<PAGE>   1


                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C. 20549

                                  FORM 10-K
(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


                          EDUCATIONAL MEDICAL, INC.
                                  FORM 10-K
                                    INDEX



<TABLE>
      <S>                                                                                                      <C>
      PART I ............................................................................................       1

        ITEM 1.  BUSINESS ...............................................................................       1
        ITEM 2.  PROPERTIES .............................................................................      19 
        ITEM 3.  LEGAL PROCEEDINGS ......................................................................      20
        ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................................      21

      PART II ...........................................................................................      21

        ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ..................      21
        ITEM 6.  SELECTED FINANCIAL DATA ................................................................      22
        ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS ..................................................................      23
        ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................      34
        ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                 FINANCIAL DISCLOSURE ...................................................................      34

      PART III ..........................................................................................      35

        ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................................      35
        ITEM 11.  EXECUTIVE COMPENSATION ................................................................      35
        ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................      35
        ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................      35
        ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .......................      35

      SIGNATURES ........................................................................................      41
</TABLE>




 


<PAGE>   3

                                    PART I

ITEM 1.  BUSINESS

COMPANY HISTORY

     The Company, a Delaware corporation, was founded in 1988 by Gary D.
Kerber, the Chairman of the Board and President of the Company. The Company
began business by acquiring seven schools in fiscal 1989 and 1990, all of which
offered programs in the healthcare field. In fiscal 1992, the Company
continued to grow by acquisition and implemented a new strategy to diversify
outside of the healthcare field by acquiring a fashion and design school. In
fiscal 1993 and 1994, the Company acquired seven additional schools which
included schools offering programs in the fields of healthcare, business,
fashion and design, and photography.  In fiscal 1997, the Company acquired six
schools which included schools offering programs in the fields of healthcare
and business - See "Fiscal Year 1997 Acquisitions."  As a result of its fiscal
1992, 1993, 1994 and 1997 acquisitions (4,176 students were attending such
schools at the date of their respective acquisitions) and increasing enrollment
at its existing and newly acquired schools, the number of students attending
the Company's schools rose 3,153 from 2,840 at March 31, 1993 to 5,993 at March
31, 1997. During the same period, the Company's net revenues increased 97% from
$25.1 million for the year ended March 31, 1993 to $49.4 million for the year
ended March 31, 1997.  As of March 31, 1997, the Company owned and operated 19
schools in nine states.  The foregoing and all other information include the
operations of the Company's two schools in Nebraska, which were acquired in
fiscal 1997 and accounted for as a pooling of interests.

THE INITIAL PUBLIC OFFERING

     In October 1996, the Company completed an initial public offering (the
"IPO") of 2,200,000 shares of its common stock and received net proceeds of
approximately $19.3 million. Approximately $4.8 million of the net proceeds of
the IPO were used to repay indebtedness and related interest and expenses.  The
remainder of the net proceeds, approximately $14.5 million, have been and
continue to be used for general corporate purposes, principally the expansion
of its operations through the acquisition of additional schools and adding
academic programs at existing schools.  Certain stockholders also sold 410,000
shares in the IPO; the Company received no proceeds related to these sales.

FISCAL YEAR 1997 ACQUISITIONS

     During the fiscal year ended March 31, 1997, the Company acquired a total
of six schools operating in Texas, Maryland and Nebraska.

The Texas Acquisition

     In September 1996, the Company acquired three Texas schools (the "Texas
Schools") for $2.5 million  (the "Texas Acquisition").  As of the acquisition
date, approximately 706 students attended the schools, which offer diploma
programs in the healthcare field at locations in San Antonio, McAllen, and El
Paso, Texas.  As of March 31, 1997, approximately 844 students attended the
Texas Schools.  The acquisition was accounted for as a purchase and the results
of operations of the Texas Schools are included in the consolidated results
of operations of the Company, effective September 1996.

     Of the $2.5 million purchase price for the Texas Acquisition, $1,250,000
was paid in cash and the remaining $1,250,000 was financed by the issuance of
the Company's five-year promissory note

                                      1

<PAGE>   4



bearing interest at 8% per annum and due in five equal annual principal
payments, beginning in fiscal year 1998.

The Maryland Acquisition

     In December 1996, the Company acquired one school in Maryland known as
Hagerstown Business College (the "Hagerstown School") for $2.7 million in cash
(the "Maryland Acquisition").  As of the date of the acquisition, approximately
495 students attended Hagerstown Business College, which offers diploma and 
degree programs in the field of business at a single location in Hagerstown, 
Maryland, which is located in the Washington, D.C.-Baltimore corridor.  As of 
March 31, 1997 approximately 435 students attended the Hagerstown School.  The 
decrease is a result of the seasonal timing of student starts.  The acquisition
was accounted for as a purchase and the results of operations of the Hagerstown
School are included in the consolidated results of operations of the
Company, effective December 1996.

The Nebraska Acquisition

     On March 31, 1997, the Company acquired two schools located in Nebraska
(the "Nebraska Schools") by merging Educational Management, Inc., a privately
held corporation, which previously operated the schools, into a wholly-owned
subsidiary of the Company in exchange for 761,263 shares (the "Merger Shares")
of the Company's common stock (the "Nebraska Acquisition").  As of March 31,
1997, approximately 687 students attended the Nebraska Schools, which offer
degree and diploma programs in business and healthcare at locations in Lincoln,
Nebraska ("Lincoln") under the name of the "Lincoln School of Commerce," and
Omaha, Nebraska ("Omaha") under the name "Nebraska College of Business."  The
Nebraska Acquisition has been accounted for as a pooling of interests, and
therefore the results of the Nebraska Schools' operations are included in the
restated consolidated results of operations of the Company for fiscal 1997
and all prior periods.

     The Company has agreed to file a registration statement pursuant to the
Securities Act of 1933 (the "Act")  with respect to the Merger Shares prior to
August 1, 1997.  When declared effective by the Securities and Exchange
Commission (the "SEC"), and provided it continues to be effective, such
registration statement will enable the holders of the Merger Shares to sell
their shares in the public market.

OVERVIEW

     As of March 31, 1997, the Company provides diversified career oriented
postsecondary education to approximately 6,000 students in 19 schools located
in nine states. The Company's 19 schools offer diploma and/or associate degree
programs designed to provide students with the knowledge and skills necessary
to qualify them for entry level employment in the fields of healthcare (offered
in 17 schools), business (offered in seven schools), fashion and design
(offered in three schools), and photography (offered in one school). The
Company's curricula include programs leading to employment in nine of the 15
fastest growing occupations (measured by percentage growth from 1994 through
2005) as projected by the U.S. Department of Labor. At March 31, 1997,
approximately 67% of the Company's students were enrolled in programs in the
healthcare field. As of the same date, approximately 32% of the Company's
students were enrolled in associate degree programs and the remainder were
enrolled in diploma programs.  Due to the diversity of the programs offered by
the Company's schools, graduates of the Company's programs are employed by a
wide variety of employers, including hospitals, physicians, insurance
companies, retailers, corporate graphics departments, photographic studios and
other businesses.

                                       2


<PAGE>   5





     The Company believes the demand for postsecondary career oriented
education will increase over the next several years as a result of recognized
trends, including  (i) a projected 21% growth in the number of new high school
graduates from approximately 2.5 million in 1993-94 to approximately 3.0
million in 2005-06, (ii) the increasing enrollment of students over the age of
24 in postsecondary education institutions as they seek to enhance their skills
or retrain for new technologies, and (iii) the increasing recognition of the
income premium attributable to higher education degrees, with individuals
holding associate degrees earning on average approximately 30% more income
during their lifetimes than individuals holding only high school diplomas.

     The Company derives a substantial majority of its revenues from federal
financial aid received by the students of its schools under Title IV programs
("Title IV Programs") administered by the United States Department of Education
("Department of Education") under the Higher Education Act of 1965, as amended
(the "HEA").  Each of the Company's schools participates in Title IV Programs.

     According to the Department of Education, there were approximately 2,187
accredited, proprietary postsecondary main campuses that participate in Title
IV programs as of March 1997. The ownership of these schools is highly
fragmented.  Although the industry appears to be moving into a consolidation
phase, management believes that no organization either holds a significant
national market share or owns or operates more than 75 schools.

     The Company's goal is to increase its market share in the expanding market
for postsecondary education and improve profitability by (i) acquiring
additional schools, (ii) promoting internal growth at the Company's existing
and any newly acquired schools, and (iii) enhancing operating efficiencies. The
Company has implemented the following strategies to achieve these goals:

Acquisition Strategy

     The Company intends to acquire additional schools and integrate them into
its existing school system. The Company believes that the fragmentation of the
postsecondary education market provides significant opportunities to
consolidate existing independently owned schools. The Company expects to
utilize a majority of the proceeds of the IPO in connection with such
acquisitions.

     In general, the Company's principal acquisition criteria are: historical
profitability; acceptable default rates with respect to federally guaranteed or
funded student loans; established and marketable curricula; and locations with
populations in excess of 100,000. Each of the Company's acquisitions during
fiscal 1997 met these criteria.  The Company intends to concentrate its
acquisition efforts on schools which satisfy its general eligibility criteria
regardless of whether they offer programs in the fields of study in which
programs are currently being offered at the Company's schools. However, the
Company will consider other school acquisitions which it believes will further
its long-term goals. The Company believes the newly acquired schools can
benefit from its marketing analysis, accounting, information systems, financial
aid and regulatory compliance systems to increase enrollment and enhance
operating efficiencies. The Company also believes that both new and existing
schools will benefit from the ability to replicate successful programs among
the schools.

     The Company believes its acquisition strategy and the increased liquidity
provided by the proceeds of the IPO and the availability of funds pursuant to
its recently completed loan arrangements with a major bank will encourage
acquisition candidates to consider the Company as a leading potential
acquirer. The Company's experience with acquiring and integrating schools
offering diverse curricula

                                       3


<PAGE>   6



provides it with the ability to consider a wide variety of potential school
candidates. The Company believes that its decentralized management strategy,
which in many cases will enable existing management to remain involved in the
operations of acquired schools, also will enhance its ability to attract
acquisition candidates.

Internal Growth Strategy

     The Company intends to increase student enrollment at its existing and any
newly acquired schools by continuing to enhance local marketing efforts and
increasing the number and variety of program offerings at its schools.

     The Company's ability to increase enrollment is limited by the capacity of
its facilities and its ability to attract teachers to maintain appropriate
student/teacher ratios. In the past, the Company has not had any difficulty in
expanding its facilities to accommodate increased enrollment or relocating
facilities if expansion was not feasible. The Company has also been able to
maintain appropriate student/teacher ratios by offering its existing teachers
the opportunity to work additional hours and by recruiting additional teachers.
Based on its experience, the Company anticipates that neither facilities nor
faculty will constitute a significant barrier to increasing enrollment.

     The Company's decentralized marketing strategy makes use of centralized
marketing data which tracks, among other things, lead sources, media
expenditures and individual school enrollments on a weekly basis. Individual
schools utilize these statistics to monitor their own marketing efforts. These
statistics, combined with placement statistics, allow the individual schools to
respond quickly to changing employment markets by developing new programs or
changing the emphasis placed on existing programs, and to identify new
populations of student candidates. The constant monitoring of enrollment
activity also allows the Company to determine whether it is appropriate to
increase its capital commitment to additional marketing efforts either to
improve unsatisfactory performance or to take advantage of successfully
marketed programs.

     The Company intends to continue to increase the number and variety of
programs offered at its schools by (i) developing new diploma and degree
programs, (ii) replicating existing programs at schools where such programs
were not previously offered, and (iii) introducing associate degree granting
programs at all of its schools currently offering only diploma programs.

     The Company intends to continue to create new programs at individual
schools and to replicate its new and existing programs for introduction into
additional schools on a market-selected basis to increase student enrollment
and revenue at its existing schools.

     The Company intends to continue to increase the number of associate degree
programs at those schools already approved to grant degrees and to introduce
degree granting programs at all of its other schools. Associate degree programs
generally generate greater revenue to the Company on a per student basis than
diploma programs because generally they take longer to complete and are more
expensive than diploma programs. In addition, the Company believes the ability
of its individual schools to offer one or more associate degree programs
enables the schools to attract additional students from market segments with
different academic goals. The Company also believes such programs attract
diploma students because of the increased prestige the associate degree
programs bring to the diploma programs. Furthermore, the continued
participation in the schools' associate degree programs by students desiring to
continue their studies beyond the diploma level has the same economic impact as
a newly enrolled degree student. In order to introduce additional degree
programs, the Company must secure approval

                                       4


<PAGE>   7



from relevant state and accrediting agencies. After receiving such approval, in
order to receive Title IV funding, the schools must apply to the Department of
Education for certification of the new degree program for eligibility under
Title IV. The time to complete this process varies from state to state, and the
entire process as to an individual program has taken the Company up to one year
to complete.

Operating Strategy

     The Company provides each of its schools with certain services which the
Company believes can be performed most efficiently and cost effectively by a
centralized office. Such services include marketing analysis, accounting,
information systems, financial aid and regulatory compliance. The Company
believes this will enable it to achieve significant economies of scale during
its planned expansion by combining a number of general and administrative
functions at the home office and regional levels. The Company believes that
this leaves local management the flexibility to react to the needs of its
students and changing job markets both promptly and effectively.

     Although the Company provides centralized services to its schools, it
operates through a decentralized management structure to manage them. The
Company manages its schools with experienced local managers who have a valuable
understanding of their local markets and businesses. The Company intends to
continue its strategy of operating with a decentralized management structure in
which local school management is empowered to make most of the day-to-day
operating decisions at each school and are primarily responsible for the
profitability and growth of that school.

SCHOOLS

     The following table shows the location of each of the Company's schools,
the name under which it operates, the date of its acquisition, the fields of
study in which it offers its programs, its degree granting status and number of
students attending the school at March 31, 1997 and at the time of its
acquisition.

