<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

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

For the fiscal year ended: June 30, 2001      Commission File Number: 000-21363

                               ----------------

                       EDUCATION MANAGEMENT CORPORATION
            (Exact name of registrant as specified in its charter)

             Pennsylvania                            25-1119571
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)


   300 Sixth Avenue, Pittsburgh, PA                     15222
    (Address of principal executive                   (Zip Code)
               offices)

      Registrant's telephone number, including area code: (412) 562-0900

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $.01 par value
                               (Title of class)

                        Preferred Share Purchase Rights
                               (Title of class)

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 pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.


The aggregate market value of the voting common stock held by non-affiliates
of the registrant as of September 11, 2001 was approximately $531,251,190. The
number of shares of Common Stock outstanding on September 11, 2001 was
30,351,322 shares.

Documents incorporated by reference: Portions of the definitive Proxy
Statement of the registrant for the annual meeting of shareholders to be held
on November 8, 2001 ("Proxy Statement") are incorporated by reference into
Part III of this Form 10-K. The incorporation by reference herein of portions
of the Proxy Statement shall not be deemed to incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                                    PART I

  Forward-Looking Statements: This Annual Report on Form 10-K contains
statements that may be forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995. Those statements can be
identified by their use of terms such as "believes," "estimates,"
"anticipates," "continues," "contemplates," "expects," "may," "will," "could,"
"should" or "would" or the negatives thereof or other variations thereon or
comparable terminology. Those statements are based on the intent, belief or
expectation of Education Management Corporation ("EDMC" or the "Company") as
of the date of this Annual Report. Such forward-looking statements are not
guarantees of future performance and may involve risks and uncertainties that
are outside the control of the Company. Actual results may vary materially
from the forward-looking statements contained herein as a result of changes in
United States or international economic conditions, governmental regulations
and other factors, including those factors described at the end of the
response to Item 7 under the heading "Risk Factors." The Company expressly
disclaims any obligation or understanding to release publicly any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in the
events, conditions or circumstances on which any such statement is based. The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto filed in response to Item 8 of this
Annual Report.

ITEM 1--BUSINESS

Business Overview

  EDMC is among the largest providers of proprietary postsecondary education
in the United States, based on student enrollment and revenues. The Company
was organized as a Pennsylvania corporation in 1962 and completed its initial
public offering (the "IPO") in 1996. Through its main operating unit, the Art
Institutes ("The Art Institutes"), the Company offers bachelor's and
associate's degree programs and non-degree programs in the areas of design,
media arts, culinary arts and fashion. The Company's Art Institutes have
graduated over 125,000 students. In the fall quarter beginning October 2000,
EDMC's schools had 27,999 students enrolled, representing all 50 states and 97
countries.

  As of June 30, 2001, The Art Institutes consisted of 22 schools in 20 cities
throughout the United States. Art Institute programs are designed to provide
the knowledge and skills necessary for entry-level employment in various
fields, including graphic design, media arts and animation, multimedia and web
design, video production, interior design, industrial design, culinary arts,
photography, and fashion. These programs typically are completed in 18 to 48
months and culminate in a bachelor's or associate's degree. In the summer
quarter beginning July 2001, 19 Art Institutes offered bachelor's degree
programs, and EDMC expects to continue to introduce bachelor's degree programs
at schools in states that permit proprietary postsecondary institutions to
offer such programs.

  The Company offers a culinary arts curriculum at 11 Art Institutes. In
addition, The New York Restaurant School ("NYRS"), a culinary arts and
restaurant management school located in New York City and owned by the
Company, offers an associate's degree program and certificate programs in
these fields.

  The Company also owns NCPT (The National Center for Paralegal Training),
which offers paralegal certificate programs. The National Center for
Professional Development (NCPD) maintained consulting relationships with
certain colleges and universities to assist in the development, marketing and
delivery of paralegal, legal nurse consultant and financial planning
certificate programs. As of June 30, 2001, all but one of these relationships
had expired or had been terminated, and the remaining relationship expired on
August 31, 2001.

  EDMC's graduates are employed by a broad range of employers nationwide.
Approximately 90.7% of the calendar year 2000 graduates of all programs at
EDMC's schools who were available for employment obtained positions in fields
related to their programs of study within six months of graduation.

                                       1
<PAGE>

The Business of Education

  EDMC's primary mission is to promote student success by providing students
with the education necessary to meet employers' current and anticipated needs.
To achieve this objective, the Company focuses on marketing to a broad range
of potential students, admitting students who possess the relevant interests
and capabilities, providing students with programs of study taught by industry
professionals, and assisting students with job placement.

  Student Recruitment and Marketing

  The general reputation of The Art Institutes and referrals from current
students, alumni and employers are the largest sources of new students. The
Company also employs marketing tools such as the Internet, high school visits
and recruitment events, and television and print media advertising. EDMC uses
its internal advertising agency to create publications, television and radio
commercials, videos and other promotional materials for the Company's schools.
The Company estimates that in fiscal 2001 referrals accounted for 34% of new
student enrollment at The Art Institutes, high school recruitment programs
accounted for 19%, the Company's web sites accounted for 19%, broadcast
advertising accounted for 17%, print media accounted for 6%, direct mail
efforts accounted for 3%, and international marketing accounted for less than
1%. The remainder was classified as miscellaneous.

  In fiscal 2001, The Art Institutes' marketing efforts generated inquiries
from approximately 370,000 qualified prospective students. The Art Institutes'
inquiry-to-application conversion ratio decreased from 9.7% in fiscal 2000 to
9.1% in fiscal 2001, and the applicant-to-new student ratio was 63.8% for both
fiscal 2000 and 2001.

  The Company also employs approximately 100 representatives who make
presentations at high schools to promote The Art Institutes. Art Institute
representatives also participate in college fairs at which prospective
students can meet with a representative, view artwork and videos, and receive
enrollment information. In fiscal 2001, representatives visited over 12,000
high schools and attended approximately 1,800 career events. Summer teenager
and teacher workshops are held to inform students and educators of the
education programs offered by The Art Institutes. The Company's marketing
efforts to reach young adults and working adults who may be attracted to
evening programs are conducted through local newspaper advertising, direct
mail campaigns and broadcast advertising.

  Student Admissions and Retention

  Each applicant for admission to an Art Institute is required to have a high
school diploma or a recognized equivalent and to submit a written essay.
Prospective students are interviewed to assess their qualifications, their
interest in the programs offered by the applicable Art Institute and their
commitment to their education. In addition, the curricula, student services,
education costs, available financial resources and student housing are
reviewed during interviews, and tours of the facilities are conducted for
prospective students.

  Art Institute students are of varying ages and backgrounds. For fiscal 2001,
approximately 31% of the entering students matriculated directly from high
school, approximately 29% were between the ages of 19 and 21, approximately
28% were 22 to 29 years of age and approximately 12% were 30 years old or
older.

  Students at the Company's schools may fail to finish their programs for a
variety of personal, financial or academic reasons. To reduce the risk of
student withdrawals, each Art Institute devotes staff resources to advising
students regarding academic and financial matters, part-time employment and
housing. Remedial courses are mandated for students with lower academic skill
levels and tutoring is encouraged for students experiencing academic
difficulties. The Art Institutes' net annual persistence rate, which measures
the number of students who are enrolled during a fiscal year and either
graduate or advance to the next fiscal year, was 64.8% in fiscal 2000 and
65.7% in fiscal 2001.

                                       2
<PAGE>

  Education Programs

  The Art Institutes offer the following degree programs. Not all programs are
offered at each Art Institute. (For internal purposes, the Company classifies
its degree programs according to four "schools" or areas of study.)

The School of Design                            The School of Media Arts
Associate's Degree Programs                     Associate's Degree Programs
 Computer-Aided Drafting & Design                Audio Production
 Animation Art & Design                          Broadcasting
 Graphic Design                                  Information Technology &
 Interior Design                                  Design
 Industrial Design Technology                    Photography
                                                 Multimedia & Web Design
Bachelor's Degree Programs                       Video Production
 Media Arts & Animation
 Game Art & Design                              Bachelor's Degree Programs
 Graphic Design                                  Multimedia & Web Design
 Interior Design                                  Photography
 Industrial Design
                                                The School of Fashion
The School of Culinary Arts                     Associate's Degree Programs
Associate's Degree Programs                      Fashion Design
 Culinary Arts                                   Fashion Marketing
 Restaurant and Catering Management              Visual Merchandising

Bachelor's Degree Programs                      Bachelor's Degree Programs
 Culinary Management                             Fashion Design
                                                 Fashion Marketing and
                                                  Management

  NYRS also offers an associate's degree program in culinary arts and
restaurant management and certificate programs in culinary arts, pastry arts,
culinary skills and restaurant management.

  Approximately 7.9% of the average quarterly student enrollment at the
Company's schools in fiscal 2001 were in specialized diploma and certificate
programs. Academic credits from the specialized diploma programs at The Art
Institutes and NYRS are generally transferable into bachelor's and associate's
degree programs at those schools. Diploma and certificate programs are
designed for working adults who seek to supplement their education or are
interested in enhancing their marketable skills.

  During fiscal 2001, The Illinois Institute of Art at Schaumburg, The Art
Institute of Colorado and The Art Institute of Houston began offering
certificate programs through the Center for Professional Development. The
Center for Professional Development was formed to develop and administer
certificate programs to a wide audience, including alumni seeking advances in
their career fields and professionals in other career fields looking to add
marketable new skill sets. Additionally, the Center for Professional
Development will conduct contract skills training for companies seeking to
update their employees' skills.

                                       3
<PAGE>

  Graduate Employment

  Based on information received from graduating students and employers, the
Company believes that students graduating from the Company's schools during
the five calendar years ended December 31, 2000 obtained employment in fields
related to their programs of study as follows:

<TABLE>
<CAPTION>
                                                         Percentage of Available
                                             Number of   Graduates Who Obtained
     Graduating Classes                      Available    Employment Related to
     (Calendar Year)                        Graduates(1)   Program of Study(2)
     ------------------                     -----------  -----------------------
     <S>                                    <C>          <C>
     2000..................................    5,414              90.7%
     1999..................................    5,279              90.1
     1998..................................    4,719              90.9
     1997..................................    4,749              87.3
     1996..................................    4,167              86.4
</TABLE>
--------
(1) The term "Available Graduates" refers to all graduates except those who
    are pursuing further education, deceased, in active military service, who
    have medical conditions that prevent such graduates from working, who are
    continuing in a professional unrelated career, or who are international
    students no longer residing in the United States.
(2) The information presented reflects employment in fields related to
    graduates' programs of study within six months after graduation.

  For calendar year 2000, the approximate average starting salaries of
graduates of degree and diploma programs at The Art Institutes were as
follows: The School of Culinary Arts--$25,557; The School of Design--$28,529;
The School of Fashion--$25,861; and The School of Media Arts--$27,719.

  Each Art Institute offers career-planning services to all graduating
students through its Career Services department. Specific career advice is
provided during the last two quarters of a student's education. In addition to
individualized training in interviewing and networking techniques and resume-
writing, a Career Development course is required for all students. Students
also receive portfolio counseling where appropriate. The Art Institutes
maintain contact with approximately 40,000 employers nationwide. Career
Services advisors educate employers about the programs at The Art Institutes
and the caliber of their graduates. These advisors also participate in
professional organizations, trade shows and community events to keep apprised
of industry trends and maintain relationships with key employers. Career
Services staff also visit employer sites to learn more about their operations
and better understand their recruiting needs.

  Employers of Art Institute graduates include numerous small and medium-sized
companies, as well as larger companies with a national or international
presence. The following companies are representative of the larger companies
that employ Art Institute graduates: AT&T, Microsoft Corporation, Marriott
International, Inc., Home Depot, Viacom, The Gap, Federated Department Stores,
The Boeing Company, Eddie Bauer, Inc., Ethan Allen Interiors, Inc.,
FlightSafety International, Humongous Entertainment, Inc., Kinko's
Corporation, Sodexho, The May Department Stores Company, The Neiman Marcus
Group, Inc., Aramark, Nintendo of America, Nordstrom, Inc., The Ritz-Carlton,
Sears Roebuck and Co., Sierra On-Line, Inc., Starwood Hotels & Resorts, Fox
Entertainment Group, TCI International, Inc., Time Warner, Inc., and The Walt
Disney Company.

Accreditation

  Accreditation is a process through which an institution submits itself to
qualitative review by an organization of peer institutions. Accrediting
agencies primarily examine the academic quality of the instructional programs
of an institution, and a grant of accreditation is generally viewed as
certification that an institution's programs meet generally accepted academic
standards. Accrediting agencies also review the administrative and financial
operations of the institutions they accredit to ensure that each institution
has the resources to perform its educational mission.

                                       4
<PAGE>

  Pursuant to provisions of the Higher Education Act of 1965, as amended
("HEA"), the U.S. Department of Education relies on accrediting agencies to
determine whether institutions' educational programs qualify them to
participate in federal financial aid programs under Title IV of the HEA
("Title IV Programs"). The HEA specifies certain standards that all recognized
accrediting agencies must adopt in connection with their review of
postsecondary institutions. All of EDMC's schools are accredited by one or
more accrediting agencies recognized by the U.S. Department of Education.
Seven of the Company's schools are accredited by one of the six regional
accrediting agencies that accredit virtually all of the public and private
non-profit colleges and universities in the United States.

  The following table shows the location of each of EDMC's schools, the name
under which it operates, the year of its establishment, the date EDMC opened
or acquired it, and the accrediting agency (for schools accredited by more
than one recognized accrediting agency, the primary accrediting agency is
listed first).

