10-K

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, 2002                                                  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.)
210 Sixth Avenue, Pittsburgh, PA	15222
(Address of principal executive offices)	(Zip Code)

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 into Part III of this Form 10-K or any amendment to this Form 10-K.  x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of September 17, 2002 was approximately $961,651,408. The number of shares of Common Stock outstanding on September 17, 2002 was 35,182,296 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 14, 2002 (“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 Items 306 or 402(a)(8) of Regulation S-K.

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 post-secondary education in North America, based on student enrollment and revenue. EDMC has provided career-oriented education for 40 years and its education institutions have over 150,000 alumni. The Company was organized as a Pennsylvania corporation in 1962 and completed its initial public offering in 1996. EDMC’s Art Institutes division (“The Art Institutes”) offers programs in the creative and applied arts. In December 2001, EDMC acquired Argosy Education Group, Inc. (“Argosy”), which owns and operates Argosy University, Western State University College of Law, and Argosy Professional Services. Argosy offers programs in psychology, counseling, education, business, law and the health sciences.

As of June 30, 2002, The Art Institutes consisted of 24 schools in 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, game art and design, animation, video and digital media 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 2002, 21 Art Institutes offered bachelor’s degree programs, and EDMC expects to continue to introduce bachelor’s degree programs at its schools in states that permit proprietary post-secondary institutions to offer such programs. As of fall 2001, The Art Institutes had approximately 32,000 students enrolled.

Founded in 1975, Argosy offers doctoral and master’s programs in clinical psychology, counseling and education. Argosy also offers doctoral, master’s and bachelor’s degree programs in business administration, law degrees, bachelor’s degrees in psychology and associate’s degree programs in various health sciences fields. Argosy operates 13 Argosy University campuses and six extension sites in 11 states, as well as Western State University College of Law in California. Through its Argosy Professional Services division, Argosy also provides courses and materials for post-graduate licensure examinations in human services fields and provides continuing education courses for K-12 educators. As of fall 2001, Argosy University and Western State College of Law had approximately 5,800 students enrolled.

In November 2001, EDMC acquired ITI Information Technology Institute Incorporated (“ITI”), a Canadian company offering post-graduate education programs in Halifax, Nova Scotia (this location has since been

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closed), Toronto and Vancouver. ITI’s programs teach students to apply technology to business problems. At June 30, 2002, ITI was operated as a division of Argosy. As of fall 2001, ITI had approximately 400 students enrolled.

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 experienced professionals and assisting students with job placement.

Student Recruitment and Marketing

The Art Institutes.    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 2002 referrals accounted for 32% of new student enrollment at The Art Institutes, the Company’s web sites accounted for 25%, high school recruitment programs accounted for 18%, broadcast advertising accounted for 15%, print media accounted for 5%, direct mail efforts accounted for 3% and international marketing accounted for less than 1%. The remainder was classified as miscellaneous.

In fiscal 2002, The Art Institutes’ marketing efforts generated inquiries from approximately 410,000 qualified prospective students. The Art Institutes’ inquiry-to-application conversion ratio decreased from 9.1% in fiscal 2001 to 8.8% in fiscal 2002, and the applicant-to-new-student ratio was 63.8% for fiscal 2001 and 61.7% for fiscal 2002.

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 and other inquiry-generating activities. In fiscal 2002, representatives visited over 13,000 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.

Argosy.    Argosy seeks to attract students with both the motivation and the ability to complete the programs offered by its schools. To generate interest, the Company engages in a broad range of activities to inform potential students and their parents about its schools and programs of study.

The general reputation of Argosy’s schools and referrals from current students, alumni and employers are the largest sources of new students. The Company also employs marketing tools such as its web sites and creates publications and other promotional materials for Argosy’s schools, participates in school fairs and uses other traditional marketing techniques common to undergraduate and post-graduate institutions.

Student Admissions and Retention

The Art Institutes.    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.

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Art Institute students are of varying ages and backgrounds. For fiscal 2002, approximately 32% 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.

Art Institute students 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 65.7% in fiscal 2001 and 66.3% in fiscal 2002.

Argosy.    Argosy’s admissions objective is to achieve controlled student enrollment growth while consistently maintaining the integrity and quality of its academic programs. At each of Argosy’s schools, student admissions are overseen by a committee, consisting principally of members of the faculty, that reviews each application and makes admissions decisions. Argosy’s education programs operate with varying degrees of selectivity. Admissions criteria for such programs include a combination of prior academic record, performance on an admissions essay and work experience. Other programs are likely to be beneficial to anyone who possesses the necessary qualifications and chooses to enroll. Those programs tend to be less selective; however, Argosy does screen students both for their commitment to completing a particular program of study and their aptitude for the academic subject matter of their chosen program.

The average age of entering students in Argosy programs for the 2001-2002 academic year was 36 for Argosy University and 30 for Western State University College of Law.

At Argosy schools, student retention is considered an entire school’s responsibility, from admissions to faculty and administration to career counseling services. Students are counseled early in the application process to gauge their commitment to completing their chosen course of study. To minimize student withdrawals, faculty and staff members at each campus strive to establish personal relationships with students. Each campus devotes staff resources to advising students regarding academic and financial matters, part-time employment and other matters that may affect their success. While doctoral psychology students have seven years to complete their studies, students generally complete the program in approximately five and one-half years. Since 1997, annual retention rates at the graduate level have averaged 94% and at the undergraduate level have averaged 81%.

ITI’s programs require a baccalaureate degree as a prerequisite to admission. Completion rates for ITI’s programs, which are typically nine months in length, have averaged 93.3% for 2001.

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Education Programs

The Art Institutes.    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 Associate’s Degree Programs Graphic Design Industrial Design Technology Interior Design Bachelor’s Degree Programs Advertising Graphic Design Industrial Design Interior Design Visual Communications Yacht & Marine Design The School of Culinary Arts Associate’s Degree Programs Culinary Arts Restaurant & Catering Management Bachelor’s Degree Programs Culinary Management The School of Media Arts Associate’s Degree Programs Animation Art & Design Audio Production Broadcasting Multimedia & Web Design Photography Video Production Bachelor’s Degree Programs Digital Media Production Film Game Art & Design Media Arts & Animation Multimedia & Web Design Photography Visual Effects & Motion Graphics The School of Fashion Associate’s Degree Programs Apparel Design Fashion Design Fashion Marketing Visual Merchandising Bachelor’s Degree Programs Apparel Design Fashion Design Fashion Marketing & Management

Approximately 40% of the average quarterly student enrollment at The Art Institutes in fiscal 2002 was in bachelor’s degree programs and approximately 54% was in associate’s degree programs. In addition to bachelor’s and associate’s degrees, The International Fine Arts College offers a master’s degree in computer animation.

