                              157
  Unearned revenues                                                                   8,477                            4,323
  Income taxes payable                                                                    0                            1,616
  Line of credit                                                                      1,820                                -
  Current maturities -- long-term debt                                                1,686                              574
                                                                               ------------                       ----------       
Total current liabilities                                                            18,904                            9,899       
Capital leases and other -- less current maturities                                   5,821                              667       
Deferred rent                                                                           966                              849       
Other liabilities                                                                        82                               60       
                                                                               ------------                       ----------
Total liabilities                                                                    25,773                           11,475       
Commitments and contingencies                                                                                                      
                                                                                                                                   
SHAREHOLDERS' EQUITY                                                                                                               
                                                                                                                                   
Common stock, Class A voting, one vote per share, without par                                                                      
  value, 40,000,000 shares authorized, 4,362,605 and 4,335,401,                                                                    
  issued and outstanding, respectively                                               36,611                           36,564       
Common stock, Class B voting, ten votes per share, without par value,                                                              
  10,000,000 shares authorized, 6,293,000 issued and outstanding                      3,973                            3,973       
                                                                                                                                   
Accumulated other comprehensive income                                                   24                               88       
Retained earnings (accumulated deficit)                                              (1,847)                           3,669       
                                                                                  ---------                       ----------        
Total shareholders' equity                                                           38,761                           44,294       
                                                                                  ---------                       ----------        
                                                                                    $64,534                          $55,769       
                                                                                  =========                       ==========
</TABLE>

                See notes to consolidated financial statements.

                                     -34-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                                                           THE COMPANY
                                                            ------------------------------------------------------------------------
                                                                 SEVEN MONTHS ENDED           YEAR ENDED    PERIOD FROM JULY 1, 1996
                                                                    DECEMBER 31,               MAY 31,       (DATE OF FORMATION) TO
                                                              1998                1997           1998             MAY 31, 1997
                                                            -------             -------       ----------    ------------------------
                                                                               (Unaudited)
<S>                                                         <C>                 <C>           <C>           <C>
Net revenues                                                $ 23,848            $19,174          $41,914          $    23,590
Costs and expenses:                                                                                                         
   Cost of education and facilities                          12,775               8,263           16,927               9,014
   Selling and promotional expenses                           5,770               3,280            6,321               2,428
   General and administrative expenses                        9,189               5,948           10,516               5,468
   Acquisition costs                                              -                   -              487                   -
   Write-off of license fees and                              3,533                   -                -                   -
    accrual of termination costs (Note 8)                                                                                   
   Amortization of goodwill                                     588                 588            1,008                 696
                                                            -------             -------       ----------    ------------------------
     Total costs and expenses                                31,855              18,079           35,259              17,606
                                                            -------             -------       ----------    ------------------------

Income (loss) from campus operations                         (8,007)              1,095            6,655               5,984
Income from management agreement                                  -                  23               23                 479
                                                            -------             -------       ----------    ------------------------

Income (loss) from operations                                (8,007)              1,118            6,678               6,463
Interest expense                                                234               1,232            1,328               2,499
Other income -- net                                              64                  83            1,539                  20
                                                            -------             -------       ----------    ------------------------

Income (loss) before income taxes, minority                                                                                 
   interest, and extraordinary item                          (8,177)                (31)           6,889               3,984 
Benefit (provision) for income taxes                          3,280                 (60)          (2,581)             (1,981)
                                                            -------             -------       ----------    ------------------------

Income (loss) before minority interest and                                                                                  
   extraordinary item                                        (4,897)                (91)           4,308               2,003
Minority interest in earnings of                                                                                            
   American University in Dubai                                (619)               (463)          (1,445)                  -
                                                            -------             -------       ----------    ------------------------

Income (loss) before extraordinary item                      (5,516)               (554)           2,863               2,003
Extraordinary loss less applicable income taxes                   -                (960)            (960)                  -
                                                            -------             -------       ----------    ------------------------

Net income (loss)                                           $(5,516)            $(1,514)         $ 1,903          $    2,003 
                                                            =======             =======       ==========    ========================

Earnings Per Share:                                                                                                         
Basic income (loss) per share before extraordinary item     $ (0.52)            $ (0.06)           $0.30          $     0.29      
Basic net income (loss) per share                           $ (0.52)            $ (0.17)           $0.20          $     0.29      
                                                                                                                                  
Diluted income (loss) per share before extraordinary item   $ (0.52)            $ (0.06)           $0.28          $     0.26      
Diluted net income (loss) per share                         $ (0.52)            $ (0.17)           $0.19          $     0.26      
                                                                                                                            
Average shares outstanding                                   10,639               8,742            9,527               7,000
Dilutive effect:                                                                                                            
      Warrants                                                    -                   -              240                 569
      Options                                                     -                   -              441                   -
                                                            -------             -------       ----------    ------------------------
                                                                                                     681                 569
                                                            -------             -------       ----------    ------------------------
Average shares outstanding assuming dilution                 10,639               8,742           10,208               7,569
</TABLE>
 
                See notes to consolidated financial statements.

                                     -35-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
 
 
<TABLE>
<CAPTION>
                                                                                         THE PREDECESSOR
                                                                            -----------------------------------------
                                                                            PERIOD FROM JUNE 1,            YEAR ENDED
                                                                               1996 THROUGH                 MAY 31,
                                                                              OCTOBER 8, 1996                 1996
                                                                            -------------------            ----------
<S>                                                                         <C>                            <C>
Net revenues                                                                         $  6,189                $26,493
Costs and expenses:                                                                          
   Cost of education and facilities                                                     3,256                 11,144
   Selling and promotional expenses                                                     1,335                  3,614
   General and administrative expenses                                                  2,739                  6,677
   Rents paid to majority stockholders                                                     49                    150
                                                                            -------------------            ---------- 
     Total costs and expenses                                                           7,379                 21,585
                                                                            -------------------            ---------- 
Income (loss) from campus operations                                                   (1,190)                 4,908
Income (loss) from management agreement                                                   (21)                   127
                                                                            -------------------            ---------- 
Income (loss) from operations                                                          (1,211)                 5,035
Interest expense                                                                          258                    730
Other income -- net                                                                       164                    433
                                                                            -------------------            ---------- 
Income (loss) before income taxes, minority interest, and                                    
   extraordinary item                                                                  (1,305)                 4,738
Provision for income taxes                                                                  -                   (107)
                                                                            -------------------            ---------- 
Net income (loss)                                                                    $ (1,305)               $ 4,631
                                                                            ===================            ========== 
</TABLE> 
 
                See notes to consolidated financial statements.

                                     -36-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                (In thousands)
 
<TABLE>
<CAPTION>  
                                                                                       ACCUMULATED
                                                                                          OTHER
                                                                    STOCKHOLDERS'     COMPREHENSIVE     ACCUMULATED
PREDECESSOR                      COMMON STOCK    PAID-IN CAPITAL     NOTES             INCOME           DEFICIT           TOTAL
-----------                      ------------    ---------------    -------------     -------------     -----------     --------- 
<S>                              <C>             <C>                <C>               <C>               <C>             <C>
Balance -- May 31, 1995                $    1             $  434        $ (3,229)        $   67           $ (3,440)      $ (6,167)
Distribution to shareholders                                                                                (4,500)        (4,500)
Capital contributed                                                                                                               
 by stockholder                                               43                                                               43 
Net income                                                                                                   4,631          4,631
Foreign currency translation                                                                 35                                35
Notes receivable and                                                                                                             
 advances from shareholders                                               (1,330)                                          (1,330)
                                 ------------    ---------------    -------------     -------------     -----------     --------- 
Balance -- May 31, 1996                     1                477          (4,559)           102             (3,309)        (7,288)
Distribution to shareholders                                                                                (1,890)        (1,890)
Capital contributed                                                                                                               
 by stockholder                                                                                              1,239          1,239 
Comprehensive income:                                                                                                            
  Net loss                                                                                                  (1,305)        (1,305)
  Foreign currency translation                                                              (18)                              (18)
                                                                                                                        --------- 
                                                                                                                           (1,323)
Notes receivable and advances                                                                                                    
 from shareholders                                                        (1,016)                                          (1,016)
                                 ------------    ---------------    -------------     -------------     -----------     --------- 
Balance -- October 8, 1996             $    1             $  477        $ (5,575)        $   84           $ (5,265)      $(10,278)
                                 ============    ===============    =============     =============     ===========     ========= 
</TABLE> 
 