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Fiscal Year
                                                                          Calendar      EDMC
                                                                            Year      Acquired/
 School                                                   Location       Established   Opened       Accrediting Agency
 ------                                                   --------       ----------- ----------- ------------------------
 <C>                                                 <C>                 <C>         <C>         <S>
 The Art Institute of Atlanta....................... Atlanta, GA            1949        1971     Commission on Colleges
                                                                                                 of the Southern
                                                                                                 Association of Colleges
                                                                                                 and Schools ("SACS")
 The Art Institute of California.................... San Diego, CA          1981        2001     Accrediting Commission
                                                                                                 of Career Schools and
                                                                                                 Colleges of Technology
                                                                                                 ("ACCSCT")
 The Art Institute of Charlotte..................... Charlotte, NC          1973        2000     Accrediting Council of
                                                                                                 Independent Colleges and
                                                                                                 Schools ("ACICS")
 The Art Institute of Colorado...................... Denver, CO             1952        1976     ACICS
 The Art Institute of Dallas........................ Dallas, TX             1964        1985     SACS
 The Art Institute of Fort Lauderdale............... Fort Lauderdale, FL    1968        1974     ACICS
 The Art Institute of Houston....................... Houston, TX            1974        1979     SACS
 The Art Institute of Las Vegas..................... Las Vegas, NV          1983        2001     ACCSCT
 The Art Institute of Los Angeles................... Los Angeles, CA        1997        1998     ACCSCT & ACICS (as a
                                                                                                 branch of The Art
                                                                                                 Institute of Pittsburgh)
 The Art Institute of Los Angeles--Orange County.... Orange County, CA      2000        2001     ACICS (as a branch of
                                                                                                 The Art Institute of
                                                                                                 Colorado)
 The Art Institute Online........................... Pittsburgh, PA         1999        2000     Approved to offer
                                                                                                 programs as a division
                                                                                                 of The Art Institute of
                                                                                                 Pittsburgh
 The Art Institute of Philadelphia.................. Philadelphia, PA       1971        1980     ACICS
 The Art Institute of Phoenix....................... Phoenix, AZ            1995        1996     ACICS (as a branch of
                                                                                                 The Art Institute of
                                                                                                 Colorado)
 The Art Institute of Pittsburgh.................... Pittsburgh, PA         1921        1970     ACCSCT, ACICS
 The Art Institute of Portland...................... Portland, OR           1963        1998     Commission on Colleges
                                                                                                 of the Northwest
                                                                                                 Association of Schools
                                                                                                 and Colleges ("NWASC")
 The Art Institutes International at San Francisco.. San Francisco, CA      1939        1998     ACICS
 The Art Institute of Seattle....................... Seattle, WA            1946        1982     NWASC
 The Art Institute of Washington.................... Arlington, VA          2000        2001     SACS (as a branch of The
                                                                                                 Art Institute of
                                                                                                 Atlanta)
 The Art Institutes International Minnesota......... Minneapolis, MN        1964        1997     ACICS
 The Illinois Institute of Art at Chicago........... Chicago, IL            1916        1996     ACCSCT
 The Illinois Institute of Art at Schaumburg........ Schaumburg, IL         1983        1996     ACCSCT, as a branch of
                                                                                                 The Illinois Institute
                                                                                                 of Art at Chicago
 Massachusetts Communications College (1)........... Boston, MA             1988        2000     New England Association
                                                                                                 of Schools and Colleges,
                                                                                                 Inc. through its
                                                                                                 Commission on Technical
                                                                                                 and Career Institutions
 NCPT: The National Center for Paralegal Training... Atlanta, GA            1973        1973     ACICS
 The New York Restaurant School..................... New York, NY           1980        1997     ACCSCT, ACICS, New York
                                                                                                 State Board of Regents
</TABLE>
--------

(1) Subsequent to June 30, 2001, the school was renamed The New England
    Institute of Art and Communications.

                                       6
<PAGE>

  Accrediting agencies monitor each institution's performance in specific
areas. In the event that the information provided by a school to an
accrediting agency indicates that such school's performance in one or more
areas falls below certain parameters, the accrediting agency may require that
school to supply it with supplemental reports on the accrediting agency's
specific areas of concern until that school meets the accrediting agency's
performance guideline or standard. A school that is subject to this heightened
monitoring must seek the prior approval of its accrediting agency in order to
open or commence teaching at new locations. The accrediting agencies do not
consider requesting that a school provide supplemental reports to be a
negative action.

Student Financial Assistance

  Many students at EDMC's schools must rely, at least in part, on financial
assistance to pay for the cost of their education. The largest source of such
support is the federal programs of student financial assistance under Title IV
of the Higher Education Act (HEA). Additional sources of funds include other
federal grant programs, state grant and loan programs, private loan programs
and institutional grants and scholarships. To provide students access to
financial assistance resources available through Title IV Programs, a school
must be (i) authorized to offer its programs of instruction by the relevant
agency of the state in which it is located, (ii) accredited by an agency
recognized by the U.S. Department of Education, and (iii) certified as an
eligible institution by the U.S. Department of Education. In addition, the
school must ensure that Title IV Program funds are properly accounted for and
disbursed in the correct amounts to eligible students. All of the Company's
schools can participate in Title IV Programs.

  Nature of Federal Support for Postsecondary Education

  While the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use this support at any institution that has been certified
as eligible by the U.S. Department of Education. Students at EDMC's schools
receive loans, grants and work-study funding to fund their education under
several Title IV Programs, of which the two largest are the Federal Family
Education Loan ("FFEL") program and the Federal Pell Grant ("Pell") program.
The Company's schools also participate in the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, the Federal Perkins Loan ("Perkins")
program, and the Federal Work-Study ("FWS") program.

  FFEL. The FFEL program consists of two types of loans: Stafford loans, which
are made available to students regardless of financial need, and PLUS loans,
which are made available to parents of students classified as dependents.
Under the Stafford loan program, a student may borrow up to $2,625 for the
first academic year, $3,500 for the second academic year and, in certain
educational programs, $5,500 for each of the third and fourth academic years.
Students who are classified as independent can obtain an additional $4,000 for
each of the first and second academic years and, depending upon the
educational program, an additional $5,000 for each of the third and fourth
academic years. Amounts received by students in the Company's schools under
the Stafford loan program in fiscal 2001 equaled approximately 35% of the
Company's net revenues. PLUS loans may be obtained by the parents of a
dependent student in an amount not to exceed the difference between the total
cost of that student's education (including allowable expenses) and other aid
to which that student is entitled. Amounts received by parents of students in
the Company's schools under the PLUS loan program in fiscal 2001 equaled
approximately 16% of the Company's net revenues.

  Pell. Pell grants are the primary component of the Title IV Programs under
which the U.S. Department of Education makes grants to students who
demonstrate financial need. Every eligible student is entitled to receive a
Pell grant; there is no institutional allocation or limit. During fiscal 2001,
Pell grants ranged up to $3,300 per year; beginning on July 1, 2001, the limit
was increased to $3,750 per year. Amounts received by students enrolled in the
Company's schools in fiscal 2001 under the Pell program represented
approximately 6.5% of the Company's net revenues.


                                       7
<PAGE>

  FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $300 to $1,200 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants and scholarships and, in certain states, portions of
state grants and scholarships. Amounts received by students in the Company's
schools under the FSEOG program in fiscal 2001 represented approximately 1% of
the Company's net revenues.

  Perkins. Eligible undergraduate students may borrow up to $4,000 under the
Perkins program during each academic year, with an aggregate maximum of
$20,000, at a 5% interest rate and with repayment delayed until nine months
after a student ceases enrollment as at least a half-time student. Perkins
loans are made available to those students who demonstrate the greatest
financial need. Perkins loans are made from a revolving account, with 75% of
new funding contributed by the U.S. Department of Education, and the remainder
by the applicable school. Subsequent federal capital contributions, which must
be matched by school funds, may be received if an institution meets certain
requirements. Each school collects payments on Perkins loans from its former
students and relends those funds to currently enrolled students. Collection
and disbursement of Perkins loans is the responsibility of each participating
institution. During fiscal 2001 the Company collected approximately
$3.5 million from its former students. In fiscal 2001, the Company's required
matching contribution was approximately $187,000. The Perkins loans disbursed
to students in the Company's schools in fiscal 2001 represented approximately
1% of the Company's net revenues. Twelve of the Company's schools participate
in the Perkins program.

  Federal Work-Study. Under the FWS program, federal funds are made available
to pay up to 75% of the cost of part-time employment of eligible students,
based on their financial need, to perform work for the institution or for off-
campus public or non-profit organizations. At least 7% of an institution's FWS
allocation must be used to fund student employment in community service
positions and at least one position must be in a literacy program or as a
reading tutor. In fiscal 2001, FWS funds represented under 1% of the Company's
net revenues.

  Other Financial Assistance Sources

  Students at several of the Company's schools participate in state grant
programs. In fiscal 2001, approximately 3% of the Company's net revenues was
derived from state grant programs. In addition, certain students at some of
the Company's schools receive financial aid provided by the United States
Department of Veterans Affairs, the United States Department of the Interior
(Bureau of Indian Affairs) and the Rehabilitative Services Administration of
the U.S. Department of Education (vocational rehabilitation funding). In
fiscal 2001, financial assistance from such federal and state programs equaled
approximately 1% of the Company's net revenues. The Art Institutes also
provide institutional scholarships to qualified students. In fiscal 2001,
institutional scholarships had a value equal to approximately 2.5% of the
Company's net revenues. The Company has also arranged alternative supplemental
loan programs that allow students to repay a portion of their loans after
graduation and allow students with lower than average credit ratings to obtain
loans. The primary objective of these loan programs is to lower the monthly
payments required of students. Such loans are without recourse to the Company
or its schools. In fiscal 2001, alternative loans represented approximately 5%
of the Company's net revenue.

  Availability of Lenders

  During fiscal 2001, five lending institutions provided over 85% of all
federally guaranteed loans to students attending the Company's schools. While
the Company believes that other lenders would be willing to make federally
guaranteed student loans to its students if loans were no longer available
from its current lenders, there can be no assurances in this regard. In
addition, the HEA requires the establishment of lenders of last resort in

                                       8
<PAGE>

every state to make certain loans to students at any school that cannot
otherwise identify lenders willing to make federally guaranteed loans to its
students.

  One student loan guaranty agency (USA Group Guarantee Services, formerly
United Student Aid Funds) currently guarantees approximately 95% of all
federally guaranteed student loans made to students enrolled at the Company's
schools. The Company believes that other guaranty agencies would be willing to
guarantee loans to the Company's students if that agency ceased guaranteeing
those loans or reduced the volume of those loans it guaranteed.

  Federal Oversight of Title IV Programs

  Each institution that participates in Title IV Programs must annually submit
to the U.S. Department of Education an audit by an independent accounting firm
of that school's compliance with Title IV Program requirements, as well as
audited financial statements. The U.S. Department of Education also conducts
compliance reviews, which include on-site evaluations, of several hundred
institutions each year, and directs student loan guaranty agencies to conduct
additional reviews relating to student loan programs. In addition, the Office
of the Inspector General of the U.S. Department of Education conducts audits
and investigations in certain circumstances. Under the HEA, accrediting
agencies and state licensing agencies also have responsibilities for
overseeing institutions' compliance with certain Title IV Program
requirements. As a result, each participating institution is subject to
frequent and detailed oversight and must comply with a complex framework of
laws and regulations or risk being required to repay funds or becoming
ineligible to participate in Title IV Programs.

  Cohort Default Rates (CDR). Each institution that participates in the FFEL
program must maintain a student loan CDR equal to or less than 25% (15% for
the Perkins program) for three consecutive years or will no longer be eligible
to participate in that program or the Federal Direct Student Loan Program for
the remainder of the federal fiscal year in which the U.S. Department of
Education determines that such institution has lost its eligibility and for
the two subsequent federal fiscal years.

  None of the Company's schools has had an FFEL cohort default rate of 25% or
greater for any of the last three consecutive federal fiscal years. For
federal fiscal year 1998, the most recent year for which such rates have been
published, the average FFEL cohort default rate for borrowers at all
proprietary institutions was 11.4%. For that year, the combined FFEL cohort
default rate for all borrowers at the Company's schools was 9.9%. For federal
fiscal year 1999, the combined preliminary FFEL cohort default rate for all
borrowers at the Company's schools was 8.4% and its individual schools'
preliminary rates ranged from 0% to 12.3%.

  If an institution's FFEL cohort default rate equals or exceeds 25% in any of
the three most recent federal fiscal years, or if its cohort default rate for
loans under the Perkins program exceeds 15% for the most recent federal award
year (i.e., July 1 through June 30), that institution may be placed on
provisional certification status for up to four years. Provisional
certification does not limit an institution's access to Title IV Program
funds, but does subject that institution to closer review by the U.S.
Department of Education and possible summary adverse action if that
institution commits a material violation of Title IV Program requirements. To
EDMC's knowledge, the U.S. Department of Education reviews an institution's
compliance with the cohort default rate thresholds described in this paragraph
only when that school is otherwise subject to a U.S. Department of Education
certification review. Nine of the Company's schools had Perkins cohort default
rates in excess of 15% for students who were to begin repayment during the
federal award year ending June 30, 2000, the most recent year for which such
rates have been calculated. For each of those schools, funds from the Perkins
program equaled less than 5% of the school's net revenues in both fiscal 2000
and 2001. To date, only The Art Institute of Portland has been placed on
provisional certification status for this reason, based upon the CDR for
Perkins. If an institution is placed on such status for this reason and the
institution reduces its Perkins cohort default rate to below 15% in a
subsequent year, the institution can ask the U.S. Department of Education to
remove the provisional status.


                                       9
<PAGE>

  Each of the Company's schools maintains a student loan default management
plan. Those plans provide for extensive loan counseling, methods to increase
student persistence and completion rates and graduate employment rates,
strategies to increase graduate salaries and, for most schools, the use of
external agencies to assist the school with loan counseling and loan servicing
if a student ceases to attend that school. Those activities are in addition to
the loan servicing and collection activities of FFEL lenders and guaranty
agencies.

  Regulatory Oversight. The U.S. Department of Education is required to
conduct periodic reviews of the eligibility and certification of every
institution participating in Title IV Programs. A denial of recertification
precludes a school from continuing to participate in Title IV Programs. All
schools that submitted recertification applications during FY2001 received
recertification.

  During fiscal 2002, only The Art Institutes International at San Francisco
is scheduled to apply for recertification.

  The Art Institutes International at San Francisco, The Art Institute of
California, The Art Institute of Las Vegas, Massachusetts Communications
College, and The Art Institute of Charlotte are all provisionally certified by
the United States Department of Education due to their recent acquisition by
the Company. The Art Institute of Portland is provisionally certified due to
its Perkins CDR being in excess of 30%. The U.S. Department of Education
stated that when The Art Institute of Portland is below 30%, the Institute can
request to be removed from the provisional status.