Approximately 6% of the average quarterly student enrollment at The Art Institutes in fiscal 2002 was in specialized diploma and certificate programs. Academic credits from the specialized diploma programs at The Art Institutes 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. Additionally, at certain Art Institutes the Center for Professional Development offers certificate programs to a wide audience, including alumni seeking advances in their career fields and professionals who wish to add marketable new skill sets.

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Argosy.    The following degree programs are offered by Argosy, organized by discipline.

Psychology and Behavioral Sciences Doctor of Psychology Clinical Psychology Doctor of Education Counseling Psychology Organizational Leadership Pastoral Community Counseling Master of Arts Clinical Psychology Counseling Psychology Forensic Psychology Guidance Counseling Mental Health Counseling Professional Counseling Sport-Exercise Psychology Specialist Degree School Counseling Bachelor of Arts Psychology Law Juris Doctor Education Doctor of Education, Education Specialist, Master of Arts in Education Curriculum & Instruction Educational Leadership Business Doctor of Business Administration, Master of Business Administration, Bachelor of Science Business Administration Organizational Leadership Master of Science Health Science Management Health Sciences Associate of Applied Science Diagnostic Medical Sonography Histotechnology Medical Assisting Veterinary Technology Radiologic Technology Associate of Science Dental Hygiene Medical Laboratory Technician Radiation Therapy

Approximately 60% of the average quarterly student enrollment at Argosy in the period Argosy has been owned by the Company was in doctoral programs, 25% in master’s-level programs, 1% in bachelor’s-level programs and 14% in associate’s degree programs.

Argosy was among the first institutions in the United States to offer the practitioner-focused Doctor of Psychology (“Psy.D.”) degree, as compared to the research-oriented Ph.D. degree. The Psy.D. is a four-year program consisting of one year of classroom training, two years divided between classroom training and fieldwork practicum and a fourth year consisting of a paid internship. The program focuses on practical issues in clinical psychology rather than abstract research topics. For example, fourth-year students prepare a case study as their final project rather than a doctoral dissertation. Clinical M.A. students complete a two-year program, all of which can be carried over into Argosy’s Psy.D. program.

Argosy’s doctoral, master’s, and bachelor-level programs in business administration are offered both part-time and full-time and consist of classes in disciplines such as statistics, economics, accounting and finance. The D.B.A. is a three-year program; the M.B.A. is a two-year program, which may count towards two of the three years required for the D.B.A.; and the bachelor-level programs are two-year degree completion programs.

The master’s and doctoral-education and behavioral sciences programs are offered to professional educators from across the United States. The Ed.D. is a three-year program and the M.Ed. and Ed.S. are two-year programs.

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Argosy also offers post-doctoral certificate programs in clinical psychology, psychopharmacology and sports psychology.

Health Sciences Programs.    These programs typically consist of 12 to 15 months of full-time classroom training and two to six additional months of internship.

Test Preparation.    Argosy Professional Services’ Ventura division publishes materials and holds workshops in cities across the United States to prepare individuals to take various national and state-administered oral and written health care licensure examinations in the fields of psychology, social work, counseling, marriage and family therapy, and marriage, family and child counseling. The programs typically last three to four days.

Continuing Education.    Argosy Professional Services’ Connecting Link division provides graduate-level continuing education courses to educators. It partners with local institutions that approve the instructors and curricula and provide the credit for each of these courses. Students then apply these credits toward career advancement and/or continuing education requirements of their state’s teacher’s license.

ITI.    ITI offers students a nine-month post-graduate applied information technology diploma program that prepares graduates to solve business challenges using technology.

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Graduate Employment

The Art Institutes.    Based on information received from graduating students and employers, the Company believes that students graduating from The Art Institutes during the five calendar years ended December 31, 2001 obtained employment in fields related to their programs of study as follows:

Graduating Classes (Calendar Year)	Number of Available Graduates(1)	Percentage of Available Graduates Who Obtained Employment Related to Program of Study(2)
2001	5,598	86.6%
2000	5,414	90.7
1999	5,279	90.1
1998	4,719	90.9
1997	4,749	87.3

(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 2001, the approximate average starting salaries of graduates of degree and diploma programs at The Art Institutes were as follows: The School of Culinary Arts—$26,277; The School of Design—$27,560; The School of Fashion—$27,083; and The School of Media Arts—$28,347.

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. Employers of Art Institute graduates include numerous small and medium-sized companies, as well as larger companies with a national or international presence. 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.

Argosy.    Argosy estimates that over 90% of its doctoral and health sciences students who graduated in 2001 were employed in their respective fields within six months after graduation. Western State University College of Law and ITI reported employment rates of 88% and 82%, respectively, for the same period. Historically, Argosy did not collect detailed data on graduate placement or salaries; however, Argosy University now plans to implement career services across its campuses over the next three years.

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Accreditation

In the United States, 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.

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 post-secondary institutions. All of EDMC’s U.S. schools are accredited by an accrediting agency recognized by the U.S. Department of Education.

In addition to the accreditations described above, three Art Institutes offer interior design programs that are accredited by the Foundation for Interior Design Education Research (FIDER) and six offer culinary programs accredited by the American Culinary Federation. Seven Argosy University locations have received accreditation by the American Psychological Association for their Doctor of Psychology programs.

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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). No accreditation is shown for ITI Toronto as the Province of Ontario has no accreditation process for post-secondary schools.

School	Location	Calendar Year Established	Fiscal Year EDMC Acquired/ Opened	Accrediting Agency
The Art Institutes
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— Los Angeles	Los Angeles, CA	1997	1998	Accrediting Council of Independent Colleges and Schools (“ACICS”) (as a branch of The Art Institute of Pittsburgh)
The Art Institute of California—Orange County	Orange County, CA	2000	2001	ACICS (as a branch of The Art Institute of Colorado)
The Art Institute of California— San Diego	San Diego, CA	1981	2001	Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”)
The Art Institute of California— San Francisco	San Francisco, CA	1939	1998	ACICS
The Art Institute of Charlotte	Charlotte, NC	1973	2000	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 New York City	New York, NY	1980	1997	ACICS, New York State Board of Regents
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	ACICS
The Art Institute of Portland	Portland, OR	1963	1998	Commission on Colleges and Universities of the Northwest Association of Schools and of Colleges and Universities (“NWASC”)
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 Institute Online	Pittsburgh, PA	1999	2000	Approved by ACICS to offer programs as a division of The Art Institute of Pittsburgh
The Art Institutes International Minnesota	Minneapolis, MN	1964	1997	ACICS