<TABLE> 
<CAPTION>
                                                                                         APPROXIMATE 
                                                                                           STUDENT               STUDENT 
                                                    ASSOCIATE       INSTITUTIONAL        POPULATION             POPULATION
                          DATE                       DEGREE          ACCREDITING         AT DATE OF              AT MARCH 
INSTITUTION             ACQUIRED     CURRICULUM     GRANTING (1)      AGENCY (2)         ACQUISITION             31, 1997
-----------           -------------  ----------  -----------------  --------------    -------------------    ------------------
<S>                   <C>            <C>              <C>               <C>                   <C>                    <C>
Maric College of
Medical Careers
San Diego, CA         4/88           Healthcare       Yes               ACCSCT                135                   829

Maric College of
Medical Careers
San Marcos Campus
Vista, CA (3)         4/88           Healthcare       Yes(4)            ACCSCT                 91                   222

Maric College of
Medical Careers
Vista Campus
Vista, CA (3)         4/88           Healthcare       Yes(4)            ACCSCT                 14                   265

</TABLE>


                                       5


<PAGE>   8

<TABLE>
<CAPTION>
                                                                                         APPROXIMATE 
                                                    ASSOCIATE                              STUDENT               STUDENT 
                                                     DEGREE         INSTITUTIONAL        POPULATION             POPULATION
                          DATE                      GRANTING         ACCREDITING         AT DATE OF              AT MARCH 
INSTITUTION             ACQUIRED     CURRICULUM        (1)            AGENCY (2)         ACQUISITION             31, 1997
-----------           -------------  ----------  -----------------  --------------    -------------------    ------------------
<S>                      <C>         <C>              <C>              <C>                   <C>                    <C>


Long Medical Institute
Phoenix, AZ               4/88       Healthcare       Yes               ACCSCT               129                    168

Andon College
Stockton, CA             11/89       Healthcare        No               ABHES                150                    420

Andon College
Modesto, CA              11/89       Healthcare       Yes               ABHES                123                    286

Bauder College                       Fashion and                        ACCSCT
Atlanta, GA               3/92     Design/ Business   Yes              SACS/COC              440                    384

Modern Technology
School of X-Ray
North Hollywood, CA       3/93       Healthcare       Yes               ACCSCT               221                    357

Dominion Business School              Business/
Roanoke, VA               5/93       Healthcare       Yes               ACICS                129                    161

Dominion Business School              Business/
Harrisonburg, VA(5)       5/93       Healthcare       Yes               ACICS                408                    150

ICM School of Business                Business/
Pittsburgh, PA            7/93       Healthcare/      Yes               ACICS                376                    420
                                   Fashion and Design
Ohio Institute of
Photography &
Technology                          Photography/
Dayton, OH                7/93       Healthcare       Yes               ACCSCT                67                    259

California Institute of
Merchandising Art &
Design                               Fashion and 
Sacramento, CA            8/93         Design         Yes               ACICS                  5                    106

San Antonio College of
Medical and Dental
Assistants
San Antonio, TX           9/96       Healthcare        No               ACCSCT               234                    342

San Antonio College of 
Medical and Dental 
Assistants
McAllen Campus
McAllen, TX               9/96       Healthcare        No               ACCSCT               186                    176
</TABLE>


                                       6


<PAGE>   9

<TABLE>
<CAPTION>
                                                                                         APPROXIMATE 
                                                    ASSOCIATE                              STUDENT               STUDENT 
                                                     DEGREE         INSTITUTIONAL        POPULATION             POPULATION
                          DATE                      GRANTING         ACCREDITING         AT DATE OF              AT MARCH 
INSTITUTION             ACQUIRED     CURRICULUM        (1)            AGENCY (2)         ACQUISITION             31, 1997
-----------           -------------  ----------  -----------------  --------------    -------------------    ------------------
<S>                      <C>         <C>              <C>               <C>                   <C>                    <C>

Career Centers of 
  Texas-El Paso                      
El Paso, TX               9/96       Healthcare       No                ACCSCT                286                    326
                               
Hagerstown Business                           
  College                            Business/
Hagerstown, MD           12/96       Healthcare       Yes               ACICS                 495                    435
                               
Lincoln School                       
  of Commerce                        Business/
Lincoln, NE               3/97       Healthcare       Yes               ACICS                 342                    342
                               
Nebraska College               
  of Business                        Business/
Omaha, NE                 3/97       Healthcare       Yes               ACICS                 345                    345
                                                                                            -----                  -----
TOTAL                                                                                       4,176                  5,993
</TABLE>

(1)  In order for a school to grant associate degrees, it must be accredited
     by the applicable accrediting agency and approved by the relevant state
     agency. After receiving accreditation and state authorization, the
     Department of Education must recertify the school when it becomes degree
     granting in order for Title IV funding to be available for the new degree
     programs.
(2)  Accrediting Commission of Career Schools and Colleges of Technology
     ("ACCSCT"), Accrediting Council for Independent Colleges and Schools
     ("ACICS"), Accrediting Bureau of Health Education Schools ("ABHES"),
     Southern Association of Colleges and Schools/Commission on Colleges
     ("SACS/COC"), and Council on Occupational Educational Institutions
     ("COEI").  All schools were accredited at their time of acquisition other
     than Maric College of Medical Careers in Vista, California, which was
     accredited in fiscal 1989. See "Financial Aid and Regulation-State
     Authorization and Accreditation."
(3)  The Company recently determined that there was a substantial overlap in
     the San Marcos and Vista, California markets.  The Vista school will be
     combined into the San Marcos school during the second quarter of fiscal
     1998.  The Vista and San Marcos schools were acquired at approximately the
     same time.
(4)  Degree granting status has been approved; however, programs have not yet
     been implemented.
(5)  The Company determined that there was a substantial overlap in the
     Harrisonburg and Staunton, Virginia markets, and combined its Staunton
     school with the Harrisonburg school in fiscal 1997.  The Harrisonburg and
     Staunton schools were both acquired at the same time.  The chart

                                       7


<PAGE>   10



      represents the combined operations of the schools at the date of the
      acquisition and at March 31, 1997.

PROGRAMS OF STUDY

     The Company's programs are intended to provide students with the specific
knowledge and job skills required to prepare them for entry-level positions in a
chosen career field. The Company's programs, which generally provide for
internships or include business simulation instruction, are designed after
consultation with employers and advisory committees, which are composed of
business and educational professionals who assist the Company in assessing and
updating curricula and other aspects of relevant programs.

     The Company offers both associate degree and diploma programs in three
areas: healthcare, business and photography and offers associate degree
programs in fashion and design. The healthcare programs are designed to prepare
students for occupations associated with the medical and healthcare industry,
such as nursing, medical and dental assisting, home health aid, patient care
services and medical and dental office management. Fashion and design programs
prepare students for positions associated with fashion merchandising, fashion
design and interior design, such as buyers, display directors, fashion
coordinators, pattern makers, fashion designers and interior designers. The
photography programs provide education in photography, video, desktop media and
computer graphics, and are designed to prepare students for such occupations as
professional photographer, videographer, photographic laboratory technician,
computer graphic technician and desktop publisher. The business programs
provide education in areas such as accounting, business management, computer
operations, secretarial skills, paralegal skills and travel, and are designed
to prepare students for entry level positions in such areas.

     The Company provides healthcare programs at 17 of its schools, business
programs at seven of its schools, fashion and design at three of its schools
and photography at one of its schools. Tuition and fees vary depending on the
program offered and the location of the school.

     The following table provides information at March 31, 1997 with respect to
the programs offered by the Company's schools in each of the four major fields
described above:

<TABLE>
<CAPTION>
                                       DIPLOMA
                    ---------------------------------------------------
                                                          AVERAGE              
                                                          STUDENT 
                        NO. OF          NO. OF            PROGRAM                       
PROGRAM                SCHOOLS         STUDENTS            COST*      
                    --------------  ---------------  ------------------
<S>                         <C>           <C>               <C>                   
Healthcare                  17            3,537             $6,376  
Business                     7              485             $6,679  
Fashion and Design           -                -                  -         
Photography                  1               26             $9,205  
                                       --------                        
Company Total                             4,048                        



                                                  DEGREE
                      --------------------------------------------------------------------
                                                            
                                                                                 
                                                            AVERAGE              
                                                            STUDENT            Total No.
                          NO. OF          NO. OF            PROGRAM               of       
PROGRAM                  SCHOOLS         STUDENTS           COST*              Students
                      --------------  ---------------  --------------------  -------------
<S>                        <C>             <C>                <C>                 <C>
Healthcare                 8               489                $7,204              4,026
Business                   7               880                $9,456              1,365
Fashion and Design         3               451                $9,745                451
Photography                1               125                $7,883                151
                                      --------                                ------------
Company Total                            1,945                                    5,993


*  Represents weighted average tuition and fees on an academic year basis (i.e., a nine month basis)
</TABLE>

     As of March 31, 1997, approximately 67%, 23%, 7% and 3% of students were
enrolled in programs in the fields of healthcare, business, fashion and design,
and photography, respectively. All of the Company's programs are designed to 
prepare graduates to perform effectively in a variety of

                                       8


<PAGE>   11



entry-level positions by providing the student with practical experience both
in the classroom and, in the case of most programs in the healthcare and
fashion and design fields, through the use of internships. The internships
constitute a graded portion of the curricula and provide hands-on experience in
the work place as well as a source of job opportunities. In addition, most of
the Company's business programs provide for a significant amount of education
in a simulated business environment with a view toward preparing the student
for participation in actual business situations.

     The academic schedule of the Company's schools varies depending on the
programs offered by the individual schools. Degree programs begin four times a
year. Diploma programs begin every four to six weeks. Diploma courses are
typically offered mornings, afternoons, and evenings, and degree programs are
principally offered during day-time hours. The schools generally have classes
operating year round and are generally open five days per week. The Company
believes that its diversified curricula provide it with an extensive library of
programs and experience in various fields enabling it to meet changing demands
in the areas served by each of its schools and to expand offerings at each of
the schools when justified by student and employer demand.

     Programs which lead to similar occupational outcomes have the same general
content. However, modifications are made to conform each program to the
requirements of the particular market as well as to state and accrediting
regulations. In addition to courses directly related to a student's program of
study, degree programs may also include general education courses such as
English, Psychology or Mathematics. The programs in each field are reviewed
periodically by the regional managers and the schools' directors in order to
respond to changes in the job market and technology. Each school also has
established advisory committees, comprised of local business executives and
academics, to assist it in assessing and updating curricula and other aspects
of the relevant programs.

STUDENT RECRUITMENT

     The Company endeavors to recruit motivated students with the ability to
complete the programs offered by the Company's schools and to secure
entry-level employment in the fields for which their programs are designed to
prepare them. To attract potential students, the Company engages in several
activities to inform them, and in some instances their parents, about the
Company's programs.  These expenditures vary from school to school, depending
on the desired audience, and include television advertising, direct mailings,
newspaper advertising and yellow pages advertising.  The Company also engages
in high school visits to attract potential students.

     The Company's television advertising is coordinated and developed locally,
and budgeted on a centralized basis. It is tailored to and directed at the
local market in which each school is located and is intended to create
recognition for the name under which the applicable school operates. Responses
to direct mail campaigns are received and followed up on a local basis;
however, all marketing activities are tracked and analyzed on a centralized
system and the results forwarded to the individual schools for use in
evaluating the effectiveness of their marketing programs.

     Each of the Company's schools employs a director of admissions who
generally reports to the school director. The director of admissions for each
school is responsible for, among other things, coordinating the efforts of the
school to recruit qualified students to the school. The director of admissions
also determines recruiting policies and procedures and standards for hiring and
training admissions representatives; however, such policies, procedures and
standards are reviewed at the regional or national level.


                                       9


<PAGE>   12




     Admissions representatives contact potential students who have indicated
an interest in the schools' programs and arrange for interviews which generally
take place at the school, although occasionally such interviews take place at
the prospective student's home. The interview is designed to establish the
student's qualifications, academic background and employment goals.
Prospective students are generally given a school catalogue which describes the
applicable school's programs, a tour of the campus, an explanation of the
programs offered and the types of employment opportunities typically available
to graduates of the Company's schools. The Company employs admissions
representatives who generally perform their services in recruitment offices
located at each school, but who, in some instances, make visits and
presentations at high schools or other sources from which students may likely
be recruited.

     The Company's central marketing system monitors the effectiveness of each
school's marketing efforts to gauge the extent to which such efforts result in
student enrollment. The results of such monitoring are communicated to each of
the Company's schools allowing each school to more efficiently utilize its
marketing resources. Also, when a particular school develops a successful
marketing program, the Company makes such programs available to the other
schools for incorporation into their marketing programs as appropriate.

ADMISSION AND RETENTION

     In order to apply for admission to any of the Company's programs, a
candidate is required to have a high school diploma or recognized equivalent,
or to pass an admissions test specifically approved by the Department of
Education. At March 31, 1997, 85% of the students were high school graduates or
held recognized equivalent certification. Approximately 15% of enrolled
students were under 20 years of age, 39% were between 20 and 24 years of age,
and 46% were 25 years of age or older. At March 31, 1997, 84% of the students
attending the Company's schools were women.

     In an attempt to minimize student withdrawals prior to the completion of
their program, each of the Company's schools provides staff and other resources
to assist and advise its students regarding academic and financial matters, and
employment.  Each of the schools also provides tutoring, and encourages help
sessions between individual students and instructors when students are
experiencing academic difficulties.  The Company is obligated to provide
refunds to those students who withdraw from school prior to completion of the
program based on formulas required by applicable accrediting agencies or by
state and federal regulations. The refund formula in California, where the
Company's largest schools are located, provides for pro rata refunds based on
the number of days a student is in attendance compared to the total number of
days in the program. In other states, the Company is generally allowed to
retain a greater percentage of tuition than that provided for by the California
formula.

GRADUATE PLACEMENT

     Each of the Company's schools employs placement personnel to provide
placement assistance services to students and graduates and to solicit
appropriate employment opportunities from employers. In addition, the Company's
schools utilize their internship programs to develop job opportunities and
referrals. During the course of each program, students receive instruction on
job-search and interviewing skills and have available reference materials and
assistance with the composition of resumes.

     Since their respective acquisition by the Company, the Company's schools
have graduated approximately 23,000 students, including 4,992 in fiscal 1997.

                                       10


<PAGE>   13





     Based on data obtained by the Company from its students and their
employers, the Company believes that 77% of the students graduating from 
programs offered by the Company's schools during the prior two calendar years, 
who did not go on to further education, obtained employment in a field related 
to their program of study as of June 30 or earlier of the year following 
graduation.

FACULTY

     Faculty members are hired locally in accordance with criteria established
by the school, applicable accreditation organizations, and applicable state
regulatory authorities. Members of a school's faculty are hired based on
academic background, prior educational experience, and prior work experience. A
significant portion of the Company's faculty were previously employed in fields
related to their area of instruction. The Company believes that such faculty
members provide a "real world" perspective to the students. At most of the
Company's schools, instructors are supervised by the school director and an
academic dean. At the remaining schools, faculty members are supervised by lead
instructors with respect to particular areas of instruction, subject to review
by the school director. As of March 31, 1997, the Company's schools employed
approximately 242 full-time faculty members (defined as those faculty members
spending at least 20 hours per week teaching classes at the Company's schools)
and 230 part-time faculty members.

ADMINISTRATION AND EMPLOYEES

     Each of the Company's schools is managed by a school director.
Additionally, the staff of each school includes a director of placement, a
financial aid administrator, and a director or assistant director of admissions.
Twelve schools also employ a director of education. In the other schools, lead
instructors are appointed to oversee instruction in their areas of expertise,
subject to the overall supervision of the school director. As of March 31,
1997, the Company had approximately 1,212 full and part-time employees,
including 42 people employed at its home office in Roswell, Georgia and its
regional offices in Tampa, Florida, San Diego, California and Pittsburgh,
Pennsylvania, and 472 full and part-time faculty members. It also employed 75
students under the Federal Work-Study program. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are satisfactory.

     From its home office and its three regional offices, the Company provides
each of its schools with financial aid services, oversees regulatory compliance,
assists in the development and addition of programs to existing curricula,
implements and supports management information systems and provides accounting
services and financial resources. The Company's regional offices each have a
regional manager and staff who manage the individual school directors and
provide expertise in the area of operations, curriculum development, and sales
and marketing. These centralized services relieve the local school management
of tasks which the Company believes can be performed most efficiently and cost
effectively by a centralized office. However, because of the Company's belief
that each of the markets served by its schools is unique, and that by offering
programs specifically targeted at each market it can maximize its long-term
ability to enroll and place students in an appropriate outcome, local school
management has the responsibility and authority to schedule the school's
programs, hire its teachers, and originate new program development or propose
the addition of programs from the existing curricula library.

                                       11


<PAGE>   14



COMPETITION

     The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Competition among educational institutions is believed to be
based on the quality of the program, perceived reputation of the institution,
the cost of the program, and the employability of graduates. Public and private
colleges may offer programs similar to those offered by the Company's schools
at lower tuition costs due in part to government subsidies, foundation grants,
tax deductible contributions, or other financial resources not available to
proprietary institutions. Certain of the Company's competitors in both the
public and private sector have greater financial and other resources than the
Company.

TITLE IV STUDENT FINANCIAL ASSISTANCE PROGRAMS

     A substantial majority of the students attending the Company's schools
finance all or a part of their education through grants or loans under Title IV
Programs. Revenues from Title IV funding provide most of the Company's tuition
revenues (approximately 76% of cash receipts in fiscal 1997). The maximum
amount of a student's available Title IV program assistance is generally based
on the student's financial need. The Company determines a student's financial
need based on the national standard need analysis system established by the
HEA. If there is a difference between the amount of Title IV program funding a
student is entitled to receive (combined with other outside assistance) and the
student's tuition, the student is responsible for the difference.

     Students at the Company's schools participate in the following Title IV
Programs:

Pell and FSEOG Grants

     The Federal Pell Grant Program provides for grants to help financially
needy undergraduate students meet the costs of their postsecondary education.
The amount of an eligible student's Pell grant award currently ranges from $400
to $2,470 annually, depending on the student's financial need, as determined by
a formula set by the HEA and the Regulations. The HEA guarantees that all of
the eligible students at a school receive Pell grants in the amounts to which
they are entitled. In fiscal 1997, Pell grants to students represented
approximately $9.5 million, or 19.3%, of the Company's net revenues.