  The HEA requires each accrediting agency recognized by the U.S. Department
of Education to undergo comprehensive periodic review by the U.S. Department
of Education to ascertain whether such accrediting agency is adhering to
required standards. Many of the accrediting agencies that accredit the
Company's schools will be reviewed by the U.S. Department of Education within
the next two years. While EDMC knows of no reason that any of the
accreditation agencies that its institutions use would not be approved, if an
accreditation agency is not approved by the U.S. Department of Education, the
institutions that are affected are given time to apply for accreditation from
a different agency.

  Financial Responsibility Standards. All institutions participating in Title
IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. For the year
ended June 30, 2001, the Company believes that, on an individual institution
basis, each of its schools then participating in Title IV Programs satisfied
the financial responsibility standards. The Illinois Institute of Art at
Schaumburg, The Art Institute of Phoenix, The Art Institute of Los Angeles,
The Art Institute of Los Angeles--Orange County and The Art Institute of
Washington are combined with their main campuses, The Illinois Institute of
Art at Chicago, The Art Institute of Colorado, The Art Institute of
Pittsburgh, The Art Institute of Colorado and The Art Institute of Atlanta
respectively, for that purpose.

  Restrictions on Operating Additional Schools. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and applicable regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location and
apply to participate in Title IV Programs at that location without reference
to the two-year requirement if such additional location satisfies all other
applicable requirements. In addition, a school that undergoes a change of
ownership resulting in a change in control (as defined under the HEA) must be
reviewed and recertified for participation in Title IV Programs under its new
ownership. Most of a school's change of ownership application can be reviewed
prior to the change of ownership. If the application is considered to be
substantially complete, the U.S. Department of Education may generate a
temporary Provisional Program Participation Agreement allowing the school's
students to continue to receive

                                      10
<PAGE>

federal funding, subject to certain conditions. After the change of ownership
and the remainder of the application is submitted, if the school is
recertified, it is recertified on a provisional basis. During the time a
school is provisionally certified, it may be subject to summary adverse action
for a material violation of Title IV Program requirements and may not
establish additional locations without prior approval from the U.S. Department
of Education. However, provisional certification does not otherwise limit an
institution's access to Title IV Program funds. The Company's expansion plans
are based, in part, on its ability to add additional locations and acquire
schools that can be recertified.

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

  The "90/10 Rule." Under a provision of the HEA commonly referred to as the
"90/10 Rule," a proprietary institution such as each of EDMC's schools will
cease to be eligible to participate in Title IV Programs if, on a cash
accounting basis, more than 90% of its revenues for the prior fiscal year was
derived from Title IV Programs. Any school that violates the 90/10 Rule
immediately becomes ineligible to participate in Title IV Programs and is
unable to apply to regain its eligibility until the following fiscal year. For
those schools that disbursed federal financial aid during fiscal 2001, the
percentage of revenues derived from Title IV Programs ranged from
approximately 47% to 74%.

  Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA
prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollment or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. EDMC believes that
its current compensation plans are in substantial compliance with HEA
requirements.

State Authorization

  Each of EDMC's schools is authorized to offer education programs and grant
degrees or diplomas by the state in which such school is located. The level of
regulatory oversight varies substantially from state to state. In some states,
the schools are subject to licensure by the state education agency and also by
a separate higher education agency. State laws establish standards for
instruction, qualifications of faculty, location and nature of facilities,
financial policies and responsibility and other operational matters. State
laws and regulations may limit the ability of the Company to obtain
authorization to operate in certain states or to award degrees or diplomas or
offer new degree programs. Certain states prescribe standards of financial
responsibility that are different from those prescribed by the U.S. Department
of Education. The Company believes that each of its schools is in substantial
compliance with applicable state authorizing and licensure laws.

Employees

  As of June 30, 2001, EDMC employed 2,719 full-time and 989 part-time staff
and faculty.

Competition

  The postsecondary education market is highly competitive. The Art Institutes
compete with traditional public and private two-year and four-year colleges
and universities and other proprietary schools. Certain public
and private colleges and universities may offer programs similar to those of
The Art Institutes. Public institutions often receive government subsidies,
government and foundation grants, tax-deductible contributions and other
financial resources generally not available to proprietary schools.
Accordingly, public institutions may have facilities and equipment superior to
those in the private sector, and can offer lower tuition prices. However,
tuition at private non-profit institutions is, on average, higher than The Art
Institutes' tuition.

                                      11
<PAGE>

Seasonality in Results of Operations

  EDMC has experienced seasonality in its results of operations primarily due
to the pattern of student enrollment. Historically, EDMC's lowest quarterly
revenues and income have been in the first quarter (July to September) of its
fiscal year due to fewer students being enrolled during the summer months and
the expenses incurred in preparation for the peak enrollment in the fall
quarter (October to December). EDMC expects that this seasonal trend will
continue.

                                      12
<PAGE>

ITEM 2--PROPERTIES

  As of June 30, 2001, EDMC's schools were located in major metropolitan areas
in 16 states. Typically, the schools occupy an entire building or several
floors or portions of floors in a building. The Company and its subsidiaries
currently lease the majority of their facilities.

  The following table sets forth certain information as of June 30, 2001 with
respect to the principal properties used by the Company and its subsidiaries:

<TABLE>
<CAPTION>
                          Square Feet
                         --------------
Location (City/State)    Leased  Owned
---------------------    ------- ------
<S>                      <C>     <C>
Phoenix, AZ............   58,635
Los Angeles, CA........   56,150
Orange County, CA......   27,600
San Diego, CA..........   20,885
San Francisco, CA......   26,965
Denver, CO.............   35,620 98,840
Ft. Lauderdale, FL(1)..  122,850
Atlanta, GA............  117,895
Charlotte, NC..........   16,915
Chicago, IL............   62,657
Schaumburg, IL.........   42,300
</TABLE>
<TABLE>
<CAPTION>
                         Square Feet
                       ---------------
Location (City/State)  Leased   Owned
---------------------  ------- -------
<S>                    <C>     <C>
Boston, MA............  57,110
Minneapolis, MN.......  67,750
Las Vegas, NV.........  11,045
New York, NY..........  42,245
Portland, OR..........  38,680
Philadelphia, PA(2)... 158,810
Pittsburgh, PA........  36,930 173,470
Dallas, TX............  95,420
Houston, TX...........  82,445
Seattle, WA...........  58,975  74,635
Arlington, VA.........  32,330
</TABLE>
--------
(1) One of the properties occupied by The Art Institute of Fort Lauderdale is
    owned by a limited partnership that includes among its limited partners
    one current member of EDMC's management who is also a director.
(2) One of the properties occupied by The Art Institute of Philadelphia is
    owned indirectly by a limited partnership that includes among its limited
    partners one current member of EDMC's management who is also a director as
    well as one other current director of EDMC.

ITEM 3--LEGAL PROCEEDINGS

  The Company is a defendant in certain legal proceedings arising out of the
conduct of its business. In the opinion of management, based upon its
investigation of these claims and discussion with legal counsel, the ultimate
outcome of such legal proceedings, individually and in the aggregate, will not
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.

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

    Not applicable.

                                      13
<PAGE>

                                    PART II

ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

  The Common Stock is traded on the Nasdaq National Market System under the
symbol "EDMC." As of September 11, 2001, there were 30,351,322 shares of
Common Stock outstanding held by 463 holders of record. The prices set forth
below reflect the high and low sales prices for the Company's Common Stock, as
reported in the consolidated transaction reporting system of the Nasdaq
National Market System.

<TABLE>
<CAPTION>
                                                         2000          2001
                                                     ------------- -------------
     Three Months Ended                               High   Low    High   Low
     ------------------                              ------ ------ ------ ------
     <S>                                             <C>    <C>    <C>    <C>
     September 30................................... $21.13 $12.38 $26.94 $17.75
     December 31....................................  14.81   8.69  38.38  24.75
     March 31.......................................  14.63  11.00  37.81  26.06
     June 30........................................  18.69  14.88  40.05  28.92
</TABLE>

  EDMC has not declared or paid any cash dividends on its capital stock during
the past two years. EDMC currently intends to retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.

                                      14
<PAGE>

ITEM 6--SELECTED FINANCIAL DATA

  The following summary consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto filed in response to Item 8 and the information included in response
to Item 7 below. Most of the summary data presented below is derived from the
Company's consolidated financial statements audited by Arthur Andersen LLP,
independent public accountants, whose report covering the financial statements
as of June 30, 2000 and 2001 and for each of the three years in the period
ended June 30, 2001 also is filed in response to Item 8 below. The summary
consolidated income statement data for the years ended June 30, 1997 and 1998
and the summary consolidated balance sheet data as of June 30, 1997, 1998 and
1999 are derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                               Year ended June 30,
                                   --------------------------------------------
                                     1997     1998     1999     2000     2001
                                   -------- -------- -------- -------- --------
                                     (Dollars in thousands, except per share
                                                     amounts)
<S>                                <C>      <C>      <C>      <C>      <C>
Income Statement Data:
Net revenues...................... $182,849 $221,732 $260,805 $307,249 $370,681
Net income........................    9,985   14,322   18,752   22,530   28,978
Dividends on Series A Preferred
 Stock(1).........................       83       --       --       --       --
Other Series A Preferred Stock
 Transactions(1)..................      403       --       --       --       --
Per Share Data(1):
Basic:
 Net income....................... $    .40 $    .50 $    .64 $    .78 $    .97
 Weighted average number of shares
  outstanding, in thousands(2)....   23,878   28,908   29,314   28,964   29,742
Diluted:
 Net income....................... $    .36 $    .48 $    .61 $    .75 $    .93
 Weighted average number of shares
  outstanding, in thousands(2)....   27,342   29,852   30,615   29,921   31,016
Other Data:
Capital expenditures(3)........... $ 18,942 $ 18,814 $ 55,892 $ 58,149 $ 38,822
Enrollment at beginning of fall
 quarter(4).......................   15,838   18,763   21,518   24,502   27,999
<CAPTION>
                                                  As of June 30,
                                   --------------------------------------------
                                     1997     1998     1999     2000     2001
                                   -------- -------- -------- -------- --------
                                                  (in thousands)
<S>                                <C>      <C>      <C>      <C>      <C>
Balance Sheet Data:
Cash and cash equivalents......... $ 33,227 $ 47,310 $ 32,871 $ 39,538 $ 47,290
Receivables, net..................   10,547   10,292   12,490   14,931   18,945
Current assets....................   48,886   65,623   55,709   66,713   81,816
Total assets......................  126,292  148,783  178,746  240,675  283,946
Current liabilities...............   36,178   38,097   45,188   62,891   70,303
Long-term debt (including current
 portion).........................   34,031   38,382   37,231   64,283   53,660
Shareholders' investment..........   57,756   73,325   96,805  112,950  159,949
</TABLE>
--------
(1) Dividends on the outstanding shares of Series A Preferred Stock, dividends
    accrued but not paid on outstanding shares of Series A Preferred Stock and
    a redemption premium paid upon redemption of 75,000 shares of Series A
    Preferred Stock have been deducted from net income in calculating earnings
    per share.
(2) The weighted average shares outstanding used to calculate basic income per
    share does not include potentially dilutive securities (such as stock
    options, warrants and convertible preferred stock). Diluted income per
    share includes, where dilutive, the equivalent shares of Common Stock
    calculated under the treasury stock method for the assumed exercise of
    options and warrants and conversion of shares of Series A Preferred Stock.
(3) Capital expenditures for fiscal 1999, 2000 and 2001 reflect approximately
    $5.1 million, $13.2 million and $4.5 million included in accounts payable
    at year-end, respectively.
(4) Excludes students enrolled in programs at those colleges and universities
    with which the Company has consulting arrangements.

                                      15
<PAGE>

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

  The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the information filed
in response to Item 6 above and Item 8 below. Unless otherwise specified, any
reference to a "year" is to a fiscal year ended June 30.

Background

  EDMC is among the largest providers of proprietary postsecondary education
in the United States, based on student enrollment and revenues. Through its
main operating unit, The Art Institutes, the Company offers bachelor's and
associate's degree programs and non-degree programs in the areas of design,
media arts, culinary arts and fashion. The Company has provided career-
oriented education programs for over 35 years, and its Art Institutes have
more than 125,000 graduates. As of June 30, 2001, the Company operated 24
schools in 20 major metropolitan areas throughout the United States.

  Net revenues, income before interest and taxes and net income increased in
each of the last two years. Net revenues are presented after deducting
refunds, scholarships and other adjustments. Net revenues increased 42.1% to
$370.7 million in 2001 from $260.8 million in 1999. Income before interest and
taxes increased 56.7% to $49.7 million in 2001 from $31.7 million in 1999. Net
income increased by 54.5% to $29.0 million in 2001 from $18.8 million in 1999.
Average quarterly student enrollment at the Company's schools was 25,549 in
2001 compared to 19,325 in 1999. The increase in average enrollment relates
to, among other factors, new education programs and additional school
locations, along with expanded bachelor's degree and evening degree program
offerings.

  The Company's revenues consist of tuition and fees, student housing fees and
student supply store and restaurant sales. In 2001, the Company derived 89.8%
of its net revenues from net tuition and fees paid by, or on behalf of, its
students. Tuition revenue generally varies based on the average tuition charge
per credit hour and the average student population. Student supply store and
housing revenue is largely a function of the average student population. The
average student population is influenced by the number of continuing students
attending school at the beginning of a fiscal period and by the number of new
students entering school during such period. New students enter The Art
Institutes at the beginning of each academic quarter, which typically commence
in January, April, July and October. The Company believes that the size of its
student population is influenced by the number of graduating high school
students, the attractiveness of its program offerings, the effectiveness of
its marketing efforts, changes in technology, the persistence of its students,
the length of its education programs and general economic conditions. The
introduction of additional program offerings at existing schools and the
establishment of new schools (through acquisition or start-up) are important
factors influencing the Company's average student population.

