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                                                                   EXHIBIT 10.09



                 THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                             WITH ROBERT B. KNUTSON

                                SEPTEMBER 8, 1999

         The parties to this Third Amended and Restated Employment Agreement
(this "Agreement") are Education Management Corporation, a Pennsylvania
corporation (the "Company"), and Robert B. Knutson (the "Executive"). The
Company and the Executive currently are parties to the Second Amended and
Restated Employment Agreement of Robert B. Knutson dated August 14, 1996 (the
"Existing Employment Agreement"). The Executive is presently the Chairman and
Chief Executive Officer of the Company and the parties wish to provide for the
continued employment of the Executive in such positions.

         Accordingly, the parties, intending to be legally bound, agree that the
Existing Employment Agreement is amended and restated in its entirety as
follows:

1. Position and Duties. During the term of the Executive's employment under this
Agreement, the Company shall employ the Executive and the Executive shall serve
the Company as its Chairman and Chief Executive Officer. He shall report to and
otherwise shall be subject to the direction and control of the Board of
Directors of the Company. The Executive's duties, titles and responsibilities
shall not be changed materially at any time without his consent (which consent
shall not be unreasonably withheld). The Executive shall use his best efforts to
promote the Company's interests and he shall perform his duties and
responsibilities faithfully, diligently and to the best of his ability,
consistent with sound business practices. The Executive shall devote his full
working time to the business and affairs of the Company, but may engage in such
activities that do not, in the reasonable opinion of the Board of Directors of
the Company, violate Section 8 or materially interfere with the performance of
his obligations to the Company under this Agreement. The Executive shall perform
his duties under this Agreement at the Company's principal executive offices in
Pittsburgh, Pennsylvania.
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2. Term of Employment. The term of the Executive's employment by the Company or
any direct or indirect subsidiary of the Company under this Agreement shall be
for a period of three (3) years commencing on the date of this Agreement (the
"Effective Date"), subject to earlier termination under Section 5 or Section 6
or extension of such term as described in the next sentence. The Executive's
employment under this Agreement shall renew automatically for successive
one-year periods, unless at least one hundred eighty (180) days prior to the
third or any subsequent anniversary of the Effective Date (each such anniversary
referred to herein as an "Expiration Date") either party shall have given notice
to the other party that the term of employment shall terminate on that
anniversary date. The term during which the Executive is employed pursuant to
this Agreement shall be referred to herein as the "Employment Term."

3. Compensation.

         3.1. Base Salary. During the Employment Term, the Executive shall be
entitled to receive a base salary ("Base Salary") at the annual rate of not less
than $375,000 for services rendered to the Company or any of its direct or
indirect subsidiaries and payable in substantially equal biweekly installments.
The Executive's Base Salary under this Section 3.1 shall be increased on each
July 1 during the Employment Term, beginning on July 1, 2000, by the percentage
increase, if any, in the United States Bureau of Labor Statistics Consumer Price
Index for Urban Wage Earners and Clerical Workers - all items, for the
Pittsburgh Metropolitan Area during the immediately preceding twelve (12)
months. The Executive's Base Salary shall be subject to further increases, if
any, as may be approved at any time by the Board of Directors of the Company in
its discretion, on the recommendation of the Compensation Committee of the Board
of Directors.

         3.2. Incentive Compensation. During the Employment Term, the Executive
also shall be entitled to receive incentive compensation (a "Bonus") in such
amounts and at such times as the Board of Directors of the Company (or a duly
authorized Compensation Committee of the Board, if applicable) may determine in
its discretion to award to him under any incentive compensation or other bonus
plan or plans for senior executives of the Company as may be established by the
Company from time to time (collectively, the "Executive Bonus Plan"). The


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amount of any Bonus payable to the Executive under the Executive Bonus Plan
shall be paid to the Executive in accordance with the terms of the Executive
Bonus Plan. In accordance with the provisions of the Executive Bonus Plan and
generally subject to the discretion of the Board of Directors, the Executive
shall have an annual target bonus opportunity (a "Bonus Opportunity"). For the
Company's fiscal year ending June 30, 2000, the Executive's Bonus Opportunity
shall be not less than $400,000, but the actual bonus amount earned and payable
shall be contingent on the Executive meeting or exceeding performance standards
and goals to be established by the Board of Directors of the Company (or the
Compensation Committee, if applicable). For fiscal years beginning after June
30, 2000, the Executive's Bonus Opportunity shall be determined by the Board of
Directors of the Company (or a duly authorized Compensation Committee of the
Board, if applicable) in its discretion.

4. Expenses and Other Benefits.

         4.1. Reimbursement of Expenses. During the Employment Term, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the policies and practices
presently followed by the Company or as may be established by the Board of
Directors of the Company for its senior executive officers) in performing
services under this Agreement, provided that the Executive properly accounts for
such expenses in accordance with the Company's policies.

         4.2. Employee Benefits. During the Employment Term, the Executive shall
be entitled to participate in and to receive benefits as a senior executive
under all of the Company's employee benefit plans, programs and arrangements, as
they may be duly amended, approved or adopted by the Board of Directors of the
Company as of the Effective Date and from time to time thereafter, including any
retirement plan, profit sharing plan, savings plan, life insurance plan, health
insurance plan, stock-based compensation or incentive plan, accident or
disability insurance plan and any vacation policy.

