<PAGE>   1


                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C. 20549

                                 FORM 10-K/A
(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the fiscal year ended March 31, 1997

                                     OR

[  ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        For the transition period from              to
                                       ------------    -------------

                      Commission file number 000-21567

                          EDUCATIONAL MEDICAL, INC.
           (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        DELAWARE                                                65-0038445
(State or other jurisdiction                                   (IRS Employer
of incorporation or organization)                           Identification No.)


1327 Northmeadow Parkway, Suite 132, Roswell, Georgia             30076
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:             (770) 475-9930

Securities registered under Section 12(b) of the Exchange Act:    NONE

Securities registered under Section 12(g) of the Exchange Act:    COMMON STOCK,
                                                                 PAR VALUE $.01
                                                                    PER SHARE


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

     Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K (Section  229.405 of this chapter) 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 to Part
III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the last sale price for such stock at June 23, 1997:
$3,616,822

The number of shares outstanding of each of the registrant's classes of common
stock, as of June 23, 1997:  7,383,283(one class).

                     DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A not later than July
29, 1997 is incorporated by reference in Part III hereof.




<PAGE>   2

                                   PART IV

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

(a) FINANCIAL STATEMENTS

           Report of Ernst & Young LLP, Independent Auditors
   
           Notes to Consolidated Financial Statements



                                       2


<PAGE>   3




                       Report of Independent Auditors

Board of Directors and Stockholders
Educational Medical, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Educational
Medical, Inc. and subsidiaries as of March 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1997.  Our audits also
included the financial statement schedule listed in the Index at Item 14(b).
These financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.  We did not audit the financial
statements of Nebraska Acquisition Corporation, a wholly-owned subsidiary, or
its predecessors (Educational Management, Inc. and Wikert and Rhude, a general
partnership) acquired by Educational Medical, Inc. on March 31, 1997 in a
business combination accounted for as a pooling of interests as described in
Note 4 to the consolidated financial statements, which statements reflect total
assets of approximately $2,625,000 and $5,681,000 as of March 31, 1996 and
1997, respectively, and total net revenues of approximately $5,015,000,
$4,695,000, and $6,012,000 for the years ended March 31, 1995, 1996 and 1997,
respectively.  Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for Nebraska Acquisition Corporation, is based solely on the report of the
other auditors.

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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Educational Medical, Inc. and
subsidiaries at March 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of other auditors, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

                                                        /s/ Ernst & Young LLP

                                          
Atlanta, Georgia
June 30, 1997 
except as to the second
paragraph of Note 3 as to
which the date is August 27, 1997
                                                                             F-1


<PAGE>   4




                  Educational Medical, Inc. and Subsidiaries

                  Notes to Consolidated Financial Statements

                                 March 31, 1997

                                       
1. ORGANIZATION AND NATURE OF BUSINESS

Educational Medical, Inc. (the "Company") operates diversified career-oriented
postsecondary education schools. The Company offers diploma and, in certain
locations, degree programs through its 19 schools located in nine states. The
Company's 19 schools offer programs designed to provide enrolled students with
the knowledge and skills necessary for entry level employment in the fields of
healthcare, business, fashion and design, and photography.

The consolidated financial statements have been restated for the March 31, 1997
acquisition of Educational Management, Inc. ("Nebraska Acquisition"), which has
been accounted for as a pooling of interests.  The financial statements and
notes reflect amounts related to the consolidated results of the Company and
the Nebraska Acquisition.  See Note 4 for further details.

On October 28, 1996, the Company completed its initial public offering ("IPO")
of common stock by selling 2,200,000 shares of newly issued shares, in addition
to 410,000 shares sold by certain selling stockholders in October and November
1996.  See Note 7 for further details.

Approximately 46% and 12% of the Company's fiscal 1997 net revenues were
derived from its schools in California and Nebraska, respectively. No other
state represented over 10% of net revenues. Approximately 76% of the Company's
fiscal 1997 cash receipts were derived from Title IV programs as provided for
by the Higher Education Act of 1965, as amended. Cash receipts approximated 98%
of the Company's net revenues in fiscal 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.



                                                                            F-7


<PAGE>   5

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)





2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in accordance with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS/RESTRICTED CASH

Cash equivalents includes overnight investments in a bank. These investments
are recorded at cost, which approximates market. The Company considers
investments with maturities of three months or less at the date of purchase to
be cash equivalents for purposes of the statements of cash flows.

Restricted cash represents 25% of certain of the Company's Title IV program
refunds made in the preceding fiscal year, as previously required by such
programs or posting of irrevocable letters of credit.  In 1997, the Company
determined that segregation of such funds was no longer required except in
instances of failure to demonstrate financial responsibility, as defined, or to
pay refunds on a timely basis.

At March 31, 1996 and 1997, the Company held $3,717,558 and $13,515,475,
respectively, in cash balances at certain financial institutions which amounts
were in excess of the $100,000 federally insured amounts.  The Company monitors
the financial condition of these institutions since it is exposed to credit
risk for such excess amounts, however, at this time the Company does not
believe any of these institutions present such a risk.




                                                                             F-8

<PAGE>   6

                  Educational Medical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                                       


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LONG-LIVED ASSETS

In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS 121"), the Company records impairment losses on
long-lived assets, including intangibles, used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation, including that related
to assets under capital leases, is computed using the straight-line method over
the estimated useful lives of the related assets or the remaining lease term
for leasehold improvements, if shorter.

COVENANTS NOT TO COMPETE

Non-compete agreements obtained from the sellers of certain acquired schools
are being amortized on the straight-line basis over the life of the agreement,
generally from two to 15 years.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is amortized over a fifteen year period.

Other intangible assets, which are similar in character to goodwill (acquired
student contracts, program curriculum, favorable leases assumed, accreditation
and acquired tradenames) are being amortized using the straight-line method
over periods ranging generally from two to ten years.



                                                                             F-9
<PAGE>   7

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

During the fiscal year ended March 31, 1995, the Company wrote-off
approximately $176,000 of unamortized intangible assets due to changes in
federal regulations regarding student referrals. During the fiscal year ended
March 31, 1996, the Company wrote-off approximately $764,000 of unamortized
goodwill related to one of its schools due to estimated impairment in value
(see Note 11).

LONG-TERM DEBT

Outstanding principal amounts are carried net of unamortized debt discount,
when applicable. The debt discount is being amortized over the period until
maturity of the underlying debt, using the straight-line method. Such
amortization is included in interest expense.

Deferred debt issuance costs represent fees and other costs associated with
obtaining long-term debt financing.  Such amounts are amortized over the lives
of the related loans.

REVENUE RECOGNITION

Tuition revenue is recognized monthly on a straight-line basis over the term of
the course of study. Certain nonrefundable fees and charges are fully
recognized as revenue at the time a student begins classes.

The Company is generally required to refund a portion of a student's unearned
tuition who withdraws from a Company school. The amount of tuition, if any,
that may be retained by the Company after payment of any potential refund is
immediately recognized in the Company's statement of operations.