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School	Location	Calendar Year Established	Fiscal Year EDMC Acquired/ Opened	Accrediting Agency
The Illinois Institute of Art— Chicago	Chicago, IL	1916	1996	ACCSCT
The Illinois Institute of Art— Schaumburg	Schaumburg, IL	1983	1996	ACCSCT (as a branch of The Illinois Institute of Art—Chicago)
The International Fine Arts College	Miami, FL	1965	2002	SACS
The New England Institute of Art & Communications	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 (1)	Atlanta, GA	1973	1973	ACICS
Argosy University				Higher Learning Commission of the North Central Association of Colleges and Schools (all locations)
Argosy University/Atlanta	Atlanta, GA	1990	2002
Argosy University/Chicago	Chicago, IL	1976	2002
Argosy University/Chicago Northwest	Rolling Meadows, IL	1979	2002
Argosy University/Dallas	Dallas, TX	2002	2002
Argosy University/Honolulu	Honolulu, HI	1979	2002
Argosy University/Orange County	Orange, CA	1999	2002
Argosy University/Phoenix	Phoenix, AZ	1997	2002
Argosy University/San Francisco	Point Richmond, CA	1998	2002
Argosy University/Sarasota	Sarasota, FL	1969	2002
Argosy University/Seattle	Seattle, WA	1997	2002
Argosy University/Tampa	Tampa, FL	1997	2002
Argosy University/Twin Cities	Bloomington, MN	1961	2002
Argosy University/Washington D.C.	Arlington, VA	1994	2002
Western State University College of Law	Fullerton, CA	1966	2002	Commission on Colleges of the Western Association of Schools and Colleges; provisionally accredited by American Bar Association
ITI Information Technology Institute (2)
ITI Toronto	Toronto, Ontario	1997	2002
ITI Vancouver	Vancouver, British Columbia	1998	2002	Private Post Secondary Education Commission of British Columbia

(1) Programs at this school are being taught out and no new students are being accepted.

(2) A third ITI location, in Halifax, Nova Scotia, has taught out its programs and closed effective September 27, 2002.

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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. As of June 30, 2002, nine of the Company’s schools were required to provide such supplemental reports. Four of these schools must seek the prior approval of their 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 U.S. schools must rely, at least in part, on financial assistance to pay for the cost of their education. In the United States, the largest source of such support is the federal programs of student financial assistance under the 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.

Nature of Federal Support for Post-secondary 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 post-secondary 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 U.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 U.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. Students enrolled in programs higher than a bachelor-level program can borrow up to $18,500 per academic year. Students enrolled in certain graduate-level health professions can receive an additional $12,500 per academic year. Amounts received by students in the Company’s U.S. schools under the Stafford loan program in fiscal 2002 equaled approximately 40% 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 educational expenses) and other aid to which that student is entitled. Amounts received by parents of students in the Company’s U.S. schools under the PLUS loan program in fiscal 2002 equaled approximately 15% 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 2002, Pell grants ranged up to $3,750 per year; beginning on July 1, 2002, the limit was increased to $4,000 per year. Amounts received by students enrolled in the Company’s U.S. schools in fiscal 2002 under the Pell program represented approximately 7% of the Company’s net revenues.

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FSEOG.    FSEOG awards are designed to supplement Pell grants for the neediest students. FSEOG grants at EDMC schools 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 U.S. schools under the FSEOG program in fiscal 2002 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. Eligible graduate students may borrow up to $6,000 in Perkins loans each academic year, with an aggregate maximum of $40,000. Perkins loans have a 5% interest rate and repayment is 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 2002, the Company collected approximately $5.1 million from its former students. In fiscal 2002, the Company’s required matching contribution was approximately $181,948. The Perkins loans disbursed to students in the Company’s U.S. schools in fiscal 2002 represented approximately 1% of the Company’s net revenues.

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. In fiscal 2002, FWS funds represented approximately 1% of the Company’s net revenues.

Legislative Action.    Political and budgetary concerns significantly affect the Title IV Programs. The U.S. Congress must reauthorize the HEA approximately every six years. The most recent reauthorization in October 1998 reauthorized the HEA through 2003. In addition, the U.S. Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. The U.S. Congress can also make changes in the laws affecting Title IV Programs in those annual appropriations bills and in other laws it enacts between HEA reauthorizations. Since a significant percentage of the Company’s revenue is derived from Title IV Programs, any action by the U.S. Congress that significantly reduces Title IV Program funding or the ability of the Company’s schools or students to participate in the Title IV Programs could have a material adverse effect on the Company’s business, results of operations or financial condition. Legislative action may also increase the Company’s administrative costs and require the Company to adjust its practices in order for its schools to comply fully with Title IV Program requirements.

Other Financial Assistance Sources

Students at several of the Company’s U.S. schools participate in state grant programs. In fiscal 2002, approximately 3% of the Company’s net revenues were indirectly derived from state grant programs. In addition, certain students at some of the Company’s U.S. schools receive financial aid provided by the U.S. Department of Veterans Affairs, the U.S. 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 2002, financial assistance from such federal and state programs equaled less than 1% of the Company’s net revenues. The schools also provide institutional scholarships to qualified students. In fiscal 2002, institutional scholarships had a value equal to approximately 3% 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.

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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 2002, alternative loans represented approximately 8% of the Company’s net revenue.

Availability of Lenders

During fiscal 2002, eight lending institutions provided over 95% of all federally guaranteed loans to students attending the Company’s U.S. schools. While the Company believes that other lenders (and/or the William  D. Ford Federal Direct Loan program) 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 every state to ensure that loans are available 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, currently guarantees approximately 70% of all federally guaranteed student loans made to students enrolled at the Company’s U.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 loans it guaranteed, although there can be no assurances in this regard.

Federal Oversight of Title IV Programs.    The Company’s U.S. schools are subject to audits or program compliance reviews by various external agencies, including the U. S. Department of Education, its Office of Inspector General, and state, guaranty and accrediting agencies. The HEA and its implementing regulations also require that an institution’s administration of Title IV Program funds be audited annually by an independent accounting firm. If the U. S. Department of Education or another regulatory agency determines that an institution has improperly disbursed Title IV Program funds or violated a provision of the HEA or its implementing regulations, the affected institution may be required to repay such funds to the U. S. Department of Education or the appropriate state agency or lender and may be assessed an administrative fine. Although EDMC makes all reasonable effort to comply with the HEA and implementing regulations, it cannot guarantee that its interpretation of the relevant rules will be upheld by the U. S. Department of Education in all cases.

If the U. S. Department of Education views a violation as significant, it can also transfer the institution from the advance system of receiving Title IV Program funds to the cash monitoring or reimbursement method of payment, under which a school must disburse its own funds to students and document students’ eligibility for Title IV Program funds.