         4.3. Vesting of Stock Options. Any stock options granted to the
Executive during the term of the Existing Employment Agreement, to the extent
those options have not previously vested or terminated, shall be fully vested
and exercisable no later than June 30, 2000.

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5. Termination of Employment.

         5.1. Death. The Executive's employment under this Agreement shall
terminate upon his death.

         5.2. Termination by the Company.

                  (a) With or Without Cause. Subject to the provisions of
Section 5.2(b), the Company may terminate the Executive's employment under this
Agreement with or without Cause (as defined below). For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment under this Agreement if (i) the Executive willfully, or as a result
of gross negligence on his part, fails substantially to perform and to discharge
his duties and responsibilities under this Agreement for any reason other than
the Executive's Disability (as defined in Section 6) or (ii) the Executive
engages in an action or course of conduct which is unlawful or materially in
violation of his obligations to the Company under this Agreement and which is
demonstrably and substantially injurious to the Company, or (iii) the Executive
deliberately and intentionally violates the provisions of Sections 8.1, 8.2, 8.3
or 8.4. For purposes of this Agreement, a "termination by the Company without
Cause" shall include the termination of the Executive's employment on the
Expiration Date solely as a result of the Company's electing under Section 2 not
to extend the term of the Agreement.

                  (b) Right to Cure. The Executive shall not be deemed to have
been terminated for Cause unless and until the occurrence of the following two
events:

                           (i) The Executive is given a notice from the Board of
Directors of the Company that identifies with reasonable specificity the grounds
for the proposed termination of the Executive's employment and notifies the
Executive that he shall have an opportunity to address the Board of Directors
with respect to the alleged grounds for termination at a meeting of the Board
called and held for the purpose of determining whether the Executive engaged in
conduct described in Section 5.2. The notice shall, except as is otherwise
provided in the last sentence of this Subsection (i), provide the Executive with
thirty (30) days from the day such notice is given to cure the alleged grounds
of termination contained in this Agreement. The Board of Directors shall
determine, reasonably and in good faith, whether the Executive has



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effectively cured the alleged grounds of termination. If the grounds for
termination are limited to acts or conduct described in Subsections (ii) or
(iii) of Section 5.2(a), and in the reasonable good faith opinion of the Board
of Directors those grounds may not reasonably be cured by the Executive, then
the notice required by this Section 5.2(b)(i) need not provide for any cure
period; and

                           (ii) The Executive is given a copy of certified
resolutions, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors (excluding the Executive, if
applicable) at a meeting of the Board of Directors called and held for the
purpose of finding that, in the reasonable good faith opinion of a majority of
the Board of Directors, the Executive was guilty of conduct set forth in Section
5.2, which specify in detail the grounds for termination and indicate that the
grounds for termination have not been cured within the time limits, if any,
specified in the notice referred to in Section 5.2(b)(i).

         5.3. Termination by the Executive. The Executive may terminate his
employment under this Agreement with or without Good Reason (as defined below).
If such termination is with Good Reason, the Executive shall give the Company
notice, which shall identify with reasonable specificity the grounds for the
Executive's resignation and provide the Company with thirty (30) days from the
day such notice is given to cure the alleged grounds for resignation contained
in the notice. In the event that the Executive fails to give such notice and the
Executive's employment under this Agreement in fact terminates at the initiation
of the Executive, such termination shall be deemed a termination by the
Executive without Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following to which the Executive shall not consent in
writing: (i) a reduction in the Executive's Base Salary, (ii) a reduction in the
amount of the Executive's annual Bonus Opportunity of more than 20% of the
Applicable Base Period Bonus Opportunity (as defined below), including a
material change in the individual performance goals applicable to the
Executive's annual Bonus Opportunity that (A) as of the date of such change,
makes achievement of those goals highly unlikely even if the Executive performs
his obligations under this Agreement, and (B) would result in a reduction in the
annual Bonus Opportunity of more than such 20% amount, (iii) a relocation of the

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Executive's primary place of employment from his current place of employment as
described in Section 1, (iv) any change or diminution in offices, titles, status
or reporting requirements in the Executive's specific executive officer
position, other than an insubstantial and inadvertent act that is remedied by
the Company promptly after receipt of notice given by the Executive, or (v) on
or after a Change in Control (as defined in Section 7.3(d)), in addition to
those events stated above, a material reduction in the Executive's actual annual
Bonus. For purposes of this Agreement, "Applicable Base Period Bonus
Opportunity" means (A) with respect to the annual Bonus Opportunity for any
fiscal year ending on or prior to June 30, 2002, the annual Bonus Opportunity in
effect for fiscal year 2000, and (B) with respect to the annual Bonus
Opportunity for any fiscal year ending after June 30, 2002, the average annual
Bonus Opportunity in effect for the three preceding fiscal years.