Deferred tuition income represents the portion of student tuitions received in
advance of the course of study's completion.



                                                                            F-10


<PAGE>   8

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)





2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and the tax bases of assets and
liabilities measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

PRO FORMA INCOME TAX DATA

Prior to March 31, 1997, the Nebraska Acquisition consisted of a Subchapter S
Corporation and a partnership and, accordingly, was not subject to federal or
state income taxes.  For informational purposes, the statements of operations
include a pro forma presentation that includes a provision for income taxes as
if the Nebraska Acquisition had been a taxable corporation for these periods
and had filed a consolidated income tax return with the Company.  Such pro forma
calculations were based on the income tax laws and rates in effect during those
periods and Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes.

STATEMENTS OF CASH FLOWS

The following non-cash transactions have been excluded from the consolidated
statements of cash flows:


<TABLE>
<CAPTION>
                                                       YEAR ENDED MARCH 31
                                                   1995      1996       1997
                                                 -------------------------------
<S>                                              <C>       <C>        <C>
Capital leases                                   $623,000  $347,000   $  121,000
Issuance of notes payable in connection with
 acquisitions and related non-compete           
 agreements                                             -         -    4,100,000
Distribution of note receivable to former 
 Nebraska shareholders                                  -         -      213,498                                                 
Conversion of note receivable to treasury
 stock                                                  -         -       65,000
</TABLE>

                                                                            F-11
<PAGE>   9

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE

Historical net income (loss) per share presented in accordance with generally
accepted accounting principles is as follows:


<TABLE>
<CAPTION>
                                                Year ended March 31
                                         1995          1996         1997
                                     -------------------------------------- 
<S>                                  <C>           <C>           <C>  
Net income (loss) per common share
 and common equivalent share:
 Income (loss)
  before extraordinary item          $    (0.18)   $     0.10    $     0.60
 Extraordinary item                           -             -          (.05)
 Net income (loss)                        (0.18)         0.10          0.55
Weighted average number of shares
 used in computing net income (loss)
 per common share and common
 equivalent share                     2,483,115     5,149,764     6,447,339
</TABLE>

Historical net income (loss) per share was computed by dividing net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding including 761,263 shares issued on March 31,
1997 to effect the Nebraska Acquisition less 37,810 shares returned pursuant to
the contingency clause, as if outstanding for all periods plus cheap stock
using the treasury stock method at the estimated market prices at each
applicable date.  In 1995, common stock equivalents were antidilutive,
therefore they were not included in the computation of weighted average shares
outstanding for such period.

Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock and common stock equivalents issued at prices below the
assumed initial public offering price per share ("cheap stock") during the
twelve month period immediately preceding the initial filing date of the
Company's Registration Statement for its IPO have been included as if
outstanding for all periods prior to the IPO (using the treasury stock method
at the IPO price) even though the effect is to reduce the loss per share in 
1995.



                                                                           F-12


<PAGE>   10

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Pro forma net income (loss) per share was computed by dividing net income
(loss) adjusted for the pro forma income tax provision after considering the
Nebraska Acquisition (which previously was a Subchapter S corporation) by the
weighted average number of shares of common stock and common stock equivalents
outstanding (including the 761,263 shares issued on March 31, 1997 to effect
the Nebraska Acquisition less 37,810 shares returned pursuant to the
contingency clause, as if outstanding for all



                                                                            F-13


<PAGE>   11

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE (CONTINUED)

periods) plus cheap stock using the treasury stock method at the IPO price
for all periods. In 1995, common stock equivalents were antidilutive, therefore
they were not included in the computation of weighted average shares
outstanding for such period.

Assuming the repayment of certain long-term debt outstanding of $4,800,000 as   
if repaid at the beginning of the period with the proceeds of the sale of 
common stock, supplemental historical net income for fiscal year 1997 would
have been $0.59 per share of common stock before extraordinary item and $0.55
per share of common stock after extraordinary item.

STOCK COMPENSATION

The Company uses the intrinsic value method of accounting for its stock-based
compensation awards.  As such, compensation expense is measured and recorded if
the exercise price of the stock options (or other awards) is below the fair
value of the Company's stock on the date of grant.  The Company discloses the
pro forma effect of all stock compensation using the fair value method as
prescribed by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-based Compensation, ("SFAS 123").  See Note 7.




                                                                            F-14


<PAGE>   12

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share", ("SFAS 128"), which generally simplifies the calculation
of earnings per share.  The Company will adopt this new standard in fiscal year
1998 and has not yet evaluated the impact.

RECLASSIFICATIONS

Certain reclassifications were made to the 1995 and 1996 consolidated financial
statements to conform to the 1997 presentation.

3. REGULATORY MATTERS

The Company derives a substantial portion of its revenues from financial aid    
received by its students under Title IV programs ("Title IV Programs")
administered by the United States Department of Education ("Department")
pursuant to the federal Higher Education Act of 1965, ("HEA"), as amended. In
order to continue to participate in Title IV Programs, the Company and its
schools must comply with complex standards set forth in the HEA and the
regulations promulgated thereunder (the "Regulations"). Among other things
these Regulations require the Company's schools to exercise due diligence in
approving and disbursing funds and servicing loans, limit the proportion of
cash receipts by the Company's schools derived from Title IV Programs to no
more than 85% of the total revenue derived from the school's students in its
Title IV eligible educational programs, and to exercise financial
responsibility related to maintaining certain financial covenants (including
cash reserve for refunds, an "acid test" ratio, a positive tangible net worth
test and limitations on the amount of operating losses in comparison to
tangible net worth, as defined). All of the Company's schools participate in
Title IV Programs.

The failure of any of the Company's schools to comply with the requirements of  
the HEA or the Regulations could result in the restriction or loss by the
Company or such school of its ability to participate in Title IV Programs. If
the Department determines that any of the Company's schools is not financially
responsible, the Department may require that the Company or such school post an



                                                                            F-15
<PAGE>   13

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)





3. REGULATORY MATTERS (CONTINUED)

irrevocable letter of credit in an amount equal to not less than one-half of
Title IV Program funds received by the relevant school during the last complete
award year or, at the Department's discretion, require some other less onerous
demonstration of financial responsibility. One-half of Title IV funds received
by the Company's individual schools in the most recent fiscal year ranged from
$0.2 million to $3.7 million and one-half of the aggregate Title IV funds
received by all of the Company's schools in the most recent fiscal year equaled
$18.4 million.  At March 31, 1997, the Company posted irrevocable letters
of credit for two of its schools totaling $145,000 which are payable to the
Department of Education and expire in January 1998.

Many of the financial responsibility standards are new, difficult to interpret,
and subject to the interpretation of the Department for implementation.
Further, the process for resolving lack of compliance with such Regulations is
also subject to interpretation and, in some cases, negotiation with the
Department. The Company believes each of its schools satisfies the financial
responsibility standards for fiscal 1997 except with respect to the operating
losses incurred by the Company's school located in Roanoke, Virginia.