  Tuition increases have been implemented in varying amounts in each of the
past several years. Historically, the Company has been able to pass along cost
increases through increases in tuition. The Company believes that it can
continue to increase tuition as educational costs at other postsecondary
institutions, both public and private, continue to rise. The Company's schools
implemented tuition rate increases averaging approximately 7% during 2001.
Tuition rates vary by geographic region, but are generally consistent by
program at the respective schools.

  The majority of students at The Art Institutes 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. For the year ended June 30, 2001, approximately
60% of the Company's net revenues were indirectly derived from Title IV
Programs.

  Educational services expense consists primarily of costs related to the
development, delivery and administration of the Company's education programs.
Major cost components are faculty compensation, administrative salaries, costs
of educational materials, facility and school occupancy costs, information
systems

                                      16
<PAGE>

costs, bad debt expense and depreciation and amortization of property and
equipment. The Company's faculty comprised approximately 46% full-time and 54%
part-time employees for 2000 and approximately 49% full-time and 51% part-time
employees for 2001.

  General and administrative expense consists of marketing and student
admissions expenses and certain central staff departmental costs such as
executive management, finance and accounting, legal and corporate development
and other departments that do not provide direct services to the Company's
students. The Company has centralized many of these services to gain
consistency in management reporting, efficiency in administrative effort and
control of costs.

  Amortization of intangibles relates to the values assigned to identifiable
intangible assets and goodwill. These intangible assets arose principally from
the acquisitions of the schools discussed below.

  In October 1998, the Company acquired the assets of Socrates Distance
Learning Technologies Group for approximately $0.5 million in cash. This
acquisition was made to further the development of the Company's distance
learning capabilities.

  In August 1999, the Company acquired the outstanding stock of the American
Business & Fashion Institute in Charlotte, North Carolina, for $0.5 million in
cash. The school was renamed The Art Institute of Charlotte.

  In August 1999, the Company acquired the outstanding stock of Massachusetts
Communications College in Boston, Massachusetts for approximately $7.2 million
in cash. Subsequent to June 30, 2001, the school was renamed The New England
Institute of Art and Communications.

  In October 2000, the Company acquired the outstanding stock of The Art
Institute of California located in San Diego, California for approximately
$9.8 million in cash.

  In April 2001, the Company acquired the outstanding stock of the Design
Institute located in Las Vegas, Nevada for approximately $2.1 million in cash.
The school was renamed The Art Institute of Las Vegas.

  Start-up schools and smaller acquisitions are expected to incur operating
losses during the first two to three years following their opening or
purchase. The combined operating losses of the Company's newer schools were
approximately $6.7 million and $9.6 million in fiscal 2000 and 2001,
respectively.

Results of Operations

  The following table sets forth for the periods indicated the percentage
relationships of certain income statement items to net revenues.

<TABLE>
<CAPTION>
                                                             Year ended June
                                                                   30,
                                                            -------------------
                                                            1999   2000   2001
                                                            -----  -----  -----
     <S>                                                    <C>    <C>    <C>
     Net revenues.......................................... 100.0% 100.0% 100.0%
     Costs and expenses:
     Educational services..................................  65.5   65.5   65.4
     General and administrative............................  21.9   21.5   20.7
     Amortization of intangibles...........................   0.5    0.5    0.5
                                                            -----  -----  -----
                                                             87.8   87.5   86.6
                                                            -----  -----  -----
     Income before interest and taxes......................  12.2   12.5   13.4
     Interest expense, net.................................    --    0.3    0.6
                                                            -----  -----  -----
     Income before income taxes............................  12.2   12.2   12.8
     Provision for income taxes............................   5.0    4.9    5.0
                                                            -----  -----  -----
     Net income............................................   7.2%   7.3%   7.8%
                                                            =====  =====  =====
</TABLE>


                                      17
<PAGE>

Year Ended June 30, 2001 Compared with Year Ended June 30, 2000

  Net Revenues

  Net revenues increased by 20.6% to $370.7 million in 2001 from $307.2
million in 2000. The revenue increase was primarily due to an increase in
average quarterly student enrollment ($33.4 million) and tuition increases of
approximately 7.0% ($24.2 million). The average academic year (three academic
quarters) tuition rate for a student attending classes at an Art Institute on
a recommended full schedule increased to $12,584 in 2001 from $11,703 in 2000.

  Net housing revenues increased by 20.8% to $21.9 million in 2001 from $18.1
million in 2000 and revenues from the sale of educational materials in 2001
increased by 15.1% to $15.8 million. Both increased primarily as a result of
higher average student enrollment. Refunds increased to $8.9 million in 2001
from $8.6 million in 2000. As a percentage of gross revenue, refunds decreased
from 2000.

  Educational Services

  Educational services expense increased by $41.1 million, or 20.4%, to $242.3
million in 2001 from $201.2 million in 2000. The increase was primarily due to
additional costs required to service higher student enrollment, accompanied by
normal cost increases for wages and other services at the schools owned by
EDMC prior to 2000 ($26.9 million) and schools added in 2000 and 2001 ($14.9
million). Higher costs associated with establishing and supporting new schools
and developing new education programs contributed to the increase. As a
percentage of net revenues, educational services expense decreased slightly
between years.

  General and Administrative

  General and administrative expense increased by 15.9% to $76.7 million in
2001 from $66.2 million in 2000 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollment at the
schools owned by EDMC prior to 2000 ($2.2 million) and additional marketing
and student admissions expenses at the schools added in 2000 and 2001 ($4.6
million). General and administrative expense decreased approximately 80 basis
points as a percentage of net revenues in 2001 compared to 2000, reflecting
operating leverage at the schools operated by EDMC for more than two years.

  Amortization of Intangibles

  Amortization of intangibles increased by $0.5 million, or 30.8%, to $2.0
million in 2001 from $1.5 million in 2000, as a result of additional
amortization associated with fiscal 2001 acquisitions and on-line curriculum.
Goodwill amortization was approximately $1.0 million for fiscal 2001.

  Interest Expense, Net

  The Company had net interest expense of $2.3 million in 2001 as compared to
$726,000 in 2000. This change is attributable to increased average borrowings
related primarily to capital expenditures and acquisitions, offset by a lower
effective interest rate. The average outstanding debt balance was
approximately $28.2 million in 2001, up from $15.6 million in 2000.
Additionally, interest incurred in connection with construction of facilities
in Denver and Pittsburgh was capitalized during the respective construction
periods in 2000.

  Provision for Income Taxes

  The Company's effective tax rate decreased to 38.9% in 2001 from 40.1% in
2000. This reduction primarily reflects a more favorable distribution of
taxable income among the states in which the Company operates and a decrease
in nondeductible expenses as a percentage of taxable income. The effective
rates differed from the combined federal and state statutory rates due to
expenses that are nondeductible for income tax purposes.


                                      18
<PAGE>

  Net Income

  Net income increased by $6.5 million or 28.6% to $29.0 million in 2001 from
$22.5 million in 2000. The increase resulted from improved operations at the
Company's schools owned prior to 2000 and a lower effective income tax rate,
offset by increased amortization of intangible and interest expense.

Year Ended June 30, 2000 Compared with Year Ended June 30, 1999

  Net Revenues

  Net revenues increased by 17.8% to $307.2 million in 2000 from $260.8
million in 1999. The revenue increase was primarily due to an increase in
average quarterly student enrollment ($25.4 million) and tuition increases of
approximately 5% ($16.2 million). The average academic year (three academic
quarters) tuition rate for a student attending classes at an Art Institute on
a recommended full schedule increased to $11,703 in 2000 from $11,262 in 1999.

  Net housing revenues increased by 23.2% to $18.1 million in 2000 from $14.7
million in 1999 and revenues from the sale of educational materials in 2000
increased by 11.8% to $13.8 million. Both increased primarily as a result of
higher average student enrollment. Refunds increased from $8.0 million in 1999
to $8.6 million in 2000. As a percentage of gross revenue, refunds decreased
from 1999.

  Educational Services

  Educational services expense increased by $30.4 million, or 17.8%, to $201.2
million in 2000 from $170.7 million in 1999. The increase was primarily due to
additional costs required to service higher student enrollment, accompanied by
normal cost increases for wages and other services at the schools owned by
EDMC prior to 1999 ($23.0 million) and schools added in 1999 and 2000 ($7.5
million). Higher costs associated with establishing and supporting new schools
and developing new education programs contributed to the increase. As a
percentage of net revenues, educational services expense was consistent
between years at 65.5%. This represents an improvement over the 66.4% of net
revenues in the prior year, primarily a result of margin improvements in
various expenses, such as rent, bad debt, and other operating costs.

  General and Administrative

  General and administrative expense increased by 15.8% to $66.2 million in
2000 from $57.2 million in 1999 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollment at the
schools owned by EDMC prior to 1999 ($5.0 million), and additional marketing
and student admissions expenses at the schools added in 1999 and 2000 ($3.1
million). General and administrative expense increased slightly as a
percentage of net revenues in 2000 compared to 1999 as a result of increased
advertising expenditures designed to promote awareness of and generate
inquiries about the newer locations and new program offerings.

  Amortization of Intangibles

  Amortization of intangibles increased by $0.3 million, or 25.6%, to $1.5
million in 2000 from $1.2 million in 1999, as a result of additional
amortization associated with the fiscal 2000 additions.

  Interest Expense (Income), Net

  The Company had net interest expense of $726,000 in 2000 as compared to
interest income of $113,000 in 1999. The average outstanding debt balance
increased from $4.6 million in 1999 to $15.6 million in 2000. Accordingly,
more interest cost on borrowings has been offset against interest earned on
investments.

  Provision for Income Taxes

  The Company's effective tax rate decreased to 40.1% in 2000 from 41.1% in
1999. This reduction reflects a more favorable distribution of taxable income
among the states in which the Company operates and a decrease

                                      19
<PAGE>

in non-deductible expenses as a percentage of taxable income. The effective
rates differed from the combined federal and state statutory rates due to
expenses that are nondeductible for income tax purposes.

  Net Income

  Net income increased by $3.8 million or 20.1% to $22.5 million in 2000 from
$18.8 million in 1999. The increase resulted from improved operations at the
Company's schools owned prior to 1999 and a lower effective income tax rate.

Seasonality and Other Factors Affecting Quarterly Results

  The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollment. The Company experiences a seasonal
increase in new enrollment in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollment at the Company's schools is highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly
as revenues on a quarterly basis. The Company anticipates that the seasonal
pattern in revenues and earnings will continue in the future.

Quarterly Financial Results (unaudited)

  The following table sets forth the Company's quarterly results for 2000 and
2001.

<TABLE>
<CAPTION>
                                             Sept.
                                              30     Dec. 31  Mar. 31   June 30
                                            (Summer)  (Fall)  (Winter)  (Spring)
                                            -------  -------- --------  -------
2000                                        (dollars in thousands, except per
----                                                   share data)
<S>                                         <C>      <C>      <C>       <C>
Net revenues............................... $60,850  $ 87,023 $ 83,195  $76,181
Income before interest and taxes........... $ 1,693  $ 19,566 $ 11,968  $ 5,115
Income before income taxes................. $ 1,570  $ 19,247 $ 11,881  $ 4,918
Net income................................. $   926  $ 11,524 $  7,113  $ 2,967
Earnings per share
 --Basic................................... $   .03  $    .40 $    .25  $   .10
 --Diluted................................. $   .03  $    .39 $    .24  $   .10
<CAPTION>
2001
----
<S>                                         <C>      <C>      <C>       <C>
Net revenues............................... $72,561  $103,112 $100,366  $94,642
Income before interest and taxes........... $ 2,511  $ 24,639 $ 16,009  $ 6,516
Income before income taxes................. $ 1,896  $ 23,816 $ 15,570  $ 6,118
Net income................................. $ 1,156  $ 14,531 $  9,498  $ 3,793
Earnings per share
 --Basic................................... $   .04  $    .49 $    .32  $   .13
 --Diluted................................. $   .04  $    .47 $    .30  $   .12
</TABLE>

  Earnings per share amounts for each quarter are required to be calculated
independently and, therefore, may not equal the amount calculated for the
year.

Liquidity and Capital Resources

  The Company's cash flow from operations has been the primary source of
financing for capital expenditures and growth. Additionally, the Company
maintains a revolving credit facility. Cash flow from operations was $36.4
million, $47.7 million, and $70.9 million for 1999, 2000, and 2001,
respectively. Cash flow from operating and investing activities does not
reflect capital expenditures of approximately $5.1 million, $13.2 million, and
$4.5 million which are included in accounts payable as of June 30, 1999, 2000
and 2001, respectively.

                                      20
<PAGE>

Additionally, cash flows from operating and financing activities does not
reflect income tax deductions related to the exercise of options of $2.7
million, $0.9 million and $9.8 million. These deductions do not effect the
Company's tax provision; the benefit is recorded as additional paid-in capital
in the accompanying consolidated balance sheets. Therefore, the change in the
applicable balance sheet accounts (accounts payable, property and equipment,
accrued liabilities and additional paid in capital) does not directly
correlate to the corresponding amounts in the accompanying statement of cash
flows.

  The Company had net working capital of $11.5 million as of June 30, 2001, up
from $3.8 million as of June 30, 2000. This change is due primarily to the
timing of payments made for capital expenditures. As noted above, purchases of
property and equipment included in accounts payable decreased approximately
$8.7 million from June 30, 2000 to June 30, 2001. Advanced payments increased
approximately $8.1 million and $14.9 million as compared to the respective
prior year-end balances at June 30, 2000 and 2001. Increases in enrollment,
tuition and monies received in connection with alternative loan programs
offered to students, as well as arrangements offering incentives for early
tuition payments have all contributed to this increase. Unearned revenue of
approximately $446,000 and $1.7 million was included with advanced payments as
of June 30, 2000 and 2001, respectively.