         5.4. Date of Termination. "Date of Termination" shall mean the earlier
of (a) the "Expiration Date" (as defined in Section 2) and (b) if the
Executive's employment is terminated (i) by his death, the date of his death, or
(ii) pursuant to the provisions of Section 5.2 or Section 5.3, as the case may
be, the date on which the Executive's employment with the Company actually
terminates.

6. Disability. The Executive shall be determined to be "Disabled" (and the
provisions of this Section 6 shall be applicable) if the Executive is unable to
perform his duties under this Agreement on essentially a full-time basis for six
(6) consecutive months by reason of a physical or mental condition (a
"Disability") and, within thirty (30) days after the Company gives notice to the
Executive that it intends to replace him due to his Disability, the Executive
shall not have returned to the performance of his duties on essentially a
full-time basis. Upon a determination that the Executive is Disabled, the
Company may replace the Executive without breaching this Agreement; provided,
however, that this Agreement shall not terminate until the Expiration Date next
following the date that the Executive is determined to be Disabled. Prior to
such Expiration Date, the Executive shall continue to be entitled to the
compensation and benefits provided in Sections 3 and 4; provided, however, that
the Company shall be entitled to offset against the amounts payable by the
Company to the Executive under this Agreement the amount of benefits



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received by the Executive from third parties under long-term disability plans
carried by the Company (if any) and that in no event shall the total annual
obligation of the Company under this Agreement to make Base Salary payments to
the Executive during a period of his Disability be greater than an amount equal
to two-thirds (2/3) of the Executive's Base Salary, beginning in the year in
which the Executive is replaced in accordance with this Section 6, and
continuing until the earlier of the year in which the Expiration Date occurs or
the year in which the Executive dies.

7. Compensation Upon Termination.

         7.1. Death. If the Executive's employment under this Agreement is
terminated by reason of his death, the Company shall continue to pay the
Executive's Base Salary at the rate in effect at the time of his death to such
person or persons as the Executive shall have designated for that purpose in a
notice filed with the Company, or, if no such person shall have been so
designated, to his estate, for a period of six (6) months after the Executive's
date of death. The Company also shall pay to such person(s) or estate, (a) the
amount of the Executive's Accrued Obligations (as defined below), and (b) an
amount equal to one-twelfth (1/12) of the Executive's average annual Bonus paid
or payable under Section 3.2 with respect to the most recent three (3) full
fiscal years or, if greater, the most recent twelve (12)-month period (in each
case, determined by annualizing the bonus paid or payable with respect to any
partial fiscal year) (the "Average Bonus"), that amount being payable in each of
the six (6) months following the Date of Termination. Any amounts payable under
this Section 7.1 shall be exclusive of and in addition to any payments which the
Executive's widow, beneficiaries or estate may be entitled to receive pursuant
to any pension plan, profit sharing plan, employee benefit plan, or life
insurance policy maintained by the Company. For purposes of this Agreement, the
Executive's "Accrued Obligations" means, as of the Date of Termination, any
accrued but unpaid Base Salary, accrued Bonus (including (1) any accrued but
unpaid Bonus (if any) with respect to the fiscal year prior to the year in which
the Date of Termination occurs, and (2) the amount of the Executive's Average
Bonus multiplied by a fraction, the numerator of which is the number of days
from the first day of the fiscal year of the Company in which such termination
occurs through and


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including the Date of Termination and the denominator of which is 365 (the "Pro
Rata Bonus")) and any accrued but unpaid cash entitlements.

         7.2. By the Company for Cause or the Executive Without Good Reason. If
the Executive's employment is terminated by the Company for Cause, or if the
Executive terminates his employment other than for Good Reason, the Company
shall pay to the Executive the amount of any Accrued Obligations within 30 days
of the Date of Termination and the Company thereafter shall have no further
obligation to the Executive under this Agreement, other than for payment of any
amounts accrued and vested under any employee benefit plans or programs of the
Company.

         7.3. By the Executive for Good Reason or the Company other than for
Cause.

                  (a)      Termination Prior to a Change in Control.

                           (i) Severance Benefits. Subject to the provisions of
Section 7.3(a)(ii) and Section 7.3(c), if, prior to (and not in anticipation of)
or more than two (2) years after a Change in Control (as defined in Section
7.3(d)), the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Severance Benefits"):

                                    (A) the amount of his Accrued Obligations,
that amount being payable in a single lump sum cash payment within thirty (30)
days of the Date of Termination;

                                    (B) a cash amount equal to the sum of (1)
one-twelfth (1/12) of the Executive's Base Salary at the highest rate in effect
at any time during the twelve (12)-month period prior to the Date of
Termination, and (2) one-twelfth (1/12) of the Executive's Average Bonus, that
total amount being payable in each of the twelve (12) months following the month
in which the Date of Termination occurs;

                                    (C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twelve (12)-month period following the Date of Termination,
with such benefits provided to the Executive at no less than the same coverage
level



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as in effect as of the Date of Termination and the Executive shall pay any
portion of such cost as was required to be borne by key executives of the
Company generally on the Date of Termination; provided, however, that,
notwithstanding the foregoing, the benefits described in this Section
7.3(a)(i)(C) may be discontinued prior to the end of the period provided in this
Subsection (C) to the extent, but only to the extent, that the Executive
receives substantially similar benefits from a subsequent employer;

                                    (D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services); and

                                    (E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, any nonvested
stock options held by the Executive as of the Date of Termination shall become
vested and immediately exercisable by the Executive as of the Date of
Termination.