4. ACQUISITIONS

During the fiscal year ended March 31, 1997, the Company acquired the stock or
certain assets and assumed certain liabilities of three businesses operating a
total of six schools. The following summarizes key information relevant to
these acquisitions:

TEXAS ACQUISITION

On September 6, 1996, the Company entered into an acquisition agreement
providing for the purchase of three schools located in Texas for $2.5 million
(the "Texas Acquisition").  The schools offer healthcare degree and diploma
programs and are located in San Antonio, McAllen and El Paso, Texas.

The Company financed the purchase of the Texas schools with $1,250,000 in
cash and the remaining $1,250,000 payable in the form of a promissory note
bearing interest at 8% per annum and due in five equal annual principal
payments.




                                                                            F-16


<PAGE>   14

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






4. ACQUISITIONS (CONTINUED)

MARYLAND ACQUISITION

On December 12, 1996, the Company entered into an acquisition agreement
providing for the purchase of one school located in Hagerstown, Maryland
("Maryland Acquisition") for $2.7 million in cash.  The Maryland school offers
healthcare and business diploma and degree programs.

The Texas Acquisition and the Maryland Acquisition, described above, were each
accounted for using the purchase method of accounting.  The results of
operations of the acquired companies are included in the Company's fiscal 1997
consolidated statement of operations beginning with the respective acquisition
dates.  The assets and liabilities of the acquired companies are included in
the Company's consolidated balance sheet based on a preliminary allocation of
the estimated fair values on the dates of acquisition.  The excess of cost over
acquired net assets of the Texas and Maryland businesses acquired aggregated
approximately $5,687,000 at the dates of acquisition and is being amortized over
a 15 year period.

NEBRASKA ACQUISITION

On March 31, 1997, the Company acquired all of the outstanding stock of
Educational Management, Inc. ("Nebraska Acquisition"). The Nebraska Acquisition
consisted of two schools located in Lincoln and Omaha, Nebraska, which offer
business degree and diploma programs, and related real estate.  In connection
with the acquisition, the Company issued 761,263 shares of its common stock,
agreed to pay $300,000 in non-compete agreements and paid approximately 
$1,100,000 in cash which was used to pay off mortgage notes on certain real
estate owned by the Nebraska Acquisition.

This transaction was accounted for as a pooling of interests; therefore, all
financial statements presented have been restated to reflect the acquisition.
The Nebraska Acquisition prepared its financial statements using a December 31
calendar year-end prior to the acquisition.  In recording the pooling of
interests combination, the Nebraska Acquisition's financial statements for the
years ended March 31, 1997, March 31, 1996 and December 31, 1994 were combined
with the Company's financial statements for the



                                                                            F-17

<PAGE>   15

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






4. ACQUISITIONS (CONTINUED)

NEBRASKA ACQUISITION (CONTINUED)

years ended March 31, 1997, 1996 and 1995, respectively. The Nebraska
Acquisition reported net revenues and net income of $1,345,000 and $208,229,
respectively for the three-month period ended March 31, 1995.  An adjustment of
$208,229 was made directly to the Company's consolidated stockholders' equity
representing the results of operations for the Nebraska Acquisition for the
period from January 1, 1995 through March 31, 1995 to conform the Nebraska
Acquisition's year end to the Company's year-end.  Prior to the acquisition,
the Nebraska Acquisition and its predecessor filed its income tax returns under
the provisions of Subchapter S of the Internal Revenue Code and as a
partnership and hence recorded no income tax provision.  Certain adjustments
were made to the Company's financial statements to record deferred income taxes
at the date of acquisition.

Net revenues and net income (loss) included in the Company's consolidated
statements of operations are as follows:


<TABLE>
<CAPTION>
                                        YEAR ENDED MARCH 31
                                 1995           1996         1997
                             ---------------------------------------  
<S>                          <C>            <C>          <C>
Net revenues:
 Educational Medical, Inc.   $32,065,009    $38,651,827  $43,437,416
 Nebraska Acquisition          5,015,036      4,694,706    6,012,264
                             -----------    -----------  -----------
                             $37,080,045    $43,346,533  $49,449,680
                             ======================================= 
Net income (loss):
 Educational Medical, Inc.   $(1,428,376)   $    79,424  $ 2,321,432
 Nebraska Acquisition            984,597        447,384    1,236,528
                             -----------    -----------  -----------
                             $  (443,779)   $   526,808  $ 3,557,960
                             ======================================= 
</TABLE>




                                                                            F-18
<PAGE>   16

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






4. ACQUISITIONS (CONTINUED)

SUMMARY PRO FORMA INFORMATION (UNAUDITED)

In connection with this acquisition, 95,000 shares of the 761,263 shares issued
were placed into escrow pending the resolution of certain financial aid
compliance matters with the Department of Education. In May 1997, the Company
settled a portion of these contingencies and as a result agreed to pay
approximately $397,000 to various parties and hence will receive approximately
37,810 shares from the sellers' escrow.  The other shares will continue to be
held in escrow for specified periods.

Summary unaudited pro forma results of operations for the years ended March 31,
1996 and 1997 for the acquisitions, as if the acquisitions had occurred at
April 1, 1995 and as if the Texas and Nebraska Acquisitions were filing as C
Corporations rather than as Subchapter S corporations and a partnership, are as
follows:


<TABLE>
<CAPTION>
                                                          YEAR ENDED MARCH 31
                                                           1996          1997
                                                       -------------------------
<S>                                                    <C>           <C>
Net revenues                                           $50,631,529   $53,156,034
Income before extraordinary item                         1,225,350     3,914,088
Net income                                               1,225,350     3,605,405

Income per share before extraordinary item             $      0.24   $      0.61
Net income per share                                          0.24          0.56

Weighted average common and common equivalent
shares outstanding                                       5,149,764     6,447,339
</TABLE>

The pro forma adjustments for acquisitions are based on the available
information and certain assumptions that management believes are reasonable.



                                                                            F-19
<PAGE>   17

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






4. ACQUISITIONS (CONTINUED)

SUMMARY PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)

These unaudited pro forma results of operations do not purport to represent
what the Company's actual results of operations would have been if the
acquisitions had occurred on April 1, 1995, and should not serve as a forecast
of the Company's operating results for any future periods.  The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time.  Management believes the
full impact of potential cost savings has not been reflected in the pro forma
results presented above, although there can be no assurances such cost savings
will be achieved.  Subsequent adjustments may be necessary upon final
determination of the allocation of the purchase prices.