<TABLE>
<CAPTION>
                                                                                             ACCUMULATED      RETAINED
                                       COMMON STOCK --                            COMMON        OTHER         EARNINGS
                                      NUMBER OF SHARES        COMMON STOCK        STOCK     COMPREHENSIVE   (ACCUMULATED
                                     -------------------    -----------------
COMPANY                              CLASS A     Class B    CLASS A   Class B    WARRANTS      INCOME         DEFICIT)      TOTAL
-------                              -------     -------    -------   -------    --------   -------------   ------------   --------
<S>                                  <C>         <C>        <C>       <C>        <C>        <C>             <C>            <C>
Issuance of common stock
 -- July 1, 1996                                   2,240              $1,000                                               $  1,000
Issuance of common stock in
 connection with the acquisition                            
 of EduTrek Systems, Inc.               105        1,995                                                       $  (237)        (237)

Sale of common stock in                                     
 connection with                                            
 acquisition of Predecessor                        2,100               3,000                                                  3,000
Issuance of common stock in                                 
 exchange for certain fees              350                 $   500                                                             500 

Issuance of warrants in                                     
 connection with acquisition                                
 of Predecessor                                                                    $ 677                                        677
Issuance of common stock in                                 
 exchange for stock of                                      
 Predecessor                            210                     787                                                             787
Comprehensive income:                                       
 Foreign currency translation                                                                      $ 147                        147
 Net income                                                                                                      2,003        2,003
                                                                                                                           --------
                                                                                                                              2,150
                                     -------     -------    -------   -------    --------   -------------   ------------   --------
Balance -- May 31, 1997                 665        6,335      1,287    4,000         677             147         1,766        7,877
Issuance of common stock net of                             
 initial public offering costs                              
 -- September 29, 1997                2,733                  34,560                                                          34,560
Conversion of warrants to                                   
 common stock                           879                     677                 (677)                                         - 

Conversion of Class B Common                                
 Stock to Class A Common Stock           42          (42)        27      (27)                                                     - 

Issuance of common stock                                    
 under stock option plan                 16                      13                                                              13 

Comprehensive income:                                       
 Foreign currency translation                                                                        (59)                       (59)

 Net income                                                                                                      1,903        1,903
                                                                                                                           --------
                                                                                                                              1,844
                                     -------     -------    -------   -------    --------   -------------   ------------   --------
Balance -- May 31, 1998               4,335        6,293     36,564    3,973           -              88         3,669       44,294
Issuance of common stock                                    
 under stock option plan                 28                      47                                                              47 
Comprehensive income:                                       
 Foreign currency translation                                                                        (64)                       (64)
 Net loss                                                                                                       (5,516)      (5,516)
                                                                                                                           --------
                                                                                                                             (5,580)
                                     -------     -------    -------   -------    --------   -------------   ------------   --------
Balance -- December 31, 1998          4,363        6,293    $36,611   $3,973       $   -           $  24       $(1,847)    $ 38,761
                                     =======     =======    =======   =======    ========   =============   ============   ========
</TABLE> 
 
                See notes to consolidated financial statements.

                                     -37-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
 
<TABLE>
<CAPTION>
                                                                                            THE COMPANY
                                                                 -----------------------------------------------------------------
                                                                   SEVEN MONTHS ENDED                    
                                                                      DECEMBER 31,         YEAR ENDED    PERIOD FROM JULY 1, 1996
                                                                 -----------------------    MAY 31,       (DATE OF FORMATION) TO  
                                                                    1998          1997        1998             MAY 31, 1997
                                                                 ---------     ---------   ---------     -------------------------
                                                                              (Unaudited)
<S>                                                              <C>           <C>         <C>           <C>
Net income (loss)                                                $ (5,516)     $ (1,514)   $  1,903          $  2,003
Adjustments to reconcile net income (loss) to net cash
 provided by operating activities:
    Write-off of license fees (Note 8)                              3,533             -           -                 -
    Write-off of pre-opening costs (Note 2)                           141             -           -                 -
    Depreciation and amortization                                   1,801         1,653       2,718             1,626
    Bad debt expense                                                  310           234         307               126
    Extraordinary loss                                                  -         1,600       1,600                 -
    Gain on sale of aircraft                                            -             -        (991)                -
    Amortization of loan discount                                       -            22          22               146
    Decrease (increase) in accounts receivable                       (477)       (1,450)     (2,920)            1,334
    (Increase) decrease in deferred taxes                          (2,177)            -        (137)              225
    Increase (decrease) in accounts payable and accrued 
       liabilities                                                  3,216          (153)        561               796
    Increase (decrease) in unearned revenues                        4,154         4,386         325            (6,508)
    Increase (decrease) in value-added taxes payable                  316          (202)       (449)             (323)
    Increase (decrease) in income taxes payable                    (1,616)       (1,591)       (140)            1,537
    Other                                                            (991)         (259)       (113)              394
                                                                 ---------     ---------   ---------     -------------------------
 Net cash provided by operating activities                          2,694         2,726       2,686             1,356
                                                                 ---------     ---------   ---------     -------------------------
INVESTING ACTIVITIES                                                                                                 
 Additions to licenses, pre-opening, and curriculum                                                       
  development costs                                                (3,552)         (836)     (1,440)                -
 Purchases of property, plant, and equipment                       (3,651)       (1,328)     (2,681)             (681)
 Sale of property, plant, and equipment                                 -             -       2,076                 -
 Acquisition of Predecessor                                             -             -           -           (30,747)
 Net increase in note receivable from related parties and                                                            
  former stockholders                                                   -             -           -                 -
                                                                 ---------     ---------   ---------     -------------------------
 Net cash used in investing activities                             (7,203)       (2,164)     (2,045)          (31,428)
                                                                 ---------     ---------   ---------     -------------------------
FINANCING ACTIVITIES                                                                                                 
 Net receipts (payments) -- line-of-credit                          1,820        (3,000)          -              (938)
 Principal payments under capital lease                              (460)          (98)       (346)              (52)
 obligations                                                                                                         
 Principal repayments on long-term debt                                54       (25,012)    (33,347)              (26)
 Proceeds from issuance of common stock                                 -        34,560      34,560             4,000
 Proceeds from long-term borrowings                                     -             -       4,043            29,117
 Increase in deferred loan costs                                        -             -           -            (1,321)
 Other                                                                 46            21        (400)                -
                                                                 ---------     ---------   ---------     -------------------------
 Net cash provided by financing activities                          1,460         6,471       4,510            30,780
                                                                 ---------     ---------   ---------     -------------------------

 Effect of exchange rate changes on cash                              (15)           32          14               (30)
                                                                 ---------     ---------   ---------     -------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               (3,064)        7,065       5,165               678
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      5,843           678         678                 -
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $  2,779      $  7,743    $  5,843          $    678 
                                                                                                                     
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                   
 Cash paid during the period for:                                                                                    
    Interest                                                     $    150      $  1,439    $  1,567          $  1,690
    Income taxes                                                      679           989       2,047                45 
</TABLE> 
 
                See notes to consolidated financial statements.