  As of June 30, 2001, gross trade accounts receivable increased by $7.3
million, or 27.9%, to $33.4 million from the prior year primarily due to the
higher enrollment and tuition rates. Additionally, certain recently acquired
schools have not yet been converted to the quarter system used by most of The
Art Institutes and were in session as of year-end. Under the payment terms,
these balances would be reduced by the end of the applicable class sessions.
Although tuition increases have exceeded corresponding increases in federal
financial aid sources, the Company has arranged for alternative financing
sources to manage its credit risk. The allowance for doubtful accounts was
$9.4 million, $14.1 million, and $17.4 million as of June 30, 1999, 2000, and
2001, respectively. This represents increases of 12.6%, 50.4%, and 23.6% in
the allowance for doubtful accounts for 1999, 2000, and 2001, respectively.
The Company determines its reserve for accounts receivable by categorizing
gross receivables based upon the enrollment status of the student (in-school,
out of school, summer leave of absence, and collections) then establishing a
reserve based on the likelihood of collections (in-school receivables being
the lowest percent reserved). The Company provides for extended payment terms
beyond graduation (generally six months). As more students have utilized this
option, the out-of-school category has increased as a percentage of gross
receivables which has resulted in an increase in the corresponding allowance
against these balances. Therefore, the change between years in the allowance
results from both the overall increase in trade receivables as well as changes
in the distribution of gross receivables among the categories.

  The Credit Agreement (the "Credit Agreement"), which the Company entered
into during fiscal 2000, currently allows for maximum borrowings of $100.0
million through its expiration on February 18, 2005. Borrowings under this
facility are unsecured and bear interest at one of three rates set forth in
the Credit Agreement, at the election of the Company. Certain outstanding
letters of credit reduce this facility. As of June 30, 2001, the Company had
approximately $45.4 million of borrowing capacity available under the Credit
Agreement. As of June 30, 2001, the Company was in compliance with all
covenants under the Credit Agreement. As of June 30, 2001, the average
interest rate for borrowings under the Credit Agreement was 4.5%.

  Borrowings under the Credit Agreement are used by the Company primarily to
fund working capital needs resulting from the seasonal pattern of cash
receipts throughout the year. The level of accounts receivable reaches a peak
immediately after the billing of tuition and fees at the beginning of each
academic quarter. Collection of these receivables is heaviest at the start of
each academic quarter.

  Subsequent to year-end, the Company and its lenders amended and restated the
Credit Agreement to increase allowable borrowings from $100 million to $200
million. The Amended and Restated Credit Agreement, which will expire
September 20, 2004, is secured by certain assets of the Company and provides
the Company the ability to borrow up to $150 million on a revolving basis and
$50 million in the form of a term loan (collectively, the "Secured Credit
Facilities"). The Secured Credit Facilities contain the customary covenants
that, among other matters, require the Company to meet specified financial
ratios, restrict the repurchase of Common Stock and limit the incurrence of
additional indebtedness.

                                      21
<PAGE>

  Capital Expenditures

  Capital expenditures made during the three years ended June 30, 2001 reflect
the implementation of the Company's initiatives emphasizing the addition of
new schools and education programs and investment in classroom technology. The
Company's capital expenditures (on an accrual basis) were $55.9 million, $58.1
million, and $38.8 million, for 1999, 2000, and 2001, respectively. The
Company expects that total capital spending for 2002 will remain relatively
consistent as a percentage of net revenues, as compared to 2001. The Company
anticipates that these expenditures will be financed primarily through cash
flow from operations and supplemented as needed with borrowings under the
revolving credit facility. The anticipated expenditures relate principally to
the investment in schools acquired or started during the previous several
years and to be added in 2002, continued improvements to current facilities,
additional or replacement school and housing facilities and classroom and
administrative technology.

  The Company leases the majority of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.

Regulations

  The Company indirectly derived approximately 60% of its net revenues from
Title IV Programs in 2001. U.S. Department of Education regulations prescribe
the timing of disbursements of funds under Title IV Programs. Students must
apply for a new loan for each academic year. Lenders generally provide loan
funds in multiple disbursements each academic year. For first-time students in
their first academic quarter, the initial loan disbursement is generally
received at least 30 days after the commencement of that academic quarter.
Otherwise, the first loan disbursement is received, at the earliest, 10 days
before the commencement of the student's academic quarter.

  U.S. Department of Education regulations require Title IV Program funds
received by the Company's schools in excess of the tuition and fees owed by
the relevant students at that time to be, with these students' permission,
maintained and classified as restricted until they are billed for the portion
of their education program related to those funds. Funds transferred through
electronic funds transfer programs are held in a separate cash account and
released when certain conditions are satisfied. These restrictions have not
significantly affected the Company's ability to fund daily operations.

  Education institutions participating in Title IV Programs must satisfy a
series of specific standards of financial responsibility. The U.S. Department
of Education has adopted standards to determine an institution's financial
responsibility to participate in Title IV Programs. The regulations establish
three ratios: (i) the equity ratio, intended to measure an institution's
capital resources, ability to borrow and financial viability; (ii) the primary
reserve ratio, intended to measure an institution's ability to support current
operations from expendable resources; and (iii) the net income ratio, intended
to measure an institution's profitability. Each ratio is calculated
separately, based on the figures in the institution's most recent annual
audited financial statements, and then weighted and combined to arrive at a
single composite score. Such composite score must be at least 1.5 for the
institution to be deemed financially responsible without conditions or
additional oversight.

  Regulations promulgated under the HEA also require all proprietary education
institutions to comply with the "90/10 Rule," which prohibits participating
schools from deriving 90% or more of total revenue from Title IV Programs in
any year.

  If an institution fails to meet any of these requirements, it may be deemed
to be not financially responsible by the U.S. Department of Education, or
otherwise ineligible to participate in Title IV Programs. The Company believes
that all of its participating schools met these requirements as of June 30,
2001.

Effect of Inflation

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

                                      22
<PAGE>

Impact of New Accounting Standards

  In June 2001, SFAS No. 141, "Business Combinations" was issued. The
statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
FASB statement No. 38 "Accounting for Preacquisition Contingencies of
Purchased Enterprises." The statement requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method. SFAS
141 is effective July 1, 2001. The Company's adoption of SFAS 141 will not
have a material impact on the Company's financial position or results of
operations.

  In June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
issued. This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets". It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company has adopted this standard
as of July 1, 2001. The Company is required to complete a transitional
goodwill impairment test for all goodwill at the reporting unit level by
December 31, 2001 and is currently preparing for this. Adopting SFAS 142 will
affect the financial position and results of operations because goodwill will
no longer be amortized. It is anticipated that the adoption of this standard
in fiscal 2002 will decrease amortization of intangibles expense by
approximately $1 million, reduce the effective tax rate (but not the tax
provision) by less than 1%, and increase diluted earnings per share by
approximately $.03 for the fiscal year.

Risk Factors

  In addition to the important factors described elsewhere in this Annual
Report on Form 10-K, the following factors, among others, could affect the
Company's business, results of operations, financial condition and prospects
in fiscal 2002 and later years: (i) the perceptions of the U.S. Congress, the
U.S. Department of Education and the public concerning proprietary
postsecondary education institutions to the extent those perceptions could
result in changes in the HEA in connection with its reauthorization; (ii)
EDMC's ability to comply with federal and state regulations and accreditation
standards, including any changes therein or changes in the interpretation
thereof; (iii) the continued availability of alternative loan programs to
students at the Company's schools; (iv) the Company's ability to foresee
changes in the skills required of its graduates and to design new courses and
programs to develop those skills in a cost effective and timely manner; (v)
the ability of the Company to gauge successfully which markets are underserved
in the skills that the Company's schools teach; (vi) the Company's ability to
continue to attract and retain students by maintaining the appropriate
capacity and system operations; (vii) security risks that the Company's
computer networks may be vulnerable to which could disrupt operations and
require the Company to expend significant resources; (viii) the Company's
ability to gauge appropriate acquisition and start-up opportunities and to
manage and integrate them successfully, as well as obtain necessary regulatory
approvals for the acquisitions; (ix) the Company's ability to defend
litigation successfully; (x) proprietary rights and intellectual property that
the Company relies upon may not be adequately protected by law; (xi) the
Company's ability to recruit and retain key personnel; (xii) anti-takeover
provisions in the Company's charter documents could disincent a takeover of
the Company or serve as a disincentive; (xiii) competitive pressures from
other education institutions; and (xiv) general economic conditions, including
stock market volatility and uncertainty arising from the terrorist attacks of
September 11, 2001.

ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

  The fair values and carrying amounts of the Company's financial instruments,
primarily accounts receivable and debt, are approximately equivalent. The debt
instruments bear interest at floating rates based upon market rates or at
fixed rates that approximate market rates. All other financial instruments are
classified as current and will be utilized within the next operating cycle.


                                      23
<PAGE>

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Education Management Corporation and Subsidiaries:

  We have audited the accompanying consolidated balance sheets of Education
Management Corporation (a Pennsylvania corporation) and Subsidiaries as of
June 30, 2000 and 2001, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Education Management
Corporation and Subsidiaries as of June 30, 2000 and 2001, and their results
of operations and their cash flows for each of the three years in the period
ended June 30, 2001 in conformity with accounting principles generally
accepted in the United States.

                                                         s/ Arthur Andersen LLP

Pittsburgh, Pennsylvania,
July 27, 2001

                                      24
<PAGE>

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                   (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                             As of June 30,
                                                            ------------------
                                                              2000      2001
                                                            --------  --------
<S>                                                         <C>       <C>
Assets
Current assets:
 Cash and cash equivalents, including restricted balances
  of $679 and $218......................................... $ 39,538  $ 47,290
 Receivables:
  Trade, net of allowances of $14,088 and $17,410..........   12,057    16,032
  Notes, advances and other................................    2,874     2,913
 Inventories...............................................    3,145     3,528
 Deferred and prepaid income taxes.........................    4,676     7,350
 Other current assets......................................    4,423     4,703
                                                            --------  --------
   Total current assets....................................   66,713    81,816
                                                            --------  --------
Property and equipment, net................................  134,738   149,482
Deferred income taxes and other long-term assets...........    9,156     9,590
Intangible assets, net of amortization of $6,065 and
 $8,042....................................................   30,068    43,058
                                                            --------  --------
   Total assets............................................ $240,675  $283,946
                                                            ========  ========
Liabilities and shareholders' investment
Current liabilities:
 Current portion of long-term debt......................... $     16  $     26
 Accounts payable..........................................   19,898    10,795
 Accrued liabilities.......................................   13,062    14,692
 Advance payments..........................................   29,915    44,790
                                                            --------  --------
   Total current liabilities...............................   62,891    70,303
                                                            --------  --------
Long-term debt, less current portion.......................   64,267    53,634
Other long-term liabilities................................      567        60
Commitments and contingencies
Shareholders' investment:
 Common Stock, par value $.01 per share; 60,000,000 shares
  authorized; 29,877,025 and 30,479,880 shares issued......      299       305
 Additional paid-in capital................................   96,585   108,463
 Treasury stock, 907,446 and 216,945 shares at cost........   (9,733)   (3,596)
 Retained earnings.........................................   25,799    54,777
                                                            --------  --------
   Total shareholders' investment..........................  112,950   159,949
                                                            --------  --------
   Total liabilities and shareholders' investment.......... $240,675  $283,946
                                                            ========  ========
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.

                                       25
<PAGE>

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    For the years ended June
                                                              30,
                                                   ---------------------------
                                                     1999      2000     2001
                                                   --------  -------- --------
<S>                                                <C>       <C>      <C>
Net revenues...................................... $260,805  $307,249 $370,681
Costs and expenses:
 Educational services.............................  170,742   201,187  242,313
 General and administrative.......................   57,162    66,209   76,716
 Amortization of intangibles......................    1,203     1,511    1,977
                                                   --------  -------- --------
                                                    229,107   268,907  321,006
                                                   --------  -------- --------
Income before interest and taxes..................   31,698    38,342   49,675
 Interest expense (income), net...................     (113)      726    2,275
                                                   --------  -------- --------
Income before income taxes........................   31,811    37,616   47,400
 Provision for income taxes.......................   13,059    15,086   18,422
                                                   --------  -------- --------
Net income........................................ $ 18,752  $ 22,530 $ 28,978
                                                   ========  ======== ========
Earnings per share:
  Basic........................................... $    .64  $    .78 $    .97
  Diluted......................................... $    .61  $    .75 $    .93
Weighted average number of shares outstanding (in
 000's):
  Basic...........................................   29,314    28,964   29,742
  Diluted.........................................   30,615    29,921   31,016
</TABLE>


  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.

                                       26
<PAGE>

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                      For the years ended
                                                           June 30,
                                                    -------------------------
                                                     1999     2000     2001
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Cash flows from operating activities:
 Net income........................................ $18,752  $22,530  $28,978
 Adjustments to reconcile net income to net cash
   flows
   from operating activities:
   Depreciation and amortization...................  17,440   21,043   26,055
   Deferred credit for income taxes................  (1,992)  (1,895)  (2,728)
   Changes in current assets and liabilities:
    Receivables....................................  (3,655)  (1,237)  (3,263)
    Inventories....................................    (105)    (978)    (383)
    Other current assets...........................    (650)  (1,312)  (1,458)
    Accounts payable...............................      57     (724)  (1,161)
    Accrued liabilities............................   3,940    2,148   11,567
    Advance payments...............................   2,571    8,090   13,318
                                                    -------  -------  -------
     Total adjustments.............................  17,606   25,135   41,947
                                                    -------  -------  -------
    Net cash flows from operating activities.......  36,358   47,665   70,925
                                                    -------  -------  -------
Cash flows from investing activities:
 Acquisition of subsidiaries, net of cash ac-
 quired............................................    (500)  (8,602) (12,065)
 Expenditures for property and equipment........... (50,821) (50,059) (47,477)
 Other items, net..................................    (389)  (1,008)  (1,150)
                                                    -------  -------  -------
    Net cash flows from investing activities....... (51,710) (59,669) (60,692)
                                                    -------  -------  -------
Cash flows from financing activities:
 Net activity under revolving credit facilities....   1,500   27,650  (10,625)
 Principal payments on debt........................  (2,651)  (1,666)    (102)
 Net proceeds from issuance of Common Stock........   2,205    1,925    8,246
 Repurchase of shares..............................    (141)  (9,238)      --
                                                    -------  -------  -------
    Net cash flows from financing activities.......     913   18,671   (2,481)
                                                    -------  -------  -------
Net change in cash and cash equivalents............ (14,439)   6,667    7,752
Cash and cash equivalents, beginning of year.......  47,310   32,871   39,538
                                                    -------  -------  -------
Cash and cash equivalents, end of year............. $32,871  $39,538  $47,290
                                                    =======  =======  =======
</TABLE>

  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.