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:


<TABLE>
<CAPTION>
                                                               MARCH 31
                                                      -------------------------
                                                          1996          1997
                                                      -----------   -----------
<S>                                                   <C>           <C>
Land                                                  $   732,148   $   748,598
Buildings                                               2,544,531     3,288,257
Equipment, furniture and fixtures                       5,812,629     7,451,297
Leasehold improvement                                   1,272,871     1,517,178
                                                      -----------   -----------
                                                       10,362,179    13,005,330
Less accumulated depreciation and amortization         (4,091,560)   (5,387,372)
                                                      -----------   -----------
                                                      $ 6,270,619   $ 7,617,958
                                                      ===========   ===========
</TABLE>




                                                                            F-20

<PAGE>   18

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






6. LONG-TERM DEBT

   Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                                       MARCH 31
                                                                   1996        1997
                                                                ---------   ---------
<S>                                                             <C>         <C>
Bank line of credit, $17,500,000 principal, monthly
 interest-only payments, matures February 25, 2000.  As of
 March 31, 1997, $4,200,000 was available under the revolving
 line of credit and none was available under the term loan (a)  $        -  $       -

14% senior subordinated debt, ("14% Notes"), $2,200,000
 principal, quarterly interest-only payments through March 31,
 2000, principal due March 31, 2000. Outstanding principal
 amounts at March 31, 1996 are net of unamortized discount of
 $294,520 (b)                                                    1,905,480          -

13% senior subordinated debt, ("13% Notes") $4,000,000
 principal, quarterly interest-only payments through March 31,
 1993, quarterly principal payments of $100,000 plus interest
 beginning June 30, 1993 through the repayment of the 14%
 notes. One month after repayment in full of the 14% Notes, 15%
 of unpaid principal is due. The remaining balance is then
 payable in three monthly installments of 20%, 25% and
 remaining principal balance, respectively. Outstanding
 principal amounts at March 31, 1996 are net of unamortized
 debt discount of $216,056 (c)                                   2,583,944          -

8% note, due in monthly installments of interest and annual
 installments of principal, secured by substantially all assets
 including land and buildings at two schools and the personal
 guarantees of three individuals (d)                               615,051          -
</TABLE>



                                                                            F-21


<PAGE>   19

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






6. LONG-TERM DEBT (CONTINUED)


<TABLE>
<CAPTION>
                                                               MARCH 31
                                                          1996          1997
                                                      ------------  ------------
<S>                                                   <C>           <C>
8.75% mortgage payable, adjustable in 1998 up to
 prime plus 1.25%, to a bank, due in monthly
 installments of principal and interest, secured by
 land and building of one school                          653,527       625,668

8% to 11% unsecured promissory notes payable to
 sellers of various schools acquired, principal and
 interest payable periodically through November 2001      810,000     1,790,000

Various unsecured, non-interest bearing notes
 payable for noncompetition agreements, payable
 periodically through July 1999                           702,500       757,500

Various unsecured, non-interest bearing notes
 payable to sellers of various schools acquired,
 payable in fiscal 1997                                         -     2,500,000

8% to 12% capital leases, payable periodically
 through November 2001; secured by equipment              484,492       455,563
                                                      -----------   -----------
                                                        7,754,994     6,128,731
Less current portion                                   (1,080,085)   (3,964,851)
                                                      -----------   -----------
                                                      $ 6,674,909   $ 2,163,880
                                                      ===========   ===========
</TABLE>

(a)  In February 1997, the Company entered into a loan with a major U.S. bank
     for $17.5 million of which $5 million is for a three year revolving line
     of credit and the remainder a three year term loan (the "Bank Line of
     Credit").  Subject to certain financial conditions of the Company and the
     use of all the net proceeds received by the Company from the IPO, the 
     term loan begins at the lesser of $5 million or the amount of eligible 
     accounts receivable in the first year, increasing to $7.5 million in the 
     second year and then to $12.5 million in the third year.  Interest will be 
     charged on borrowings at different floating rates above LIBOR depending on 
     certain financial conditions of the Company and depending on whether drawn 
     under




                                                                            F-22
<PAGE>   20

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






6.   LONG-TERM DEBT (CONTINUED)

     the revolving line of credit or the term loan.  In addition, the Bank
     Line of Credit requires fees for the borrowing commitment.  The Bank Line
     of Credit contains restrictions on the payment of dividends, capital
     expenditures and incurrence of additional debt and contains various
     financial covenants such as minimum net worth, tangible net worth and debt
     coverage.  The loan is secured by substantially all of the assets of the
     Company.

(b)  On March 31, 1995, the Company issued $2,200,000 of 14% Senior
     Subordinated Debt and warrants to purchase a total of up to 308,333 shares
     of Common Stock. Pursuant to this transaction, $368,150 was recorded as
     debt discount and attributed to the warrants (see Note 7). Amortization of
     this discount aggregated $73,630 and $42,952 in the years ended March 31,
     1996 and 1997, respectively. The 14% Notes were secured by substantially
     all the assets of the Company.  These Notes were repaid in full with
     proceeds of the IPO.

(c)  In 1991, the Company issued $4,000,000 of 13% Senior Subordinated Debt
     Notes and warrants to purchase a total of 1,333,333 shares of common
     stock. Pursuant to this transaction, $1,050,000 was recorded as debt
     discount and attributed to the warrants (see Note 7). Amortization of the
     discount aggregated $50,000 and $29,092 for the year ended March 31, 1996
     and 1997, respectively. In 1995, the 13% Notes were amended to extend the
     maturity date from 1996 to dates correlated to the repayment of the 14%
     Notes. The 13% Notes were secured by substantially all the assets of the
     Company. Such security was subordinate to all senior debt, as defined,
     including the 14% Notes.  These Notes were repaid in full with proceeds of
     the IPO.

(d)  This mortgage note was paid in full in conjunction with the Nebraska
     Acquisition in March 1997.  See Note 4.




                                                                            F-23
<PAGE>   21

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






6. LONG-TERM DEBT (CONTINUED)

Aggregate maturities of long-term debt at March 31, 1997 are as follows:


<TABLE>
<CAPTION>

Fiscal year ending March 31
<S>                          <C>
1998                         $3,964,851
1999                            726,370
2000                            380,575
2001                            321,173
2002                            306,447
Thereafter                      429,315
                             ----------
                             $6,128,731
                             ==========
</TABLE>

Interest paid during the years ended March 31, 1995, 1996 and 1997 was
approximately $1,002,000, $1,328,000 and $655,000, respectively.

The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses, based on the Company's estimate of current borrowing rates
for credit facilities with maturities which approximate the weighted average
maturities for its existing long-term debt. At March 31, 1996 the estimated
fair value of the Company's long-term debt approximated $8,600,000 and at March
31, 1997 the estimated fair value of the Company's long-term debt approximated
its carrying value.

7. STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

On October 28, 1996, the Company completed its IPO.  A total of 2,400,000
shares were sold at $10 per share which included 2,200,000 shares sold by the
Company and 200,000 shares sold by certain selling stockholders. The selling
stockholders sold an additional 210,000 shares in November 1996; the Company
did not receive any of the proceeds from the selling stockholders sales. The
net proceeds to the Company were approximately $19.3 million and were partially
used to repay $4.8 million of subordinated debt.  The balance of the IPO
proceeds will be used for general corporate purposes, including the expansion
of its operations through the acquisition of additional schools.



                                                                            F-24
<PAGE>   22

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

INITIAL PUBLIC OFFERING (CONTINUED)

In connection with the early extinguishment of the $4.8 million in subordinated
debt in fiscal year 1997, the Company incurred an extraordinary loss of
$514,500 ($308,683, net of tax), as a result of the write-off of the related
unamortized deferred debt issuance costs and unamortized debt discount.