                           (ii) Conditions to Receipt of Severance Benefits
under Section 7.3(a). As a condition to receiving any Severance Benefits (other
than any Accrued Obligations) to which the Executive may otherwise be entitled
under this Section 7.3(a) only, the Executive shall execute a release (the
"Release"), in a form and substance reasonably satisfactory to the Company, of
any claims, whether arising under Federal, state or local statute, common law or
otherwise, against the Company and its direct or indirect subsidiaries which
arise or may have arisen on or before the date of the Release, other than any
claims under this Agreement or any rights to indemnification from the Company
and its direct or indirect subsidiaries pursuant to any provisions of the
Company's (or any of its subsidiaries') articles of incorporation or by-laws or
any directors and officers liability insurance policies maintained by the
Company. If the Executive fails or otherwise refuses to execute a Release within
a reasonable time after the Company's request to do so, the Executive will not
be entitled to any Severance Benefits or any other benefits provided under this
Agreement and the Company shall have no further obligations with respect to the
payment of the Severance Benefits. In addition, if, following a termination of


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employment that gives the Executive a right to the payment of Severance
Benefits under Section 7.3(a), the Executive engages in any activities that
would have violated any of the covenants in Section 8.3 (had those covenants
been applicable), the Executive shall have no further right or claim to any
Severance Benefits (other than any Accrued Obligations) to which the Executive
may otherwise be entitled under this Section 7.3(a) from and after the date on
which the Executive engages in such activities and the Company shall have no
further obligations with respect to the payment of the Severance Benefits.

                  (b) Termination In Anticipation of or After a Change in
                      Control.

                           (i) Change in Control Severance Benefits. Subject to
the provisions of Section 7.3(c), if, in anticipation of (as defined below) or
within a two (2) year period following the occurrence of a Change in Control,
the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Change in Control Severance Benefits"):

                                    (A) the sum of his Accrued Obligations, that
amount being payable in a single lump sum cash payment within thirty (30) days
of the Date of Termination;

                                    (B) a cash amount equal to twenty-four (24)
times the sum of (1) one-twelfth (1/12) of the Executive's Base Salary at the
highest rate in effect at any time during the twelve (12)-month period prior to
the Date of Termination, and (2) one-twelfth (1/12) of the Executive's Average
Bonus, that total amount being payable in a single lump sum cash payment within
thirty (30) days of the Date of Termination;

                                    (C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twenty-four (24) month period following the Date of
Termination, with such benefits provided to the Executive at no less than the
same coverage level as in effect as of the Date of Termination and the Executive
shall pay any portion of such cost as was required to be borne by key executives
of the Company generally on the Date of


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Termination; provided, however, that, notwithstanding the foregoing, the
benefits described in this Section 7.3(b)(i)(C) may be discontinued prior to the
end of the period provided in this Subsection (C) to the extent, but only to the
extent, that the Executive receives substantially similar benefits from a
subsequent employer;

                                    (D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services);

                                    (E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, all unexercised
stock options held by the Executive as of the Date of Termination shall become
fully vested and shall be immediately exercisable by the Executive; and

                                    (F) notwithstanding any provisions of the
Supplemental Executive Retirement Plan ("SERP") in which the Executive is a
participant to the contrary, the Executive shall be deemed fully vested and
entitled to an immediate lump sum distribution of his benefit under the SERP,
calculated as if the Executive had been employed during the twenty-four (24)
month period following the Date of Termination and had received compensation as
provided under Section 3 for that period.

                           (ii) Definition of In Anticipation Of. For purposes
of this Section 7.3, the termination of the Executive's employment shall be
deemed to have been "in anticipation of" a Change in Control if such termination
(A) was at the request of an unrelated third party who has taken steps
reasonably calculated to effect a Change in Control, or (B) otherwise arose in
connection with a Change in Control.

                  (c) Superseding Termination. If, subsequent to the giving by
either party of a notice of termination under this Agreement and prior to the
actual Date of Termination pursuant to such notice, the Executive's employment
is properly terminated pursuant to any other provision of this Agreement, the
Executive shall be entitled only to those benefits, if any, arising out of such
subsequent and superseding termination.