     The Federal Supplemental Educational Opportunity Grant ("FSEOG") program 
provides for awards to exceptionally needy undergraduate students. The amount
of an FSEOG award currently ranges from $100 to $4,000, depending on the
student's financial need and the availability of funds. The availability of
federal funding for FSEOG awards is restricted. The Company, or another outside
source, is required to make a 25% matching contribution for FSEOG program funds
it disburses.  FSEOG awards made to the Company's students (net of matching
contributions) amounted to approximately $618,000 and represented approximately
1.3% of the Company's net revenues in fiscal 1997.

Federal Family Education Loans and Federal Direct Student Loans

     The Federal Family Education Loan ("FFEL") programs include the Federal
Stafford Loan Program ("Stafford Loan") and the Federal PLUS Program ("PLUS"),
pursuant to which private lenders

                                       12


<PAGE>   15



make loans to enable 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 nonprofit
guarantee agencies that insure loans directly, collect defaulted loans 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 Federal Direct Student Loan Program ("FDSLP") is substantially the
same as the FFEL program in providing Stafford and PLUS loans. Under the FDSLP,
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 FDSLP replaces the FFEL program, although loans are made on
the same general terms and conditions. The Company was one of the initial
participants in the FDSLP.

Stafford Loan Program

     Students may borrow an aggregate of $2,625 for their first undergraduate
academic year and $3,500 for their second academic year under the FFEL Stafford
Loan or FDSLP Stafford Loan program. 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 Stafford Loan, the
interest accruing on the loans must be paid by the student. In addition,
independent students may qualify for an additional $4,000 a year in
unsubsidized Stafford loans.

     By the end of fiscal 1997, all of the Company's existing schools
participated in the FDSLP program and in fiscal 1998, all of its existing
schools will participate exclusively in such programs. FDSLP and FFEL Stafford
loans amounted to approximately $27.1 million, or approximately 54.8% of the
Company's net revenues, in fiscal 1997.

PLUS Loan Program

     Parents of dependent students may receive loans under the FFEL PLUS
Program or the FDSLP PLUS 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. PLUS loans carry a maximum interest rate of 9%. These loans are
repayable commencing 60 days following the last disbursement made with respect
to the relevant academic year, with flexible payment schedules over a 10 year
period. The FFEL PLUS loans are made by lending institutions and guaranteed by
the federal government. The FDSLP PLUS Program provides PLUS loans by the
federal government on the same general terms as the FFEL PLUS loans. FDSLP PLUS
loans and FFEL PLUS loans amounted to approximately $3.6 million, or
approximately 7.3% of the Company's net revenues, in fiscal 1997.

Perkins Loans

     Students who demonstrate financial need may borrow up to $3,000 per
academic year under the Federal Perkins Loan ("Perkins") program, subject to
the availability of Perkins funds at the institution. Repayment of loans under
the Perkins program is delayed until nine months after graduation or the
termination of studies.  Funding for a school's Perkins program is made by the
Department of Education into a fund maintained by the participating school for
that purpose. The participating school is required

                                       13


<PAGE>   16



to make a matching contribution into the fund of 25% of the total loans made
from the fund and to deposit all repayments into the fund.

     Five of the Company's schools participated in the Perkins program in
fiscal 1997.  In fiscal 1998, three of these schools will liquidate the Perkins
programs and no longer participate.  The Company made no matching contributions
in fiscal 1997 because the Company did not receive any Perkins funding from the
Department of Education and utilized only funds received from borrower
repayments. A school will not receive continued federal funding for Perkins
loans if the school's Cohort Default Rate for Perkins loans exceeds 30%.
One of the Company's schools receiving Perkins loan funding had a Cohort
Default Rate in excess of 30% in the last fiscal year and is therefore
ineligible to receive additional funds from the government for the subsequent
fiscal year. The school will, however, remain able to make Perkins loans to
students through funds repaid by previous borrowers. Perkins loans amounted to
approximately $311,500, or approximately 0.6% of the Company's net revenues, in
fiscal 1997.

Federal Work-Study

     Pursuant to the Federal Work-Study ("FWS") program, federal funds are made
available to provide part-time employment to eligible students based on
financial need. The Company's schools provide a limited number of on-campus and
off-campus jobs to eligible students participating in the FWS program. During
the 1996-97 award year, the Company's schools employed less than 300 students
pursuant to this program. The Company, or another outside source, is required
to pay 25% of the gross earnings for each participant in the FWS program.

TITLE IV REGULATION

     To obtain and maintain eligibility to participate in the programs
described above, the Company's schools 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" 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 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.

     Generally, a school (a main campus and any additional locations for
purposes of the Regulations) is considered separately for compliance with the
Regulations.  Seventeen of the Company's schools are main campuses. One school, 
located in Vista, California, is an additional location of the San Marcos,
California main campus, and another school located in McAllen, Texas is an
additional location of the San Antonio, Texas main campus.

     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 four 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.

                                       14


<PAGE>   17




     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 is reapplying for certification or when a school
undergoes a change of ownership resulting in a change in control, 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 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 additional conditions on a provisionally certified institution's
eligibility to continue participating in the Title IV Programs.

Student Loan Defaults

     Under the HEA, an institution may lose its eligibility to participate in
some or all Title IV Programs if student defaults on the repayment of federally
guaranteed student loans exceed specified Cohort Default Rates. Similar rules
regarding default rates apply to Federal Direct Loans made pursuant to the
FDSLP, commencing with those loans entering into repayment for the first time
in the 12 month period ending September 30, 1995. Under existing regulations,
these rates are based on the repayment history of current and former students
for loans provided under the Stafford Loan program and the SLS program. A
Cohort Default Rate is calculated for each school on a federal fiscal year
basis by determining the rate at which the school's students entering repayment
in that federal fiscal year default by the end of the following federal fiscal
year. Cohort Default Rates are subject to revision by the Department of
Education if new data becomes available and is subject to appeal by schools
contesting the accuracy of the data or the adequacy of the servicing of the
loans by the loan servicer.

     An institution whose Cohort Default Rate exceeds 40% for any single
federal fiscal year may have its eligibility to participate in all Title IV
Programs limited, suspended or terminated. If the Department of Education
elects to take such action due to a single-year Cohort Default Rate in excess
of the regulatory level, it must afford the institution a hearing before an
independent Department of Education hearing officer and an opportunity to
appeal any decision to the Secretary of Education before the limitation,
suspension, or termination may take effect. Except for its school located in
Albany, Georgia, which was closed in fiscal 1995, none of the Company's schools
has, or has had, a Cohort Default Rate in excess of 40%.

     An institution whose Cohort Default Rate is 25% or more for the three most
recent federal fiscal years for which data is available is subject to immediate
loss of eligibility to participate in Title IV Student Loan Programs, subject
to an appeal (on the bases stated in the prior paragraph) of the determination, 
including an appeal based on a claim of exemption from the Cohort Default Rate
requirements by virtue of exceptional mitigating circumstances. The loss of
eligibility lasts for the duration of the fiscal year in which the
determination of ineligibility is made, plus the two succeeding fiscal years.
However, an institution remains eligible for Title IV funding while the appeal
is pending.

     None of the Company's schools had a Cohort Default Rate of 25% or more for
either each of the three consecutive federal fiscal years ending 1994 or those
ending with federal fiscal 1995 based on 1995 data released by the Department
of Education in May 1997.  The Department of Education has designated this 1995
data as preliminary, reserving the right to issue final 1995 Cohort Default
Rates in

                                       15


<PAGE>   18



or about November 1997.  The Company does not expect its final 1995 Cohort
Default Rates to differ materially from the preliminary data.  Accordingly, the
Company believes that none of the schools is currently vulnerable to
termination from Title IV eligibility based on three consecutive years of
excess default rates.  Only the Company's school located in Omaha, Nebraska had
a Cohort Default Rate of 25% or more for federal fiscal 1995 (based on the
preliminary data).  This school had a Cohort Default Rate of 17.3% in federal
fiscal 1994, and therefore, is not vulnerable to termination of Title IV
Student Loan Program eligibility unless its rates for the next two federal
fiscal years are 25% or more.  The Company's other schools must have  Cohort
Default Rates of 25% or more for consecutive three year periods beginning with
federal fiscal 1996 and thereafter in order to become vulnerable to termination
of Title IV eligibility.

     The Regulations require that any school which experiences a Cohort Default
Rate in excess of 20% must establish a default management plan in compliance
with the federally mandated plan included in the Regulations. This plan
includes measures to reduce student withdrawal rates, improve student
employment rates and counseling of students on their responsibility to repay
their loans.  The Company also instituted default reduction programs in each of 
its schools; however, economic and other factors outside of the Company's 
control could adversely affect default rates.

The 85/15 Rule

     The "85/15" rule, which applies to for-profit institutions such as the
schools owned and operated by the Company, became applicable to the Company's
schools beginning with the fiscal year ending March 31, 1996. It requires that
no more than 85% of the school's applicable cash receipts may be derived from
Title IV Programs. A school whose annual certified financial statement or Title
IV compliance audit report to the Department of Education does not reflect
compliance with the 85/15 rule is subject to immediate termination of its Title
IV eligibility. The Company believes that each of its schools was in compliance
with the 85/15 rule with respect to fiscal 1995, 1996 and 1997, and has taken
steps to help ensure on-going compliance with the 85/15 Rule.

Change in Control

     Upon a change in ownership resulting in a change in control of the
Company, as defined in the HEA and Regulations, each of the Company's schools
would 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 the Company's
schools.

     The Department of Education's regulations provide that after a company
becomes publicly traded, a change in control occurs when a report on Form 8-K
is required to be filed with the Securities and Exchange Commission disclosing
a change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in
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 in control may also discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company.

                                       16


<PAGE>   19




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 that the school's Cohort Default Rate not equal or exceed 25%
for any single fiscal year.

     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.

     Eight of the Company's schools are provisionally certified to participate
in the Title IV Programs. The conditions imposed on them as a result of such
provisional certification include reporting requirements relating to each
school. The material violation of such requirements, or any of the requirements
of the HEA or the Regulations, would subject the school to a loss of its
provisional eligibility.

Financial Responsibility Requirements

     The HEA and the Regulations prescribe specific standards of financial
responsibility which the Department of Education must consider with respect to
qualification for participation in the Title IV Programs ("Financial
Responsibility Standards"). These standards are generally applied on an
individual school basis.  However, there can be no assurance that the
Department of Education will not apply such standards on a consolidated basis.
If the Department of Education determines that any of the Company's schools
fails to satisfy the Financial Responsibility Standards, the Department may
require that such school post an irrevocable letter of credit (a "Financial
Responsibility Bond") in favor of the Secretary of Education in an amount equal
to not less than one-half of Title IV Program funds received by the school
during the last complete fiscal year or, in the Department of Education's
discretion, require some other less onerous demonstration of financial
responsibility (a "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 approximately $232,000 to $3.7 million, and one-half of
the total Title IV funds received by all the Company's schools in the most
recent fiscal year was $18.4 million. Pursuant to the Regulations, the Company
submits annual audited consolidated financial statements and unaudited
consolidating financial statements to the Department of Education.

     Among the principal Financial Responsibility Standards which a school must
satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year, (ii) a positive
tangible net worth, as defined by the applicable Regulations, at the end of the
most recent fiscal year (the "Tangible Net Worth Standard") and (iii) net
operating results for the two most recent fiscal years, excluding extraordinary
losses or losses from discontinued operations, which do not show an aggregate
net loss in

                                       17


<PAGE>   20



excess of 10% of tangible net worth at the beginning of the two year period.
The Company has a positive tangible net worth of $16.7 million as of
March 31, 1997, primarily because of the receipt of the net proceeds
of the IPO, although the Company has not yet filed the applicable financial
statements with the Department of Education.  Primarily because a large portion
of the Company's assets consists of goodwill and other intangibles related to
school acquisitions, the Company had a negative tangible net worth on a
consolidated basis for the Company's three prior fiscal years; none of the
Company's schools had a negative tangible net worth on an individual school
basis as of March 31, 1997.  The Company has filed audited consolidated 
financial statements with the Department of Education for each of the last 
three fiscal years ended March 31, 1996, along with unaudited consolidating 
statements. Although the Department of Education has not cited any of the 
Company's schools for violation of the Tangible Net Worth Standard, there can
be no assurance that the Department of Education will not attempt to apply the 
Tangible Net Worth Standard on a consolidated basis.  There also can be no 
assurance that the Company's acquisition program will not again result in the 
Company having a negative tangible net worth, and, no assurance can be given 
that the Department of Education may not make a request for the Company to post
a Financial Responsibility Bond in such circumstances or otherwise make a 
request for a Demonstration of Financial Responsibility based on its 
consolidated negative tangible net worth.  If such a request were to be made, 
there is no assurance that the Company (i) would be successful in persuading 
the Department of Education or a court that such a request is contrary to law, 
(ii) could secure the funds to post the Financial Responsibility Bond which the
Department of Education may request, or (iii) that the Company would be 
successful in negotiating a more favorable Demonstration of Financial 
Responsibility. If the Company were unable to post a Financial Responsibility 
Bond or make a satisfactory Demonstration of Financial Responsibility, it could
become ineligible to receive Title IV funding in some or all of its schools.
Ineligibility for Title IV funding would have an immediate material adverse
effect on the Company's operations.

     Other than the Roanoke, Virginia school, none of the Company's schools had
operating losses in fiscal 1996 or fiscal 1997 which, in the aggregate,
exceeded 10% of the tangible net worth at the beginning of the period.
Therefore, only the Roanoke school is in violation of the Financial
Responsibility Standard relating to operating losses.

The Nebraska Acquisition

     The Lincoln School underwent a program review (the "Program Review") which
was completed in May 1997 in which the Department of Education alleged that the
prior operations were not in compliance with certain applicable regulations.
As a result, the Company was obligated to make payments to the Department of
Education and various other parties totaling approximately $398,000 (the
"Compliance Payment"), all of which were paid in June 1997.  The Nebraska
Schools are also subject to allegations of certain fund administration errors
which were noted in connection with certain Title IV Financial Aid Audits (the
"Financial Aid Audits") filed pursuant to the applicable regulations.  The
terms of the Nebraska Acquisition provide that the number of shares of the
Company's common stock exchanged in the transaction will be adjusted with
respect to all liabilities arising from the resolution of (a) the alleged
compliance deficiencies asserted by Department of Education in the Program
Reviews, (b) the fund administration errors described in the Financial Aid
Audits, or otherwise.  To facilitate any adjustments, a total of 95,000 shares
of the total number of shares of the Company's stock exchanged were placed in
escrow and approximately one tenth of such shares will be returned to the
Company for each dollar paid to the DOE with respect to the relevant program
compliance deficiencies or administration error refunds.  As a result of the
Compliance Payment, 37,884 shares of the Company's

                                       18


<PAGE>   21



common stock will be returned to it from escrow.  Certain other contingencies 
have not yet been resolved and the balance of the shares remain in escrow.

     Each of the Nebraska Schools must be recertified as eligible for
participation in Title IV funding  by the Department of Education because of
the change in ownership resulting in a change in control, as defined by
applicable regulations.  While such approval is pending, the relevant school is
not eligible to participate in Title IV funding programs, which make up
substantially all of its revenue and cash receipts; therefore, the school's
operations must be funded from the Company's working capital.  Upon
recertification, the school receives applicable Title IV funding for students
currently enrolled, including funding for prior periods.  Although the Company
has had no difficulty in obtaining such recertification in the past, there can
be no assurance that such approvals may not be subject to unexpected delays or
difficulties which may adversely effect the Company's operations.

ITEM 2.  PROPERTIES

     All of the Company's facilities are leased by the Company, except for the
facilities in Dayton, Ohio, Lincoln, Nebraska, and Omaha, Nebraska, which are
owned by the Company. The table below sets forth certain information regarding
these facilities as of March 31, 1997.