STOCK SPLIT

On June 20, 1996, the Company amended its certificate of incorporation to
increase the authorized Common Stock to 15,000,000 shares, retain the par value
of $.01 per share, and to provide a five-for-three Common Stock split. Such
amendment was effective upon the IPO. All common share and per common share
amounts have been adjusted for all periods to reflect the stock split. In
addition, the Company authorized 5,000,000 shares of Preferred Stock; terms
will be set upon issuance.

CONVERTIBLE PREFERRED STOCK

Prior to its IPO, the Company had issued and outstanding 1,023,049 shares of
Convertible Preferred Stock, $.01 par value. At the option of the holder,
shares of Convertible Preferred Stock converted into 1.67 shares of Common
Stock and prior to March 1996, were mandatorily redeemable at $6.66 per share,
subject to certain antidilution adjustments (1,705,082 shares at March 31,
1996).

Through July 22, 1991, the shares of Convertible Preferred Stock accrued
dividends at an annual rate of 8%. In 1991, pursuant to the issuance of the 13%
Notes (see Note 6), the terms of the Convertible Preferred Stock were amended
to eliminate the cumulative dividends feature and the mandatory redemption
requirement except in the event of an initial public offering of common stock
and certain other circumstances. The Company issued 410,833 shares of Common
Stock in 1991 in full payment of accrued dividends through July 22, 1991
totaling $1,232,498. In March 1996, the terms were further amended to eliminate
the mandatory redemption in all circumstances, but still permitting



                                                                            F-25
<PAGE>   23

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)





7. STOCKHOLDERS' EQUITY (CONTINUED)

CONVERTIBLE PREFERRED STOCK (CONTINUED)

conversion at the option of the holder. In May 1996, terms were again amended
to require automatic conversion of all outstanding shares of Convertible
Preferred Stock in the event of an IPO.

All outstanding shares of Convertible Preferred Stock converted into 1,705,082
shares of common stock at the IPO.

COMMON STOCK

As of March 31, 1997, the Company has reserved the following shares of Common
Stock for future issuance by the following:


<TABLE>
                     <S>                             <C>           
                     Common Stock purchase warrants   43,334       
                     Stock options                   340,167       
                                                     -------
                                                     383,501       
                                                     =======       
</TABLE>

COMMON STOCK PURCHASE WARRANTS

As described in Note 6, the holders of the 14% Notes were granted common stock
purchase warrants allowing for the purchase of at least 141,667 and up to
308,333 common shares, depending on the date of repayment of the 14% Notes, at
$.006 per share. The warrants were assigned a value of $368,150 and did
not include put or call features.  As of the IPO, these warrants were exercised
for the purchase of 141,667 shares of Common Stock.

As also described in Note 6, the holders of the 13% Notes were granted stock
purchase warrants allowing for the purchase of up to 1,333,333 shares of Common
Stock at $3 per share (the "$3 Warrants"), for a total amount of $4,000,000.
The $3 exercise price of the warrants was subject to adjustment for any future
issuances of equity or equity related



                                                                            F-26
<PAGE>   24

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)





7. STOCKHOLDERS' EQUITY (CONTINUED)

COMMON STOCK PURCHASE WARRANTS (CONTINUED)

securities at a per share price less than the exercise price.  As of the IPO,
these warrants were exercised for the purchase of 1,333,333 shares, less shares
used for the cashless exercise, yielding 933,333 additional shares of Common
Stock.

At any time after March 31, 1998, but on or before March 31, 1999, the holders
of the $3 warrants had the right to "put" to the Company warrants representing
50% of total warrants then outstanding. At any time after March 31, 1999, the
holders had the right to "put" to the Company all then outstanding $3 warrants.
The Company could "call" the warrants at the later of two years from closing
(July 23, 1991) or after the Company's stock has been publicly traded for six
months. The put/call price was $3 per share. In May 1996, the terms of the
warrants were amended to provide for a cashless exercise based on the IPO price
per share, in the event of an IPO of the Company's common stock and to
eliminate the "put" feature.

The $3 warrants were assigned a value of $1,050,000 when issued. The difference
between the $1,050,000 and the exercise price of $4,000,000 was being accreted,
using a method which approximated the effective interest rate method, through
the date of earliest exercise (50% through March 31, 1998 and 50% through March
31, 1999). Accretion of $339,252, $406,346 and $281,398 was charged to
accumulated deficit during the years ended March 31, 1995, 1996 and 1997,
respectively.

In connection with the issuance of the Convertible Preferred Stock in 1991, a
third party was granted warrants to purchase 26,667 shares of Common Stock
exercisable at $3.60 per share. These warrants expire July 31, 1999 and are
outstanding as of March 31, 1997.

At the time of the IPO, the Company issued to a third party, warrants to
purchase 16,667 shares of Common Stock at $10 per share. These warrants expire
October 28, 2001 and are outstanding as of March 31, 1997.




                                                                            F-27
<PAGE>   25

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

The Company has granted employees and non-employee directors options to
purchase its Common Stock. The employee options vest incrementally over periods
ranging from four to five years and expire five years after vesting.  The
non-employee director options vest immediately and expire five years after
vesting.

A summary of the status of the Company's employee and director stock option
activity, and related information for the years ended March 31 is as follows:



<TABLE>
<CAPTION>
                                             1995                         1996                           1997
                                    ----------------------       ----------------------         ----------------------
                                                  WEIGHTED                     WEIGHTED                       WEIGHTED
                                    NUMBER        AVERAGE       NUMBER          AVERAGE         NUMBER         AVERAGE
                                      OF          EXERCISE        OF           EXERCISE           OF          EXERCISE
                                    SHARES         PRICE        SHARES          PRICE           SHARES         PRICE
                                    ------         -----        ------          -----           -----          -----
<S>                                 <C>             <C>          <C>             <C>            <C>            <C> 
Outstanding at beginning                                                                                      
 of year                            199,166         $2.67        190,833         $2.68          361,666        $ 3.13
    Granted                               -             -        175,000          3.60          465,500         10.10
    Exercised                             -             -              -             -                -             -
    Canceled/forfeited               (8,333)         2.40         (4,167)         2.40           (5,667)         8.12
                                    -------                      -------                        -------              
Outstanding at end of year          190,833          2.68        361,666          3.13          821,499          7.04
                                    =======                      =======                        =======              
Exercisable at end of year          130,833          2.50        156,667          2.57          313,000          5.09
                                    =======                      =======                        =======              
Options available for                                                                                         
 future grant                       770,833                      600,000                        340,167               
                                    =======                      =======                        =======               
</TABLE>




                                                                            F-28


<PAGE>   26

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

The following table summarizes information about employee and director stock
options outstanding at March 31, 1997:


<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE         
                             ----------------------------------------------    ----------------------------      
                                                WEIGHTED                                                         
                               NUMBER            AVERAGE           WEIGHTED       NUMBER            WEIGHTED     
                             OUTSTANDING        REMAINING           AVERAGE    EXERCISABLE           AVERAGE     
                              MARCH 31,        CONTRACTUAL         EXERCISE      MARCH 31,          EXERCISE     
    EXERCISE PRICES             1997              LIFE               PRICE         1997               PRICE            
    ---------------          -----------       ------------        --------    -----------          --------
         <S>                   <C>               <C>                <C>          <C>                 <C>                    
         $ 2.40                153,333           5.0 years          $ 2.40       153,333             $ 2.40                
         $ 4.00                 33,333           5.3 years            4.00        25,000               4.00                
         $ 3.60                173,333           8.7 years            3.60        34,667               3.60                
         $10.00                100,000           4.6 years           10.00       100,000              10.00                
         $10.00                331,000           9.6 years           10.00             -                  -                
         $11.50                 30,500           9.8 years           11.50             -                  -                
                               -------                                           -------                         
                               821,499                                7.04       313,000               5.09                
                               =======                                           =======                         
</TABLE>

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

On June 20,1996, the Company adopted and its stockholders approved a
Non-employee Director Stock Option Plan (the "Directors' Plan") to attract and
retain the services of non-employee members of the Board of Directors and to
provide them with increased motivation and incentive to exert their best
efforts on behalf of the Company by enlarging their personal stake in the
Company.  The maximum number of shares of Common Stock with respect to which
options may be granted under the Directors' Plan is 200,000 shares.
As of March 31, 1997, 100,000 options were available for future grant.



                                                                            F-29


<PAGE>   27

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (CONTINUED)

Each member of the Board of Directors of the Company who otherwise (i) is not
currently an employee of the Company, (ii) is not a former employee still
receiving compensation for prior services, and (iii) is not currently receiving
remuneration from the Company in any capacity other than as a director shall be
eligible for the grant of stock options under the Directors' Plan
("Participant").  Currently, all directors other than the Chairman are eligible
to participate in the Directors' Plan.

On the date the Directors' Plan was adopted, each of the four existing
non-employee directors were each granted, contingent upon completion of the
IPO, options to purchase 25,000 shares of Common Stock of the Company at the
per share IPO price ($10).  These options vested immediately upon consummation
of the IPO.  Upon the election of any new member of the Board of Directors,
such member will be granted an option to purchase 25,000 shares of Common Stock
at the fair market value at date of grant, vesting in five equal annual
installments beginning on the first anniversary of the date of grant.
Beginning with the next annual meeting of the stockholders of the Company and
provided that a sufficient number of shares remain available under the
Directors' Plan, each year immediately following the date of the annual meeting
of the Company there automatically will be granted to each non-employee
director who is then serving on the Board an option to purchase 3,000 shares of
the Common Stock of the Company, which options will be immediately vested.

PRO FORMA INFORMATION

Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee and director stock options granted
subsequent to April 1, 1995 under the fair value method described in SFAS 123.



                                                                            F-30


<PAGE>   28

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

PRO FORMA INFORMATION (CONTINUED)

The fair value of these stock options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended March 31, 1996 and 1997, respectively: (i)
dividend yield of 0%; (ii) expected volatility of 4.91; (iii) risk-free
interest rates of 6.50% and 6.18%; and (iv) expected life of 6.00 and 5.64 
years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee and director stock
options.

For purposes of pro forma disclosure, the estimated fair value of the employee
and director options is amortized to expense over the options' vesting period.
The Company's pro forma information using SFAS 123 follows:


<TABLE>
<CAPTION>
                                                             YEAR ENDED MARCH 31
                                                               1996       1997
                                                            --------------------
<S>                                                         <C>       <C>
Pro forma income before extraordinary item                  $479,629  $3,456,221
Pro forma net income                                         479,629   3,147,538

Pro forma earnings per common share and common
  equivalent share:
     Income before extraordinary item                       $    .09  $      .54
     Net income                                                  .09         .49
</TABLE>



                                                                            F-31

<PAGE>   29

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






7. STOCKHOLDERS' EQUITY (CONTINUED)

PRO FORMA INFORMATION (CONTINUED)

Because SFAS 123 is applicable only to options granted subsequent to April 1,
1995, its pro forma effect will not be fully reflected until future years.

8. INCOME TAXES

At March 31, 1997, the Company recognized the deferred income tax assets and
liabilities related to its Nebraska Acquisition.  The predecessor entities 
previously filed their income tax returns under the provisions of Subchapter 
S of the Internal Revenue Code and as a partnership and hence recorded no 
income tax provision or deferred income tax assets or liabilities at the 
corporate level.

The components of historical income tax expense (benefit) are as follows:


<TABLE>
<CAPTION>
                                        YEAR ENDED MARCH 31         
                                   -----------------------------    
                                     1995     1996        1997      
                                   -------  --------  ----------    
                                                                    
                      <S>          <C>      <C>       <C>           
                      Current:                                      
                       Federal     $     -  $484,376  $  567,544    
                       State        27,982   147,809     151,088    
                                   -------  --------  ----------    
                                    27,982   632,185     718,632    
                                                                    
                      Deferred:                                     
                       Federal           -         -  (1,218,248)   
                       State             -         -    (345,747)   
                                   -------  --------  ----------    
                                         -         -  (1,563,995)   
                                   -------  --------  ----------    
                                   $27,982  $632,185  $ (845,363)   
                                   =======  ========  ==========    
</TABLE>




                                                                            F-32

<PAGE>   30

                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






8. INCOME TAXES (CONTINUED)

A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate on income before extraordinary item to the Company's 
effective income tax rate follows:


<TABLE>
<CAPTION>
                                                  YEAR ENDED MARCH 31
                                        ----------------------------------------
                                           1995           1996           1997
                                        ---------       --------     -----------
<S>                                     <C>             <C>          <C>                
Federal                                 $(141,370)      $394,058     $ 1,027,235
State, net of federal tax benefit               -         97,554          99,718
Permanent differences                      49,988         55,436          53,554
Increase (decrease) in deferred tax
 asset valuation allowance                465,497        308,584      (1,319,987)
Effect of Nebraska Acquisition filing
 as a Subchapter S corporation           (344,763)      (152,111)       (420,420)
Effect of Nebraska Acquisition's
 termination of Subchapter S
 corporation status                             -              -        (285,463)
Utilization of AMT credit                       -        (56,000)              -
Other, net                                 (1,370)       (15,336)              -
                                        ---------      ---------     -----------                                                  
                                        $  27,982      $ 632,185     $  (845,363)
                                        =========      =========     ===========
</TABLE>                                                               


                                                                            F-33

<PAGE>   31

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






8. INCOME TAXES (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and liabilities are as follows:


<TABLE>
<CAPTION>
                                                   MARCH 31
                                           -----------------------
                                              1996          1997
                                           -----------  ----------
<S>                                        <C>          <C>     
Prepaid expenses                           $  (192,974) $ (229,722)
                                           -----------  ----------
Total deferred income tax liabilities         (192,974)   (229,722)