Violations of Title IV Program requirements also could subject the Company to other civil and criminal sanctions, including a proceeding to impose a fine, place restrictions on an institution’s participation in Title IV Programs or terminate its eligibility to participate in Title IV Programs. Potential restrictions may include a suspension of an institution’s ability to participate in Title IV Programs for up to 60 days and/or a limitation of an institution’s participation in Title IV programs, either by limiting the number or percentage of students enrolled who may participate in Title IV Programs or by limiting the percentage of an institution’s total receipts derived from Title IV Programs. The U. S. Department of Education also may initiate an emergency action to temporarily suspend an institution’s participation in Title IV Programs without advance notice if it determines that a regulatory violation creates an imminent risk of material loss of public funds.

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. EDMC knows of no reason that any of the agencies that accredit its institutions would not be approved as a result of such review. However, 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.

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Cohort Default Rates.    Each institution that participates in the FFEL program must maintain a student loan cohort default rate equal to or less than 25% (50% for the Perkins program) for three consecutive years or it 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 2000, the most recent year for which such rates have been published, the average FFEL cohort default rate for borrowers at all proprietary institutions was 9.4%. For that year, the combined FFEL cohort default rate for all borrowers at the Company’s schools was 7.8% and its individual schools’ rates ranged from 2.1% to 18.5%.

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 by itself 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. Five 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, 2001, the most recent year for which such rates have been calculated. In aggregate, funds from the Perkins program equaled less than 2% of these schools’ net revenues in fiscal 2002. To date, only The Art Institute of Portland has been placed on provisional certification status for this reason, based upon its cohort default rate for Perkins. The U.S. Department of Education has stated that when the Perkins cohort default rate of The Art Institute of Portland is below 30%, the school may request to be removed from provisional status.

Each of the Art Institutes 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. These activities are in addition to the loan servicing and collection activities of FFEL lenders and guaranty agencies. Argosy’s historical default rates have been quite low, and therefore Argosy has engaged in significantly fewer default management activities.

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 EDMC schools that submitted recertification applications during fiscal 2002 received recertification.

During fiscal 2003, The Illinois Institute of Art, The Art Institute of New York City, The Art Institutes International Minnesota, The Art Institute of Charlotte, The New England Institute of Art & Communications and The Art Institute of Portland are scheduled to apply for recertification.

The Art Institute of Charlotte, The New England Institute of Art & Communications, The Art Institute of California—San Diego, The Art Institute of Las Vegas, International Fine Arts College, Argosy University and

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Western State University College of Law 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 cohort default rate being in excess of 30%.

Financial Responsibility Standards.    All institutions participating in Title IV Programs must satisfy certain standards of financial responsibility. Institutions are evaluated for compliance with these 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, 2002, 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—Schaumburg, The Art Institute of Phoenix, The Art Institute of California—Los Angeles, The Art Institute of California—Orange County and The Art Institute of Washington are combined with their main campuses, The Illinois Institute of Art—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. All campuses of Argosy University are also combined for this purpose.

Return of Title IV Funds.    Institutions that receive Title IV funds must follow requirements that ensure the return to the federal student financial aid programs of all unearned funds of a student who withdraws from a program. If refunds are not properly calculated and timely paid, institutions are subject to adverse actions by the U.S. Department of Education. The Company has posted letters of credit for seven of its schools because independent audits indicated that they had been late in the payment of more than 5% of their refunds during at least one of their two most recent fiscal years. The Company has instituted new practices and procedures to expedite refunds of FFEL program funds, including payment by electronic fund transfers.

Administrative Capability Requirements.    Regulations of the U.S. Department of Education specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV Programs. These criteria require, among other things, that the institution comply with all applicable federal student financial aid regulations; have capable and sufficient personnel to administer the Title IV Programs; have acceptable methods of defining and measuring the satisfactory academic progress of its students; provide financial aid counseling to its students; and submit all reports and financial statements required by the regulations. If an institution fails to satisfy any of these criteria, the U.S. Department of Education may require the repayment of federal student financial aid funds; transfer the institution from the advance system of payment of Title IV Program funds to the cash monitoring or reimbursement method of payment; place the institution on provisional certification status; or commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs.

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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. A school’s change of ownership application can be reviewed prior to the change of ownership. If the Department finds the application to be materially complete, the Department may generate a Temporary Program Participation Agreement allowing the school’s students to continue to receive federal funding, subject to the Department’s continued review of the transaction and certain other conditions. Subsequent to the Department’s review of the complete application filed as a result of the transaction, the Department will either deny recertification to the school under the new ownership or recertify the school 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.

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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 U.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 eligibility until the following fiscal year. For the Company’s schools that disbursed federal financial aid during fiscal 2002, the percentage of revenues derived from Title IV Programs ranged from approximately 51% to 81%, with a weighted average of approximately 65%.

Restrictions on Payment of Bonuses, Commissions or Other Incentives.    The HEA and Department of Education regulations forbid institutions from paying a bonus, commission or other incentive payment based directly or indirectly on success in securing financial aid or enrollments to any persons engaged in student recruiting or admissions activities or in making decisions regarding the awarding of student financial assistance. EDMC believes that its compensation plans are in substantial compliance with HEA requirements.

State Authorization and Accreditation Agencies

Each of EDMC’s U.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.

Each of EDMC’s U.S. schools is accredited by a national or regional accreditation agency and some educational programs are also programmatically accredited. The level of regulatory oversight and standards can vary based on the agency. Certain accreditation agencies prescribe standards that are different from those prescribed by the U. S. Department of Education.

If a school does not meet its accreditation or state requirements, its accreditation and/or state licensing could be limited, modified, suspended or terminated. Failure to maintain licensure or accreditation makes a school ineligible to participate in Title IV Programs.

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, establish an additional location of an existing school, or add new educational programs.

Canadian Regulation and Financial Aid

ITI Toronto is registered and in good standing with the Private Career Colleges Division of the Ontario Ministry of Training, Colleges and Universities and is regulated under the Private Career Colleges Act. While there is an assortment of financial aid programs that can assist eligible students in Ontario to attend post-secondary institutions, the largest is a combination of government-subsidized Canada Student Loans and Ontario Student Loans. In Ontario, the Canada and Ontario Student Loans are integrated and provide a maximum $165 Canadian per week of training to students attending a private career college that has been approved for partial student aid and, depending on the student circumstances, up to $500 Canadian per week of training at a private career college approved for full student aid that has met all the requirements for full student loan eligibility. It is expected that ITI Toronto will be approved for full student aid eligibility on or before October 30, 2002.

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ITI Vancouver is registered with and accredited by the Private Post-Secondary Education Commission (PPSEC) of British Columbia. PPSEC is an agency of the British Columbia government that is responsible for the regulation and accreditation of private post-secondary education in the province. As in Ontario, there is an assortment of financial aid programs available, but the largest is a combination of Canadian Student Loan funds and British Columbia Student Loan funds. Students attending ITI Vancouver are eligible for both Canada and British Columbia student aid. Depending on their need and their year in post-secondary education, full-time eligible single students can receive loans/and or grants up to $265 Canadian per week and eligible students with dependents can receive up to $435 Canadian per week.