<TABLE>
<CAPTION>
                                                                     APPROXIMATE SQUARE
OFFICE/SCHOOL                         LOCATION                       FOOTAGE
-------------                         --------                       --------------------
<S>                                   <C>                                    <C>           
Home Office                           Roswell, GA                             8,850        
Western Region Office                 San Diego, CA                           2,001        
Eastern Region Office                 Tampa, FL                               1,581        
Central Region Office                 (1)                                                  

WESTERN REGION SCHOOLS                                                                     
Andon College                         Modesto, CA                            11,319        
Andon College                         Stockton, CA                           13,241        
California Academy of                                                                      
   Merchandising, Art, and Design     Sacramento, CA                          6,232        
Long Medical Institute                Phoenix, AZ                            11,423        
Maric College of Medical Careers      San Diego, CA                          39,092        
Maric College of Medical Careers      Vista, CA                              14,600        
Maric College of Medical Careers (2)  Vista, CA (San Marcos Campus)          13,500        
Modern Technology School of X-Ray     North Hollywood, CA                    15,194        

EASTERN REGION SCHOOLS                                                                     
Bauder College                        Atlanta, GA                            27,187        
Career Centers of Texas               El Paso, TX                            10,453        
Dominion Business School              Harrisonburg, VA                        9,400        
Dominion Business School              Roanoke, VA                            12,500        
Hagerstown Business College           Hagerstown, MD                         23,682        
Ohio Institute of Photography and                                                          
   Technology (3)                     Dayton, OH                             24,200        
San Antonio College of Medical and                                                         
   Dental Assistants                  San Antonio, TX                        23,712        
San Antonio College of Medical and                                                         
   Dental Assistants                  McAllen, TX                             7,800        

CENTRAL REGION SCHOOLS
</TABLE>


                                       19


<PAGE>   22

<TABLE>
                                                                     APPROXIMATE SQUARE
OFFICE/SCHOOL                         LOCATION                       FOOTAGE
-------------                         --------                       --------------------
<S>                                   <C>                                  <C>
                                                                           
Lincoln School of Commerce (4)        Lincoln, NE                          58,490(5)
Nebraska College of Business (4)      Omaha, NE                            19,035
ICM School of Business                Pittsburgh, PA                       47,833
</TABLE>

(1)  Because the Central Region was established at the time of the Nebraska
     Acquisition, its operations have been conducted at the school facility
     located in Pittsburgh, where the regional manager also serves as campus
     director.
(2)  The Vista campus will be consolidated with the San Marcos campus during
     the second quarter of fiscal 1998 due to market overlap.
(3)  The Dayton, Ohio facility was purchased in connection with the
     acquisition of the school in fiscal 1994. It is owned subject to a
     mortgage with an aggregate principal amount outstanding of $625,668 at
     March 31, 1997.
(4)  The Nebraska facilities were acquired in connection with the Nebraska
     Acquisition in March 1997.  These facilities are unencumbered by mortgage
     debt.
(5)  Total square footage includes dormitory facilities at this location.


ITEM 3.  LEGAL PROCEEDINGS

NORTH HOLLYWOOD PROCEEDING

     In September 1995, the Company filed suit in the California Superior Court
in connection with its 1993 purchase of its North Hollywood, California school.
The suit alleged that the sellers made significant financial and operational
misrepresentations to the Company.  The sellers denied the Company's
allegations and filed a Cross-Complaint against the Company seeking an
indeterminate amount of damages and alleging among other things, breach of
contract and fraud.  In order to avoid protracted litigation and discovery, the
Company decided it was in its best interests to settle the lawsuit in April
1997.  In that connection the Company agreed to immediately pay all amounts
remaining on the notes payable to sellers related to the financing of the
acquisition and the related payments for the covenants not to compete plus
attorneys' fees.  All amounts were paid in April 1997.

SAN DIEGO PROCEEDING

     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 class action lawsuit
against the Company in state court in San Diego, California. In substance, the
suit alleged that there were material misrepresentations made with respect to
the context of the program and the potential jobs available to 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 jobs to which the course could lead, in order to avoid further
legal expense and because of the uncertainty and risks inherent in any
litigation, the Company settled the lawsuit in March 1996. Pursuant to the
terms of the settlement, the Company paid $600,000 in March 1996 and $400,000
in April 1997.  Additionally, the Company agreed to make available tuition
credits.  Approximately $115,000 was paid in April 1997 related to unused
tuition credits.  The involved program was discontinued in the summer of 1994
for reasons unrelated to the lawsuit.

     In order to reduce the risk of any similar actions, the Company has
reviewed all of its catalogs and admission materials and, where the Company
believes appropriate, taken steps to further disclose to

                                       20


<PAGE>   23



students in writing that placement rates are based on multiple outcomes and the
course is not represented to lead to any one particular outcome, including the
course title.

ROUTINE PROCEEDINGS

     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.

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

     [NOT APPLICABLE]



                                    PART II

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

     The Company's common stock has been traded since October 28, 1996 on the
NASDAQ Exchange under the symbol "EDMD" for common stock.  Prior to that time,
there was no public market for the common stock. The following table sets forth
the range of high and low closing sale prices for the common stock as reported
on the NASDAQ National Market System during each of the quarters presented. The
quotations set forth below are inter-dealer quotations, without retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions.


<TABLE>

                                    COMMON STOCK
QUARTERLY PERIOD ENDED             HIGH         LOW
<S>                              <C>          <C>
Period from October 28, 1996
to December 31, 1996             $11.125      $10.000

Quarter ended March 31, 1997     $14.250      $10.375
</TABLE>

     As of June 15, 1997, there were approximately 117 holders of record of the
Company's common stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.

     The Company has never declared or paid any cash dividends. The Company
currently intends to retain any future earnings to finance the growth and
development of its business and future operations, and therefore does not
anticipate paying any cash dividends in the foreseeable future.

                                       21


<PAGE>   24

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data set forth below is derived from and should be
read in conjunction with the consolidated financial statements, including the
notes thereto, filed as part of this Form 10-K.  All years have been restated
to reflect the pooling of interests of the Nebraska Acquisition.  The financial
information for the Company's fiscal years ended March 31, 1993 through 1995
includes the results of the Nebraska Schools' fiscal year ended December 31,
1992 through 1994, respectively.  The results of the Company's fiscal years
ended March 31, 1996 and 1997 reflect a conformed year-end for the Nebraska
Schools.

                             YEAR ENDED MARCH 31,
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)


<TABLE>
<CAPTION>
                                                         1993                    1994                   1995           
                                                         ----                    ----                   ----           
<C>                                      <C>                     <C>                     <C>
                                         ----------------------  ----------------------  --------------------  
STATEMENT OF OPERATIONS DATA:                                                                                      
Net revenues...........................  $               25,139  $               32,231  $             37,080      
School operating costs:                                                                                            
 Cost of education and                                                                                             
  facilities...........................                  10,359                  14,944                17,488    
 Selling and promotional                                                                                           
  expenses.............................                   3,470                   4,985                 6,216    
 General and administrative expenses...                   6,773                  10,022                10,826   
Amortization of goodwill and                                                                                      
  intangibles..........................                   1,071                   1,235                 1,255    
Other expenses(1) :                                                                                                
 Merger costs..........................                       -                       -                     -    
 Legal defense and settlement                                                                                      
  costs................................                       -                       -                   600  
 Loss on closure or relocation of                                                                                  
  schools..............................                       -                   1,126                     -    
 Impairment of goodwill and                                                                                        
  intangibles..........................                       -                       -                   176  
                                         ----------------------  ----------------------  --------------------  
Income (loss) from operations..........                   3,466                     (81)                  519      
Interest expense, net..................                     572                     809                   935    
                                         ----------------------  ----------------------  --------------------  
Income (loss) before income taxes and                                                                              
 extraordinary item....................                   2,894                    (890)                 (416)    
Provision (benefit) for income taxes...                     749                    (170)                   28     
                                         ----------------------  ----------------------  --------------------  
Income (loss) before extraordinary item                   2,145                    (720)                 (444)    
Extraordinary item.....................                       -                       -                     -    
                                         ----------------------  ----------------------  --------------------  
Net income (loss)......................  $                2,145  $                 (720) $               (444)      
                                         ======================  ======================  ====================  
Pro forma income tax data: (2)                                                                                     
 Income (loss) before income taxes                                                                                 
  and extraordinary item...............  $                2,894  $                 (890) $               (416)    
 Provision for income taxes............                   1,223                     173                    97     
                                         ----------------------  ----------------------  --------------------  
 Income (loss) before extraordinary                                                                              
  item.................................                   1,671                  (1,063)                 (513)  
 Extraordinary item, net of income                                                                               
  taxes................................                       -                       -                     -       
                                         ----------------------  ----------------------  --------------------  
 Pro forma net income (loss)...........  $                1,671  $               (1,063) $               (513)    
                                         ======================  ======================  ====================  
Pro forma income (loss) per share                                                                                   
 before extraordinary loss (2).........  $                 0.39  $                (0.43) $              (0.21)    
Pro forma net income (loss) per 
 share (2).............................  $                 0.39  $                (0.43) $              (0.21)    
Pro forma shares outstanding                          4,330,864               2,483,115             2,483,115  

OTHER OPERATING DATA (3):                                                                                        
Number of schools at end of period.....                      11                      16                    16  
Number of students at end of period....                   2,840                   4,026                 4,695  
Number of new student starts during                                                                              
 period................................                   4,581                   5,504                 6,297  
Monthly withdrawal rate during                                                                                   
 period(4).............................                     5.8%                    4.8%                  4.3%  
                                                                                                                 
<CAPTION>
                                                         1996                  1997
                                                         ----                  ----
<C>                                                  <C>                   <C>  
STATEMENT OF OPERATIONS DATA:          
Net revenues...........................              $   43,347            $   49,450
School operating costs:                
 Cost of education and                 
  facilities...........................                  19,651                23,151
 Selling and promotional               
  expenses.............................                   6,534                 7,531
 General and administrative expenses...                  12,369                14,042
 Amortization of goodwill and          
  intangibles..........................                     883                   886
Other expenses(1) :                    
 Merger costs..........................                       -                   391
 Legal defense and settlement          
  costs................................                   1,115                     -
 Loss on closure or relocation of      
  schools..............................                      50                   144
 Impairment of goodwill and            
  intangibles..........................                     764                     -
                                                     ----------            ----------
Income (loss) from operations..........                   1,981                 3,305
Interest expense, net..................                     822                   284
                                                     ----------            ----------
Income (loss) before income taxes and  
 extraordinary item....................                   1,159                 3,021
Provision (benefit) for income taxes...                     632                  (845)
                                                     ----------            ----------
Income (loss) before extraordinary item                     527                 3,866
Extraordinary item.....................                       -                   309
                                                     ----------            ----------
Net income (loss)......................              $      527            $    3,557
                                                     ==========            ==========
Pro forma income tax data: (2)         
 Income (loss) before income taxes     
  and extraordinary item...............              $    1,159            $    3,021
 Provision for income taxes............                     487                   409
                                                     ----------            ----------
 Income (loss) before extraordinary    
  item.................................                     672                 2,612
 Extraordinary item, net of income     
  taxes................................                       -                   309
                                                     ----------            ----------
 Pro forma net income (loss)...........              $      672            $    2,303
                                                     ==========            ==========
Pro forma income (loss) per share         
 before extraordinary loss (2).........              $     0.13            $     0.41
Pro forma net income (loss) per 
 share (2).............................              $     0.13            $     0.36
Pro forma shares outstanding...........               5,149,764             6,447,339

OTHER OPERATING DATA (3):              
Number of schools at end of period.....                      16                    19
Number of students at end of period....                   4,954                 5,993
Number of new student starts during    
 period................................                   6,706                 7,358
Monthly withdrawal rate during         
 period(4).............................                     4.1%                  4.2%
</TABLE>


                                       22


<PAGE>   25

<TABLE>
<CAPTION>

                                                             MARCH 31,
                                                      (DOLLARS IN THOUSANDS)

                                          1993                   1994                   1995       
                                          ----                   ----                   ----       
<C>                                      <C>                  <C>                     <C>         
BALANCE SHEET DATA:                                                                                
Cash and cash equivalents                $ 7,061              $  2,737                $  2,733     
Total current assets                       9,918                 7,364                   8,125     
Total assets                              19,246                21,047                  21,867     
Long term debt, including current portion  4,756                 7,688                   8,974     
Total liabilities                          9,516                13,251                  15,271     
Total stockholders' equity                 9,730                 7,796                   6,596     
</TABLE>

<TABLE>
<CAPTION>
                                                      1996                 1997
                                                      ----                 ----
<C>                                                 <C>                 <C>       
BALANCE SHEET DATA:                       
Cash and cash equivalents                           $  3,209            $  14,048
Total current assets                                   8,375               21,800
Total assets                                          20,986               42,073
Long term debt, including current portion              7,755                6,129
Total liabilities                                     14,717               13,873
Total stockholders' equity                             6,269               28,200
</TABLE>

(1)  Other expenses consist of (i) a charge in fiscal 1994 of $1,126 in
     connection with the closing of a school purchased in 1989; (ii) charges in
     fiscal 1995 of $600 for legal costs associated with the defense of the
     class action lawsuit, and $176 for impairment of other intangible assets,
     (iii) charges in fiscal 1996 of $1,115 for the settlement of the class
     action lawsuit, $50 for the cost of relocating a school, and $764 for the
     impairment of goodwill and other intangible assets; and (iv) charges in
     fiscal 1997 of $144 for the consolidation of two schools in Virginia and
     two schools in California and $391 in merger expenses related to the
     Nebraska Acquisition.
(2)  Prior to March 31, 1997, the Nebraska Acquisition and its predecessor were
     organized as a Subchapter S-Corporation and a partnership under the
     Internal Revenue Code.  Accordingly, income taxes were the responsibility
     of the S-Corporation's stockholders and the partnership's partners.  For
     informational purposes, the selected pro forma consolidated financial data
     for the five years ended March 31, 1997 include a pro forma presentation
     that includes a provision for income taxes as if the Nebraska Acquisition
     had operated as a C-Corporation and was combined with the Company for
     those periods.  Such pro forma calculations were based on the income tax
     laws and rates in effect during those periods and Financial Accounting
     Standards Board Statement No. 109.  Primary and fully diluted earnings per
     share on a pro forma basis are the same except in fiscal year 1996 when
     fully diluted earnings per share was $0.12.
(3)  1994 Other Operating Data excludes the Company's school located in
     Albany, Georgia, which the Company decided to close in fiscal 1994.  See
     Note 1 above.
(4)  Represents the percentage calculated by dividing (i) the number of
     students who withdrew from the Company's schools in the period by (ii) the
     sum of the number of students at each month-end in the period and the
     number of students who withdrew in the period.

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

     This Annual Report on Form 10-K contains forward-looking statements.  For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements.  Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements.  These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."

     The following discussion of the Company's results of operations and
financial condition should be read in conjunction with Item 6 and Item 8 and
the Notes thereto appearing elsewhere in this Form 10-K.

                                       23


<PAGE>   26

GENERAL

     The Company owns and operates 19 schools in nine states which together
provide diversified career oriented postsecondary education to approximately
6,000 students as of March 31, 1997. The Company derives its revenue almost
entirely from tuition, fees and charges paid by, or on behalf of, its students.
Most students at the Company's schools rely on funds received under various
government-sponsored student financial aid programs, especially Title IV
Programs, to pay a substantial portion of their tuition and other
education-related expenses. During fiscal 1997, approximately 76% of the
Company's cash receipts were indirectly derived from Title IV Programs. Cash
receipts represented approximately 98% of the Company's net revenue in fiscal
1997.

     The Company's revenue varies based on the aggregate student population,
which is influenced by the number of students attending the Company's schools
at the beginning of a fiscal period, by the number of new students entering the
Company's schools during such period, and by student retention rates. New
students enter the Company's schools' degree granting programs four times a
year and diploma courses every four-to-six weeks. The Company believes that the
size of its student population is affected to some extent by general economic
conditions, and that, in the absence of countervailing factors, student
enrollments and retention rates would tend to increase as opportunities for
immediate employment for high school graduates decline and decrease as such
opportunities increase. The purchase of new Company schools and the
introduction of additional program offerings at existing Company schools have
been significant factors in increasing the aggregate student population in
recent years.

     In the fiscal year ending March 31, 1997, the Company derived
approximately 93% of its net revenues from tuition. The Company recognizes
tuition revenue on each student contract as earned on a pro rata monthly basis
over the term of the contract. Refunds are due if a student withdraws from
school prior to completion of the program and are computed using methods
required by accrediting agencies or state and federal regulations. As of the
time of withdrawal, the total earnings on the contract mandated by the
applicable formula are compared to the revenue previously recognized by the
Company. This comparison can result in either an increase or decrease in final
revenue recognition, which is recorded for accounting purposes at the time of
the applicable student's withdrawal. Historically, these net adjustments have
not been material. Other educational revenue is comprised of fees and textbook
sales.