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                  (d) Definition of Change in Control. For purposes of this
Agreement, a "Change in Control" shall mean, and shall be deemed to have
occurred upon the occurrence of, any one of the following events:

                           (i) The acquisition in one or more transactions by
any individual, entity (including any employee benefit plan or any trust for an
employee benefit plan) or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of shares or other securities (as defined in
Section 3(a)(10) of the Exchange Act) representing 50% or more of either (1) the
shares of common stock of the Company (the "Company Common Stock") or (2) the
combined voting power of the securities of the Company entitled to vote
generally in the election of directors (the "Company Voting Securities"), in
each case calculated on a fully-diluted basis in accordance with generally
accepted accounting principles after giving effect to the acquisition; provided,
however, that none of the following acquisitions shall constitute a Change in
Control as defined in this clause (i): (A) any acquisition by any shareholder or
group consisting solely of shareholders of the Company immediately prior to the
date of this Agreement or (B) any acquisition by the Company so long as such
acquisition does not result in any Person (other than any shareholder or
shareholders of the Company immediately prior to the date of this Agreement),
beneficially owning shares or securities representing 50% or more of either the
Company Common Stock or Company Voting Securities; or

                           (ii) Any election has occurred of persons to the
Board that causes two-thirds of the Board to consist of persons other than (A)
persons who were members of the Board on the date of this Agreement and (B)
persons who were nominated for elections as members of the Board at a time when
two-thirds of the Board consisted of persons who were members of the Board on
the date of this Agreement; provided, however, that any person nominated for
election by a Board at least two-thirds of whom constituted persons described in
clauses (A) and/or (B) or by persons who were themselves nominated by such Board
shall, for


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this purpose, be deemed to have been nominated by a Board composed of persons
described in clause (A);

                           (iii) The shareholder rights plan of the Company is
triggered and the Board fails to redeem the rights within the time provided for
in the rights agreement;

                           (iv) Approval by the shareholders of the Company of a
reorganization, merger, consolidation or similar transaction (a "Reorganization
Transaction"), in each case, unless, immediately following such Reorganization
Transaction, more than 50% of, respectively, the outstanding shares of common
stock (or similar equity security) of the corporation or other entity resulting
from or surviving such Reorganization Transaction and the combined voting power
of the securities of such corporation or other entity entitled to vote generally
in the election of directors, in each case calculated on a fully-diluted basis
in accordance with generally accepted accounting principles after giving effect
to such Reorganization Transaction, is then beneficially owned, directly or
indirectly, by the shareholders of the Company immediately prior to such
approval; or

                           (v) Approval by the shareholders of the Company of
(A) a complete liquidation or dissolution of the Company or (B) the sale or
other disposition of all or substantially all of the assets of the Company,
other than to a corporation or other entity, with respect to which immediately
following such sale or other disposition more than 50% of, respectively, the
shares of common stock (or similar equity security) of such corporation or other
entity and the combined voting power of the securities of such corporation or
other entity entitled to vote generally in the election of directors, in each
case calculated on a fully-diluted basis in accordance with generally accepted
accounting principles after giving effect to such sale or other disposition, is
then beneficially owned, directly or indirectly, by the shareholders of the
Company immediately prior to such approval.

         7.4. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Section 7 by seeking other
employment or otherwise, and, except as otherwise expressly provided in Sections
7.3(a)(i)(C) and 7.3(b)(i)(C), the amounts of compensation or benefits payable
or otherwise due to the Executive under this Section 7 or other


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provisions of this Agreement shall not be reduced by compensation or benefits
received by the Executive from any other employment he shall choose to undertake
following termination of his employment under this Agreement; provided, however,
that the Executive's entitlement to Severance Benefits or Change in Control
Severance Benefits, as the case may be, shall be subject to his compliance with
the covenants set forth in Section 8.

         7.5. Certain Additional Payments by the Company.

                  (a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any economic benefit,
payment or distribution by the Company to or for the benefit of the Employee,
whether paid, payable, distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties with respect to such excise tax (such
excise tax and any applicable interest and penalties, collectively referred to
in this Agreement as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up-Payment") in an amount such that
after payment by the Executive of all applicable taxes (including any interest
or penalties imposed with respect to such taxes), the Executive retains an
amount equal to the amount he would have retained had no Excise Tax been imposed
upon the Payment.

                  (b) Subject to the provisions of Section 7.5(c), all
determinations required to be made under this Section 7.5, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by the Company's regular outside independent public accounting firm (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the Date of
Termination, if applicable, or such earlier time as is requested by the Company.
The initial Gross-Up Payment, if any, as determined pursuant to this Section
7.5, shall be paid to the Executive within 5 business days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with an
opinion that he has substantial authority not to report any Excise Tax on his
federal income tax return. Any determination by the Accounting Firm shall be
binding upon the

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Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm, it is possible that Gross-Up Payments that have not been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made under this Section 7.5(b). In the event that
the Company exhausts its remedies pursuant to Section 7.5(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

                  (c) The Executive shall notify the Company of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment under the terms of this Section 7.5. This notice
shall be given as soon as practicable but no later than ten business days after
the later of either (i) the date the Executive has actual knowledge of the
claim, or (ii) ten days after the Internal Revenue Service issues to the
Executive either a written report proposing imposition of the Excise Tax or a
statutory notice of deficiency with respect to the Excise Tax, and shall apprise
the Company of the nature of the claim and the date on which the claim is
requested to be paid. The Executive shall not pay the claim prior to the
expiration of the thirty-day period following the date on which he gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to the claim is due). If the Company notifies the
Executive prior to the expiration of the above period that it desires to contest
the claim, the Executive shall: (A) give the Company any information reasonably
requested by the Company relating to the claim, (B) take such action in
connection with contesting the claim as the Company shall reasonably request in
writing from time to time, including accepting legal representation with respect
to the claim by an attorney reasonably selected by the Company, (C) cooperate
with the Company in good faith in order to effectively contest the claim, (D)
permit the Company to participate in any proceedings relating to the claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income