                                     -38-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
 
<TABLE>
<CAPTION>
                                                                                                    THE PREDECESSOR  
                                                                                       -----------------------------------------
                                                                                       PERIOD FROM JUNE 1,       YEAR ENDED
                                                                                          1996 THROUGH            MAY 31,
                                                                                         OCTOBER 8, 1996            1996
                                                                                       -------------------       --------------- 
<S>                                                                                    <C>                       <C>
Net income (loss)                                                                           $ (1,305)             $ 4,631
Adjustments to reconcile net income (loss) to net cash provided by                                                
  operating activities:                                                                                           
    Depreciation and amortization                                                                392                1,087
    Bad debt expense                                                                              69                  168
    Increase in accounts receivable                                                             (192)                (199)
    Decrease (increase) in accounts payable and accrued liabilities                             (461)                 391
    Increase in unearned revenues                                                              3,135                   30
    Increase in value-added taxes payable                                                        190                   13
    Decrease in income taxes payable                                                               -                  (58)
    Other                                                                                       (415)                (265)
                                                                                       -------------------       --------------- 
  Net cash provided by operating activities                                                    1,413                5,798
                                                                                       -------------------       ---------------
                                                                                                                  
INVESTING ACTIVITIES                                                                                              
  Purchases of property, plant, and equipment                                                   (118)              (1,434)
  Net increase in note receivable from related parties and former stockholders                  (170)              (1,228)
                                                                                       -------------------       --------------- 
  Net cash used in investing activities                                                         (288)              (2,662)
                                                                                       -------------------       ---------------
                                                                                                                   
FINANCING ACTIVITIES                                                                                               
  Proceeds from long-term borrowings                                                             750                2,058
  Principal repayments on long-term debt                                                        (234)                (893)
  Principal payments under capital lease obligations                                             (94)                (148)
  Net receipts (payments) -- line-of-credit                                                      151                   (2)
  Distributions to stockholders                                                               (1,890)              (4,500)
  Capital contribution from stockholder                                                            -                   43
  Other                                                                                          120                    -
                                                                                       -------------------       --------------- 
  Net cash used in financing activities                                                       (1,197)              (3,442)
                                                                                       -------------------       --------------- 
  Effect of exchange rate changes on cash                                                        (12)                   8
                                                                                       -------------------       --------------- 
                                                                                                                  
NET DECREASE IN CASH AND CASH EQUIVALENTS                                                        (84)                (298)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                   453                  751
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                    $    369              $   453
                                                                                                                  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                
  Cash paid during the period for:  
    Interest                                                                                $    295              $   730
    Income taxes                                                                                                      107
</TABLE> 
 
                See notes to consolidated financial statements.

                                     -39-
<PAGE>
 
                          EDUTREK INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  COMPANY - AS OF DECEMBER 31, 1998 AND MAY 31, 1998 AND FOR THE SEVEN MONTHS
  DECEMBER 31, 1998 AND 1997 (UNAUDITED), THE YEAR ENDED MAY 31, 1998, AND THE
                                     PERIOD
  FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR - FOR THE
                                     PERIOD
     FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996

NOTE 1 - ORGANIZATION AND BUSINESS

     Organization - EduTrek International, Inc. (the "Company"), through its
subsidiary American InterContinental University, Inc. ("AIU"), is a leading
provider of career-oriented, internationally focused higher education programs.
The Company operates campuses in Atlanta, the District of Columbia, Los Angeles,
Miami, London, and Dubai, United Arab Emirates, with curricula focusing on
international business, multimedia communications, design, and information
technology.  AIU is accredited by the Commission on Colleges of the Southern
Association of Colleges and Schools.

     Acquisition - The Company, formerly known as E Holdings, Inc., was
organized by Mr. Steve Bostic, the Company's current Chairman and Chief
Executive Officer, on July 1, 1996 for the purpose of acquiring all of the
capital stock of EduTrek Systems, Inc. ("EduTrek Systems") (a company also
controlled by Mr. Bostic), AIU, formerly known as American European Corporation,
and American College in London, Ltd. U.S., as well as 85% of the membership
interests of American European Middle East Corporation, L.L.C ("AEMEC" which,
together with AIU, Inc. and American College in London, Ltd., U.S. are
collectively referred to herein as the "Predecessor").  On October 8, 1996, the
Company acquired the capital stock and membership interests of the Predecessor
which, prior to its acquisition, operated The American College, now known as
AIU.  The purchase price for the acquisition of the Predecessor was
approximately $38.0 million.  Also on October 8, 1996, the Company acquired all
of the issued and outstanding capital stock of EduTrek Systems for an aggregate
of 105,000 shares of Class A Common Stock and 1,995,000 shares of Class B Common
Stock.

     The Company did not acquire the Predecessor until October 8, 1996.
Accordingly, the financial statements of the Company for the period from July 1,
1996 through October 7, 1996 do not include the Predecessor.  EduTrek Systems is
included in the financial statements of the Company from July 1, 1996, the date
of the Company's formation, in a manner similar to a pooling of interests.  The
results of operations of the Company include losses arising from the operation
of EduTrek Systems of approximately $380,000 for the period from July 1, 1996 to
May 31, 1997.  Financial information for EduTrek Systems is not included prior
to July 1, 1996.

     The Company's acquisition of the Predecessor has been accounted for as a
purchase.  Accordingly, the purchase price has been allocated to the
Predecessor's identifiable assets and liabilities based on estimated fair values
at the acquisition date.  The excess of the purchase price over the fair value
of the Predecessor's identifiable net assets has been classified as goodwill.
The purchase price, net of noncash items totaling approximately $1.5 million, of
the Predecessor has been allocated as follows (in millions):

<TABLE>
     <S>                                       <C>        
     Current assets                            $ 3.9      
     Property, plant, and equipment              3.1      
     Goodwill                                   40.4      
     Other assets                                2.1      
     Liabilities assumed                        13.0      
</TABLE>

     The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the
acquisition of the Predecessor for the period from July 1, 1996 to May 31, 1997
as if the acquisition had occurred as of July 1, 1996:

        Net revenue                    $27,926,000


                                     -40-
<PAGE>
 
          Net income                                  $   276,000            
          Basic income per share                      $      0.04            
          Diluted income per share                    $      0.03            


     Public Offering - On September 29, 1997, the Company completed an initial
public offering of 2,990,000 shares of its Class A Common Stock, of which
2,732,890 shares were sold by the Company, including 390,000 shares sold as the
result of the Underwriter's exercise of an over-allotment option, at $14 per
share, which after underwriting discounts and commissions and payment of
offering expenses raised $34,560,000 for the Company.  The Company used
$28,571,000 of the proceeds to retire long-term debt and related accrued and
unpaid interest incurred in connection with the acquisition, $620,000 to repay
short-term indebtedness outstanding under the Revolving Loan, and the remaining
net proceeds of $5,369,000 were used for general corporate purposes, including
increased working capital requirements of the Company resulting from its growth.

     Government Regulation - The Company and AIU are subject to extensive
regulation by federal, state, and foreign governmental agencies, and accrediting
agencies.  In particular, the Higher Education Act of 1965, as amended (the
"HEA"), and the regulations promulgated thereunder by the U.S. Department of
Education (the "Regulations") set forth numerous standards that schools must
satisfy in order to participate in the various federal student financial
assistance programs under Title IV of the HEA ("Title IV Programs").  For
example, the HEA and Regulations:  (i) establish certain financial
responsibility and administrative capability, (ii) establish maximum acceptable
rates of default by students on federally guaranteed or funded student loans,
(iii) restrict the ability of a school or its parent corporation to engage in
certain types of transactions that would result in a change in ownership and
control of that school or corporation, (iv) limit the proportion of school
revenues that may be derived from Title IV Programs, and (v) prohibit the
payment of certain types of incentives to personnel engaged in student
recruiting and admissions activities.

     With the enactment of the Higher Education Amendments of 1992, proprietary
schools, such as AIU, would cease to be eligible to participate in Title IV
Programs if on a cash basis of accounting, more than 85% of its revenues from
eligible programs for the prior fiscal year were derived from Title IV Programs.
This was known as the 85/15 Rule.  The percentages have been changed to 90/10
with the enactment of the Higher Education Amendments of 1998 for any fiscal
year containing the October 1, 1998 effective date.  Any school that violates
the 90/10 Rule immediately becomes ineligible to participate in Title IV
Programs and is unable to apply to regain its eligibility until the following
fiscal year.  Each year, every institution participating in Title IV Programs
must submit consolidated financial statements demonstrating compliance with this
standard.  For the year ended May 31, 1998, 29% of AIU's revenues were derived
from Title IV Programs.  The Company regularly monitors compliance with this
requirement in order to minimize the risk that AIU would derive more than 90% of
its revenues from Title IV Programs for any fiscal year.  If AIU appears likely
to approach the 90% threshold, the Company would evaluate the appropriateness of
making changes in student funding and financing to ensure compliance.