Both ITI locations must meet eligibility standards to administer these financial aid programs and must comply with extensive regulatory requirements.

Employees

As of June 30, 2002, EDMC employed 3,859 full-time and 1,157 part-time staff and faculty.

Competition

The post-secondary education market is highly fragmented and competitive. The Company’s undergraduate programs compete for students with traditional public and private two-year and four-year colleges and universities and other proprietary schools; its graduate programs also compete with other post-graduate institutions. Many public and private colleges and universities offer programs similar to those offered by the Company. 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.

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.

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ITEM 2—PROPERTIES

The Company’s corporate headquarters are located in Pittsburgh. As of June 30, 2002, EDMC’s schools were located in major metropolitan areas in 16 states and three Canadian provinces (the school in Halifax, Nova Scotia subsequently closed, effective September 27, 2002). Typically, an Art Institute occupies an entire building or several floors or portions of floors in a building. Argosy schools are smaller and typically located in office or commercial buildings.

The Company currently leases the majority of its facilities. It owns a student housing facility in Fort Lauderdale, Florida; buildings occupied by The Art Institutes of Pittsburgh, Colorado and Seattle; buildings occupied by Western State University College of Law in Fullerton, California; and the primary facility of Argosy University in Sarasota, Florida. As of June 30, 2002, the Company owned approximately 473,000 square feet and leased approximately 2,363,000 square feet. The leases have remaining terms ranging from less than one year to 17 years. The Company has secured alternative space for those lease agreements that are nearing expiration.

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.

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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 17, 2002, there were 35,182,296 shares of Common Stock outstanding held by 944 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.

	2001				2002
Three Months Ended	High		Low		High		Low
September 30	$	26.94	$	17.75	$	45.54	$	24.40
December 31		38.38		24.75		39.04		30.05
March 31		37.81		26.06		42.27		33.96
June 30		40.05		28.92		44.12		38.08

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.

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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 below 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 independent auditors, whose reports are filed in response to Item 8 below. The financial statements as of and for the year ended June 30, 2002 were audited by Ernst & Young LLP. The financial statements as of and for the two years ended June 30, 2001 were audited by Arthur Andersen LLP. The summary consolidated income statement data for the years ended June 30, 1998 and 1999 and the summary consolidated balance sheet data as of June 30, 1998, 1999 and 2000 are derived from audited financial statements not included herein. The results presented for fiscal 2002 include results of operations for the acquisitions completed during the fiscal year as of their respective acquisition dates. Note 2 to the consolidated financial statements provides pro forma results as if Argosy had been acquired and consolidated as of July 1, 2000.

	Year ended June 30,
	1998		1999		2000		2001		2002
	(dollars in thousands, except per share amounts)
Income Statement Data:
Net revenues	$	221,732	$	260,805	$	307,249	$	370,681	$	500,576
Net income		14,322		18,752		22,530		28,978		42,314
Per Share Data:
Basic:
Net income	$	.50	$	.64	$	.78	$	.97	$	1.28
Weighted average number of shares outstanding, in thousands(1)		28,908		29,314		28,964		29,742		33,026
Diluted:
Net income	$	.48	$	.61	$	.75	$	.93	$	1.23
Weighted average number of shares outstanding, in thousands(1)		29,852		30,615		29,921		31,016		34,479
Other Data:
Capital expenditures(2)	$	18,814	$	55,892	$	58,149	$	38,822	$	50,371
Enrollment at beginning of fall quarter(3)		18,402		21,133		24,152		27,718		32,180

	As of June 30,
	1998		1999		2000		2001		2002
	(in thousands)
Balance Sheet Data:
Total cash (including restricted cash)	$	47,310	$	32,871	$	39,538	$	47,290	$	86,233
Receivables, net		10,292		12,490		14,931		22,539		30,378
Current assets		65,623		55,709		66,713		83,175		140,042
Total assets		148,783		178,746		240,675		287,540		492,655
Current liabilities		38,097		45,188		62,891		73,897		139,672
Long-term debt (including current portion)		38,382		37,231		64,283		53,660		28,576
Shareholders’ investment		73,325		96,805		112,950		159,949		346,577

(1) The weighted average shares outstanding used to calculate basic income per share does not include potentially dilutive securities (such as stock options and warrants). 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.

(2) Capital expenditures for fiscal 2000, 2001 and 2002 reflect approximately $13.2 million, $4.5 million and $9.5 million included in accounts payable at year-end, respectively.

(3) Excludes students enrolled at NCPT, which is teaching out programs for its current students. NCPT had 361, 385, 350, 281, and 195 students enrolled at the beginning of the fall quarters of fiscal 1998, 1999, 2000, 2001, and 2002, respectively.

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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 private post-secondary education in North America, based on student enrollment and revenue. EDMC’s Art Institutes offer master’s, bachelor’s, associate’s and non-degree programs in the areas of design, media arts, fashion and culinary arts. In December 2001, EDMC acquired Argosy, which owns and operates Argosy University, Western State University College of Law, and Argosy Professional Services. Argosy provides graduate and undergraduate degree programs in various fields, including psychology, counseling, education, business, law and the health sciences. The Company has provided career-oriented education programs for 40 years.

Net revenues are presented after deducting refunds, scholarships and other adjustments. Net revenues increased 62.9% to $500.6 million in 2002 from $307.2 million in 2000. Income before interest and taxes increased 79.9% to $69.0 million in 2002 from $38.3 million in 2000. Net income increased by 87.8% to $42.3 million in 2002 from $22.5 million in 2000.

Art Institute net revenues increased 48.9% to $457.5 million in 2002 from $307.2 million in 2000. Income before interest and taxes for The Art Institutes increased 76.8% to $67.8 million in 2002 from $38.3 million in 2000. Average quarterly student enrollment at The Art Institutes was 29,399 in 2002 compared to 21,933 in 2000, an increase of 34.0%. 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 Art Institutes’ revenues consist of tuition and fees, student housing fees and bookstore and restaurant sales in connection with culinary programs. In 2002, The Art Institutes derived 89.7% of 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. Bookstore 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 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 at The Art Institutes 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.

Argosy’s results of operations are included in the consolidated financial statements from the date of acquisition. Argosy, including ITI, contributed $43.1 million in net revenues and $1.2 million in income before interest and taxes to the Company’s consolidated results for 2002. Argosy’s average student enrollment was 6,121 during the portion of fiscal 2002 that Argosy was owned by the Company.

Argosy’s revenues consist of tuition, workshop fees and sale of related study materials. Argosy derived approximately 95.2% of its net revenues from net tuition and fees paid by or on behalf of its students in fiscal 2002. Argosy’s schools charge tuition at varying amounts, depending on the particular school and upon the type of program and specific curriculum. Students begin courses at Argosy University at terms typically beginning in January, April, July and September.