                                      -15-
<PAGE>   16

tax, including interest and penalties with respect thereto, imposed as a result
of such representation and payment of costs and expenses. Without limitation of
the foregoing provisions of this Section 7.5(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of the claim and may, at its
sole option, either direct the Executive to request or accede to a request for
an extension of the statute of limitations with respect only to the tax claimed,
or pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the claim and sue for a refund, the Company shall advance the amount of the
required payment to the Executive, on an interest-free basis and shall indemnify
and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to any advance or with respect to any imputed income in relation to any
advance; and further provided that any extension of the statute of limitations
requested or acceded to by the Executive at the Company's request and relating
to payment of taxes for the taxable year of the Executive with respect to which
the contested amount is claimed to be due is limited solely to the contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable under the
Agreement and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.

                  (d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7.5(c), the Executive becomes
entitled to receive any refund with respect to the claim, the Executive shall
(subject to the Company's complying with the requirements of Section 7.5(c))
promptly pay to the Company the amount of that refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.5(c), a

                                      -16-
<PAGE>   17

determination is made that the Executive shall not be entitled to any refund
with respect to the claim and the Company does not notify the Executive of its
intent to contest such denial of refund prior to the expiration of thirty days
after the determination, then the advance shall be forgiven and shall not be
required to be repaid and the amount of the advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.

                  (e) In the event that any state or municipality or subdivision
thereof shall subject any Payment to any special tax which shall be in addition
to the generally applicable income tax imposed by the state, municipality, or
subdivision with respect to receipt of the Payment, the foregoing provisions of
this Section 7.5 shall apply, mutatis mutandis, with respect to such special
tax.

         7.6. Severance Benefits Not Includable for Employee Benefits Purposes.
Subject to all applicable federal and state laws and regulations, income
recognized by the Executive pursuant to the provisions of this Section 7 (other
than income accrued but unpaid as of the Date of Termination) shall not be
included in the determination of benefits under any employee benefit plan (as
that term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended) or any other benefit plans, policies or programs
applicable to the Executive that are maintained by the Company or any of its
direct or indirect subsidiaries and the Company shall be under no obligation to
continue to offer or provide such benefits to the Executive after the Date of
Termination other than as provided under this Section 7 or to the extent to
which any benefit under a pertinent plan has accrued as of the Date of
Termination.

         7.7. Exclusive Benefits. The Severance Benefits payable under Section
7.3(a) and the Change in Control Severance Benefits payable under Section
7.3(b), if either benefits become applicable under the terms of this Agreement,
shall be mutually exclusive and shall be in lieu of any other severance or
similar benefits that would otherwise be payable under any other agreement,
plan, program or policy of the Company.

8. Restrictive Covenants.

         8.1. Confidentiality. The Executive recognizes that the services to be
performed by him under this Agreement are special, unique and extraordinary in
that, by reason of his

                                      -17-
<PAGE>   18

employment with the Company, he may acquire confidential information and trade
secrets concerning the operation of the Company or an Affiliate (as defined
below), the use or disclosure of which could cause the Company or an Affiliate
substantial loss and damages which could not be readily calculated and for which
no remedy at law would be adequate. For purposes of this Section 8, the term
"Affiliate" means any direct or indirect subsidiary of the Company, including
any individual, partnership, firm, corporation or other business organization or
entity that controls, is controlled by, or is under common control with, the
Company. Accordingly, during the Employment Term and at all times thereafter,
the Executive covenants and agrees with the Company that he shall not at any
time, except in the performance of his obligations to the Company under this
Agreement or with the prior written consent of the Board of Directors of the
Company, directly or indirectly, disclose any secret or confidential information
that he may learn or has learned by reason of his association with the Company,
or any predecessors to their business, or use any such information to the
detriment of the Company. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
Company's management or otherwise known by the public or the trade with respect
to the Company's products, facilities and methods, research and development,
trade secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information (including the revenues, costs or profits
associated with any of the Company's products), business plans, prospects or
opportunities; provided, however, that the term "confidential information" shall
not include, and the Executive shall have no obligation under this Agreement
with respect to, any information that (a) becomes generally available to the
public other than as a result of a disclosure by the Executive or his agent or
other representative or (b) becomes available to the Executive on a
non-confidential basis from a source other than the Company or any Affiliate.
The Executive shall have no obligation under this Agreement to keep confidential
any of the confidential information to the extent that a disclosure of it is
required by law or is consented to by the Company; provided, however, that if
and when such a disclosure is required by law, the Executive promptly


                                      -18-
<PAGE>   19

shall provide the Company with notice of such requirement, so that the Company
may seek an appropriate protective order.