     The Company incurs expenses throughout a fiscal period in connection with
the operation of its schools. The cost of education and facilities includes
faculty salaries and benefits, cost of books sold, occupancy costs,
depreciation and amortization of equipment costs and leasehold improvements,
and certain other educational and facility costs incurred by the Company's
schools.

     Selling and promotional expenses include admission representatives'
salaries and benefits, direct and indirect marketing expenses and advertising
expenses.

     General and administrative expenses include schools', regional offices'
and home office's salaries and benefits, other direct and indirect costs of the
schools, regional offices, and home office, and the provision for losses on
accounts receivable.

     Since its inception, the Company has pursued a strategy of growth
through acquisition. All of the Company's schools have been acquired. Except in
the case of a pooling of interests, the Company records as goodwill and
intangibles the difference between the purchase price of a school and the fair
value of its tangible net assets. Since inception, the Company has allocated
approximately $20.8 million of its purchase prices of acquired schools to
goodwill and intangibles. Goodwill is amortized over 15 years. Other
intangibles are

                                       24


<PAGE>   27



amortized over two to 15 years. The Company also frequently enters into
non-competition agreements with the owners or employees of the schools it
acquires and generally records the cost of such non-competition agreements as
intangible assets which are amortized over their respective lives which range
from two to ten years. Effective July 1993, such amortization is tax
deductible; however, amortization related to acquisitions consummated prior to
that date is only partially tax deductible on a current basis.

VARIATIONS IN QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended March 31, 1997 and such
data expressed as a percentage of the Company's totals with respect to such
information for the applicable fiscal year. 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 consolidated financial statements included
elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results for any future period.


<TABLE>
<CAPTION>
                              Fiscal Year Ended March 31, 1996             Fiscal Year Ended March 31, 1997
                              --------------------------------             --------------------------------
                          1st Qtr     2nd Qtr     3rd Qtr   4th Qtr    1st Qtr     2nd Qtr    3rd Qtr   4th Qtr
                          -------     -------     -------   -------    -------     -------    -------   -------
<S>                        <C>        <C>         <C>       <C>         <C>        <C>       <C>        <C>
                                                (Dollars in Thousands)
Net revenues:
 Amount..............      $9,765     $10,377     $11,538   $11,667     $10,401    $12,039   $13,324    $13,686
 Percentage of fiscal
  year total......           22.5%       23.9%       26.6%     27.0%       21.0%      24.3%     26.9%      27.8%
Income from
 operations before
 other expenses:
 Amount............        $  145     $   792     $ 1,490   $ 1,483     $   327    $ 1,122   $ 1,404    $   987
 Percentage of fiscal
  year total.......           3.7%       20.3%       38.1%     37.9%        8.5%      29.2%     36.6%      25.7%
</TABLE>

     The Company's quarterly net revenues have fluctuated in the past and may
fluctuate significantly in the future as a result of a number of factors,
principally due to the number and timing of new students enrolling in the
Company's programs. New enrollments in the Company's schools tend to be higher
in the third and fourth fiscal quarters because the third and fourth quarters
cover periods traditionally associated with the beginning of school semesters.
The Company believes it is less affected by this seasonal pattern than many
other educational institutions because it permits students to enroll in and
begin programs in any month of the year at most of its schools. In addition,
the impact of seasonality in new enrollments on results of operations has been
moderated to some extent by growth in the number of students attending programs
and the varying lengths of those programs. In addition, other factors affecting
quarterly net revenues include student withdrawals, the termination of 
programs, the introduction of new programs, the upgrading or lengthening of 
programs, changes in tuition rates (including changes in response to pricing 
actions by competitors), changes in government-supported financial aid programs,
modification of applicable government regulations or interpretations,
regulatory audits or other actions by regulatory authorities. The Company has
not experienced any material resistance to raising its tuition rates in the
past and, based on such prior experience, anticipates that tuition increases
will keep pace with inflation for the foreseeable future. Because certain of
the Company's expenses do not vary with student enrollment, quarterly
variations in net revenues are amplified at the income (loss) from operations
level.


                                       25


<PAGE>   28




RESULTS OF OPERATIONS

     The following table sets forth the percentage relationship of certain
statement of operations data to net revenues, for the periods indicated.


<TABLE>
<CAPTION>
                                                  Year Ended March 31,
                                         ----------------------------------------
                                             1995          1996          1997
                                         ------------  ------------  ------------
                                         % of Revenue  % of Revenue  % of Revenue
                                         ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Net Revenues                                 100.0         100.0         100.0
School Operating Costs:
 Cost of education and facilities             47.2          45.4          46.8
 Selling and promotional                      16.8          15.1          15.2
 General and administrative expenses          29.2          28.5          28.4
Amortization of goodwill and intangibles       3.4           2.0           1.8
                                             -----         -----         -----
Income before other expenses                   3.4           9.0           7.8
Other expenses                                 2.1           4.4           1.1
                                             -----         -----         -----
Income from operations                         1.3           4.6           6.7
Interest expense, net                          2.5           1.9           0.6
                                             -----         -----         -----
Income (loss) before income taxes             (1.2)          2.7           6.1
Provision (benefit) for income taxes           0.1           1.5          (1.7)
                                             -----         -----         -----
Income (loss) before extraordinary item       (1.3)          1.2           7.8
Extraordinary item                               -             -           0.6       
                                             -----         -----         -----   
Net income (loss)                             (1.3)          1.2           7.2   
                                             -----         -----         -----   


</TABLE>   
Year Ended March 31, 1997 Compared With Year Ended March 31, 1996.

     Net Revenues. Net revenues increased by $6,103, or 14.1%, to $49,450 for
the year ended March 31, 1997 from $43,347 for the year ended March 31, 1996.
Factors contributing to revenue growth included an increase in the number of
students attending the Company's schools and an approximate 4% increase in
tuition rates during fiscal 1997.  The number of new student starts at the
Company's schools during the year increased to 7,358 in fiscal 1997 from 6,706
in fiscal 1996, a 9.7% increase. The Company's three San Diego area schools
experienced a decline in new student starts to 1,944 for the current year as
compared to 2,178 for the prior year, principally in its medical assistant and
medical administration programs.  The Company believes the decline in new
student starts is attributable to several factors in the San Diego area,
including a shift in employer requirements for medical assistants, a continued
decline in military personnel, and an increase in employment opportunities.
The Company believes that these factors may continue to adversely impact the
Company's operations in the San Diego area.  The Texas and Maryland schools,
acquired in fiscal 1997, accounted for 855 new students starts in fiscal 1997.
Student withdrawal rates did not change materially compared to withdrawal rates
experienced by the Company during fiscal 1996.

     Cost of Education and Facilities. Cost of education and facilities
increased by $3,500, or 17.8%, to $23,151 in fiscal 1997 from $19,651 in fiscal
1996 principally as a result of increased student count at the Company's
schools.  The cost of education and facilities as a percentage of net revenue
was 46.8% in fiscal 1997 compared with 45.4% in fiscal 1996, as a result of
increased costs associated with the introduction of several new programs at the
Company's two San Diego, California schools.

     Selling and Promotional. Selling and promotional expenses increased by
$997, or 15.3%, to $7,531 in fiscal 1997 from $6,534 in fiscal 1996.  Selling
and promotional expense as a percentage of net revenue was 15.2% in fiscal 1997
compared with 15.1% in fiscal 1996, as a result of increased advertising
spending by the Company's schools in order to increase inquiries from
prospective students.

 
                                      26

<PAGE>   29




     General and Administrative. General and administrative expenses increased
by $1,673, or 13.5%, to $14,042 in fiscal 1997 from $12,369 in fiscal 1996      
principally as a result of an increase in the number of administrative
personnel at the Company's schools and increased costs at the Company's home
office and regional offices.  Such increase in personnel was necessary to
service the increase in student population and the expansion in number of 
schools.  General and administrative expenses as a percentage of net revenues 
were 28.4% in fiscal 1997 compared with 28.5% in fiscal 1996.

     Amortization of Goodwill and Intangibles.  Amortization of goodwill and
intangibles increased $3, or .4% to $886 in fiscal 1997 from $883 in fiscal
1996.  The increase was a result of amortizing costs associated with schools
acquired in fiscal 1997 offset by fully amortizing certain intangible
assets acquired in connection with the purchase of schools in fiscal 1992 and
prior.

     Other Expenses.  Other expenses in fiscal 1997 consisted of a charge of
$391 for merger costs associated with the Nebraska acquisition and $144 for the
consolidation of two Virginia schools and two California schools.

     Interest Expense, Net.  Net interest expense decreased $538, or 65.5%, to
$284 in fiscal 1997 from $822 in fiscal 1996 principally as a result of paying
off $4.8 million in subordinated debt with the proceeds from the Company's IPO
and increased interest income from excess cash on hand.

     Income before Income Taxes and Extraordinary Item.  Income before income
taxes and extraordinary item increased to $3,021 in fiscal 1997 from $1,159 in
fiscal 1996 principally as a result of the decline in other expenses and
reduced interest expense, net.

     Extraordinary Item.  Extraordinary item consisted of a one time charge of
$309 after tax to write off unamortized deferred debt issuance costs and
unamortized debt discount for early payoff of subordinated debt from the
proceeds of the Company's IPO.

     Income Taxes.  The income tax benefit was $845 in fiscal 1997 as compared
to expense of $632 in fiscal 1996 due to the 1997 recognition of a benefit
from establishing deferred tax assets when the Nebraska Acquisition terminated
its status as a Subchapter S Corporation and the 1997 elimination of the
deferred tax asset valuation allowance of $1,320 due to the Company's
profitable operations in fiscal 1997 and the acquisition of other historically
profitable schools.  Pro forma income tax expense of $409 in fiscal 1997 as
compared to the pro forma income tax benefit of $487 in fiscal 1996 reflects
the taxation of the Nebraska Acquisition as a C corporation filing a
consolidated return with the Company for all periods and other differences
arising from the application of the liability method of accounting for income
taxes.

     Net Income.  Net income increased in fiscal 1997 to $3,557 as compared to
$527 in fiscal 1996 due primarily to the acquisition of the Texas and Maryland
schools, improved results in the Nebraska schools, the reduction in the other
expenses such as the class action lawsuit settlement and the impairment of
goodwill and intangibles, and reduced interest expense, combined with the
income tax benefit described above in fiscal 1997.

Year Ended March 31, 1996 Compared With Year Ended March 31, 1995.

     Net Revenues. Net revenues increased by $6,267, or 16.9%, to $43,347 for
the year ended March 31, 1996 from $37,080 for the year ended March 31, 1995.
Factors contributing to revenue growth included an increase in the number of
students attending the Company's schools and an approximate 5%

                                       27



<PAGE>   30



increase in tuition rates during fiscal 1996.  The number of students attending
the Company's schools increased 16.6% from the beginning of fiscal 1995 to the
beginning of fiscal 1996.  The number of new student starts at the Company's
schools during the year increased to 6,706 in fiscal 1996 from 6,297 in fiscal
1995, a 6.5% increase.  The seven new schools acquired in fiscal 1994 and the
two Nebraska schools accounted for 2,845 new student starts in fiscal 1996
compared with 2,559 in fiscal 1995 representing a 11.2% increase.  Student
withdrawal rates did not change materially compared to withdrawal rates
experienced by the Company during fiscal 1995.

     Cost of Education and Facilities.  Cost of education and facilities
increased by $2,163, or 12.4%, to $19,651 in fiscal 1996 from $17,488 in fiscal
1995 principally as a result of increased student count at the Company's
schools.  The cost of education and facilities as a percentage of net revenues
was 45.4% in fiscal 1996 compared with 47.2% in fiscal 1995, reflecting the
Company's ability to serve a greater student population without a corresponding
proportional increase in faculty and facilities costs.

     Selling and Promotional.  Selling and promotional expenses increased by
$318, or 5.1%, to $6,534 in fiscal 1996 from $6,216 in fiscal 1995.  Selling
and promotional expenses as a percentage of net revenues was 15.1% in fiscal 
1996 compared with 16.8% in fiscal 1995, due to an increased percentage of new
student starts resulting from student referrals.

     General and Administrative.  Administrative expenses increased by $1,543,
or 14.3%, to $12,369 in fiscal 1996 from $10,826 in fiscal 1995 principally as
a result of an increase in the number of administrative personnel at the
schools.  Such increase in personnel was necessary to service the increased
student population.  Administrative expense as a percentage of net revenues
declined to 28.5% in fiscal 1996 compared with 29.2% in fiscal 1995 resulting
from the Company's ability to leverage fixed costs at the home office, regional
and school level.

     Amortization of Goodwill and Intangibles.   Amortization of goodwill and
intangibles declined $372, or 29.6%, to $883 in fiscal 1996 from $1,255 in
fiscal 1995.  The decline was a result of fully amortizing certain intangible
assets acquired in connection with the purchase of schools in fiscal 1992 and
prior.

     Other Expenses.   Other expenses in fiscal 1996 consisted of a charge of
$1,115 for the settlement of a class action lawsuit and a $50 charge related to
the relocation of one of the Company's schools, and $764 for the impairment of
goodwill and intangibles due to operating losses of the Company's Roanoke,
Virginia school.

     Interest Expense, Net.  Net interest expense decreased $113, or 12.1%, to
$822 in fiscal 1996 from $935 in fiscal 1995 principally as a result of lower
debt levels during fiscal 1996.

     Income Taxes. Income taxes increased by $604 to $632 in fiscal 1996 from
$28 in fiscal 1995 due principally to not recognizing a tax benefit for the
impairment of goodwill and intangibles and a portion of the legal settlement.
As a result, the effective income tax rate in fiscal 1996 was substantially
higher than in fiscal 1995.

     Net Income. Net income increased to $527 in fiscal 1996 from a loss of
$444 in fiscal 1995 principally as a result of increased net revenues and
reduced expenses as a percentage of net revenues.


                                      28


<PAGE>   31


LIQUIDITY AND CAPITAL RESOURCES

     During the last three fiscal years, the Company financed its operating
activities and capital requirements, including debt repayments, principally
from cash provided by operating activities and by a $2.2 million subordinated
debt borrowing in March 1995.  Cash provided by operating activities for fiscal
1996 and fiscal 1997 was $4.3 million and $2.7 million, respectively.  The
Company's principal sources of funds at March 31, 1997 were cash and cash
equivalents of $14.0 million and accounts receivable of $5.2 million.

     Historically, the Company's investment activity has primarily consisted of
capital asset purchases and the purchase of schools.  Capital expenditures,
excluding capital leases, totaled $1.3 million and $2.0 million for fiscal 1996
and 1997, respectively, as a result of purchasing additional equipment and
upgrading and replacing existing equipment such as computers and medical
equipment for school programs, and expanding facilities at several locations.
Purchases of the Texas and Maryland businesses, including goodwill and
intangibles, totaled $5.2 million of which $1.4 million was paid in cash in
fiscal 1997.

     The Company's capital assets consist primarily of classroom and laboratory
equipment (such as computers and medical devices), classroom and office
furniture, and leasehold improvements.  All building facilities are leased with
the exception of the land and buildings owned by the Company in Dayton, Ohio,
Lincoln, Nebraska and Omaha, Nebraska.  The Company plans to continue to expand
current facilities, upgrade and replace equipment, and open new schools.  The
Company expects fiscal 1998 capital expenditures for its existing schools to be
approximately $2.2 million.  The Company expects that its fiscal 1998
operations and planned capital expenditures can be funded through cash to be
generated from existing operations.