Deferred income tax assets:
 Tradenames and other intangibles              868,393     575,393
 Property and equipment                          8,419     369,236
 Allowance for doubtful accounts               339,637     330,135
 Accrued expenses and other liabilities        264,166   1,108,256
 Other, net                                     32,346           -
                                           -----------  ----------
Total deferred income tax assets             1,512,961   2,383,020
Valuation allowance                         (1,319,987)          -
                                           -----------  ----------
Net deferred income tax assets             $         -  $2,153,298
                                           ===========  ==========
</TABLE>

Based on its history of recurring losses before income taxes and the Company's
evaluation of available evidence at March 31, 1995 and 1996 as described in
SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), the Company
determined that it was more likely than not, for purposes of SFAS No. 109, that
it would not realize its net deferred income tax assets at such dates.
Accordingly, the Company recorded a valuation allowance against all of its net
deferred income tax assets at March 31, 1995 and 1996.  In fiscal year 1997, as
a result of its results of operations and the three acquisitions of
historically profitable businesses, all of the valuation allowance was
eliminated.



                                                                            F-34
<PAGE>   32

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






8. INCOME TAXES (CONTINUED)

The Company paid approximately $17,000, $360,000 and $1,076,000 of income taxes
in the years ended March 31, 1995, 1996 and 1997, respectively. The Company
received approximately $733,000 of income tax refunds during the year ended
March 31, 1995.

9. LEASES

The Company leases office, classroom and dormitory space under operating lease
agreements expiring through 2004. Rent expense totaled approximately
$3,111,000, $2,971,000 and $3,650,000 for the years ended March 31, 1995, 1996
and 1997, respectively.

Future minimum lease payments under noncancelable operating leases in effect at
March 31, 1997 are as follows:


<TABLE>
<CAPTION>
                Fiscal year ending March 31
                <S>                          <C>
                1998                         $ 3,307,000
                1999                           2,499,000
                2000                           2,001,000
                2001                             777,000
                2002                           1,181,000
                Thereafter                     3,327,000
                                             -----------
                                             $13,092,000
                                             ===========
</TABLE>

10. EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company matches a portion of such
contributions up to a maximum percentage of the employees' compensation. The
Company's contributions to the plan and predecessor plans of the Nebraska
Acquisition were approximately $101,000, $104,000 and $133,000 for the years
ended March 31, 1995, 1996 and 1997, respectively.



                                                                            F-35
<PAGE>   33

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






11. OTHER EXPENSES

IMPAIRMENT OF LONG-LIVED ASSETS

The Company's Roanoke, Virginia school has incurred significant operating
losses since its acquisition. Accordingly, the Company evaluated the
recoverability of the school's long-lived assets including its identifiable
intangible assets and goodwill. Based on the Company's expectation of future
cash flows, the Company determined that assets with a carrying amount of
$764,000 were impaired and recorded an impairment loss in fiscal year 1996 to
record such assets at management's estimate of the net present value of such
future cash flows. This estimate was based on estimated undiscounted future
cash flows to be generated by such assets and is a subjectively determined
amount subject to change based upon actual results.

CONTINGENCIES

In September 1995, the Company filed suit in connection with its 1993 purchase
of its Hollywood, California school. The suit alleged that the sellers made
significant financial and operational misrepresentations to the Company. The
Company sought damages from the sellers. The Sellers denied the Company's
allegations and filed a Cross-Complaint against the Company alleging among
other things, breach of contract and fraud. Both parties agreed to dismiss
their claims in April 1997 when the Company agreed to pay a total of $564,892
representing all amounts outstanding on the acquisition notes payable to the
sellers and the notes payable for covenants not-to-compete, in addition to the
payment of a portion of the sellers' legal fees.  All amounts, including the
Company's legal defense expenses, were accrued or paid as of March 31, 1997.

On June 24, 1994, eight students enrolled in one of the Company's programs at
its schools in the San Diego, California area filed a lawsuit against the
Company in the state court in California. In substance, the suit alleged that
there were material misrepresentations made with respect to the content of the
program and the potential outcomes achieved by the students who graduated from
it. The suit was certified as a class action in the fall of 1994. Although the
Company believes that it accurately described the course content and the
multiple outcomes to which the course could lead, in order to avoid further
legal



                                                                            F-36

<PAGE>   34

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)





11. OTHER EXPENSES (CONTINUED)

CONTINGENCIES (CONTINUED)

expense and because of the uncertainty and risks inherent in any litigation,
the Company determined that it was desirable to settle the lawsuit. A final
settlement was approved in March 1996. Pursuant to the terms of the settlement,
the Company paid the plaintiffs $600,000 in the fiscal year ended March 31,
1996 and an additional $400,000 on April 1, 1997. In addition, the Company
agreed to make available tuition credits of $1,150,000 to class members,
provided that students elected to utilize such tuition credits by July 17,
1996. Any unused tuition credits were to be redeemed in cash by the Company for
10% of the credit and $115,000 was accrued for these credits, as of March 31,
1996. All of this settlement expense is reflected in the 1996 consolidated
statement of operations.  As of March 31, 1997, only a few students had
requested tuition credits and substantially all of the $115,000 balance was
paid into the settlement fund on April 1, 1997.

The Company incurred $600,000 and $1,115,000 in expenses in the fiscal years
ended March 31, 1995 and 1996, respectively (of which $515,000 and $515,000 was
accrued at March 31, 1996 and 1997, respectively) related to legal costs to
defend the class action lawsuit and the settlement related to such suit.

The Company is also a party to routine litigation incidental to its business,
including ordinary course employment litigation. Management does not believe
that the resolution of any or all of such routine litigation is likely to have
a material adverse effect on the Company's financial condition or results of
operations.





                                                                            F-37

<PAGE>   35

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






12. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

The following is a summary of the unaudited quarterly results of operations for
the fiscal years ended March 31, 1997 and 1996 (in thousands, except per share
data):



<TABLE>
<CAPTION>
                                          YEAR ENDED MARCH 31, 1997
                              1ST QUARTER  2ND QUARTER  3RD QUARTER  4TH QUARTER
                              --------------------------------------------------
<S>                               <C>          <C>          <C>          <C>
Net revenues                      $10,401      $12,039      $13,324      $13,686
Income before extraordinary
 item                                  72          698        1,141        1,956
Net income                             72          698          832        1,956
Proforma income before
 extraordinary item*                   59          738        1,071          744
Pro forma net income*                  59          738          762          744

Income per share and 
 common equivalent share:
   Income before 
      extraordinary item          $  0.01      $  0.13      $  0.16      $  0.25
   Net income                        0.01         0.13         0.12         0.25
   Pro forma income before
      extraordinary item*            0.01         0.13         0.15         0.10
   Pro forma income*                 0.01         0.13         0.11         0.10
</TABLE>

* Pro forma reflects the adjustments described in "Pro Forma Income Tax
  Data" in Note 2 and does not reflect the adjustments described in Note 4.

Quarterly earnings per share do not total to the annual amount due to the
issuance of shares in the IPO.