                                       27
<PAGE>

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                          Common
                          Stock  Additional               Stock                   Total
                          at Par  Paid-in   Treasury  Subscriptions Retained  Shareholders'
                          Value   Capital    Stock     Receivable   Earnings   Investment
                          ------ ---------- --------  ------------- --------  -------------
<S>                       <C>    <C>        <C>       <C>           <C>       <C>
Balance, June 30, 1998..  $ 290   $ 88,880  $  (354)      $ (8)     $(15,483)   $ 73,325
 Net income.............     --         --       --         --        18,752      18,752
 Payments received on
   stock subscriptions
   receivable...........     --         --       --          8            --           8
 Purchase of Common
 Stock..................     --         --     (141)        --            --        (141)
 Exercise of stock op-
 tions..................      5      4,278       --         --            --       4,283
 Issuance of Common
   Stock under
   employee stock pur-
   chase plan...........     --        578       --         --            --         578
                          -----   --------  -------       ----      --------    --------
Balance, June 30, 1999..    295     93,736     (495)        --         3,269      96,805
 Net income.............     --         --       --         --        22,530      22,530
 Purchase of Common
 Stock..................     --         --   (9,238)        --            --      (9,238)
 Exercise of stock op-
 tions..................      3      2,126       --         --            --       2,129
 Issuance of Common
   Stock under
   employee stock pur-
   chase plan...........      1        723                  --            --         724
                          -----   --------  -------       ----      --------    --------
Balance, June 30, 2000..    299     96,585   (9,733)        --        25,799     112,950
 Net income.............     --         --       --         --        28,978      28,978
 Exercise of stock op-
 tions..................      6     11,265    6,017         --            --      17,288
 Issuance of Common
   Stock under
   employee stock pur-
   chase plan...........     --        613      120         --            --         733
                          -----   --------  -------       ----      --------    --------
Balance, June 30, 2001..  $ 305   $108,463  $(3,596)      $ --      $ 54,777    $159,949
                          =====   ========  =======       ====      ========    ========
</TABLE>


  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.

                                       28
<PAGE>

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.OWNERSHIP AND OPERATIONS:

  Education Management Corporation ("EDMC" or the "Company") is among the
largest providers of proprietary postsecondary education in the United States,
based on student enrollment and revenues. Through its operating units,
primarily The Art Institutes ("The Art Institutes"), the Company offers
bachelor's and associate's degree programs and non-degree programs in the
areas of design, media arts, culinary arts, fashion and paralegal studies. The
Company has provided career-oriented education programs for over 35 years.

  As of June 30, 2001, EDMC operated 24 schools in 20 major metropolitan areas
throughout the United States. The Company's main operating unit, The Art
Institutes, offers programs designed to provide the knowledge and skills
necessary for entry-level employment in various fields, including graphic
design, media arts & animation, multimedia & web design, video production,
interior design, industrial design, culinary arts, photography, and fashion.
Those programs typically are completed in 18 to 48 months and culminate in a
bachelor's or associate's degree. As of June 30, 2001, 19 Art Institutes
offered bachelor's degree programs.

  As of June 30, 2001, the Company offered a culinary arts curriculum at 11
Art Institutes and The New York Restaurant School ("NYRS"), a culinary arts
and restaurant management school located in New York City. NYRS offers an
associate's degree program and certificate programs.

  NCPT (The National Center for Paralegal Training) offers paralegal
certificate programs. The National Center for Professional Development
maintained consulting relationships with certain colleges and universities to
assist in the development, marketing and delivery of paralegal, legal nurse
consultant and financial planning certificate programs. As of June 30, 2001,
all but one of these relationships had expired or had been terminated, and the
remaining expired on August 31, 2001.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Consolidation and Presentation

  The consolidated financial statements include the accounts of Education
Management Corporation and its subsidiaries. The results of operations of
acquired entities are consolidated with those of the Company from the date of
acquisition. All significant intercompany transactions and balances have been
eliminated. The Company operates as one reportable segment in accordance with
the manner in which it makes operating decisions and assesses performance.

Use of Estimates

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

Government Regulations

  The Art Institutes and NYRS ("the participating schools") participate in
various federal student financial assistance programs ("Title IV Programs")
under Title IV of the Higher Education Act of 1965, as amended (the "HEA").
Approximately 60% of the Company's net revenues in 2001 were indirectly
derived from funds distributed under these programs to students at the
participating schools.

  The participating schools are required to comply with certain federal
regulations established by the U.S. Department of Education. Among other
things, they are required to classify as restricted certain Title IV Program

                                      29
<PAGE>

funds in excess of charges currently applicable to students' accounts. Such
funds are reported as restricted cash in the accompanying consolidated balance
sheets.

  The participating schools are required to administer Title IV Program funds
in accordance with the HEA and U.S. Department of Education regulations and
must use due diligence in approving and disbursing funds and servicing loans.
In the event a participating school does not comply with federal requirements
or if student loan default rates are at a level considered excessive by the
federal government, that school could lose its eligibility to participate in
Title IV Programs or could be required to repay funds determined to have been
improperly disbursed. Management believes that the participating schools are
in substantial compliance with the federal requirements and that student loan
default rates are not at a level considered to be excessive.

  Certain Art Institutes make contributions to Federal Perkins Loan Programs
(the "Funds"). Current contributions to the Funds are made 75% by the federal
government and 25% by the school. The Company carries its investments in the
Funds at cost, net of an allowance for estimated future loan losses.

Cash and Cash Equivalents

  The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. These investments are
stated at cost which, based upon the scheduled maturities, approximates market
value.

  U.S. Department of Education regulations require Title IV Program funds
received by the Company's schools in excess of the tuition and fees owed by
the relevant students at that time to be, with these students' permission,
maintained and classified as restricted until the students are billed for the
portion of their education program related to those funds. Funds transferred
through electronic funds transfer programs are held in a separate cash account
and released when certain conditions are satisfied. These restrictions have
not significantly affected the Company's ability to fund daily operations.

Inventories

  Inventories consist mainly of textbooks, art supply kits, and supplies held
for sale to students enrolled in the Company's educational programs.
Inventories are valued at the lower of cost (first-in, first-out) or market.

Acquisitions

  On October 1, 1998, the Company acquired the assets of Socrates Distance
Learning Technologies Group for approximately $500,000 in cash. This
acquisition was made to further the development of the Company's distance
learning capabilities.

  On August 17, 1999, the Company acquired the outstanding stock of the
American Business & Fashion Institute in Charlotte, North Carolina, for
$500,000 in cash. The school was renamed The Art Institute of Charlotte.

  On August 26, 1999, the Company acquired the outstanding stock of
Massachusetts Communications College in Boston, Massachusetts for
approximately $7.2 million in cash. Subsequent to June 30, 2001, the school
was renamed The New England Institute of Art and Communications.

  On October 13, 2000, the Company acquired the outstanding stock of The Art
Institute of California in San Diego, California for approximately $9.8
million in cash.

  On April 11, 2001, the Company acquired the outstanding stock of the Design
Institute located in Las Vegas, Nevada for approximately $2.1 million in cash.
The school was renamed The Art Institute of Las Vegas.


                                      30
<PAGE>

  These acquisitions were accounted for using the purchase method of
accounting, with the excess of the purchase price over the fair value of the
assets acquired being assigned to identifiable intangible assets and goodwill.
The results of the acquired entities have been included in the Company's
results from the respective dates of acquisition. The pro forma effects,
individually and collectively, of the acquisitions in the Company's
consolidated financial statements would not materially impact the reported
results.

Intangible Assets

  Intangible assets consisted of the following:

<TABLE>
<CAPTION>
                                                                As of June 30,
                                                                ---------------
                                                                 2000    2001
                                                                ------- -------
                                                                (in thousands)
     <S>                                                        <C>     <C>
     Goodwill, net of accumulated amortization of $5,211 and
      $6,221 (10 to 40 years).................................. $26,588 $36,918
     Accreditation, curriculum and other, net of accumulated
      amortization of $854 and $1,821 (3 to 22 years)..........   3,480   6,140
                                                                ------- -------
                                                                $30,068 $43,058
                                                                ======= =======
</TABLE>

Lease Arrangements

  The Company conducts a major part of its operations from leased facilities.
In addition, the Company leases a portion of its furniture and equipment. In
those cases in which the lease term approximates the useful life of the leased
asset or the lease meets certain other prerequisites, the leasing arrangement
is classified as a capitalized lease. The remaining lease arrangements are
treated as operating leases.

Property and Equipment

  Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for additions and major improvements are capitalized, while those
for maintenance, repairs and minor renewals are expensed as incurred. The
Company uses the straight-line method of depreciation for financial reporting,
while using different methods for tax purposes. Depreciation is based upon
estimated useful lives, ranging from 3 to 30 years. Leasehold improvements are
amortized over the term of the lease, or over their estimated useful lives,
whichever is shorter.

Financial Instruments

  The fair values and carrying amounts of the Company's financial instruments,
primarily accounts receivable and debt, are approximately equivalent. The debt
instruments bear interest at floating rates based upon market rates or at
fixed rates that approximate market rates. All other financial instruments are
classified as current and will be utilized within the next operating cycle.

Revenue Recognition and Receivables

  The Company's net revenues consist of tuition and fees, student housing
charges and supply store and restaurant sales. In fiscal 2001, the Company
derived 89.8% of its net revenues from tuition and fees paid by, or on behalf
of, its students. Net revenues, as presented, are reduced for student refunds
and scholarships. Student supply store and restaurant sales are recognized as
they occur. Advance payments represent that portion of payments received but
not earned and are reflected as a current liability in the accompanying
consolidated balance sheets.

  The Company recognizes tuition and housing revenues on a monthly pro rata
basis over the term of instruction, typically an academic quarter. For most
Art Institute programs, the academic and financial quarters are the same;
therefore unearned revenue is not significant at the end of a financial
quarter. However, certain recently acquired schools have programs that have
class starting and ending dates that differ from the financial

                                      31
<PAGE>

quarters. Revenue associated with tuition and certain fees is either
recognized within the fiscal quarter to which the applicable service was
rendered, or is deferred over the appropriate period. Unearned tuition revenue
of approximately $446,000 and $1.7 million, related to programs not on the
Company's traditional academic quarters, is included with advanced payments in
the accompanying consolidated balance sheets as of June 30, 2000 and June 30,
2001, respectively. The Company's revenue recognition policies are in
accordance with the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements."

  Refunds are calculated in accordance with federal, state and accrediting
agency standards. Student refunds of approximately $8.6 million and $8.9
million were recorded for 2000 and 2001, respectively, of which approximately
$168,000 and $75,000 are included with accrued liabilities in the accompanying
consolidated balance sheets as of June 30, 2000 and 2001, respectively.

  The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States. The Company
determines its allowance for doubtful accounts by categorizing gross
receivables based upon the enrollment status of the student (in-school, out of
school, summer leave of absence and collections) and establishing a reserve
based on the likelihood of collections (in-school receivables being the lowest
percent reserved).

Costs and Expenses

  Educational services expense consists primarily of costs related to the
development, delivery and administration of the Company's education programs.
Major cost components are faculty compensation, administrative salaries, costs
of educational materials, facility leases and school occupancy costs,
information systems costs and bad debt expense, along with depreciation and
amortization of property and equipment.

  General and administrative expense consists of marketing and student
admissions expenses and certain central staff departmental costs such as
executive management, finance and accounting, legal, corporate development and
other departments that do not provide direct services to the Company's
students. All advertising costs are expensed in the fiscal year incurred.

  Amortization of intangibles relates primarily to the values assigned to
identifiable intangibles and goodwill, which arose principally from the
acquisitions discussed above. These intangible assets are amortized over
periods ranging from 2 to 40 years.

New Accounting Standards

  In June 2001, Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," was issued. The statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations," and FASB statement No. 38 "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The statement requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. SFAS 141 is effective July 1, 2001. The Company "s
adoption of SFAS 141 will not have a material impact on the Company's
financial position or results of operations.

  In June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets," was
issued. This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes Accounting
Pronouncement Bulletin (APB) Opinion No. 17, "Intangible Assets". It addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. The Company has adopted this standard as of July 1, 2001. The
Company is required to complete a transitional goodwill impairment test for
all goodwill at the reporting unit level by December 31, 2001 and is currently
preparing for this. Adopting SFAS 142 will affect

                                      32
<PAGE>

the financial position and results of operations because goodwill will no
longer be amortized. It is anticipated that the adoption of this standard in
fiscal 2002 will decrease amortization of intangibles expense by approximately
$1 million, reduce the effective tax rate (but not the tax provision) by less
than 1%, and increase diluted earnings per share by approximately $.03 for the
fiscal year.

Supplemental Disclosures of Cash Flow Information

<TABLE>
<CAPTION>
                                                          Year ended June 30,
                                                        -----------------------
                                                         1999    2000    2001
                                                        ------- ------- -------
                                                            (in thousands)
     <S>                                                <C>     <C>     <C>
     Cash paid during the period for:
      Interest (net of amount capitalized)............  $   313 $   175 $ 2,485
      Income taxes....................................   13,846  15,590  11,494
     Noncash investing and financing activities:
      Expenditures for property and equipment included
       in accounts payable............................    5,071  13,161   4,506
      Tax benefit for options exercised...............    2,664     928   9,775
</TABLE>

Reclassifications

  Certain prior year balances have been reclassified to conform to the current
year presentation.

3.SHAREHOLDERS' INVESTMENT:

  Pursuant to the Company's Preferred Share Purchase Rights Plan (the "Rights
Plan"), one Preferred Share Purchase Right (a "Right") is associated with each
outstanding share of Common Stock. Each Right entitles its holder to buy one
two-hundredth of a share of Series A Junior Participating Preferred Stock,
$.01 par value, at an exercise price of $50, subject to adjustment (the
"Purchase Price"). The Rights Plan is not subject to shareholder approval.