     Cash flow from operations on a long term basis is highly dependent on the
receipt of funds from Title IV Programs, and presently a majority of the
Company's net revenues are derived from Title IV Programs.  Disbursement of
Title IV Program funds is dictated by federal regulations.  For students
enrolled in "non-term" programs (i.e., not divided into quarters or semesters),
payments are generally made in two equal installments, one in the first 30 days
following the student's first day of class and the second when the student
reaches the midpoint of the program.  For students enrolled in term programs
(i.e., quarters or semesters), payments are made at the beginning of each
term, with the exception of the initial disbursement which is made 30 days
following the student's first day of class.  In addition, the Title IV
regulations set forth other financial standards for the Company and its schools
including restrictions for (i) positive tangible net worth, (ii) an "acid"
test ratio of at least 1-to-1, (iii) a 10% limitation on losses as a percentage
of tangible net worth and (iv) the maintenance of a minimum cash reserve equal
to 25% of prior year school refunds in the event of certain non-compliance.
Except with respect to the operating losses incurred at the Company's Roanoke
school, the Company believes each of its schools satisfied the financial
responsibility standards. Because the HEA and the Regulations are subject to
amendment, and because the Department of Education may change its
interpretation of the HEA and the Regulations, there can be no assurance that
the Department of Education will agree in the future with the Company's
interpretation of each such requirement or that such requirements will not
change in the future.

     In connection with the Texas Acquisition, the Company made payments of
approximately $1,150,000 to the sellers in May 1997 and will make note payments
of approximately $250,000 per year for five years, beginning in fiscal 1998.
The Company's Title IV funding from its Texas Acquisition was suspended pending
Department of Education recertification, which was received in April 1997.  In

                                       29


<PAGE>   32



connection with the Maryland Acquisition, the Company made payments of
$1,350,000 in May 1997.  No further amounts are due.  The Company's Title IV
funding from its Maryland Acquisition was suspended pending Department of
Education recertification, which was received in April 1997.  The Company's
Title IV funding for its Nebraska Acquisition has been suspended pending
Department of Education recertification, which is expected to be received in
the fall of 1997.

     The Company anticipates it will need additional debt or equity financing
in order to carry out its strategy of growth through acquisitions.  In February
1997, the Company entered into a loan agreement with a major U.S. bank for loan
facilities to the Company of up to $17.5 million (the "Bank Credit Facility").
Of the total amount of the Bank Credit Facility, $5 million is to be provided
in the form of a three year revolving line of credit and the remainder by a
term loan facility maturing on the third anniversary of the Bank Credit
Facility.  Subject to compliance by the Company with certain financial
conditions and expenditure of all the proceeds from the IPO, the term loan
facility provides $5 million of availability the first year, increasing to $7.5
million in the second year and $12.5 million in the third year. Interest is
charged on borrowings at different floating rates above LIBOR depending on
certain financial conditions of the Company and depending on whether drawn
under the revolving line of credit or the term loan. In addition, the Bank
Credit Facility provides for commitment fees to be paid on the unused portion
of the facility.  The Bank Credit Facility also contains restrictions on the
payment of dividends and incurrence of additional debt, and various other
financial covenants.  The Bank Credit Facility is secured by substantially
all of the assets of the Company.  The Company believes this Bank Credit 
Facility will be adequate to meet its financing needs for at least the next 
twelve months.

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

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Annual Report on Form 10-K and presented elsewhere by management from
time-to-time.

DEPENDENCE ON TITLE IV FUNDING; REGULATORY COMPLIANCE AS A CONDITION FOR
CONTINUED ELIGIBILITY FOR TITLE IV FUNDING

     The Company derives a substantial majority of its revenues from federal
financial aid received by the students of its schools under Title IV programs
administered by the United States Department of Education under the HEA.  Each
of the Company's schools participates in Title IV Programs.  In order to
participate in Title IV Programs, an institution, such as each of the schools
owned and operated by the Company, must obtain certification by the Department
of Education as an "eligible institution."  To obtain such certification, the
institution must satisfy certain eligibility, program, and general requirements
imposed by the HEA and by regulations thereunder (the "Regulations")
promulgated and enforced by the Department of Education.  Generally, a school
(a main campus and any additional locations for purposes of the Regulations) is
considered separately for compliance with the Regulations.  All but two of the
Company's schools are main campuses.  An institution also must be authorized to
offer its programs by the relevant state agency where it is located and it must
be accredited by a nationally recognized accrediting agency to obtain and
maintain such certification.  Each of the Company's schools is licensed and
approved in the state where it operates and is accredited by at least one
nationally recognized accrediting agency.


                                       30


<PAGE>   33




     The provisions of the HEA and the Regulations govern many aspects of the
operation of the Company and its schools, including, but not limited to (i) the
maximum acceptable rate of default by a school's students with respect to
federally guaranteed or funded student loans, (ii) the maximum acceptable
proportion of school revenues derived from Title IV Programs, (iii) the
school's satisfaction of certain financial responsibility standards, (iv) the
school's satisfaction of certain administrative capability standards, (v) the
ability of a school to add locations and educational programs, and (vi) the
ability of the Company to engage in transactions involving a change in
ownership resulting in a change in control of the schools or the Company.
Generally, each school is considered separately for purposes of determining
compliance with the regulatory requirements, although certain financial
reporting is done on a consolidated basis.

     Financial Responsibility Requirements. The HEA and the Regulations
prescribe specific standards of financial responsibility which the Department
of Education must consider with respect to qualification for participation in
the Title IV Programs ("Financial Responsibility Standards"). These standards
are generally applied on an individual school basis. However, there can be no
assurance that the Department of Education will not attempt to apply such
standards on a consolidated basis. If the Department of Education determines
that any of the Company's schools fails to satisfy the Financial Responsibility
Standards, it may require that such schools post an irrevocable letter of credit
(a "Financial Responsibility Bond") in favor of the Secretary of Education in
an amount equal to not less than one-half of Title IV Program funds received by
the school during the last complete award year or, in the Department of
Education's discretion, require some other less onerous demonstration of
financial responsibility (a "Demonstration of Financial Responsibility").

     Among the principal Financial Responsibility Standards which a school must
satisfy are: (i) an "acid test" ratio (defined as the ratio of the total of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1-to-1 at the end of the most recent fiscal year, (ii) a positive
tangible net worth, as defined by the applicable Regulations, at the end of the
most recent fiscal year (the "Tangible Net Worth Standard") and (iii) net
operating results for the two most recent fiscal years, excluding extraordinary
losses or losses from discontinued operations, which do not show an aggregate
net loss in excess of 10% of tangible net worth at the beginning of the two
year period.

     Student Loan Defaults. The HEA provides that a school may lose its
eligibility to participate in some or all Title IV Programs if defaults on the
repayment of federally guaranteed student loans or direct loans exceed certain
rates ("Cohort Default Rates"). Cohort Default Rates are calculated for each
school for each federal fiscal year by determining the rate at which the
school's students entering in that federal fiscal year default on repayment 
of their loan by the end of the following federal fiscal year. Cohort
default rates are subject to revision by the Department of Education if new
data become available and are subject to appeal by schools contesting the
accuracy of the data or the adequacy of the servicing of the loans by the loan
servicer. A school that is determined to have had Cohort Default Rates of 25%
or greater for the three most recent federal fiscal years for which data is
available is subject to immediate loss of eligibility to participate in
substantially all Title IV Student Loan Programs, subject to a limited appeal
of the determination, including an appeal based on a claim of exemption from
the Cohort Default Rate requirements by virtue of exceptional mitigating
circumstances. The loss of eligibility lasts for the duration of the federal
fiscal year in which the determination of ineligibility is made, plus the two
succeeding federal fiscal years. However, an institution remains eligible for
Title IV funding while an appeal of such determination is pending.  The loss of
Title IV eligibility at one or more of the Company schools could have a
material adverse effect on the Company's operations.



                                       31


<PAGE>   34

CHANGE IN OWNERSHIP RESULTING IN CHANGE IN CONTROL

     Upon a change in ownership resulting in a change in control of the
Company, as defined in the HEA and the Regulations, each of the Company's
schools would 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 the Company's
schools.

     The Department of Education's regulations provide that after a Company
becomes publicly-traded, a change in control occurs when a report on Form 8-K
is required to be filed with the Securities and Exchange Commission disclosing
a change in control. Most states and accrediting agencies have similar
requirements, but they do not provide a uniform definition of change in
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 affected. The possible loss of Title IV eligibility
resulting from a change in control may also discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company.

PARTICIPATION IN FEDERAL DIRECT LENDING PROGRAM; RISK OF LEGISLATIVE ACTION

     Prior to fiscal 1995, the Company derived all of its Title IV loan funding
from the FFEL loan program. Since fiscal 1995, the Company's schools elected to
administer their Title IV loan funding pursuant to the Federal Direct Student
Loan Program ("FDSLP"). As of this date, the Company expects to derive all of
its Title IV loan funding pursuant to the FDSLP program in fiscal 1998.
Funding for the FDSLP, as well as for the FFEL program, must be appropriated by
Congress annually.  FDSLP and FFEL loans represent a substantial majority of
the Company's revenues. In 1996 there was debate in Congress over whether the
Title IV loan programs should be financed entirely through the FFEL program, or
through a combination of the FFEL program and the FDSLP program. There can be
no assurance that funding will continue at current levels, or that the FDSLP
program itself will be continued. If the FDSLP program were discontinued, or
funding reduced so as to reduce the amount of direct lending funds available to
the Company's schools, the Company would have to rely on loans provided 
pursuant to FFEL. Loans pursuant to FFEL are administered through outside
lenders, such as banking institutions and are federally guaranteed. Although
the Company believes that it would have no difficulty finding lenders for
federally guaranteed student loans to its students under FFEL, there can be no
assurance that such loans would be available in amounts sufficient to provide
for the Company's schools to operate at current and anticipated levels, or at
all.

     Furthermore, there can be no assurance that federal funding for the FFEL
Program will be continued at current levels, or at all. Because the Company
derives a substantial majority of its cash receipts from Title IV funding,
discontinuance or significant reductions in the FDSLP and, if the FDSLP program
is discontinued or reduced, the FFEL program, would have a material adverse
effect on the Company's operations.

RELIANCE ON ACQUISITIONS

     The Company has acquired all of its schools. Several of the schools
acquired by the Company have experienced losses following their acquisition in
connection with their integration into the Company's operations or because of
their failure to perform as anticipated by the Company.  The Company expects
that a significant part of its future growth will be based on its ability to
identify, acquire and profitably operate additional schools. While the Company
is continually searching for acquisition opportunities,

                                       32


<PAGE>   35


there can be no assurance that the Company will be successful in identifying,
acquiring and operating additional schools. When the Company acquires an
existing school and accounts for the acquisition as a "purchase" rather than a
"pooling of interests", a significant portion of the purchase price for such
school is often allocated to goodwill and intangibles because most of these
acquisitions do not involve the purchase of significant amounts of tangible
property. All of such goodwill and intangibles must be amortized over a
relatively short period of time, which reduces the Company's reported earnings. 
If any potential acquisition opportunities are identified, there can be no 
assurance that the Company will be able to consummate the acquisition on terms 
favorable to the Company and successfully integrate any such acquisition into 
its existing operations and there can be no assurance as to the timing or 
effect on the business of the Company of any such acquisitions.

     The Company's acquisition of a school constitutes a change in ownership
resulting in a change of control with respect to such school for purposes of
Title IV eligibility, which means that schools must either be acquired subject
to recertification of eligibility by the Department of Education or that the
school will lose its eligibility to participate in Title IV Programs for an
indeterminate period of time during which it applies for recertification of
eligibility. The Company's experience has been that the Department of Education
typically processes such applications for recertification in three to six
months. Since this is less than the minimum enrollment period for each of the
Company's schools, there generally should be no significant interruption of
Title IV funding caused by the need to apply for a recertification of
eligibility as a result of an acquisition. There can be no assurance, however,
that recertification applications will be acted upon on a timely basis by the
Department of Education so as to avoid any significant interruption of Title IV
funding to students at the acquired school. Prior to recertification by the
Department of Education, the Company must also obtain approval of the change in
control from applicable states and accrediting agencies. In the past this
process has taken from three to six months for the Company to complete. The
Company has been timely recertified for eligibility by the Department of
Education with respect to each of its acquisitions. Although the Company has
had no difficulty in obtaining such recertification and approval in the past,
there can be no assurance that such state, accrediting and Department of
Education approvals may not be subject to unexpected delays or difficulties
which may materially and adversely effect the Company's operations.

     In acquiring a school, the Company becomes liable to the Department of
Education for any liabilities of the seller on account of the seller's failure
to comply with the HEA or the Regulations prior to the date of acquisition. The
Company attempts to minimize the impact of any such liabilities by including
representations as to regulatory compliance and indemnification provisions in
the relevant acquisition agreements. No material amount of unindemnified Title
IV regulatory liabilities have been asserted against the Company with respect
to any of its prior acquisitions, however, no assurance can be given that any
assertions will not be made in the future. In addition, if available offsets
are insufficient, there can be no assurance that the parties responsible for
indemnification of the Company from such liabilities will have the financial
resources necessary to indemnify the Company for all or any portion of such
possible liabilities.

VARIABILITY IN QUARTERLY OPERATING RESULTS

     The Company's quarterly revenues have varied in the past and may vary
significantly in the future as a result of a number of factors, including
fluctuations in the number of new students enrolling in the Company's programs.
New enrollments in the Company's schools tend to be higher in the third and
fourth fiscal quarters because the third and fourth quarters cover periods
associated with the beginning of school semesters. The Company expects these
seasonal trends will continue.

                                       33


<PAGE>   36




COMPETITION

     The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. The
Company's schools compete for students with not-for-profit public and private
colleges and proprietary institutions which offer degree and/or non-degree
granting programs. Such proprietary institutions include vocational and
technical training schools, continuing education programs and commercial
training programs. Public and private colleges may offer programs similar to
those offered by the Company's schools at lower tuition costs due in part to
government subsidies, foundation grants, tax deductible contributions, or other
financial resources not available to proprietary institutions. Certain of the
Company's competitors in both the public and private sector have greater
financial and other resources than the Company.

DEPENDENCE ON KEY PERSONNEL

     The Company's success depends upon the availability and performance of its
senior management, particularly Gary D. Kerber, the Company's Chairman, 
President and Chief Executive Officer. Mr. Kerber has entered into an 
employment contract with the Company, however, it may be terminated by him at
any time. Although the Company maintains key man life insurance on Mr. Kerber
in the amount of $1,000,000, the loss of Mr. Kerber's services could have a
material adverse effect on the Company.


ABSENCE OF DIVIDENDS

     The Company has not paid any dividends to date. The Company does not
currently intend to declare or pay dividends on its Common Stock in the
foreseeable future, but plans to retain any earnings for use in its business
operations. In addition, the Bank Credit Facility contains restrictions which
prohibit the Company from paying dividends while such credit line is in effect.

ANTI-TAKEOVER PROVISIONS AND TITLE IV CHANGE IN CONTROL REGULATIONS

     Certain provisions of the Company's Certificate of Incorporation and
Bylaws authorize the issuance of "Blank Check" preferred stock and establishing
advance notice requirements for director nominations and actions to be taken at
stockholder meetings. These provisions could discourage or impede a tender
offer, proxy contest or other similar transaction involving control of the
Company, which transactions might be viewed favorably by minority stockholders.
Provisions in the applicable Regulations pursuant to which the Company would
lose its Title IV eligibility in the event of a change in ownership resulting
in a change of control could have a similar discouraging effect.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary data are indexed in Item 14
hereof.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                       34


<PAGE>   37




                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item regarding directors, executive
officers, promoters and control persons of the Company is incorporated by
reference from the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
not later than July 29, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than July 29, 1997.

                                   PART IV

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

(a) FINANCIAL STATEMENTS

           Report of Ernst & Young LLP, Independent Auditors
   
           Consolidated Balance Sheets as of March 31, 1996 and 1997
           Consolidated Statements of Operations for the years ended
                   March 31, 1995, 1996 and 1997
           Consolidated Statements of Stockholders' Equity for the years
                   ended March 31, 1995, 1996 and 1997
           Consolidated Statements of Cash Flows for the years ended
                   March 31, 1995, 1996 and 1997
           Notes to Consolidated Financial Statements

(b)  FINANCIAL STATEMENT SCHEDULES


                                       35


<PAGE>   38




      The following consolidated financial statement schedule of Educational
      Medical, Inc. and subsidiaries is included in Item 14(d):

      Schedule II--Valuation and qualifying accounts

      All other schedules for which provision is made in the applicable
      accounting regulation of the Securities and Exchange Commission are not
      required under the related instructions or are inapplicable and therefore
      have been omitted.

(c)   REPORTS ON FORM 8-K:

      Form 8-K filed January 15, 1997 reporting the acquisition of Hagerstown
      Business College, Hagerstown, Maryland.