         8.2. Exclusive Property. The Executive confirms that all confidential
information is the exclusive property of the Company. All business records,
papers and documents kept or made by the Executive relating to the business of
the Company or its direct or indirect subsidiaries shall be and remain the
property of the Company or the applicable subsidiary during the Employment Term
and at all times thereafter. Upon the termination of his employment with the
Company or upon the request of the Company at any time, the Executive shall
promptly deliver to the Company, and shall retain no copies of, any written
materials, records and documents made by the Executive or coming into his
possession concerning the business or affairs of the Company or its direct or
indirect subsidiaries; provided, however, that the Executive shall be permitted
to retain copies of any documents or materials of a personal nature or otherwise
related to the Executive's rights under this Agreement.

         8.3. Non Competition. During the Employment Term and, except as
provided in the last sentence of this Section 8.3, for a period of one (1) year
after the Date of Termination, the Executive shall not, unless he receives the
prior written consent of the Company, directly or indirectly, own an interest
in, manage, operate, join, control, lend money or render financial or other
assistance to, participate in or be connected with, as an officer, employee,
partner, stockholder, consultant or otherwise, or engage in any activity or
capacity (collectively, the "Competitive Activities") with respect to any
individual, partnership, limited liability company, firm, corporation or other
business organization or entity (each, a "Person"), that is engaged directly or
indirectly in the ownership or operation of proprietary post-secondary schools
or that is in competition with any of the business activities of the Company or
its direct or indirect subsidiaries either (i) anywhere in the United States or
(ii) in any other country in which the Company or its direct or indirect
subsidiaries conduct, or actively intend to conduct, business as of the Date of
Termination; provided, however, that the foregoing (a) shall not apply with
respect to any line-of-business in which the Company or its direct or indirect
subsidiaries was not engaged on or before the Expiration Date or the Date of
Termination, as the case may be, and (b)


                                      -19-
<PAGE>   20

shall not prohibit the Executive from owning, or otherwise having an interest
in, less than one percent (1%) of any publicly-owned entity or three percent
(3%) of any private equity fund or similar investment fund that invests in
education companies, provided the Executive has no active role with respect to
any investment by such fund in any Person referred to in this Section 8.3. The
Executive shall not be subject to the covenants contained in this Section 8.3
and such covenants shall not be enforceable against the Executive from and after
the date that the Executive's employment is terminated (i) by the Company
without Cause, (ii) by the Executive for Good Reason or (iii) in anticipation of
or within two (2) years after a Change in Control.

         8.4. Non-Solicitation. During the Term of the Executive's Employment
and for a period of one (1) year after the Date of Termination, the Executive
shall not, whether for his own account or for the account of any other Person
(other than the Company or its direct or indirect subsidiaries), intentionally
solicit, endeavor to entice away from the Company or its direct or indirect
subsidiaries, or otherwise interfere with the relationship of the Company or its
direct or indirect subsidiaries with, any person who is employed by the Company
or its direct or indirect subsidiaries (including, but not limited to, any
independent sales representatives or organizations).

         8.5. Injunctive Relief. Subject to the exceptions contained in Section
8.3, the Executive acknowledges that a breach of any of the covenants contained
in this Section 8 may result in material, irreparable injury to the Company for
which there is no adequate remedy at law, that it shall not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat of breach, the Company shall be entitled to obtain a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Executive from engaging in activities prohibited by this Section 8 or such other
relief as may be required to specifically enforce any of the covenants in this
Section 8. The Executive agrees and consents that injunctive relief may be
sought in any state or federal court of record in the Commonwealth of
Pennsylvania, or in the state and county in which a violation may occur or in
any other court having jurisdiction, at the election of the Company; to the
extent that the Company seeks a temporary restraining order (but not a
preliminary or permanent injunction), the Executive agrees


                                      -20-
<PAGE>   21

that a temporary restraining order may be obtained ex parte. The Executive
agrees and submits to personal jurisdiction before each and every court
designated above for that purpose.

         8.6. Blue-Pencilling. The parties consider the covenants and
restrictions contained in this Section 8 to be reasonable. However, if and when
any such covenant or restriction is found to be void or unenforceable and would
have been valid had some part of it been deleted or had its scope of application
been modified, such covenant or restriction shall be deemed to have been applied
with such modification as would be necessary and consistent with the intent of
the parties to have made it valid, enforceable and effective.

9. Miscellaneous.

         9.1. Assignment; Successors; Binding Agreement. This Agreement may not
be assigned by either party, whether by operation of law or otherwise, without
the prior written consent of the other party, except that any right, title or
interest of the Company arising out of this Agreement may be assigned to any
corporation or entity controlling, controlled by, or under common control with
the Company, or succeeding to the business and substantially all of the assets
of the Company or any affiliates for which the Executive performs substantial
services; provided, however, that no such assignment shall relieve the Company
of its obligations hereunder without the express written consent of the
Executive. Subject to the foregoing, this Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs, legatees,
devisees, personal representatives, successors and assigns.