  The Rights will become exercisable under certain circumstances following a
public announcement by a person or group of persons (an "Acquiring Person")
that they acquired or commenced a tender offer for 17.5% or more of the
outstanding shares of Common Stock. If an Acquiring Person acquires 17.5% or
more of the Common Stock, each Right will entitle its holder, except the
Acquiring Person, to acquire upon exercise a number of shares of Common Stock
having a market value of two times the Purchase Price. In the event that the
Company is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold after a
person or group of persons becomes an Acquiring Person, each Right will
entitle its holder to purchase, at the Purchase Price, that number of shares
of the acquiring company having a market value of two times the Purchase
Price. The Rights will expire on the tenth anniversary of the closing of the
IPO (fiscal 2007) and are subject to redemption by the Company at $.01 per
Right, subject to adjustment.

4.EARNINGS PER SHARE:

  Basic EPS is computed using the weighted average number of shares actually
outstanding during the period, while diluted EPS is calculated to reflect the
potential dilution related to stock options.

Reconciliation of Diluted Shares

<TABLE>
<CAPTION>
                                                            Year ended June 30,
                                                            --------------------
                                                             1999   2000   2001
                                                            ------ ------ ------
                                                               (in thousands)
     <S>                                                    <C>    <C>    <C>
     Basic shares.......................................... 29,314 28,964 29,742
     Dilution for stock options............................  1,301    957  1,274
                                                            ------ ------ ------
     Diluted shares........................................ 30,615 29,921 31,016
                                                            ====== ====== ======
</TABLE>


                                      33
<PAGE>

  Options to purchase 122,181 and 7,280 shares were excluded from the dilutive
earnings per share calculation because of their antidilutive effect (due to
the exercise price of such options exceeding the average market price for the
period) for fiscal years 2000 and 2001, respectively.

5.PROPERTY AND EQUIPMENT:

  Property and equipment consisted of the following as of June 30:

<TABLE>
<CAPTION>
                                                                2000     2001
                                                              -------- --------
                                                               (in thousands)
     <S>                                                      <C>      <C>
     Assets (asset lives in years)
      Land..................................................  $  4,300 $  4,300
      Buildings and improvements (15 to 30).................    29,351   51,698
      Equipment and furniture (3 to 10).....................   123,165  136,442
      Library books (3).....................................     3,730    4,979
      Leasehold interests and improvements (1 to 20)........    55,554   60,359
      Construction in progress..............................    19,707    3,064
                                                              -------- --------
       Total................................................   235,807  260,842
      Less accumulated depreciation.........................   101,069  111,360
                                                              -------- --------
                                                              $134,738 $149,482
                                                              ======== ========
</TABLE>

6.LONG-TERM DEBT:

  The Company and its subsidiaries were indebted under the following
obligations as of June 30:

<TABLE>
<CAPTION>
                                                                 2000    2001
                                                                ------- -------
                                                                (in thousands)
     <S>                                                        <C>     <C>
     Revolving credit facilities............................... $64,150 $53,525
     Other indebtedness........................................     133     135
                                                                ------- -------
                                                                 64,283  53,660
     Less current portion......................................      16      26
                                                                ------- -------
                                                                $64,267 $53,634
                                                                ======= =======
</TABLE>

  The Credit Agreement provides for maximum borrowings of $100 million through
its expiration on February 18, 2005. Borrowings under this facility are
unsecured and bear interest at one of three rates set forth in the Credit
Agreement, at the election of the Company. As of June 30, 2001, the average
interest rate for borrowings under the Credit Agreement was 4.9%. Certain
outstanding letters of credit reduce this facility. The Credit Agreement
contains customary covenants that, among other matters, require the Company to
meet specified interest and leverage ratio requirements, restrict the
repurchase of Common Stock and the incurrence of additional indebtedness. As
of June 30, 2001, the Company was in compliance with all covenants under the
Credit Agreement.

  Relevant information regarding borrowings under the revolving credit
facilities under both the Credit Agreement and the prior borrowing agreement
is reflected below:

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                     -------------------------
                                                      1999     2000     2001
                                                     -------  -------  -------
                                                         (in thousands)
     <S>                                             <C>      <C>      <C>
     Outstanding borrowings, end of period.........  $36,500  $64,150  $53,525
     Approximate average outstanding balance
      throughout the period........................    2,550   15,215   28,048
     Approximate maximum outstanding balance during
      the period...................................   37,000   79,850   64,150
     Weighted average interest rate for the peri-
      od...........................................     7.48%    7.45%    6.73%
</TABLE>

                                      34
<PAGE>

  Subsequent to June 30, 2001, the Company and its lenders amended and
restated the Credit Agreement (See Note 14) to provide additional borrowing
availability.

7.COMMITMENTS AND CONTINGENCIES:

  The Company and its subsidiaries lease certain classroom, dormitory and
office space under operating leases, which expire on various dates through
September 2020. Rent expense under these leases was approximately $28,250,000,
$33,645,000, and $41,054,000 respectively for 1999, 2000 and 2001. The
approximate minimum future commitments under non-cancelable, long-term
operating leases as of June 30, 2001 are reflected below:

<TABLE>
<CAPTION>
     Fiscal Years                                                 (in thousands)
     ------------                                                 -------------
     <S>                                                          <C>
     2002........................................................   $ 41,241
     2003........................................................     34,623
     2004........................................................     32,277
     2005........................................................     31,302
     2006........................................................     30,555
     Thereafter..................................................    183,892
                                                                    --------
                                                                    $353,890
                                                                    ========
</TABLE>

  The Company has a management incentive compensation plan that provides for
the awarding of cash bonuses to management personnel using formalized
guidelines based upon the operating results of each subsidiary and the
Company.

  The Company is a defendant in certain legal proceedings arising out of the
conduct of its businesses. In the opinion of management, based upon its
investigation of these claims and discussion with legal counsel, the ultimate
outcome of such legal proceedings, individually and in the aggregate, will not
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.

8.RELATED PARTY TRANSACTIONS:

  The Art Institute of Philadelphia, a division of The Art Institutes
International, Inc ("Aii"), itself a wholly-owned subsidiary of EDMC, leases
one of the buildings it occupies from a partnership in which the subsidiary
serves as a 1% general partner and an executive officer/director and a
director of EDMC are minority limited partners. The Art Institute of Fort
Lauderdale, Inc., a wholly-owned subsidiary of Aii, leases part of its
facilities from a partnership in which an executive officer/director of EDMC
is a minority limited partner. Total rental payments under these arrangements
were approximately $1,901,000, $2,214,000, and $2,267,000 for the years ended
June 30, 1999, 2000, and 2001, respectively.

9.EMPLOYEE BENEFIT PLANS:

  The Company sponsors a retirement plan that covers substantially all
employees. This plan provides for matching Company contributions of 100% of
employee 401(k) contributions up to 3% of compensation and 50% of
contributions between 4% and 6% of compensation. Other contributions to the
plan are at the discretion of the Board of Directors. The expense relating to
these plans was approximately $2,198,000, $1,181,000, and $1,939,000 for the
years ended June 30, 1999, 2000, and 2001, respectively.

  The Company's retirement plan includes an ESOP, which enables eligible
employees to have stock ownership in the Company. The ESOP provides for the
allocations of forfeited shares and cash to be made to the accounts of
eligible participating employees based upon each participant's compensation
level relative to the total compensation of all eligible employees. Eligible
employees vest their ESOP accounts based on a five-year schedule, which
includes credit for past service. Distribution of shares from the ESOP is made
following the

                                      35
<PAGE>

retirement, disability or death of an employee. For employees who terminate
for any other reason, their vested balance will be offered for distribution in
accordance with the terms of the ESOP.

10.DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS:

  Deferred income taxes and other long-term assets consist of the following as
of June 30:

<TABLE>
<CAPTION>
                                                                    2000   2001
                                                                   ------ ------
                                                                        (in
                                                                    thousands)
     <S>                                                           <C>    <C>
     Investment in Federal Perkins Loan Program, net of allowance
      for estimated future loan losses of $1,209 and $1,252......  $2,819 $2,918
     Cash value of life insurance, net of loans of $781 each
      year; face value of $6,065.................................   2,620  2,935
     Deferred income taxes.......................................   2,046  2,067
     Other.......................................................   1,671  1,670
                                                                   ------ ------
                                                                   $9,156 $9,590
                                                                   ====== ======
</TABLE>

11.ACCRUED LIABILITIES:

  Accrued liabilities consist of the following as of June 30:
<TABLE>
<CAPTION>
                                                                 2000    2001
                                                                ------- -------
                                                                (in thousands)
     <S>                                                        <C>     <C>
     Payroll taxes and payroll related......................... $ 7,714 $10,052
     Income and other taxes....................................     404     640
     Other.....................................................   4,944   4,000
                                                                ------- -------
                                                                $13,062 $14,692
                                                                ======= =======
</TABLE>

12.INCOME TAXES:

  The provision for income taxes includes current and deferred taxes as
reflected below:

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                      -------------------------
                                                       1999     2000     2001
                                                      -------  -------  -------
                                                          (in thousands)
     <S>                                              <C>      <C>      <C>
     Current taxes:
      Federal.......................................  $11,824  $14,020  $18,129
      State.........................................    3,227    2,961    3,021
                                                      -------  -------  -------
       Total current taxes..........................   15,051   16,981   21,150
                                                      -------  -------  -------
     Deferred taxes.................................   (1,992)  (1,895)  (2,728)
                                                      -------  -------  -------
       Total provision..............................  $13,059  $15,086  $18,422
                                                      =======  =======  =======
</TABLE>

  The provision for income taxes reflected in the accompanying consolidated
statements of income vary from the amounts that would have been provided by
applying the federal statutory income tax rate to earnings before income taxes
as shown below:

<TABLE>
<CAPTION>
                                                                Year ended
                                                                 June 30,
                                                              ----------------
                                                              1999  2000  2001
                                                              ----  ----  ----
     <S>                                                      <C>   <C>   <C>
     Federal statutory income tax rate......................  35.0% 35.0% 35.0%
     State and local income taxes, net of federal income tax
      benefit                                                  4.9   4.4   3.7
     Amortization of goodwill and other intangibles.........    .5    .4    .5
     Nondeductible expenses.................................    .7    .4    .2
     Other, net.............................................    --   (.1)  (.5)
                                                              ----  ----  ----
      Effective income tax rate.............................  41.1% 40.1% 38.9%
                                                              ====  ====  ====
</TABLE>


                                      36
<PAGE>

  Net deferred income tax assets (liabilities) consist of the following as of
June 30:

<TABLE>
<CAPTION>
                                                         1999    2000    2001
                                                        ------  ------  ------
                                                           (in thousands)
     <S>                                                <C>     <C>     <C>
     Deferred income tax--current...................... $2,476  $2,872  $4,946
     Deferred income tax--long term....................    548   2,046   2,067
                                                        ------  ------  ------
      Net deferred income tax asset.................... $3,024  $4,918  $7,013
                                                        ======  ======  ======
     Consisting of:
       Allowance for doubtful accounts................. $3,850  $5,649  $6,766
       Assigned asset values in excess of tax basis.... (1,585) (1,767) (1,640)
       Depreciation....................................  1,508   1,687   1,295
       Financial reserves and other....................   (749)   (651)    592
                                                        ------  ------  ------
      Net deferred income tax asset.................... $3,024  $4,918  $7,013
                                                        ======  ======  ======
</TABLE>

13.STOCK-BASED COMPENSATION:

  The Company maintains a Stock Incentive Plan for directors, executive
management and key personnel, which provides for the issuance of stock-based
incentive awards with respect to a maximum of 5,000,000 shares of Common
Stock. Options issued to employees under this plan provide for time-based
vesting over four years.

  The Company also has two non-qualified management stock option plans under
which options to purchase a maximum of 1,119,284 shares of Common Stock were
granted to management employees prior to 1996. All outstanding options under
these non-qualified plans are fully vested. Under the terms of the three
plans, the Board of Directors granted options to purchase shares at prices
varying from $1.27 to $32.00 per share, representing the fair market value at
the time of the grant.

  The Company also has an employee stock purchase plan. The plan allows
eligible employees of the Company to purchase up to an aggregate of 1,500,000
shares of Common Stock at quarterly intervals through periodic payroll
deduction. The number of shares of Common Stock issued under this plan was
37,620, 59,800, and 31,712 in 1999, 2000 and 2001, respectively.