     Other - The Company effected a 7 for 1 stock split in June 1997.  All share
and per share data information in the accompanying 1998 and 1997 consolidated
financial statements have been restated to reflect the stock split as if such
had occurred as of the earliest period presented.

     Also in June 1997, one warrant holder exercised its option to purchase
257,110 shares of Class A Common Stock at an exercise price of $.0014 per share.
In September 1997, another warrant holder exercised its option to purchase
444,318 shares of Class A Common Stock at the same exercise price.

     In December 1997, one warrant holder exercised its option to purchase
177,723 shares of Class A Common Stock at an exercise price of $.0014 per share.
There are no remaining warrants outstanding.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

     Change in Fiscal Year - During the seven months ended December 31, 1998,
the Board of Directors adopted a change in the fiscal year end of the Company
from May 31 to December 31.  The

                                     -41-
<PAGE>
 
Company historically experienced seasonality in its results of operations as a
result of lower student enrollments in the summer terms. This seasonality will
be mitigated by new educational programs which are offered throughout the year,
thereby decreasing seasonality and the need for a May 31 year end.

     Principles of Consolidation - Effective September 1, 1997, AEMEC entered
into an agreement with Middle East Colleges, Ltd. ("MEC") to modify certain
aspects of their joint venture agreement relating to the operation of the
American University in Dubai ("Dubai").  These modifications give effective
control of the joint venture to AEMEC as defined in Statement of Financial
Accounting Standards ("SFAS") 94, "Consolidation of All Majority-Owned
Subsidiaries," and require consolidation of the financial statements of Dubai
with those of the Company as of September 1, 1997.  Prior to this date, AEMEC's
portion of the net income from Dubai had been reported in the income statement
of the Company as "income from management agreement."  Effective September 1,
1997, the Company records MEC's ownership interest in the joint venture of 49.9%
as minority interest in the consolidated financial statements.

     The consolidated financial statements include the accounts of the Company,
AIU, Inc., the American College in London Ltd. U.S., AEMEC, Dubai, and the
American College in London, Ltd., a registered British corporation that is
wholly owned by The American College in London, Ltd. U.S.  Significant
intercompany accounts and transactions have been eliminated in consolidation.

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

     Cash and Cash Equivalents - The Company considers cash equivalents to be
all demand deposits and highly liquid unrestricted investments with an original
maturity of three months or less which can be readily converted to cash on
demand without penalty.

     Cash at December 31, 1998 and May 31, 1998 includes approximately $474,000
and $218,000, respectively, which is restricted to expenditures for scholarships
and other awards to students.  A corresponding liability has been recorded for
these funds until they are disbursed.

     Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation.  Prior to its sale, the aircraft was depreciated over
10 years on the double declining balance method (see note 4).  Depreciation for
all other property and equipment is calculated on a straight-line basis over the
estimated useful lives of the assets.

     Intangible Assets - Goodwill is amortized over 40 years using the straight-
line method.

     Curriculum Development Costs - The Company's policy is to capitalize direct
costs incurred in the production of and improvements to educational courses.
These direct costs, which are included in other assets, primarily include
salaries for staff directly engaged in the curriculum development process and
are amortized over a three year period beginning in the month the courses are
placed into service.

     Pre-opening Costs - The Company's policy was to capitalize all pre-opening
costs, except those costs related to advertising, prior to the commencement of a
new educational program.  Pre-opening costs were amortized over twelve months
upon commencement of a new program.  American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," (SOP 98-5) requires the Company to expense all pre-opening costs as
incurred and to write off any pre-opening costs included on the balance sheet
beginning in January 1999 or earlier.  The Company wrote-off the remaining
deferred pre-opening costs of $141,000 in December 1998.

     Licenses - The Company capitalizes license fees and amortizes the fees over
the life of the agreement.  During the year ended May 31, 1998, the Company
capitalized and began amortizing a

                                     -42-
<PAGE>
 
$450,000 license fee paid to ITI Education Corporation ("ITI") for the use of an
information technology curriculum in the Masters of Information Technology
program in Atlanta, GA. Also during the year ended May 31, 1998, the Company
entered into a ten year license agreement with ITI Learning Systems, Inc. (a
wholly-owned subsidiary of ITI) for the use of an information technology
curriculum at subsequent locations. The cost of this license was $750,000 which
was paid in July 1998. The license fee for subsequent locations in the District
of Columbia, Los Angeles, and Miami was $900,000 per location and was paid
during the seven months ended December 31, 1998.

     The Company has decided to phase out the licensed ITI curriculum in favor
of its own internally developed information technology curriculum and to
negotiate the termination of the licensing agreement.  As a result, the Company
has elected to write-off related license fees during the seven months ended
December 31, 1998 (see note 8).

     Impairment of Long-Lived Assets - All long-lived assets are evaluated for
impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of."  Under this method,
the Company is required to review long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  All long-lived assets to be disposed of will be reported at the
lower of carrying amount or fair value less cost to sell.

     Revenue Recognition - Revenue is recognized when all educational related
services have been performed.  The Company records accounts receivable and
related unearned revenue when students are billed for tuition, fees, and dorm
payments.

     Unearned Revenues - Unearned revenues represent the portion of student
tuition, fees, and dorm payments received in advance of services being
performed.

     Deferred Rent - The Company records rent expense under operating leases
with escalating rent payments by amortizing the total operating lease obligation
over the lease term on a straight-line basis.

     Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying currently enacted statutory
rates to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities.  The effect on deferred taxes of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date.

     Earnings Per Share - Basic net income per share is computed by dividing net
income by the weighted-average number of shares outstanding.  Diluted net income
per share includes the dilutive effect of stock options and warrants.

     New Accounting Pronouncements - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" is effective for the Company
for the seven months ended December 31, 1998.  SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general purpose
financial statements.  The Company has adopted SFAS No. 130 in the current year
as required.

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is also effective for the Company for the seven months ended
December 31, 1998.  SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and related
information in financial statements.  This statement did not significantly alter
the disclosures the Company provides.

     The Company adopted SFAS No. 128, "Earnings per Share," during the year
ended May 31, 1998. In accordance with SFAS 128, the Company has presented both
basic and diluted per share amounts in the 1998 and 1997 statements of
operations presented. SFAS 128 is effective for annual financial statements for
periods ending after December 15, 1997 and requires the Company to change the
method previously

                                     -43-
<PAGE>
 
used to compute earnings per share and to restate all prior periods. As such,
the Company has conformed the 1998 and 1997 reported amounts to the provisions
of SFAS 128.

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments and hedging activities.  SFAS No. 133 will
be effective for the Company's fiscal year ending December 31, 2000.  The
Company does not currently have any derivative instruments nor is it involved in
hedging activities.

     Foreign Currency Translation - Assets and liabilities of the Company's
United Kingdom operations are translated from Pounds Sterling into U.S. dollars
at the rate of currency exchange at the end of the fiscal period.  Revenues and
expenses are translated at average monthly exchange rates prevailing during the
period.  Resulting translation differences are recognized as a component of
shareholders' equity and comprehensive income (see note 13).

     Fair Value of Financial Instruments - Management has reviewed the various
assets and liabilities of the Company in accordance with SFAS 107, "Disclosures
About Fair Values of Financial Instruments," and has concluded that
substantially all of the Company's financial instruments have terms such that
their book value approximates fair value.

     Reclassifications - Certain prior period amounts have been reclassified to
conform with current year presentation.