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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. Rates at The Art Institutes increased by approximately 7% during 2002, while rates at Argosy increased by approximately 6%. Tuition rates vary by geographic region, but are generally consistent from program to program at the respective schools.

The majority of students at The Art Institutes and Argosy 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, 2002, approximately 65% 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 occupancy costs, information systems costs, bad debt expense and depreciation and amortization of property and equipment. The Art Institutes’ faculty comprised approximately 49% full-time and 51% part-time employees for 2001 and approximately 50% full-time and 50% part-time employees for 2002. Argosy’s faculty comprised approximately 83% full-time and 17% part-time employees for 2002.

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. 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 write-offs and impairment of goodwill. These intangible assets arose principally from the acquisitions of the schools discussed below.

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. The school was renamed The New England Institute of Art & 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. The school was renamed The Art Institute of California—San Diego.

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

In September 2001, the Company purchased the assets of International Fine Arts College (“IFAC”) located in Miami, Florida for approximately $25.0 million in cash.

In November 2001, the Company purchased certain assets of ITI from ITI’s court-appointed receiver. The purchase agreement required EDMC to fund certain operating expenses prior to the closing of the acquisition. The funded expenses and purchase price totaled approximately $6.0 million.

In December 2001, the Company completed its acquisition of Argosy. In September 2001, the Company had closed in escrow its purchase of 4.9 million shares of Argosy from its controlling shareholder. The aggregate

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cash purchase price for these shares was $58.8 million. The Company acquired the approximately 1.6 million remaining Argosy shares outstanding for $12.00 per share at the closing of the acquisition in December 2001. The total cash paid for Argosy was approximately $79.3 million.

The acquisitions completed in fiscal 2002 were accounted for as purchases in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), which the Company adopted in the first quarter of fiscal 2002.

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 these newer schools were approximately $9.6 million and $8.9 million in fiscal 2001 and 2002, respectively. Several of the Company’s recent acquisitions in the Art Institutes division were profitable for 2002 and are not included in the loss results above. Included with the 2002 operating losses are approximately $884,000 of costs associated with the closure of the Halifax, Nova Scotia location of ITI.

Results of Operations

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

	Year ended June 30,
	2000		2001		2002
Net revenues	100.0	%	100.0	%	100.0	%
Costs and expenses:
Educational services	65.5		65.4		64.9
General and administrative	21.5		20.7		20.5
Amortization of intangible assets	0.5		0.5		0.8
	87.5		86.6		86.2
Income before interest and taxes	12.5		13.4		13.8
Interest expense, net	0.3		0.6		0.3
Income before income taxes	12.2		12.8		13.5
Provision for income taxes	4.9		5.0		5.0
Net income	7.3	%	7.8	%	8.5	%

Year Ended June 30, 2002 Compared with Year Ended June 30, 2001

Net Revenues

Net revenues increased by 35.0% to $500.6 million in 2002 from $370.7 million in 2001 primarily due to an increase of 28.7% in student enrollment to 32,545 from 25,284 in the prior year accomplished through growth at existing locations and acquisitions accompanied by tuition increases.

The revenue increase of 23.4% at The Art Institutes was primarily due to an increase in average quarterly student enrollment of 16.3% ($37.9 million) and tuition increases of approximately 7% ($39.5 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 $13,372 in 2002 from $12,584 in 2001. Average enrollment at locations operated by the Company for two years or more increased 8.4% in 2002 to 26,620 compared to 24,561 in 2001. In addition to the growth at more established locations, recent acquisitions have contributed approximately $22.9 million or 6.1% to the growth in net revenues. Fiscal 2002 includes a full year of revenue for The Art Institute of California—San Diego and The Art Institute of Las Vegas, neither of which the Company owned for the entire comparable prior year. Additionally, IFAC was purchased in September 2001.

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Net housing revenues increased by 23.9% to $26.9 million in 2002 from $21.9 million in 2001 and revenues from the sale of educational materials in 2002 increased by 15.8% to $18.3 million. Both increased primarily as a result of higher average student enrollment.

Argosy’s net revenues were approximately $43.1 million in 2002. The Company did not own Argosy in the comparable prior year. Argosy’s average enrollment was 6,121 for the portion of fiscal 2002 that it was owned by EDMC. The average tuition rate for a student attending classes at Argosy was approximately $12,000 for 2002. Argosy does not have student housing revenue.

Overall refunds increased to $11.5 million in 2002 from $8.9 million in 2001.

Educational Services

Educational services expense increased by $82.7 million, or 34.1%, to $325.0 million in 2002 from $242.3 million in 2001. The increase was primarily due to additional costs required to service higher student enrollment, accompanied by normal cost increases for wages and other services.

The Art Institutes’ educational services expenses increased by $56.9 million, or 23.5%, to $299.2 million in 2002 from $242.3 million in 2001. Approximately $34.0 million of the increase in educational services expenses at the Art Institutes is attributable to schools owned by EDMC prior to 2001 and $20.7 million is attributable to schools added in 2001 and 2002. Overall, the primary components of the increase include higher salaries and facility-related costs such as rent and depreciation expense.

As a percentage of net revenues, the Art Institutes’ educational services expense remained constant at 65.4% for both 2001 and 2002.

Argosy’s educational services expenses were approximately $25.8 million for 2002, representing 59.9% of Argosy’s net revenues. This balance includes a charge of approximately $627,000 related to the planned closure of the Halifax, Nova Scotia location of ITI. Argosy’s educational services costs are typically lower than the Art Institutes as a percent of net revenues.

General and Administrative

General and administrative expense increased by $25.8 million or 33.6%, to $102.5 million in 2002 from $76.7 million in 2001. The increase is primarily due to incremental marketing and student admissions expenses incurred to generate higher student enrollment at the schools.

The Art Institutes’ general and administrative expenses increased by $11.6 million, or 15.1%, to $88.3 million in 2002 from $76.7 million in 2001. Approximately $5.3 million of the increase in general and administrative expenses at The Art Institutes is attributable to schools owned by EDMC prior to 2001 and $5.8 million is attributable to schools added in 2001 and 2002. Overall, the primary components of this increase include higher expenses for employee compensation and marketing and advertising.

As a percentage of net revenues, the Art Institutes’ general and administrative expense decreased approximately 140 basis points between years from 20.7% in 2001 to 19.3% in 2002. The improvement is attributable to reductions in legal costs and marketing and advertising as a percentage of net revenues.

Argosy’s general and administrative expenses were approximately $14.2 million for 2002, and 32.9% as a percentage of their revenues. This balance includes a charge of approximately $257,000 related to the teach-out of the Halifax, Nova Scotia location of ITI. Argosy’s general and administrative costs are typically higher than the Art Institutes as a percentage of net revenues.