  The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation
expense for the stock option and stock purchase plans been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

<TABLE>
<CAPTION>
                                                        1999    2000    2001
                                                       ------- ------- -------
     <S>                                   <C>         <C>     <C>     <C>
     Net income (in 000's):............... As reported $18,752 $22,530 $28,978
                                           Pro forma   $16,850 $19,421 $25,402
     Basic EPS:........................... As reported $   .64 $   .78 $   .97
                                           Pro forma   $   .57 $   .67 $   .85
     Diluted EPS:......................... As reported $   .61 $   .75 $   .93
                                           Pro forma   $   .55 $   .65 $   .82
</TABLE>

                                      37
<PAGE>

Summary of Stock Options

<TABLE>
<CAPTION>
                                 1999               2000               2001
                          ------------------ ------------------ ------------------
                                    Weighted           Weighted           Weighted
                                    Average            Average            Average
                                    Exercise           Exercise           Exercise
                           Options   Price    Options   Price    Options   Price
                          --------- -------- --------- -------- --------- --------
<S>                       <C>       <C>      <C>       <C>      <C>       <C>
Outstanding, beginning
 of year................  2,110,240  $ 5.21  2,872,653 $ 10.11  3,768,991 $ 10.25
Granted.................  1,372,523   15.54  1,253,500    9.47    262,000   29.74
Exercised...............    544,610    4.42    270,392    4.44  1,352,519    8.12
Forfeited...............     65,500   13.29     86,770   12.72    110,498   11.47
                          ---------  ------  --------- -------  --------- -------
Outstanding, end of
 year...................  2,872,653  $10.11  3,768,991 $ 10.25  2,567,974 $ 13.30
                          =========  ======  ========= =======  ========= =======
Exercisable, end of
 year...................  1,031,753          1,403,885          1,122,932
                          =========          =========          =========
Weighted average fair
 value of options grant-
 ed*....................  $    7.97          $    5.58          $   17.54
                          =========          =========          =========
</TABLE>

<TABLE>
<CAPTION>
                       Options Outstanding                       Options Exercisable
     -------------------------------------------------------------------------------
                                           Weighted-
                                            Average    Weighted-           Weighted-
                                           Remaining    Average             Average
                                          Contractual  Exercise            Exercise
     Range of Exercise Prices    Options  Life (years)   Price    Options    Price
     ------------------------   --------- -----------  --------- --------- ---------
     <S>                        <C>       <C>          <C>       <C>       <C>
     $ 1.75--$ 1.75..........      12,000    1.00       $ 1.75      12,000  $ 1.75
       2.85--  3.60..........      78,028    2.56         2.98      78,028    2.98
       7.50--  9.38..........   1,252,246    7.75         8.97     522,679    8.40
      12.38-- 18.50..........     965,200    7.27        15.38     503,475   15.33
      19.38-- 28.00..........      17,500    7.63        21.35       6,750   19.38
      30.13-- 32.00..........     243,000    9.37        30.68          --      --
                                ---------    ----       ------   ---------  ------
                                2,567,974    7.53       $13.30   1,122,932  $11.12
                                =========    ====       ======   =========  ======
</TABLE>
--------
*  The fair value of each option granted is estimated on the date of grant
   using the Black-Scholes option pricing model with the following weighted
   average assumptions for grants:

<TABLE>
<CAPTION>
                                                               1999  2000  2001
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Risk-free interest rate.................................. 4.97% 6.45% 5.79%
     Expected dividend yield..................................    0     0     0
     Expected life of options (years).........................    6     6     6
     Expected volatility rate................................. 46.0% 55.0% 56.0%
</TABLE>

14.SUBSEQUENT EVENTS -- (UNAUDITED):

  Subsequent to June 30, 2001, the following transactions occurred:

  On July 9, 2001, the Company signed a merger agreement with Argosy Education
Group, Inc., a leading provider of postgraduate professional education,
headquartered in Chicago, IL. The merger agreement states that EDMC will
acquire all of the shares of Argosy for $12.00 cash per share for the
approximately 6.5 million shares outstanding. This transaction is expected to
close by the end of calendar year 2001 and is subject to obtaining certain
regulatory approvals.

  On July 25, 2001, the Company signed a purchase agreement acquiring the
assets of The International Fine Arts College located in Miami, Florida. This
transaction closed on September 5, 2001 (subject to final approval from the
Department of Education).


                                      38
<PAGE>

  On September 17, 2001, the Company signed an agreement to purchase certain
assets of ITI Education Corporation (ITI), based in Halifax, Nova Scotia,
Canada. This transaction is expected to close by the end of calendar year 2001
and is subject to obtaining certain regulatory approvals.

  The acquisition of these entities will be accounted for in accordance with
SFAS 141.

  The Company and its lenders amended and restated the Credit Agreement,
effective September 20, 2001, to increase allowable borrowings from $100
million to $200 million. The Amended and Restated Credit Agreement, which will
expire September 20, 2004, is secured by certain assets of the Company and
provides the Company the ability to borrow up to $150 million on a revolving
basis and $50 million in the form of a term loan (collectively, the "Secured
Credit Facilities"). The Secured Credit Facilities contain the customary
covenants that, among other matters, require the Company to meet specified
financial ratios, restrict the repurchase of Common Stock and limit the
incurrence of additional indebtedness.

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

  Not applicable.

                                      39
<PAGE>

                                   PART III

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

  The information required by this Item will be contained in the Proxy
Statement under the captions "Nominees as Directors for Terms Expiring at the
2004 Annual Meeting of Shareholders," "Directors Continuing in Office,"
"Executive Officers of the Company," and "Section 16(a) Beneficial Ownership
Reporting Compliance," and is incorporated herein by reference.

ITEM 11--EXECUTIVE COMPENSATION

  The information required by this Item will be contained in the Proxy
Statement under the captions "Compensation of Executive Officers," "Directors'
Compensation," "Compensation Committee Interlocks and Insider Participants"
and "Employment Agreements," and is incorporated herein by reference.

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this Item will be contained in the Proxy
Statement under the caption "Security Ownership," and is incorporated herein
by reference.

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this Item will be contained in the Proxy
Statement under the caption "Certain Transactions," and is incorporated herein
by reference.

                                      40
<PAGE>

                                    PART IV

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

  (a) The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this
Form 10-K are filed herewith or are incorporated herein by reference.

  (1) Financial Statements:

    The following financial statements of the Company and its subsidiaries
    are included in Part II, Item 8, on pages 24 through 39 of this Form
    10-K.

    Report of Independent Public Accountants

    Consolidated Balance Sheets for years ended June 30, 2000 and 2001

    Consolidated Statements of Income for years ended June 30, 1999, 2000
    and 2001

    Consolidated Statements of Cash Flows for years ended June 30, 1999,
    2000 and 2001

    Consolidated Statements of Shareholders' Investment for years ended
    June 30, 1999, 2000 and 2001

    Notes to Consolidated Financial Statements

  (2) Supplemental Financial Statement Schedules

    Valuation and Qualifying Accounts, on page S-1 of this Form 10-K, is
    filed herewith.

  (b) No reports on Form 8-K were filed during the three months ended June
      30, 2001.

                                      41
<PAGE>

                                  SIGNATURES

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

                                               EDUCATION MANAGEMENT CORPORATION

                                                    By: /s/ Robert B. Knutson
                                                  -----------------------------
                                                        Robert B. Knutson
                                                  Chairman and Chief Executive
                                                             Officer

Date: September 28, 2001

  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.

Signatures                             Title                   Date

        s/ Robert B. Knutson           Chairman and Chief      September 28,
-------------------------------------   Executive Officer;     2001
Robert B. Knutson                       Director

        s/ Robert P. Gioella           President and Chief     September 28,
-------------------------------------   Operating Officer;     2001
Robert P. Gioella                       Director

      s/ John R. McKernan, Jr.         Vice Chairman;          September 28,
-------------------------------------   Director               2001
John R. McKernan, Jr.

        s/ Robert T. McDowell          Executive Vice          September 28,
-------------------------------------   President and Chief    2001
Robert T. McDowell                      Financial Officer

         s/ Robert H. Atwell           Director                September 28,
-------------------------------------                          2001
Robert H. Atwell

       s/ James J. Burke, Jr.          Director                September 28,
-------------------------------------                          2001
James J. Burke, Jr.

     s/ William M. Campbell, III       Director                September 28,
-------------------------------------                          2001
William M. Campbell, III

        s/ Albert Greenstone           Director                September 28,
-------------------------------------                          2001
Albert Greenstone

        s/ Miryam L. Knutson           Director                September 28,
-------------------------------------                          2001
Miryam L. Knutson

       s/ James S. Pasman, Jr.         Director                September 28,
-------------------------------------                          2001
James S. Pasman, Jr.

      s/ Daniel M. Fitzpatrick         Vice President and      September 28,
-------------------------------------   Controller             2001
Daniel M. Fitzpatrick


                                      42
<PAGE>

                                 EXHIBIT INDEX

Exhibit
Number                 Exhibit                            Method of Filing
-------                -------                           ------ ----------

3.01   Amended and Restated Articles of                  Incorporated herein by
       Incorporation                                     reference to Exhibit
                                                         3.01 to the Annual
                                                         Report on Form 10-K for
                                                         the year ended June 30,
                                                         1997 (the "1997 Form
                                                         10-K")

3.02   Articles of Amendment filed on February 4,        Incorporated herein by
       1997                                              reference to Exhibit
                                                         3.02 to the 1997 Form
                                                         10-K

3.03   Restated By-laws                                  Incorporated herein by
                                                         reference to Exhibit
                                                         3.03 to the 1997 Form
                                                         10-K

4.01   Specimen Common Stock Certificate                 Incorporated herein by
                                                         reference to Exhibit
                                                         4.01 to Amendment No. 3
                                                         filed on October 28,
                                                         1996 to the
                                                         Registration Statement
                                                         on Form S-1 (File No.
                                                         333-10385) filed on
                                                         August 19, 1996 (the
                                                         "Form S-1")

4.02   Rights Agreement, dated as of October 1,          Incorporated herein by
       1996, between Education Management                reference to Exhibit
       Corporation and Mellon Bank, N.A                  4.02 to the 1997 Form
                                                         10-K

4.03   Amendment No. 1, dated November 9, 1999, to       Incorporated herein by
       the Rights Agreement dated as of October 1,       reference to Exhibit
       1996 between the Company and ChaseMellon          4.01 to Quarterly
       Shareholder Services, L.L.C., as Rights Agent     Report on Form 10-Q for
                                                         the quarter ended
                                                         September 30, 1999
                                                         (the "September 30,
                                                         1999 10-Q")

4.04   Letter Agreement dated November 9, 1999 by        Incorporated herein by
       and among the Company, Baron Capital Group,       reference to Exhibit
       Inc., BAMCO, Inc., Baron Capital Management       4.02 to the September
       Inc. and Ronald Baron                             30, 1999 10-Q

4.05   Credit Agreement, dated February 18, 2000,        Incorporated herein by
       among Education Management Corporation,           reference to Exhibit
       certain banks, National City Bank of              4.01 to Quarterly
       Pennsylvania and First Union National Bank        Report on Form 10-Q for
                                                         the quarter ended March
                                                         31, 2000 (the "March
                                                         31, 2000 Form 10-Q")

4.06   First Amendment to Credit Agreement, dated        Incorporated herein by
       March 31, 2000 among Education Management         reference to Exhibit
       Corporation, certain banks, National City         4.02 to the March 2000
       Bank of Pennsylvania and First Union National     Form 10-Q
       Bank

10.01  Education Management Corporation Retirement       Filed herewith*
       Plan, amended and restated as of August 1,
       2001

10.02  Education Management Corporation Management       Incorporated herein by
       Incentive Stock Option Plan, effective            reference to Exhibit
       November 11, 1993                                 10.05 to the Form S-1*

                                      E-1
<PAGE>

Exhibit
Number               Exhibit                                Method of Filing
-----                -------                                ----------------

10.03  EMC Holdings, Inc. Management Incentive Stock   Incorporated herein by
       Option Plan, effective July 1, 1990             reference to Exhibit
                                                       10.06 to Amendment No. 1*

10.04  Form of Management Incentive Stock Option       Incorporated herein by
       Agreement, dated various dates, between EMC     reference to Exhibit
       Holdings, Inc. and various management           10.07 to Amendment No. 1*
       employees

10.05  Form of Amendment to Management Incentive       Incorporated herein by
       Stock Option Agreement, dated January 19,       reference to Exhibit
       1995, among Education Management Corporation    10.08 to Amendment No. 1*
       and various management employees

10.06  Education Management Corporation Deferred       Filed herewith*
       Compensation Plan amended and restated as of
       April 1, 2000

10.07  1996 Employee Stock Purchase Plan               Incorporated herein by
                                                       reference to Exhibit
                                                       10.12 to Amendment No. 1

10.08  Education Management Corporation 1996 Stock     Incorporated herein by
       Incentive Plan                                  reference to Exhibit
                                                       10.13 to Amendment No. 1*

10.09  Third Amended and Restated Employment           Incorporated herein by
       Agreement, dated as of September 8, 1999        reference to Exhibit
       between Robert B. Knutson and Education         10.09 to the 1999 Form
       Management Corporation                          10-K*

10.10  Form of Employment Agreement, dated as of       Incorporated herein by
       June 4 and September 8, 1999, between certain   reference to Exhibit
       executives and Education Management             10.10 to the 1999 Form
       Corporation                                     10-K*

10.11  Form of EMC-Art Institutes International,       Incorporated herein by
       Inc. Director's and/or Officer's                reference to Exhibit
       Indemnification Agreement                       10.17 to the Form S-1

10.12  Senior Management Team Incentive Compensation   Incorporated herein by
       Plan                                            reference to Exhibit
                                                       10.12 to the 1999 Form
                                                       10-K*

10.13  Common Stock Registration Rights Agreement,     Incorporated herein by
       dated as of August 15, 1996, among Education    reference to Exhibit
       Management Corporation and Marine Midland       10.19 to the 1997 Form
       Bank, Northwestern Mutual Life Insurance        10-K
       Company, National Union Fire Insurance
       Company of Pittsburgh, PA, Merrill Lynch
       Employees LBO Partnership No. I, L.P.,
       Merrill Lynch IBK Positions, Inc., Merrill
       Lynch KECALP L.P., 1986, Merrill Lynch
       Offshore LBO Partnership No. IV, Merrill
       Lynch Capital Corporation, Merrill Lynch
       Capital Appreciation Partnership IV, L.P.,
       Robert B. Knutson and certain other
       individuals

21.01  Material subsidiaries of Education Management   Filed herewith
       Corporation

23.01  Consent of Arthur Andersen LLP                  Filed herewith

--------
* Management contract or compensatory plan or arrangement.

                                      E-2
<PAGE>

   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

  We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Education
Management Corporation and Subsidiaries included in this Form 10-K, and have
issued our report thereon dated July 27, 2001. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14(a)(2) of this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

                                                         s/ Arthur Andersen LLP

Pittsburgh, Pennsylvania
July 27, 2001

                                                                    SCHEDULE II

               EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                              Balance  Additions                      Balance
                                at      Charged                         at
                             Beginning    to                          End of
                             of Period Expenses  Deductions Other(a)  Period
                             --------- --------- ---------- -------  ---------
<S>                          <C>       <C>       <C>        <C>      <C>
Allowance accounts for:
Year ended June 30, 1999
 Uncollectible accounts re-
  ceivable..................  $ 8,318   $5,660    $4,611     $ --     $  9,367
 Estimated future loan loss-
  es........................    1,032      123        --       --        1,155
Year ended June 30, 2000
 Uncollectible accounts re-
  ceivable..................  $ 9,367   $7,551    $2,986     $156     $ 14,088
 Estimated future loan loss-
  es........................    1,155       54        --       --        1,209
Year ended June 30, 2001
 Uncollectible accounts re-
  ceivable..................  $14,088   $9,250    $6,109     $181     $ 17,410
 Estimated future loan loss-
  es........................    1,209       43        --       --        1,252
</TABLE>
--------
(a) Allowance for uncollectible accounts receivable acquired in connection
    with acquisitions of subsidiaries.


                                      S-1