         9.2. Modification and Waiver. No provision of this Agreement may be
modified, waived, or discharged unless such waiver, modification or discharge is
duly approved by the Board of Directors of the Company and is agreed to in
writing by the Executive and such officer(s) as may be specifically authorized
by the Board of Directors of the Company to effect it. No waiver by any party of
any breach by any other party of, or of compliance with, any term or condition
of this Agreement to be performed by any other party, at any time, shall
constitute a waiver of similar or dissimilar terms or conditions at that time or
at any prior or subsequent time.

         9.3. Entire Agreement. No agreement or representation, oral or
otherwise, express or implied, with respect to the subject matter of this
Agreement, has been made by either party


                                      -21-
<PAGE>   22

which is not set forth expressly in this Agreement. Further, this Agreement
shall amend and supersede any and all previously existing employment or
consulting agreements between the Executive and the Company or any of its direct
or indirect subsidiaries or affiliates.

         9.4. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania other than the conflict of laws provision thereof.

         9.5. Arbitration. In the event of any dispute, controversy or claim
between the Company and the Executive arising out of or relating to the
interpretation, application or enforcement of any provision of this Agreement
(other than with respect to provisions under Section 8 of this Agreement),
either the Company or the Executive may, by written notice to the other, require
such dispute or difference to be submitted to arbitration. The arbitrator or
arbitrators shall be selected by agreement of the parties or, if they do not
agree on an arbitrator or arbitrators within 30 days after one party has
notified the other of his or its desire to have the question settled by
arbitration, then the arbitrator or arbitrators shall be selected by the
American Arbitration Association (the "AAA") in Pittsburgh, Pennsylvania. The
determination reached in such arbitration shall be final and binding on all
parties without any right of appeal or further dispute. Execution of the
determination by such arbitrator may be sought in any court of competent
jurisdiction. The arbitrators shall not be bound by judicial formalities and may
abstain from following the strict rules of evidence and shall interpret this
Agreement as an honorable engagement and not merely as a legal obligation.
Unless otherwise agreed by the parties, any such arbitration shall take place in
Pittsburgh, Pennsylvania, and shall be conducted in accordance with the
Commercial Arbitration Rules of the AAA.

         9.6. Consent to Jurisdiction and Service of Process. In the event of
any dispute, controversy or claim between the Company and the Executive arising
out of or relating to the interpretation, application or enforcement of the
provisions of Section 8 or Section 9.5, the Company and the Executive agree and
consent to the personal jurisdiction of the Court of Common Pleas for Allegheny
County, Pennsylvania and/or the United States District Court for the Western
District of Pennsylvania for resolution of the dispute, controversy or claim,
and that


                                      -22-
<PAGE>   23

those courts, and only those courts, shall have exclusive jurisdiction to
determine any dispute, controversy or claim related to, arising under or in
connection with Section 8 of this Agreement. The Company and the Executive also
agree that those courts are convenient forums for the parties to any such
dispute, controversy or claim and for any potential witnesses and that process
issued out of any such court or in accordance with the rules of practice of that
court may be served by mail or other forms of substituted service to the Company
at the address of its principal executive offices and to the Executive at his or
her last known address as reflected in the Company's records.

         9.7. Withholding of Taxes. The Company shall withhold from any amounts
payable under the Agreement all Federal, state, local or other taxes as legally
shall be required to be withheld.

         9.8. Notice. For the purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be furnished
in writing and shall be deemed to have been duly given when delivered or when
mailed if such mailing is by United States certified or registered mail, return
receipt requested, postage prepaid, addressed to such party (notices to the
Company being addressed to the Secretary of the Company) at the Company's
principal executive office, or at other address as either party shall have
designated by giving written notice of such change to the other party at anytime
hereafter.

         9.9. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.

         9.10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

         9.11. Headings. The headings used in this Agreement are for convenience
only, do not constitute a part of the Agreement, and shall not be deemed to
limit, characterize, or affect in any way the provisions of the Agreement, and
all provisions of the Agreement shall be construed as if no headings had been
used in the Agreement.

                                      -23-
<PAGE>   24

         9.12. Construction. As used in this Agreement, unless the context
otherwise requires: (a) the terms defined herein shall have the meanings set
forth herein for all purposes; (b) references to "Section" are to a section
hereof; (c) all "Schedules" referred to herein are incorporated herein by
reference and made a part hereof; (d) "include," "includes" and "including" are
deemed to be followed by "without limitation" whether or not they are in fact
followed by such words or words of like import; (e) "writing," "written" and
comparable terms refer to printing, typing, lithography and other means of
reproducing words in a visible form; (f) "hereof," "herein," "hereunder" and
comparable terms refer to the entirety of this Agreement and not to any
particular section or other subdivision hereof or attachment hereto; (g)
references to any gender include references to all genders; and (h) references
to any agreement or other instrument or statute or regulation are referred to as
amended or supplemented from time to time (and, in the case of a statute or
regulation, to any successor provision).

         IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date and year first above written.

                               EDUCATION MANAGEMENT CORPORATION

                               By: /s/ James J. Burke, Jr.
                                  -------------------------
                                  James J. Burke, Jr.
                                  Chairman of the Compensation Committee


                               EXECUTIVE

                                   /s/ Robert B. Knutson
                                  -----------------------
                                  Robert B. Knutson


                                      -24-