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Amortization of Intangible Assets

Amortization of intangible assets increased by $2.1 million, or 107.2%, to $4.1 million in 2002 from $2.0 million in 2001, as a result of additional amortization associated with the acquisitions completed during 2001 and 2002 and the amortization of ongoing curriculum developed at The Art Institute Online. Additionally, during fiscal 2002 a goodwill impairment charge of approximately $1.2 million is included with amortization of intangible assets in connection with the planned closures of NCPT and of the Halifax, Nova Scotia location of ITI. The effect of these increases for the year was partially offset by a decrease of approximately $1.0 million in amortization of goodwill as a result of the Company’s adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.

Interest Expense, Net

The Company had net interest expense of $1.6 million in 2002 as compared to $2.3 million in 2001. The Company’s outstanding borrowings were reduced significantly at the end of the second quarter of fiscal 2002 due to cash received in a public offering of the Company’s Common Stock (the “Offering”). The average outstanding debt balance was approximately $10.0 million in 2002, down from $28.2 million in 2001. Additionally, the average borrowing rate decreased approximately 220 basis points, from 6.7% in 2001 to 4.5% in 2002. Net interest expense includes, among other items, the amortization of fees paid in connection with amendment of the Company’s credit agreement (the “Credit Agreement”) during fiscal 2002.

Provision for Income Taxes

The Company’s effective tax rate was 37.2% in 2002, compared to 38.9% in 2001. The income tax provision for 2002 was reduced by approximately $0.8 million resulting from a one-time tax credit for the rehabilitation of the building occupied by The Art Institute of Pittsburgh. Without this non-recurring credit, the effective tax rate would have been 38.3% for the year. The effective rates differed from the combined federal and state statutory rates due to the net impact of non-deductible expenses, the tax credit, the tax liability adjustment and an increase in the valuation allowance on the deferred tax asset.

Net Income

Net income increased by $13.3 million or 46.0% to $42.3 million in 2002 from $29.0 million in 2001. The increase resulted from improved operations at the Company’s schools owned prior to 2001, the impact of the Argosy acquisition, reduced interest expense, and a lower effective income tax rate, offset by increased amortization of intangible assets.

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 from $8.6 million in 2000 to $8.9 million in 2001. As a percentage of gross revenue, refunds decreased from 2000.

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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). 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 Intangible Assets

Amortization of intangible assets 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 development of on-line curriculum. Goodwill amortization was approximately $1.0 million for fiscal 2001.

Interest Expense (Income), Net

The Company had net interest expense of $2.3 million in 2001 as compared to net interest expense of $726,000 in 2000. The average outstanding debt balance increased from $15.6 million in 2000 to $28.2 million in 2001.

Provision for Income Taxes

The Company’s effective tax rate decreased to 38.9% in 2001 from 40.1% in 2000. This reduction 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.

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.

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 post-secondary 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.

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Quarterly Financial Results (unaudited)

The following table sets forth the Company’s quarterly results for 2001 and 2002.

	Sept. 30 (Summer)		Dec. 31 (Fall)		Mar. 31 (Winter)		June 30 (Spring)
	(dollars in thousands, except per share data)
2001
Net revenues	$	72,561	$	103,112	$	100,366	$	94,642
Income before interest and income 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
2002
Net revenues	$	91,874	$	129,490	$	145,710	$	133,502
Income before interest and income taxes	$	3,709	$	31,955	$	23,378	$	9,925
Income before income taxes	$	3,230	$	31,407	$	23,100	$	9,678
Net income	$	1,983	$	19,284	$	14,933	$	6,114
Earnings per share
—Basic	$	.07	$	.61	$	.43	$	.17
—Diluted	$	.06	$	.58	$	.41	$	.17

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. In December 2001, the Company closed the Offering for $32.50 per share. A total of 5,175,000 shares were sold, including 4,164,681 newly-issued shares sold by the Company and 1,010,319 shares sold by members of the Company’s senior management and board of directors. In the Offering, the Company received total net proceeds, after deduction of expenses and underwriting discounts payable by the Company, of approximately $127.6 million. The proceeds were used to repay outstanding indebtedness, fund the acquisition of Argosy and for general purposes.

Cash flow from operations was $47.7 million, $71.4 million, and $92.8 million for 2000, 2001 and 2002, respectively. The increase of $21.4 million in cash flow from operations for fiscal 2002 is due primarily to the increases in net income and depreciation and amortization. Cash flow from operating and investing activities does not reflect capital expenditures of approximately $13.2 million, $4.5 million and $9.5 million, which are included in accounts payable as of June 30, 2000, 2001 and 2002, respectively. Additionally, cash flow from operating and financing activities does not reflect income tax deductions related to the exercise of options of $0.9 million, $9.8 million and $5.9 million in 2000, 2001 and 2002, respectively. These deductions do not affect 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 approximately $370,000 as of June 30, 2002, down from $9.3 million as of June 30, 2001. The decrease in working capital is due primarily to the classification of borrowings under the revolving credit facility as a current liability and the timing of payments made for capital expenditures. Prior to the Offering, the Company traditionally had outstanding borrowings under the revolving credit facility. The classification of such outstanding borrowings was based upon the repayment provisions under the credit agreement and expected usage of the facility. Subsequent to the receipt of the net proceeds of the Offering, the Company has utilized borrowings only occasionally. The borrowings were repaid in full subsequent to June 30, 2002 and accordingly were included with current liabilities in the accompanying consolidated balance sheet. Purchases of property and equipment included in accounts payable increased approximately $5.0 million from June 30, 2001 to June 30, 2002.

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As of June 30, 2002, gross trade accounts receivable increased by $13.8 million, or 37.2%, to $50.8 million from the prior year of $37.0 million primarily due to acquisitions and the higher enrollment and tuition rates. Argosy receivables of approximately $5.0 million contributed to this change. Additionally, certain recently acquired schools within the Art Institutes division 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 $17.4 million and $24.0 million as of June 30, 2001 and 2002, respectively. This represents increases of 23.6%, and 37.9% in the allowance for doubtful accounts for 2001 and 2002, 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 balances in collection), then establishing a reserve based on the likelihood of collection (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.

Advanced payments increased approximately $22.2 million to $70.6 million at June 30, 2002. 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 $1.7 and $7.6 million was included with advanced payments as of June 30, 2001 and 2002, respectively.