      Form 8-K/A filed March 14, 1997 submitting financial statements and pro
      forma financial statements as to the acquisition of Hagerstown Business
      College, Hagerstown, Maryland.

(d)   EXHIBITS

<TABLE>
<CAPTION>

EXHIBIT                 DESCRIPTION
-------                 -----------
<S>        <C>
3.1(a)*    Restated Certificate of Incorporation of EMI Acquisition Corp. (See
           Exhibit 3.1(a) to Amendment No. 1 to Registration Statement on Form S-1
           filed with the Commission on September 20, 1996.)
3.1(b)*    Certificate of Amendment of Certificate of Incorporation of EMI
           Acquisition Corp. (See Exhibit 3.1(b) to Amendment No. 3 to Registration
           Statement on Form S-1 filed with the Commission on October 22, 1996.)
3.1(c)*    Second Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(c) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(d)*    Third Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(d) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(e)*    Fourth Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(e) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(f)*    Fifth Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(f) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(g)*    Sixth Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(g) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(h)*    Seventh Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(h) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
3.1(i)*    Eighth Amendment to Restated Certificate of Incorporation of
           Educational Medical, Inc. (See Exhibit 3.1(i) to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)

</TABLE>
                                       36


<PAGE>   39


<TABLE>
<CAPTION>

<S>        <C>
3.2*       Restated By-Laws of the Company. (See Exhibit 3.2 to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
4.1*       Form of Common Stock Certificate. (See Exhibit 4.1 to Amendment No. 3
           to Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
10.1*      Securities Purchase Agreement, dated as of July 23, 1991, by and among
           the Company and the Pecks Managed Entities. (See Exhibit 10.1 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.2*      Promissory Note R-002, dated as of July 16, 1991, in the principal
           amount of $2,900,000 issued by the Company in favor of NAP & Company. (See
           Exhibit 10.2 to  Amendment No. 3 Registration Statement on Form S-1 filed
           with the Commission on October 22, 1996.)
10.3*      Promissory Note R-003, dated as of July 23, 1991, in the principal
           amount of $603,000 issued by the Company in favor of Fuelship & Company.
           (See Exhibit 10.3 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.4*      Promissory Note R-004, dated as of July 23, 1991, in the principal
           amount of $497,000 issued by the Company in favor of Fuelship & Company.
           (See Exhibit 10.4 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.5*      Allonge to Promissory Note R-002, dated as of March 31, 1995. (See
           Exhibit 10.5 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.6*      Allonge to Promissory Note R-003, dated as of March 31, 1995. (See
           Exhibit 10.6 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.7*      Allonge to Promissory Note R-004, dated as of March 31, 1995. (See
           Exhibit 10.7 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.8*      Warrant No. R-001 to purchase Common Stock issued to Fuelship &
           Company. (See Exhibit 10.8 to  Registration Statement on Form S-1 filed
           with the Commission on August 8, 1996.)
10.9*      Warrant No. R-002 to purchase Common Stock issued to NAP & Company.
           (See Exhibit 10.8 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.10*     Warrant No. E-007 to purchase Common Stock issued to Equitable
           Securities Corporation. (See Exhibit 10.10 to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22,  1996.)
10.11*     First Amendment to Securities Purchase Agreement, dated as of March
           31, 1995, by and among the Company and the Pecks Managed Entities. (See
           Exhibit 10.11 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.12*     Loan Agreement, dated as of March 31, 1995, by and between the
           Company, each of its subsidiaries, and Sirrom. (See Exhibit 10.12 to
           Amendment No. 3 to  Registration Statement on Form S-1 filed with the
           Commission on October 22, 1996.)
10.13*     Letter Addendum to Loan Agreement, dated as of March 31, 1995, between
           the Company, each of its subsidiaries, and Sirrom. (See Exhibit 10.13 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.14*     Secured Promissory Note, dated as of March 31, 1995, in the principal
           amount of $2,200,000, issued by the Company and each of its subsidiaries
           in favor of Sirrom. (See Exhibit 10.14 to Amendment No. 3 to  Registration
           Statement on Form S-1 filed with the Commission on October 22, 1996.)
10.15*     Security Agreement, dated as of March 31, 1995, among the Company,
           each of its subsidiaries, and Sirrom. (See Exhibit 10.15 to Amendment No.
           3 to Registration Statement on Form S-1 filed with the Commission on
           October 22, 1996.)

</TABLE>
                                       37


<PAGE>   40

<TABLE>

<S>        <C>
10.16*     Stock Purchase Warrant to purchase Common Stock of the Company issued
           to Sirrom, dated as of March 31, 1995. (See Exhibit 10.16 to  Registration
           Statement on Form S-1 filed with the Commission on August 8, 1996.)
10.17*     Pledge Agreement, dated as of March 31, 1995, between the Company and
           Sirrom. (See Exhibit 10.17 to  Registration Statement on Form S-1 filed
           with the Commission on August 8, 1996.)
10.18*     Agreement in Respect of Warrant, dated as of March 31, 1995, among NAP
           & Company, the Company and Sirrom. (See Exhibit 10.18 to  Registration
           Statement on Form S-1 filed with the Commission on August 8, 1996.)
10.19*     Agreement in Respect of Warrant, dated as of March 31, 1995, among
           Fuelship & Company, the Company and Sirrom. (See Exhibit 10.19 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.20*     Registration Rights Agreement, dated as of July 23, 1991, by and among
           the Company, the Sprout Group, LTOS, and the Pecks Managed Entities (See
           Exhibit 10.20 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.).
10.21*     First Amendment to Registration Rights Agreement, dated as of March
           31, 1995, by and among the Company, the Sprout Group, LTOS, the Pecks
           Managed Entities and Sirrom. (See Exhibit 10.21 to  Registration Statement
           on Form S-1 filed with the Commission on August 8, 1996.)
10.22*     Coinvestors Agreement, dated as of July 23, 1991, by and among the
           Company, the Sprout Group, LTOS, the Pecks Managed Entities and Investech,
           L.P. (See Exhibit 10.22 to  Registration Statement on Form S-1 filed with
           the Commission on August 8, 1996.)
10.23*     Letter Agreement, dated as of July 23, 1991, by and among the Company,
           the Sprout Group, LTOS and Investech, L.P. (See Exhibit 10.23 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.24*     Business Loan Agreement, dated as of July 14, 1993, between Bank One,
           Dayton, N.A. and OIOPT Acquisition Corp. (See Exhibit 10.24 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.25*     Business Purpose Promissory Note, dated as of July 14, 1993, in the
           principal amount of $720,000 issued by OIOPT Acquisition Corp. in favor of
           Bank One, Dayton, N.A., and guaranteed by the Company. (See Exhibit 10.25
           to  Registration Statement on Form S-1 filed with the Commission on August
           8, 1996.)
10.26*     Mortgage, dated as of July 14, 1993, by OIOPT Acquisition Corp.,
           (Mortgagor), to Bank One, Dayton, N.A., (Mortgagee), guaranteed by the
           Company. (See Exhibit 10.26 to  Registration Statement on Form S-1 filed
           with the Commission on August 8, 1996.)
10.27*     Pledge Agreement, dated as of July 14, 1993, among the Company, Ohio
           Institute of Photography and Technology, Inc. and OIOPT Acquisition Corp.
           (See Exhibit 10.27 to  Registration Statement on Form S-1 filed with the
           Commission on August 8, 1996.)
10.28*     Asset Purchase Agreement, dated as of June 23, 1993, among the
           Company, OIOPT Acquisition Corp., Ohio Institute of Photography and
           Technology, Inc., K. Terry Guthrie, Richard L. Cretcher, Stephen T.
           McLain, Gerald D. Guthrie and James R. Madden. (See Exhibit 10.28 to
           Registration Statement on Form S-1 filed with the Commission on August 8,
           1996.)
10.29*     Amendment to Business Loan Agreement, dated as of August 28, 1995, by
           and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., with the
           Company as guarantor. (See Exhibit 10.29 to  Registration Statement on
           Form S-1 filed with the Commission on August 8, 1996.)
10.30*     Promissory Note Modification Agreement, dated as of August 28, 1995,
           by and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., with
           the Company as guarantor.

</TABLE>
                                       38


<PAGE>   41
<TABLE>

<S>        <C>
           (See Exhibit 10.30 to  Registration Statement on Form S-1 filed
           with the Commission on August 8, 1996.)
10.31*     Amendment to Business Loan Agreement, dated as of August 28, 1995, by
           and between OIOPT Acquisition Corp. and Bank One, Dayton, N.A., and the
           Company as guarantor. (See Exhibit 10.39 to Amendment No. 3 to
           Registration Statement on Form S-1 filed with the Commission on October
           22, 1996.)
10.32*     Employment Agreement, dated as of December 31, 1992, between the
           Company and Gary D. Kerber. (See Exhibit 10.42 to  Registration Statement
           on Form S-1 filed with the Commission on August 8, 1996.)
10.33*     Letter Agreement, dated November 21, 1988 between the Company and
           Robert L. Heidrich concerning the granting of options. (See Exhibit 10.52
           to Registration Statement on Form S-1 filed with the Commission on August
           8, 1996.)
10.34*     1996 Stock Incentive Plan of the Company. (See Exhibit 10.53 to
           Amendment No. 1 to  Registration Statement on Form S-1 filed with the
           Commission on September 20, 1996.)
10.35*     Non-employee Director Stock Option Plan of the Company. (See Exhibit
           10.54 to Amendment No. 1 to  Registration Statement on Form S-1 filed with
           the Commission on September 20, 1996.)
10.36*     Letter Agreement, dated April 6, 1995 between the Company and
           Equitable Securities Corporation amending the maturity date of Warrant No.
           E-007. (See Exhibit 10.55 to  Registration Statement on Form S-1 filed
           with the Commission on August 8, 1996.)
10.37*     Asset Purchase Agreement, dated as of September 6, 1996, among the
           Company, SACMD Acquisition Corp., San Antonio College of Medical and
           Dental Assistants, Inc., Career Centers of Texas -- El Paso, Inc. and Mr.
           Comer Alden. (See Exhibit 10.56 to Amendment No. 1 to  Registration
           Statement on Form S-1 filed with the Commission on September 20, 1996.)
10.38*     Letter of Commitment, dated August 22, 1996, from Bank of America to
           the Company concerning the Proposed Bank Line of Credit. (See Exhibit
           10.57 to Amendment No. 1 to Registration Statement on Form S-1 filed with
           the Commission on September 20, 1996.)
10.39*     Asset Purchase Agreement dated December 12, 1996, as amended, between
           the Company, HBC Acquisition Corp. and O/E Learning, Inc. (including all
           exhibits) (See Exhibit 10.1 to the Company's Form 8-K filed with the
           Commission on January 15, 1997.)
10.40*     Executed Form of Second Payment Note in the amount of $1,350,000 from
           HBC to O/E (See Exhibit 10.2 to the Company's Form 8-K filed with the
           Commission on January 15, 1997.)
10.41*     Executed Form of Pledge Agreement  (See Exhibit 10.3 to the Company's
           Form 8-K filed with the Commission on January 15, 1997.)
10.42*     Executed Form of Assumption Agreement (See Exhibit 10.4 to the
           Company's Form 8-K filed with the Commission on January 15, 1997.)
10.43*     Executed Form of Bill of Sale (See Exhibit 10.5 to the Company's Form
           8-K filed with the Commission on January 15, 1997.)
10.44*     Agreement and Plan of Reorganization dated as of March 29, 1997, by
           and among the Company,  Nebraska Acquisition Corp. and Educational
           Management, Inc. with attached Exhibit A - Plan of Merger (See Exhibit
           10.1 to the Company's Form 8-K filed with the Commission on April 15,
           1997.)
10.45*     Escrow Agreement dated as of March 29, 1997 by and among the Company,
           Acquisition and Richard O. Wikert, the Lila Rhude Trust, the Scott L.
           Rhude Trust, the A. Lauren

</TABLE>
                                       39


<PAGE>   42

<TABLE>
<S>        <C>
           Rhude Trust, Roger B. Bojens and Sacks Tierney, P.A. as  Escrow
           Agent. (See Exhibit 10.5 to the Company's Form 8-K filed with the
           Commission on April 15, 1997.)
10.46      Business Loan Agreement dated as of February 25,1997 between Bank of
           America, FSB and the Company
10.47      Stock Pledge Agreement dated as of February 25, 1997 between Bank of
           America, FSB and the Company
10.48      Security Agreement dated as of February 25, 1997 between Bank of
           America, FSB and the Company
11.1       Statement regarding computation of pro forma net income (loss) per share.
11.2       Statement regarding computation of historical net income (loss) per share.
11.3       Statement regarding computation of historical supplemental net income per share.
21         List of Subsidiaries
23.1       Consent of Winther, Stave & Co., LLP.
27.1       Financial Data Schedule (for SEC use only).
99.1       Report of Winther, Stave & Co., LLP
99.2       Report of Winther, Stave & Co., LLP
99.3       Report of Winther, Stave & Co., LLP
</TABLE>


*  The exhibits thus designated are incorporated herein by reference as exhibits
hereto.  Following the description of such exhibits is a reference to the copy
of the exhibit heretofore filed with the Commission, to which there have been
no amendments or changes.



                                       40


<PAGE>   43




                                   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: June 30, 1997                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    June 30, 1997 
-------------------------       Officer and Chairman                        
Gary D. Kerber                  of the Board (Principal                     
                                Executive Officer)                          
                                                                            
                                                                            
/s/ Vince Pisano                Vice President and Chief      June 30, 1997 
-------------------------       Financial Officer                           
Vince Pisano                                                                
                                                                            
                                                                            
/s/ Robert T. Cresci            Director                      June 30, 1997 
-------------------------                                                      
Robert T. Cresci                                                            
                                                                            
                                                                            
/s/ Carl S. Hutman              Director                      June 30, 1997 
-------------------------                                                      
Carl S. Hutman                                                              
                                                                            
                                                                            
/s/ W. Patrick Ortale, III      Director                      June 30, 1997 
--------------------------                                                      
W. Patrick Ortale, III                                                      
                                                                            
                                                                            
                                                                            
/s/ Richard E. Kroon            Director                      June 30, 1997 
-------------------------                                    
Richard E. Kroon

                                       41


<PAGE>   44
                                   ITEM 14(D)

                                  SCHEDULE II


                           EDUCATIONAL MEDICAL, INC.