NOTE 3 - OTHER CURRENT ASSETS

     Other current assets at December 31, 1998 and May 31, 1998 consist of the
following (in thousands):

<TABLE>
<CAPTION>
                                                              December 31, 1998      May 31, 1998  
                                                            ---------------------  ----------------
   <S>                                                      <C>                    <C>             
   Prepaid expenses                                                        $1,248              $511
   Pre-opening costs                                                            -               212
   Other                                                                       40                36
                                                                           ------              ----
                                                                           $1,288              $759
                                                                           ======              ==== 
</TABLE>

NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment at December 31, 1998 and May 31, 1998 is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                              December 31, 1998      May 31, 1998   
                                                            ---------------------  ---------------- 
   <S>                                                      <C>                    <C>              
   Furniture, fixtures, and equipment                                     $11,754            $4,396 
   Leasehold improvements                                                   4,683             1,896 
   Library books                                                              653               551 
   Other                                                                        -               256 
                                                                          -------            ------ 
                                                                           17,090             7,099 
   Less accumulated depreciation and amortization                           2,119             1,370 
                                                                          -------            ------ 
                                                                          $14,971            $5,729 
                                                                          =======            ======  
</TABLE>

     Depreciation expense for property, plant, and equipment was $887,000,
$580,000 (unaudited), $1,275,000, $766,000, $1,225,000, and $391,000 for the
seven months ended December 31, 1998 and 1997, the year ended May 31, 1998, the
period from July 1, 1996 to May 31, 1997, the year ended May 31, 1996, and the
period from June 1, 1996 to October 8, 1996, respectively.

NOTE 5 - CAPITAL LEASES AND OTHER

                                     -44-
<PAGE>
 
     Capital leases and other at December 31, 1998 and May 31, 1998 is
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                               December 31, 1998      May 31, 1998  
                                                               -------------------  ---------------- 
   <S>                                                         <C>                  <C>             
   Capital lease obligations                                                $7,167            $  955
   Directors and officers insurance and other (matures                                              
        in 1999)                                                               340               286 
                                                               -------------------  ---------------- 
                                                                             7,507             1,241
   Less current portion                                                      1,686               574
                                                               -------------------  ---------------- 
                                                                            $5,821            $  667
                                                               ===================  ================ 
</TABLE>
                                                                                
     At December 31, 1998, the Company had $1.8 million borrowed against its
$4.0 million line of credit.  At May 31, 1998, the Company had no amount
borrowed against its $3.0 million line of credit. Amounts outstanding bear 
interest at 9.5%.

     The extraordinary loss of $960,000, during the year ended May 31, 1998, net
of taxes ($1,600,000 less the related income tax effect of $640,000) is from the
retirement of the Company's term loan with NationsBank, N.A. and its subordinate
debt with Stratford Capital Partners, L.P. and GMM Investors SBIC, L.P.  The
funds used to retire the debt represent a portion of the proceeds from the sale
of 2,990,000 shares of the Company's Class A Common Stock.

NOTE 6 - EMPLOYEE BENEFIT PLAN

     The Company maintains a qualified 401(k) Plan available to full-time
employees who meet the Plan's eligibility requirements.  This Plan, which is a
defined contribution plan, contains a profit sharing component, with tax-
deferred contributions to each employee based on an allocated portion of a
discretionary annual contribution.  Company contributions to the Plan for
matching of employee contributions were approximately $50,000, $44,000
(unaudited), $77,000, $51,000, and $44,000 for the seven months ended December
31, 1998 and 1997, the year ended May 31, 1998, the period from July 1, 1996 to
May 31, 1997, and the year ended May 31, 1996, respectively.

NOTE 7 - LEASES

     The Company leases office and classroom space, dormitories, and various
items of equipment under lease agreements with varying expiration dates through
December 2009.  Many of the lease agreements contain renewal clauses with
various terms; however, none of the leases contain any significant restrictions.
Several of the lease agreements contain provisions for rent escalations which
are either tied to the Consumer Price Index or require a specific percentage
increase annually.  These leases are classified as operating leases.

     The Company also leases various other assets under agreements which are
classified as capital leases.  The net book value of these assets at December
31, 1998 and May 31, 1998 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                           December 31, 1998      May 31, 1998   
                                                           -------------------  ---------------- 
   <S>                                                     <C>                  <C>              
   Furniture, fixtures, and equipment                                   $8,129            $1,454 
   Less accumulated amortization                                           605               291 
                                                           -------------------  ---------------- 
                                                                        $7,524            $1,163 
                                                           ===================  ================  
</TABLE>
                                                                                
     For the years ending December 31, future minimum lease payments and present
value of net minimum lease payments under capital leases and future minimum
lease payments under noncancellable operating leases are as follows:

<TABLE>
<CAPTION>
                                                                      Capital          Operating   
   Year ending December 31:                                            Leases           Leases     
                                                                  ----------------  ---------------
   <S>                                                            <C>               <C>            
   1999                                                               $1,984,290      $ 8,551,935    
   2000                                                                1,798,972        8,678,284    
</TABLE> 

                                     -45-
<PAGE>
 
<TABLE> 
   <S>                                               <C>             <C>     
   2001                                              1,643,891        8,312,805
   2002                                              1,371,438        8,024,421
   2003                                              1,347,486        7,273,863
   Thereafter                                          947,744       39,188,434
                                                     ---------      -----------
        Total minimum lease payments                 9,093,821      $80,029,742
                                                                    ===========
   Less amount representing interest                 1,926,804                 
                                                     ---------                 
        Present value of net minimum lease payments  7,167,017                 
                                                     =========                 
</TABLE>
                                                                                
     Rent expense incurred for the seven months ended December 31, 1998 and
1997, the year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997,
the period from June 1, 1996 to October 8, 1996, and the year ended May 31, 1996
under all operating leases was approximately $3,472,500, $2,883,800 (unaudited),
$5,444,000, $3,101,000, $1,337,000, and $3,997,800, respectively.

NOTE 8 - WRITE-OFF OF LICENSE FEES AND ACCRUAL OF TERMINATION COSTS

     During the year ended May 31, 1998, the Company and ITI entered into an
agreement whereby the Company licensed information technology curriculum from
ITI. The Company's practice was to capitalize and then amortize over ten years
license fees paid to ITI. The Company has decided to phase out the licensed ITI
curriculum in favor of its own internally developed information technology
curriculum and to negotiate the termination of the licensing agreement. As a
result, the Company has elected to write-off related license fees of $3,333,000
during the seven months ended December 31, 1998. The estimated phase-out costs
range from $200,000 to $500,000; management believes the ultimate cost to phase-
out this curriculum agreement will be $200,000, which has been accrued during
the seven months ended December 31, 1998.

NOTE 9 - CONSULTING AND EMPLOYMENT AGREEMENTS

     In connection with the acquisition of the Predecessor, the Company entered
into consulting and employment agreements with the selling shareholders and
other officers of American European.  The Company also entered into an
employment agreement with an officer of the Company.  For the seven months ended
December 31, 1998 and 1997 and the years ended May 31, 1998 and 1997, such
payments, which were charged to operations, totaled $464,000, $459,000
(unaudited), $716,000, and $705,000, respectively.  Future payments under these
agreements for the years ending December 31 are as follows (in thousands):

<TABLE>
          <S>                  <C>            
          1999                 $525           
          2000                  525           
          2001                  435           
          2002                   41           
</TABLE>

     Of the above amounts, approximately $536,000 of future payments relate to a
continuing officer of the Company.  Amounts paid to such officer totaled
approximately $96,250, $96,250 (unaudited), $165,000, and $27,500 for the seven
months ended December 31, 1998 and 1997 and for the years ended May 31, 1998 and
1997, respectively.