                                                                            F-38
<PAGE>   36

                  Educational Medical, Inc. and Subsidiaries

            Notes to Consolidated Financial Statements (continued)






12. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)


<TABLE>
<CAPTION>

                                          YEAR ENDED MARCH 31, 1996
                              1ST QUARTER  2ND QUARTER  3RD QUARTER  4TH QUARTER
                              --------------------------------------------------
<S>                               <C>          <C>         <C>           <C>
Net revenues                      $9,765       $10,377     $11,538       $11,667
Net income (loss)                   (119)          321         (66)          391
Pro forma net income (loss)*         (74)          288          92           366

Income (loss) per share and
 common equivalent share:
 Net income (loss)                $(0.05)      $  0.07     $ (0.03)      $  0.08
 Pro forma net income (loss)*      (0.03)         0.06        0.02          0.07
</TABLE>

* Pro forma reflects the adjustments described in "Pro Forma Income Tax
  Data" in Note 2 and does not reflect the adjustments described in Note 4.

Fully diluted earnings per common and common equivalent share for the fourth
quarter in the year ended March 31, 1996 was $0.07.  Primary and fully diluted
earnings per share were the same for all other quarters in each of the years
ended March 31, 1996 and 1997.




                                                                            F-39
<PAGE>   37
                 Educational Medical, Inc. and Subsidiaries

           Notes to Consolidated Financial Statements (continued)






2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share", ("SFAS 128"), which generally simplifies the calculation
of earnings per share.  The Company will adopt this new standard in fiscal year
1998 and has not yet evaluated the impact.

RECLASSIFICATIONS

Certain reclassifications were made to the 1995 and 1996 consolidated financial
statements to conform to the 1997 presentation.

3. REGULATORY MATTERS

The Company derives a substantial portion of its revenues from financial aid    
received by its students under Title IV programs ("Title IV Programs")
administered by the United States Department of Education ("Department")
pursuant to the federal Higher Education Act of 1965, ("HEA"), as amended. In
order to continue to participate in Title IV Programs, the Company and its
schools must comply with complex standards set forth in the HEA and the
regulations promulgated thereunder (the "Regulations"). Among other things
these Regulations require the Company's schools to exercise due diligence in
approving and disbursing funds and servicing loans, limit the proportion of
cash receipts by the Company's schools derived from Title IV Programs to no
more than 85% of the total revenue derived from the school's students in its
Title IV eligible educational programs, and to exercise financial
responsibility related to maintaining certain financial covenants (including
cash reserve for refunds, an "acid test" ratio, a positive tangible net worth
test and limitations on the amount of operating losses in comparison to
tangible net worth, as defined). All of the Company's schools participate in
Title IV Programs.

The following table sets forth, for each institution, the percentage of
revenues derived from Student Financial Assistance programs in the year ended
March 31, 1997.  Percentages were calculated including funds received in
periods prior to acquisition by the Company.


<TABLE>
<CAPTION>          
                                        OPE                           TOTAL    TITLE IV FUNDS
                                     IDENTIFI-        TITLE IV       ELIGIBLE  AS PERCENTAGE
                                       CATION          FUNDS          FUNDS    OF TOTAL FUNDS
SCHOOL                                 NUMBER        RECEIVED        RECEIVED     RECEIVED
-----------------------------------------------------------------------------------------------
<S>                                   <C>           <C>             <C>             <C>
Maric College of Medical Careers-     02091700      $7,486,083      $9,246,540      81.0%
   San Diego, California
Maric College of Medical Careers-     02549000       4,204,441       5,012,133      83.9%
   San Marcos/Vista, California
Long Medical Institute-               02071200       1,212,291       1,471,521      82.4%
   Phoenix, Arizona
Andon College-                        02565400       2,187,271       2,613,929      83.7%
  Stockton, California  
Andon College of Modesto-             02306300       1,485,259       1,808,792      82.1%
  Modesto, California
Bauder College-                       01157400       2,807,549       4,327,637      64.9%
  Atlanta, Georgia
Modern Technology School of           02539100       2,632,371       3,127,512      84.2%
  X-Ray-
  North Hollywood, California
Dominion Business School-             01290100         952,712       1,122,745      84.9%
  Roanoke, Virginia
Dominion Business School-             03077000         923,703       1,144,852      80.7%
  Harrisburg, Virginia
ICM School of Business-               00743600       2,919,497       4,590,857      63.6%
  Pittsburgh, Pennsylvania
Ohio Institute of Photography         02052000       1,838,577       2,707,130      67.9%
  & Technology-
  Dayton, Ohio
California Academy of                 02351900         781,616         924,969      84.5%
  Merchandising, Art, and Design-
  Sacramento, California
San Antonio College of Medical        00946600       1,330,135       1,785,291      74.5%
  & Dental Assistants-
  San Antonio/McAllen, TX
Career Centers of Texas-              02591900         711,116       1,140,656      62.3%
  El Paso, Texas
Hagerstown Business College-          00794600         989,180       1,916,954      51.6%
  Hagerstown, Maryland           
Nebraska College of Business-         00849100       2,645,949       3,242,624      81.6%
  Omaha, Nebraska
Lincoln School of Commerce-           00472100       2,635,081       3,312,854      79.5%
  Lincoln, Nebraska
</TABLE>


The failure of any of the Company's schools to comply with the requirements of  
the HEA or the Regulations could result in the restriction or loss by the
Company or such school of its ability to participate in Title IV Programs. If
the Department determines that any of the Company's schools is not financially
responsible, the Department may require that the Company or such school post an



                                                                            F-15
<PAGE>   38
                                   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.

                                   EDUCATIONAL MEDICAL, INC.
                                     (Registrant)

Date: February 3, 1998             By: /s/ Gary D. Kerber
                                     --------------------------------------
                                       Gary D. Kerber
                                       Chairman of the Board, President and
                                       Chief Executive 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 and in the capacities and on the dates indicated.


SIGNATURE                       TITLE                         DATE          
                                                                            
/s/ Gary D. Kerber              President, Chief Executive    February 3, 1998
--------------------------      Officer and Chairman                        
Gary D. Kerber                  of the Board (Principal                     
                                Executive Officer)                          
                                                                            
                                                                            
/s/ Vince Pisano                Vice President and Chief      February 3, 1998
--------------------------      Financial Officer                           
Vince Pisano                                                                
                                                                            
                                                                            
/s/ Robert T. Cresci            Director                      February 3, 1998
--------------------------                                                     
Robert T. Cresci                                                            
                                                                            
                                                                            
/s/ Carl S. Hutman              Director                      February 3, 1998
--------------------------                                                     
Carl S. Hutman                                                              
                                                                            
                                                                            
/s/ W. Patrick Ortale, III      Director                      February 3, 1998
--------------------------                                                      
W. Patrick Ortale, III                                                      
                                                                            
                                                                            
                                                                            
/s/ Richard E. Kroon            Director                      February 3, 1998
--------------------------                                   
Richard E. Kroon

                                       41