                       VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                                                                     
                                                BALANCE AT        ADDITIONS CHARGED                                      
                                               BEGINNING OF          TO COSTS AND                         BALANCE AT END
                                                  YEAR                EXPENSES         NET DEDUCTIONS        OF YEAR    
                                             --------------       -----------------    --------------     --------------
<S>                                          <C>                  <C>                  <C>                <C>
Allowance for doubtful accounts:                                                                      
  For the year ended March 31, 1995          $  1,027,433         $   1,280,654        $1,286,920         $ 1,021,167
  For the year ended March 31, 1996             1,021,167             1,270,565         1,317,375             974,357
  For the year ended March 31, 1997               974,357             1,239,151         1,290,804             922,704
</TABLE>




<PAGE>   45


                 Educational Medical, Inc. and Subsidiaries

                      Consolidated Financial Statements


                               March 31, 1997




                                  CONTENTS


<TABLE>
       <S>                                                              <C>
       Report of Independent Auditors...................................F-1

       Consolidated Financial Statements

       Consolidated Balance Sheets as of March 31, 1996 and 1997........F-2
       Consolidated Statements of Operations for the years ended
        March 31, 1995, 1996 and 1997...................................F-4
       Consolidated Statements of Stockholders' Equity for the years
        ended March 31, 1995, 1996 and 1997.............................F-5
       Consolidated Statements of Cash Flows for the years
        ended March 31, 1995, 1996 and 1997.............................F-6
       Notes to Consolidated Financial Statements.......................F-7
</TABLE>




<PAGE>   46




                       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

June 30, 1997                                           
Atlanta, Georgia

                                                                             F-1


<PAGE>   47





                 Educational Medical, Inc. and Subsidiaries

                         Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                MARCH 31
                                                           1996         1997
                                                        ------------------------
<S>                                                     <C>          <C>
ASSETS
Current assets:
 Cash and cash equivalents                              $ 3,209,045  $14,047,889
 Restricted cash                                            610,000            -
 Trade accounts receivable, less allowance for
  doubtful accounts of $974,357 and $922,704,
  respectively                                            3,522,715    5,238,742
 Prepaid expenses                                         1,033,098    1,149,146
 Income taxes receivable                                          -      155,542
 Deferred income tax assets                                       -    1,208,669
                                                        ------------------------
Total current assets                                      8,374,858   21,799,988






Property and equipment, net                               6,270,619    7,617,958






Deferred debt issuance costs, net of accumulated
  amortization of $286,402 and $0, respectively              96,109      297,492
Covenants not to compete, net of accumulated
  amortization of $902,780 and $1,194,238, respectively     974,445    1,082,987
Goodwill and other intangible assets, net of
  accumulated amortization of $6,488,863 and
  $7,063,793, respectively                                5,040,410   10,152,625
Deferred income tax assets                                        -      944,629
Other assets                                                229,210      176,855
                                                        ------------------------
Total assets                                            $20,985,651  $42,072,534
                                                        ========================
</TABLE>



                                                                             F-2
 

<PAGE>   48


<TABLE>
<CAPTION>
                                                               MARCH 31
                                                          1996          1997
                                                      -------------------------
<S>                                                   <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
 Accounts payable                                     $   723,834   $   820,784
 Accrued compensation                                   1,175,423       858,049
 Accrued income taxes                                     232,252             -
 Other accrued expenses                                 1,051,497     2,486,532
 Deferred tuition income                                2,821,257     3,184,225
 Current portion of long-term debt                      1,080,085     3,964,851
                                                      -------------------------
Total current liabilities                               7,084,348    11,314,441

Long-term debt, less current portion                    6,674,909     2,163,880
Other liabilities                                         957,166       394,145
                                                      -------------------------
Total liabilities                                      14,716,423    13,872,466

Commitments and contingencies

Stockholders' equity:
 Preferred stock, authorized 5,000,000 shares, none
  issued and outstanding                                        -             -
 Convertible preferred stock, $.01 par value -
  authorized 1,100,000 shares; 1,023,049 shares
  issued and outstanding (liquidation preference of
  $6.66 per share) at March 31, 1996; none
  authorized, issued or outstanding at March 31, 1997      10,230             -
 Additional paid-in capital on convertible preferred
  stock                                                 6,732,160             -
 Common stock, $.01 par value - authorized 5,833,333
  and 15,000,000 shares in 1996 and 1997,
  respectively; 2,438,100 and 7,418,100 shares issued
  and outstanding at March 31, 1996 and 1997,
  respectively                                             24,381        74,181
 Additional paid-in capital on common stock                42,424    30,222,776
 Common stock purchase warrants                         2,838,148             -
 Accumulated deficit                                   (3,343,115)   (1,996,889)
 Less treasury stock, at cost, 29,165 and 34,817
  common shares at March 31, 1996 and 1997,
  respectively                                            (35,000)     (100,000)
                                                      -------------------------
Total stockholders' equity                              6,269,228    28,200,068
                                                      -------------------------
Total liabilities and stockholders' equity            $20,985,651   $42,072,534
                                                      =========================
</TABLE>

See accompanying notes.



                                                                             F-3
<PAGE>   49




                 Educational Medical, Inc. and Subsidiaries

                    Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                     YEAR ENDED MARCH 31
                                                               1995          1996          1997
                                                           --------------------------------------- 
<S>                                                        <C>           <C>           <C>
Net revenues                                               $37,080,045   $43,346,533   $49,449,680

School operating costs:
  Cost of education and facilities                          17,487,917    19,650,937    23,150,599
  Selling and promotional                                    6,215,697     6,533,229     7,530,741
  Provision for losses on accounts receivable                1,280,654     1,270,565     1,239,151
  General and administrative expenses                        9,545,715    11,098,422    12,802,441
Amortization of goodwill and intangibles                     1,255,288       882,953       886,268
Other expenses:
  Legal defense and settlement costs                           600,000     1,115,000             -
  Loss on closure or relocation of schools                           -        50,000       143,585
  Impairment of goodwill and intangibles                       176,042       764,000             -
  Merger expenses                                                    -             -       391,453
                                                           --------------------------------------- 
Income from operations                                         518,732     1,981,427     3,305,442

Interest expense (net of interest income of $60,327 in
  1995, $171,870 in 1996, and $476,194 in 1997)                934,529       822,434       284,162
                                                           --------------------------------------- 
Income (loss) before income taxes and extraordinary item      (415,797)    1,158,993     3,021,280

Provision (benefit) for income taxes                            27,982       632,185      (845,363)
                                                           --------------------------------------- 
Net income (loss) before extraordinary item                   (443,779)      526,808     3,866,643
Extraordinary item - loss on early extinguishment of
  debt, net of income taxes                                          -             -       308,683
                                                           --------------------------------------- 
Net income (loss)                                          $  (443,779)  $   526,808   $ 3,557,960
                                                           =======================================

Pro forma income tax data:
  Income (loss) before income taxes and extraordinary item $  (415,797)  $ 1,158,993   $ 3,021,280
  Provision (benefit) for income taxes                          97,633      (486,505)      408,951
                                                           --------------------------------------- 
  Income (loss) before extraordinary item                     (513,430)      672,488     2,612,329
  Extraordinary item, net of income taxes                            -             -       308,683
                                                           ---------------------------------------       
Pro forma net income (loss)                                $  (513,430)  $   672,488   $ 2,303,646
                                                           ---------------------------------------       
Pro forma net income (loss) per common and common
  equivalent share:
Primary:
  Income (loss) before extraordinary item                  $     (0.21)  $      0.13   $      0.41
  Extraordinary item                                                 -             -         (0.05)
                                                           --------------------------------------- 
  Net income (loss)                                        $     (0.21)  $      0.13   $      0.36
                                                           =======================================
Weighted average number of shares and common equivalent
  shares outstanding (primary)                               2,483,115     5,149,764     6,447,339
                                                           =======================================
Fully diluted:
  Income (loss) before extraordinary item                  $     (0.21)  $      0.12   $      0.41
  Extraordinary item                                                 -             -         (0.05)
                                                           --------------------------------------- 
  Net income (loss)                                        $     (0.21)  $      0.12   $      0.36
                                                           =======================================
Weighted average number of shares and common equivalent
  shares outstanding (fully diluted)                         2,483,115     5,416,712     6,447,339
                                                           =======================================
</TABLE>

See accompanying notes.



                                                                            F-4
<PAGE>   50




                  Educational Medical, Inc. and Subsidiaries

               Consolidated Statements of Stockholders' Equity




<TABLE>
<CAPTION>
                                                                    ADDITIONAL                                                   
                                                                     PAID-IN                   ADDITIONAL                        
                                                                    CAPITAL ON                   PAID-IN            COMMON    
                                                      CONVERTIBLE  CONVERTIBLE                 CAPITAL ON            STOCK     
                                                       PREFERRED    PREFERRED    COMMON          COMMON            PURCHASE   
                                                         STOCK        STOCK       STOCK           STOCK            WARRANTS   
                                                        -------------------------------------------------------------------      
<C>                                                     <C>        <C>           <C>          <C>               <C>   
Balance at March 31, 1994, as restated                  $ 10,230   $ 6,732,160   $24,381      $    42,424       $ 1,724,400      
  Accretion of value of common stock purchase warrants         -             -         -                -           339,252      
  Issuance of common stock purchase warrants                   -             -         -                -           368,150      
  Distributions to former Nebraska Shareholders                -             -         -                -                 -      
  Adjustment for change in Nebraska year end                   -             -         -                -                 -      
  Net loss                                                     -             -         -                -                 -      
                                                        -------------------------------------------------------------------    
Balance at March 31, 1995                                 10,230     6,732,160    24,381           42,424         2,431,802      
  Accretion of value of common stock purchase warrants         -             -         -                -           406,346      
  Distributions to former Nebraska Shareholders                -             -         -                -                 -      
  Net income                                                   -             -         -                -                 -      
                                                        -------------------------------------------------------------------    
Balance at March 31, 1996                                 10,230     6,732,160    24,381           42,424         2,838,148      
  Accretion of value of common stock purchase warrants         -             -         -                -           281,398      
  Issuance of common stock in connection with initial                                                                            
   public offering                                             -             -    22,000       19,238,000                 -      
  Conversion of note receivable to treasury stock              -             -         -                -                 -      
  Exercise of common stock purchase warrants                   -             -     1,417          367,583          (368,150)     
  Cashless exercise of common stock purchase warrants          -             -     9,333        2,742,063        (2,751,396)     
  Conversion of convertible preferred stock to common                                                                            
   stock                                                 (10,230)   (6,732,160)   17,050        6,725,340                 -      
  Distributions to former Nebraska Shareholders                -             -         -                -                 -      
  Reclassification of undistributed Nebraska S                                                                                   
   Corporation earnings to additional paid-in-capital          -             -         -          693,366                 -      
  Recognition of deferred income tax assets related to 
   termination of Nebraska Subchapter S Corporation                                                                              
   status upon consummation of pooling of interests            -             -         -          414,000                 -      
  Net income                                                   -             -         -                -                 -      
                                                        -------------------------------------------------------------------    
Balance at March 31, 1997                               $      -   $         -   $74,181      $30,222,776       $         -      
                                                        ===================================================================

<CAPTION>
                                                      
                                                      
                                                      
                                                                ACCUMU-                                     
                                                                 LATED    TREASURY                          
                                                                DEFICIT     STOCK        TOTAL              
                                                           --------------------------------------           
<C>                                                        <C>            <C>         <C>                  
Balance at March 31, 1994, as restated                     $  (702,527)   $ (35,000)  $ 7,796,068           
  Accretion of value of common stock purchase warrants        (339,252)           -             -           
  Issuance of common stock purchase warrants                         -            -       368,150         
  Distributions to former Nebraska Shareholders             (1,333,075)           -    (1,333,075)        
  Adjustment for change in Nebraska year end                   208,229            -       208,229         
  Net loss                                                    (443,779)           -      (443,779)        
                                                           --------------------------------------           
Balance at March 31, 1995                                   (2,610,404)     (35,000)    6,595,593           
  Accretion of value of common stock purchase warrants        (406,346)           -             -         
  Distributions to former Nebraska Shareholders               (853,173)           -      (853,173)        
  Net income                                                   526,808            -       526,808         
                                                           --------------------------------------           
Balance at March 31, 1996                                   (3,343,115)     (35,000)    6,269,228           
  Accretion of value of common stock purchase warrants        (281,398)           -             -           
  Issuance of common stock in connection with initial                                                       
   public offering                                                   -            -    19,260,000           
  Conversion of note receivable to treasury stock                    -      (65,000)      (65,000)        
  Exercise of common stock purchase warrants                         -            -           850           
  Cashless exercise of common stock purchase warrants                -            -             -           
  Conversion of convertible preferred stock to common                                                       
   stock                                                             -            -             -           
  Distributions to former Nebraska Shareholders             (1,236,970)           -    (1,236,970)        
  Reclassification of undistributed Nebraska S                                                              
   Corporation earnings to additional paid-in-capital         (693,366)           -             -           
  Recognition of deferred income tax assets related to                                                           
   termination of Nebraska Subchapter S Corporation                                                         
   status upon consummation of pooling of interests                  -            -       414,000           
  Net income                                                 3,557,960            -     3,557,960         
                                                           --------------------------------------           
Balance at March 31, 1997                                  $(1,996,889)   $(100,000)  $28,200,068           
                                                           ======================================           

</TABLE>

See accompanying notes.


                                                                            F-5
<PAGE>   51




                   Educational Medical, Inc. and Subsidiaries

                     Consolidated Statements of Cash Flows



<TABLE>
<CAPTION>
                                                               YEAR ENDED MARCH 31
                                                         1995          1996          1997
                                                     --------------------------------------- 
<S>                                                  <C>           <C>           <C>
OPERATING ACTIVITIES
Net income (loss)                                    $  (443,779)  $   526,808   $ 3,557,960
Adjustments to reconcile net income (loss) to net
 cash provided by operating activities:
  Depreciation                                           930,715     1,104,039     1,330,180
  Amortization of other assets                         1,284,043       931,076       886,555
  Extraordinary item - loss on early extinguishment
   of debt, net of income taxes                                -             -       308,683
  Loss on closure or relocation of schools                     -        50,000        25,000
  Impairment of goodwill and intangibles                 176,042       764,000             -
  Provision for losses on accounts receivable          1,280,654     1,270,565     1,239,151
  Deferred income taxes                                        -             -    (1,563,995)
  Amortization of discount on long-term debt             212,445       123,567        72,044
  Changes in operating assets and liabilities, net
   of assets acquired and liabilities assumed:
    Restricted cash                                     (525,000)     (235,000)      610,000
    Accounts receivable                               (1,986,958)     (673,666)   (1,885,940)
    Income taxes receivable                                    -             -      (155,542)
    Prepaid expenses                                      91,400       (60,224)      (68,651)
    Other assets                                        (183,766)      (40,292)       62,297
    Accounts payable and accrued expenses              1,052,681      (282,548)      734,795
    Deferred tuition income                             (519,615)      202,430    (1,826,398)
    Income taxes payable                                       -       220,807       (26,461)
    Other liabilities                                    134,352       305,713      (563,021)
                                                     --------------------------------------- 
Net cash provided by operating activities              1,503,214     4,207,275     2,736,657

INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired                   -             -    (1,400,000)
Purchases of property and equipment                   (2,200,758)   (1,342,638)   (2,079,501)
                                                     --------------------------------------- 
Net cash used in investing activities                 (2,200,758)   (1,342,638)   (3,479,501)

FINANCING ACTIVITIES
Issuance of common stock                                       -             -    19,260,000
Issuance of common stock purchase warrants               368,150             -             -
Proceeds from notes payable and long-term debt         2,529,950       391,837       532,295
Principal payments on acquisition notes payable       (1,156,187)   (1,404,160)   (1,890,493)
Exercise of common stock purchase warrants                     -             -           850
Principal payments on senior subordinated debt          (300,000)     (500,000)   (5,000,000)
Increase in deferred financing costs                     (66,100)      (86,222)     (297,492)
Distributions to former Nebraska Shareholders         (1,057,273)     (790,193)   (1,023,472)
                                                     --------------------------------------- 
Net cash provided by (used in) financing activities      318,540    (2,388,738)   11,581,688
                                                     --------------------------------------- 
Increase (decrease) in cash and cash equivalents        (379,004)      475,899    10,838,844
Cash and cash equivalents at beginning of year         3,112,150     2,733,146     3,209,045
                                                     --------------------------------------- 
Cash and cash equivalents at end of year             $ 2,733,146   $ 3,209,045   $14,047,889
                                                     =======================================
</TABLE>

See accompanying notes.



                                                                             F-6


<PAGE>   52




                  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>   53

                  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>   54

                  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>   55

                  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>   56

                  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>   57

                 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>   58

                 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>   59

                 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>   60

                 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>   61

                 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>   62

                 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>   63

                 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>   64

                 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>   65

                 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>   66

                 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>   67

                  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>   68

                 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>   69

                 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>   70

                 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>   71

                 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>   72

                 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>   73

                 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>   74

                  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>   75

                 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>   76

                 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>   77

                 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>   78

                 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>   79

                  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>   80

                  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>   81

                  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>   82

                  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>   83

                  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>   84

                  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>   85
                                   ITEM 14(D)

                                  SCHEDULE II


                           EDUCATIONAL MEDICAL, INC.

                       VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                                                                     
                                                BALANCE AT        ADDITIONS CHARGED                                      
                                               BEGINNING OF          TO COSTS AND                         BALANCE AT END
                                                  YEAR                EXPENSES         NET DEDUCTIONS        OF YEAR    
                                             --------------       -----------------    --------------     --------------
<S>                                          <C>                  <C>                  <C>                  <C>
Allowance for doubtful accounts:                                                                      
  For the year ended March 31, 1995          $  1,027,433         $  1,280,654        $  1,286,920          $  1,021,167
  For the year ended March 31, 1996             1,021,167            1,270,565           1,317,375               974,357
  For the year ended March 31, 1997               974,357            1,239,151           1,290,804               922,704
</TABLE>