NOTE 10 - INCOME TAXES

     Income tax expense for the seven months ended December 31, 1998, the year
ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997 consists of
(in thousands):

<TABLE>
<CAPTION>
                                             Seven Months Ended                Year Ended May 31,
                                                                     --------------------------------------
                                             December 31, 1998              1998                1997
                                         --------------------------  ------------------  ------------------
<S>                                      <C>                         <C>                 <C>
Current:                      
   Federal                                       $(1,103)                  $2,238               $1,423      
   State                                               0                      480                  333      
                                                 -------                   ------               ------      
    Total current (benefit) provision             (1,103)                   2,718                1,756      
</TABLE> 

                                     -46-
<PAGE>
 
<TABLE> 
<S>                                           <C>                  <C>                  <C> 
Deferred:
   Federal                                     (1,600)               (117)                 194      
   State                                         (577)                (20)                  31      
                                              -------              ------               ------      
      Total deferred (benefit) provision       (2,177)               (137)                 225      
                                              -------              ------               ------      
      Total (benefit) provision               $(3,280)             $2,581                1,981      
                                              =======              ======               ======      
</TABLE>
                                                                                
     The following is a reconciliation of the statutory tax rate to the
Company's effective tax rate for the seven months ended December 31, 1998, the
year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997:

<TABLE>
<CAPTION>
                                           Seven Months Ended                   Year Ended May 31,
                                                                       -------------------------------------
                                            December 31, 1998                 1998               1997
                                    ---------------------------------  ------------------  -----------------
<S>                                 <C>                                <C>                 <C>
Statutory rate                                   34.00%                       34.00%              34.00%                
State income taxes (net of                                                                                               
   Federal benefit)                               4.30%                        4.40%               6.03%                 
Permanent differences:                                                                                                  
     Nondeductible goodwill                      (2.28%)                       4.97%               9.69%                
     Nontaxable foreign earnings                                                                                        
       of minority interest                       2.82%                       (5.90%)                                   
     Other                                       (2.35%)                      
                                                 -----                        -----               -----
          Effective rate                         40.11%                       37.47%              49.72%                
                                                 =====                        =====               =====                  
</TABLE>
                                                                                
     The deferred income tax provision of $60,000 (unaudited) for the seven
months ended December 31, 1997 is primarily a result of nondeductible goodwill
of $588,000 and nontaxable foreign earnings of minority interest of $463,000.

     The effects of temporary differences which gave rise to the deferred tax
asset and liability at December 31, 1998 and May 31, 1998, respectively, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                 December 31, 1998                     May 31, 1998  
                                         ------------------------------      --------------------------------  
                                             Current        Long-term            Current         Long-term 
                                         --------------   -------------      ---------------  ----------------
<S>                                        <C>            <C>                  <C>             <C>
Deferred tax assets arising from:
     Net operating loss carryforward                           $2,112   
     Unearned revenue                          $217                                  $ 94   
     Deferred rent                                                384                                   $376    
     Other                                       91                                    73                121    
Deferred tax liabilities                                                              (37)                         
                                               ----            ------                ----               ----    
                                               $308            $2,496                $130               $497    
                                               ====            ======                ====               ====    
</TABLE>
                                                                                
     As a result of its election to be treated as an S Corporation for income
tax purposes, the Predecessor has not been subject to federal and most state
income taxes.  Accordingly, the historical provision for income taxes includes
income taxes only for those jurisdictions that do not recognize S Corporation
status.  Distributions in the form of cash dividends have been made principally
to assist the shareholders with their income tax obligations arising from the
Predecessor's S Corporation status.  Such distributions amounted to $1,889,694
and $4,500,000 for the period from June 1, 1996 through October 8, 1996 and for
the year ended May 31, 1996, respectively.

     Significant components of the provision for income taxes for the period
from June 1, 1996 to October 8, 1996 and the year ended May 31, 1996 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                    Period from June 1, 1996             Year Ended
                                                       to October 8, 1996               May 31, 1996
                                                 -----------------------------     --------------------
<S>                                              <C>                               <C>
Domestic                                                 $   -                                $ 23
</TABLE> 

                                     -47-
<PAGE>
 
<TABLE> 
<S>                                                <C>                              <C> 
Foreign                                                           -                                  84
                                                   ---------------------------      -------------------
                                                              $   -                                $107
                                                   ===========================      ===================
</TABLE>
                                                                                
NOTE 11 - U.S. AND FOREIGN OPERATIONS

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for the Company for the seven months ended December
31, 1998. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and related information
in financial statements. SFAS No. 131 uses the management approach for
determining what operating segment information to report. The management
approach is based on the way that management organizes the operating segments
within the Company for making decisions and assessing performance. The Company
operates solely in the education industry, and management makes decisions and
assesses performance based on the geographic locations of its campuses.
Therefore, the Company has elected to report segment information based on
geographic areas.

     The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates.  The Company's operations in Dubai
represented management fees from a management agreement through August 1997 and
consolidated operations since September 1, 1997 (see note 2).  Net revenues and
income (loss) from operations by geographic area for the seven months ended
December 31, 1998 and 1997, the year ended May 31, 1998, and the period from
October 8, 1996 (date of acquisition of the Predecessor) to May 31, 1997 and
identifiable assets by geographic area at December 31, 1998 and 1997 and May 31,
1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                   Seven Months Ended December 31,    Year Ended May 31,
                                  ---------------------------------  -------------------
                                       1998             1997           1998       1997   
                                  --------------  -----------------  ---------  -------- 
                                                     (Unaudited)                         
<S>                               <C>             <C>                <C>        <C>      
Net revenues:                                                                            
     United States                     $ 13,981         $10,172       $22,453     $13,437   
     United Kingdom                       6,990           7,272        14,595      10,153   
     Dubai, UAE                           2,877           1,730         4,866           -   
     Home Office                              -               -             -           -   
                                       --------         -------       -------     -------   
          Total                        $ 23,848         $19,174       $41,914     $23,590   
                                       ========         =======       =======     =======   
Income (loss) from operations:                                                              
     United States                     $      6         $ 3,219       $ 8,089     $10,533   
     United Kingdom                       1,826           2,606         5,873       4,385   
     Dubai, UAE                             959             739         2,257         479   
     Home Office                        (10,798)         (5,446)       (9,541)     (8,934)   
                                       --------         -------       -------     -------   
          Total                        $ (8,007)        $ 1,118       $ 6,678     $ 6,463   
                                       ========         =======       =======     =======   
Identifiable assets:                                                                        
     United States                     $ 60,938         $52,054       $52,725     $46,141   
     United Kingdom                       2,753           2,242         2,216       1,530   
     Dubai, UAE                           1,780           1,607           828           -   
     Home Office                              -               -             -           -   
                                       --------         -------       -------     -------   
          Total                        $ 65,471         $55,903       $55,769     $47,671   
                                       ========         =======       =======     =======    
</TABLE>
                                                                                
NOTE 12 - STOCK OPTION PLAN

     The Company has a stock incentive plan (the "Plan") for key employees and
directors under which it may grant incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, or performance awards of
Class A Common Stock or cash.  The maximum number of shares of Class A Common
Stock which can be issued through awards granted under the Plan is 1,200,000.

     Incentive stock options granted under the Plan expire on the tenth
anniversary of the date the option is granted or the fifth anniversary of the
date the option is granted in the event that the individual grantee owns more
than 10% of the total voting power of all classes of stock of the Company.

                                     -48-
<PAGE>
 
     On December 14, 1998, the Company repriced all stock options, with the
exception of the March 1997 stock options, to an exercise price of $6.50 per
share, which was above the fair market value of the stock on that date.  In the
seven months ended December 31, 1998, fixed stock options to purchase an
aggregate of 69,000 shares of Class A Common Stock were granted to certain
officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date.  Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.

     In the seven months ended December 31, 1998, the Company issued 18,000
fixed stock options at an exercise price of $6.50 per share, which was above the
fair market value of the stock, to selected members of the Board of Directors.

     In the seven months ended December 31, 1997, fixed stock options to
purchase an aggregate of 99,644 shares of Class A Common Stock were granted to
certain officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date.  Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.

     In the year ended May 31, 1998, fixed stock options to purchase an
aggregate of 299,644 shares of Class A Common Stock were granted to certain
officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date.  Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.

     In March 1997, incentive stock options to purchase an aggregate of 415,877
shares of Class A Common Stock were granted to certain officers and employees of
the Company, exercisable at $.77 per share which was the fair market value at
the grant date.  Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.  Of these options, 35,000 vest
contingent on the Company meeting certain financial goals (the "performance
options"). The likelihood of these 35,000 performance options vesting was 
estimated to be 100% and these were not considered variable options.

     The estimated weighted average fair value of options granted during the
seven months ended December 31, 1998 and 1997, the year ended May 31, 1998, and
the period from July 1, 1996 to May 31, 1997 was $5.32, $6.51 (unaudited),
$7.82, and $1.07, respectively.  The Company applies Accounting Principles Board
Opinion 25 and related interpretations in accounting for the Plan.  Accordingly,
no compensation cost has been recognized for the Plan.  Had compensation cost
for the Plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS 123, additional
compensation expense of $306,000, $79,000 (unaudited), $425,000, and $13,200
would have been recorded for the seven months ended December 31, 1998 and 1997,
the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997,
respectively.  Accordingly, the Company's net income and earnings per share for
the seven months ended December 31, 1998 and 1997, the year ended May 31, 1998,
and the period from July 1, 1996 to May 31, 1997 would have been reduced to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                        Seven Months Ended December 31,                  Year Ended May 31,
                                 ----------------------------------------------  -----------------------------------
                                          1998                    1997                 1998               1997
                                 ----------------------  ----------------------  -----------------  ----------------
                                                              (Unaudited)
<S>                              <C>                     <C>                     <C>                <C> 
Net income (loss):
     As reported                           $(5,516,000)            $(1,514,000)         $1,903,000        $2,002,690
     Pro forma                             $(5,822,000)            $(1,593,000)         $1,478,000        $1,989,490
Basic net income (loss) per
     share:
     As reported                           $     (0.52)            $     (0.17)         $     0.20        $     0.29
     Pro forma                             $     (0.55)            $     (0.18)         $     0.16        $     0.28
Diluted net income (loss) per
     share:
</TABLE> 

                                     -49-
<PAGE>
 
<TABLE> 
     <S>                                   <C>                     <C>                  <C>               <C>  
     As reported                           $     (0.52)            $     (0.17)         $     0.19        $     0.26
     Pro forma                             $     (0.55)            $     (0.18)         $     0.14        $     0.26
</TABLE>

     The fair value of options granted under the Plan during the above periods
was estimated on the date of grant or modification using the Black-Scholes
option pricing model with the following weighted average assumptions used for
the seven months ended December 31, 1998 and 1997, the year ended May 31, 1998,
and the period from July 1, 1996 to May 31, 1997:

<TABLE>
<CAPTION>
                                             Seven Months Ended December 31,                    Year Ended May 31,
                                     ------------------------------------------------  ------------------------------------ 
                                              1998                     1997                  1998               1997
                                     -----------------------  -----------------------  -----------------  -----------------
                                                                   (Unaudited)
<S>                                  <C>                      <C>                      <C>                <C> 
Expected volatility                             48.6%                    52.9%              52.6%                 0%        
Risk-free interest rate                          4.9%                     5.9%               5.8%               6.2%        
Dividend yield                                     0%                       0%                 0%                 0%        
Expected life                                   3.74                     2.80               3.97               3.91         
Annual forfeiture rate                             3%                       3%                 3%                 3%         
</TABLE>

     The following tables set forth activity in the Company's Plan:

<TABLE>
<CAPTION>
                                                All Subsequent Options                 Initial (March 31, 1997) Options
                                         -------------------------------------       ------------------------------------
                                                            Weighted Average                          Weighted Average
                                             Shares          Exercise Price             Shares         Exercise Price
                                         --------------    -------------------       ------------     -------------------
<S>                                      <C>               <C>                       <C>              <C>
Outstanding , June 1, 1996
     Granted                                                                             415,877             $0.7714      
                                                                                         -------                          
Outstanding, May 31, 1997                                                                415,877             $0.7714      
     Granted                                   299,644              $17.065                                               
     Exercised                                                                           (16,360)            $0.7714      
     Canceled                                                                             (1,400)            $0.7714      
                                               -------                                   -------                          
Outstanding May 31, 1998                       299,644              $17.065              398,117             $0.7714      
     Granted                                    87,000              $12.460                                               
     Exercised                                  (2,000)             $14.000              (22,204)            $0.7714      
     Canceled                                  (59,000)             $14.711              (16,380)            $0.7714      
                                               -------                                   -------                          
Outstanding December 31, 1998                  325,644              $ 6.500              359,533             $0.7714      
                                               =======                                   =======                          
Exercisable December 31, 1998                   11,929              $ 6.500               71,907             $0.7714      
</TABLE>

     Exercise price for options outstanding as of December 31, 1998 ranged from
$.7714 to $6.50.  The weighted average remaining contractual life of those
options is 8.72 years.

NOTE 13 - COMPREHENSIVE INCOME

     SFAS No. 130, "Reporting Comprehensive Income" is effective for the Company
for the seven months ended December 31, 1998. SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. The Company has adopted SFAS No. 130 in the current year as
required. The components of comprehensive income are as follows (in thousands):

<TABLE>
<CAPTION>
                                             Seven Months Ended December 31,                  Year Ended May 31,
                                     -----------------------------------------------  -----------------------------------
                                              1998                    1997                  1998               1997
                                     ----------------------  -----------------------  -----------------  ----------------
                                                                  (Unaudited)
<S>                                  <C>                     <C>                      <C>                <C> 
Net income (loss)                                  $(5,516)                 $(1,514)            $1,903             $2,003
Change in equity due to foreign
</TABLE> 

                                     -50-
<PAGE>
 
<TABLE> 
<S>                                                <C>             <C>           <C>          <C>                            
   currency translation adjustments                    (64)            (26)         (59)         147                         
                                                   -------         -------       ------       ------ 
Comprehensive income (loss)                        $(5,580)        $(1,540)      $1,844       $2,150                         
                                                   =======         =======       ======       ======                          
</TABLE>
                                                                                
NOTE 14 - SUBSEQUENT EVENTS

     In March 1999, the Company entered into a ten year lease for a 17,800
square foot space in northern Virginia for a new campus.  The Company begins its
occupancy in June 1999 and will incur rent payments of approximately $250,000
for the year ended December 31, 1999 and approximately $500,000 each year
thereafter.

     Also in March 1999, the Company entered into a ten year lease for a 21,000
square foot space in Miami, Florida for its permanent facility.  The Company
begins its occupancy in September 1999 and will incur rent payments of
approximately $100,000 for the year ended December 31, 1999 and approximately
$350,000 each year thereafter.

     On March 25, 1999, the Company executed a new $10 million bank credit
agreement (the "Credit Agreement").  The Credit Agreement matures on April 30,
2001 but can be extended beyond this date.  Amounts outstanding bear interest at
LIBOR plus 2.75%.  This new Credit Agreement replaced an existing $4.0 million
bank credit facility.

                                     -51-
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     There has been no occurrence requiring a response to this item.

                                   PART III

          Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A for the Company's 1999 Annual
Meeting of Shareholders (the "Proxy Statement").  The Company will, within 120
days of December 31, 1998, file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The information concerning directors and executive officers of the
Registrant is set forth in the Proxy Statement under the headings "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
information is incorporated herein by reference.  The name, age, and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Item 1 of this Report.

ITEM 11.  EXECUTIVE COMPENSATION

          The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the headings "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation,"
which information is incorporated herein by reference.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements.  The following financial statements and auditors'
     report have been filed with Item 8 in Part II of this Report.

                                                                         PAGE
                                                                         ----

       Independent Auditors' Report                                        33
       Consolidated Balance Sheets                                         34
       Consolidated Statements of Operations                               35
       Consolidated Statements of Changes in Shareholders' Equity          37
       Consolidated Statements of Cash Flows                               38
       Notes to Consolidated Financial Statements                          40

(a)(2) Financial Statement Schedules.  All financial statement schedules are
       omitted as the required information is inapplicable.

                                     -52-
<PAGE>
 
(a)(3) Exhibits.  The exhibits listed below are filed with or incorporated by
       reference into this Report. The exhibits which are denominated with an
       asterisk (*) were previously filed as part of, and are hereby
       incorporated by reference from, either (i) the Company's registration
       statement on Form S-1, Registration Number 333-29603, as amended,
       declared effective by the Securities and Exchange Commission on September
       23, 1997 (the "S-1"); (ii) the Company's Quarterly Report on Form 10-Q
       for the quarter ended February 28, 1998 (the "2/28/98 10-Q"); or (iii)
       the Company's Annual Report on Form 10-K for the fiscal year ended May
       31, 1998 ("May 1998 10-K"). Unless otherwise indicated, the exhibit
       number corresponds to the exhibit number in the referenced document.

<TABLE> 
<CAPTION>
Exhibit Number                                              Description
----------------------------  -----------------------------------------------------------------------
<C>                           <S>
*  2.1                        Stock Purchase Agreement dated July 25, 1996 by and between EduTrek
                              International, Ltd., Thomas J. Barnette and Phillip J. Markert
                              relating to the acquisition of the Predecessor (S-1)
*  3(i)                       Articles of Incorporation (S-1)
*  3(i).1                     Articles of Amendment to Articles of Incorporation, dated September 6,
                              1996 (S-1)
*  3(i).2                     Articles of Amendment to Articles of Incorporation, dated June 17,
                              1996 (S-1)
*  3(ii)                      Bylaws (S-1)
*  4.1                        Specimen Certificate of Class A Common Stock (S-1)
   10.1                       Amended and Restated 1997 Incentive Plan
*  10.3                       Form of Incentive Stock Option Agreement (S-1)
*  10.4                       Form of Non-qualified Stock Option Agreement (S-1)
   10.5                       Credit Agreement dated as of March 25, 1999 by and between the Company
                              and First Union National Bank
   10.6                       Office Lease dated June 19, 1998 between the Company and W9/WLA Real
                              Estate Limited Partnership
   10.6.1                     First Amendment dated September 4, 1998 to Office Lease dated June 19,
                              1998 between the Company and W9/WLA Real Estate Limited Partnership
*  10.7                       Employment Agreement, dated March 21, 1997, by and between E Holdings,
                              Inc. and Stephen G. Franklin, Sr. (S-1)
*  10.10                      Agreement, dated October 1, 1995, by and between American Middle East
                              Corporation, LLC and Middle East College, Ltd., relating to the
                              formation and operation of the University's campus in Dubai (S-1)
*  10.10.1                    Agreement, dated September 1, 1997, relating to Agreements, dated
                              October 1, 1995 and January 24, 1996, by and between American Middle
                              East Corporation, LLC and Middle East College, Ltd., relating to the
                              formation and operation of the University's campus in Dubai (May 1998
                              10-K)
*  10.11                      Financial Operations Agreement, dated October 1, 1995, by and between
                              American European Middle East Corporation, LLC and Middle East
                              Colleges, Ltd., relating to the operation of the University's campus
                              in Dubai (S-1)
                             
*  10.12                      Memorandum of Understanding, dated January 24, 1996, by and between
                              American European Middle East Corporation, LLC and Middle East
                              Colleges, Ltd. (S-1)
*  10.14                      Anti-Dilution Rights Agreement, dated October 8, 1996, by and between
                              E Holdings, Inc. and Phillip J. Markert (S-1)
*  10.15                      Agent Agreement, dated March 13, 1996, by and between Target Marketing
                              Systems, Inc. and EduTrek Systems, Inc. (S-1)
*  10.16                      License Agreement, dated July 26, 1997, by and between ITI Learning
</TABLE> 

                                     -53-
<PAGE>
 
<TABLE> 
<S>                           <C>  
                              Systems, Inc., American European Corporation and the Company (S-1)
*  10.17                      Lease:  Embassy Row 500 Between EduTrek International, Inc., a Georgia
                              Corporation (Tenant) and a Maryland Corporation (Landlord) (2/28/98
                              10-Q)
*  10.18                      Lease Agreement dated June 30, 1998 between 1770 G Street Limited
                              Partnership and American Intercontinental University, Inc. (May 1998
                              10-K)
*  21.1                       Subsidiaries of the Registrant (S-1)
   23.1                       Independent Auditors' Consent
   24.1                       Power of Attorney of Stephen G. Franklin, Sr.
   24.2                       Power of Attorney of Paul D. Beckham
   24.3                       Power of Attorney of Fred C. Davison
   24.4                       Power of Attorney of Ronald P. Hogan
   24.5                       Power of Attorney of Gaylen D. Kemp
   24.6                       Power of Attorney of Gerald Tellefsen
   24.7                       Power of Attorney of J. Robert Fitzgerald
   27.1                       Financial Data Schedule (SEC only)
</TABLE>

(b)  Reports on Form 8-K.  No reports on Form 8-K were filed during the month
     ended December 31, 1998.

                                     -54-

<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                  EDUTREK INTERNATIONAL, INC.


Date:  March 30, 1999             By: /s/ Steve Bostic
                                      ----------------------------------------
                                      Steve Bostic, Chairman and
                                      Chief Executive Officer
                                      (principal executive officer)

Date:  March 30, 1999             By: /s/ Daniel D. Moore
                                      ----------------------------------------
                                      Daniel D. Moore, Chief Financial
                                      Officer (principal financial and
                                      accounting officer)

                                        
          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
         Signature                                 Title                                 Date
         ---------                                 -----                                 ----          
<S>                                     <C>                                         <C> 
                                        Chairman and Chief Executive                March 30, 1999
/s/  Steve Bostic                                Officer
----------------------------
Steve Bostic
 
/s/   Daniel D. Moore                     Chief Financial Officer                   March 30, 1999
----------------------------
Daniel D. Moore
 
                                     President, Chief Academic Officer              March 30, 1999
*                                               and Director
----------------------------
Stephen G. Franklin, Sr.
 
*                                                 Director                          March 30, 1999
----------------------------
Paul D. Beckham
 
*                                                 Director                          March 30, 1999
----------------------------
Fred C. Davison
 
*                                                 Director                          March 30, 1999
----------------------------
Ronald P. Hogan
 
*                                                 Director                          March 30, 1999
----------------------------
Gaylen D. Kemp
 
             *                                    Director                          March 30, 1999
----------------------------
Gerald Tellefsen

*                                                 Director                          March 30, 1999
----------------------------
J. Robert Fitzgerald
</TABLE>

                                     -55-
<PAGE>
 
*  By: /s/ Daniel D. Moore
       ----------------------
       Daniel D. Moore,
       as Attorney in fact pursuant to Powers
       of Attorney filed as exhibits to this Report

                                     -56-
<PAGE>
 
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT NUMBER             DESCRIPTION
--------------
<C>                        <S>
10.1                       Amended and Restated 1997 Incentive Plan
10.5                       Credit Agreement dated as of March 25, 1999 by and
                           between the Company and First Union National Bank
10.6                       Office Lease dated June 19, 1998 between the Company
                           and W9/WLA Real Estate Limited Partnership
10.6.1                     First Amendment dated September 4, 1998 to Office
                           Lease dated June 19, 1998 between the Company and
                           W9/WLA Real Estate Limited Partnership
23.1                       Independent Auditors' Consent
24.1                       Power of Attorney of Stephen G. Franklin, Sr.
24.2                       Power of Attorney of Paul D. Beckham
24.3                       Power of Attorney of Fred C. Davison
24.4                       Power of Attorney of Ronald P. Hogan
24.5                       Power of Attorney of Gaylen D. Kemp
24.6                       Power of Attorney of Gerald Tellefsen
24.7                       Power of Attorney of J. Robert Fitzgerald
27.1                       Financial Data Schedule (SEC only)
</TABLE>

                                     -57-