The Company’s Credit Agreement which was amended and restated effective September 20, 2001, to increase allowable borrowing from $100 million to $200 million and provided the banks with a security interest in certain owned real estate and the stock of certain subsidiaries. The Credit Agreement provides the Company with the ability to borrow up to $150 million on a revolving basis and $50 million in the form of a term loan and will expire on September 20, 2004. Upon the closing of the Offering, the term loan commitment was no longer available. The security interests were released on May 29, 2002 as the Company has met certain financial covenants. Certain outstanding letters of credit reduce this facility. The Credit Agreement contains 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. As of June 30, 2002, the Company had approximately $124.2 million of borrowing capacity available under the Credit Agreement. As of June 30, 2002, the Company was in compliance with all covenants under the Credit Agreement and the interest rate for borrowings under the Credit Agreement was 3.0% at June 30, 2002.

The following table describes the Company’s commitments under various contracts and agreements (in thousands):

	Total amounts committed		Payments due by period
			Less than 1 year		2–3 years		4–5 years		Over 5 years
Line of credit borrowings	$	25,000	$	25,000	$	—	$	—	$	—
Standby letters of credit(1)		826		—		—		—		—
Mortgage obligation		3,576		76		162		3,338		—
Operating leases		493,974		56,507		100,447		94,567		242,453
Total commitments	$	523,376	$	81,583	$	100,609	$	97,905	$	242,453

(1) The Company does not anticipate these letters of credit will be drawn on.

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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.

Capital Expenditures

Capital expenditures made during the three years ended June 30, 2002 reflect the implementation of the Company’s initiatives emphasizing the addition of new schools and education programs, investment in classroom technology and the acquisition of Argosy. The Company’s capital expenditures (on an accrual basis) were $58.1 million, $38.8 million and $50.4 million, for 2000, 2001 and 2002, respectively. Included in the Company’s fiscal 2002 capital expenditures was approximately $1.5 million for Argosy. The Company expects that total capital spending for 2003 will increase slightly as a percentage of net revenues, as compared to 2002. The Company anticipates that these expenditures will be financed primarily through cash flow from operations and cash on-hand, supplemented as needed with borrowings under the Credit Agreement. The anticipated expenditures relate principally to the investment in schools acquired or started during the previous several years and to be added in 2003, continued expansion and improvements to current facilities, new culinary arts programs, 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 62%, 60% and 65% of its net revenues from Title IV Programs in 2000, 2001 and 2002, respectively. 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, ten 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, 2002.

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Critical Accounting Policies

In preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States, judgements and estimates are made about the amounts reflected in the financial statements. As part of the financial reporting process, the Company’s management collaborates to determine the necessary information on which to base judgements and develop estimates used to prepare the financial statements. Historical experience and available information are used to make these judgements and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the financial statements.

In addition to the significant accounting policies described in Note 2 of the consolidated financial statements, the Company believes that the following discussion addresses its critical accounting policies.

Revenue Recognition and Receivables

The Company’s net revenues consist of tuition and fees, student housing charges and bookstore and restaurant sales. The Company derived 89.6%, 89.8%, and 90.2% of its net revenues from tuition and fees paid by, or on behalf of, its students in 2000, 2001 and 2002, respectively. Net revenues are reduced for student refunds and scholarships. Bookstore and restaurant revenue is recognized when the sale occurs. Advance payments represent that portion of payments received but not earned and are reflected as a current liability in the accompanying consolidated balance sheets. These payments are typically related to future academic periods and are for the most part, refundable.

The Company bills tuition and housing revenues at the beginning of an academic term and recognizes the revenue on a pro rata basis over the term of instruction or occupancy. For most Art Institute programs, the academic and fiscal quarters are the same; therefore, unearned revenue is not significant at the end of a fiscal quarter. However, certain recently-acquired schools have programs with class starting and ending dates that differ from the Company’s fiscal quarters. Therefore, at the end of the fiscal quarter, the Company has revenue from these programs that has not yet been earned in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” Unearned tuition revenue of approximately $1.7 million and $1.3 million, related to programs not on the Art Institutes’ quarterly academic calendar, is included with advanced payments in the accompanying consolidated balance sheets as of June 30, 2001 and 2002, respectively.

Argosy’s academic programs follow a semester schedule and several programs were in session as of June 30, 2002. Accordingly, unearned revenue of approximately $6.3 million related to Argosy is included with advanced payments in the accompanying consolidated balance sheet.

Refunds are calculated in accordance with federal, state and accrediting agency standards. Student refunds of approximately $8.9 million and $11.5 million were recorded for 2001 and 2002, respectively.

The trade receivable balances are comprised of individually insignificant amounts due primarily from students throughout the United States and Canada. 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 balances in collection) and establishing a reserve based on the likelihood of collections (in-school receivables having the lowest percentage reserved).

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, 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.

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Long-Lived Assets

The Company evaluates the recoverability of property, plant and equipment and intangible assets other than goodwill whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable. Changes in circumstances include economic conditions or operating performance. The Company’s evaluation is based upon assumptions about the estimated future undiscounted cash flows. If the future cash flows are less than the carrying value, the Company would recognize an impairment loss. The Company continually applies its best judgement when performing these evaluations to determine the timing of the testing, the undiscounted cash flows used to assess recoverability and the fair value of the asset.

The Company evaluates the recoverability of the goodwill attributable to each reporting unit as required under SFAS No. 142, “Goodwill and Other Intangible Assets,” by comparing the fair value of each reporting unit with its carrying value. The Company continually applies its best judgement when performing these evaluations to determine the financial projections used to assess the fair value of each reporting unit.

New Accounting Standards

In August 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”), Accounting Principles Board (“APB”) No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”) and APB No. 51, “Consolidated Financial Statements” (“APB 51”). SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company has adopted SFAS 144 effective July 1, 2002. The Company believes that the adoption of SFAS 144 will not have a material impact on the Company’s consolidated financial position and results of operations.

In April 2002, SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), was issued; it updates, clarifies and simplifies existing accounting pronouncements. While the technical corrections to existing pronouncements are not substantive in nature, in some instances they may change accounting practice. The provisions of this standard related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of this standard must be applied for financial statements issued on or after May 15, 2002, with early application encouraged. The adoption of SFAS 145 has not had a material impact on the Company’s consolidated financial position and results of operations.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) was issued; it addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company is currently evaluating the effects of SFAS No. 146 and does not anticipate that the adoption of SFAS 146 will have a material impact on the consolidated financial position and results of operations of the Company.

Effect of Inflation

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

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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 2003 and later years: (i) the perceptions of the U.S. Congress, the U.S. Department of Education and the public concerning proprietary post-secondary 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, and thus to maintain eligibility of its schools for Title IV Programs; (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; (vii) security risks to which the Company’s computer networks may be vulnerable that 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; (xiii) competitive pressures from other education institutions; and (xiv) general economic conditions, including stock market volatility.

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ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market risks in the ordinary course of business that include foreign currency exchange rates. The Company does not currently utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. Due to its operation of ITI in Canada, the Company is subject to fluctuations in the value of the Canadian dollar relative to the U.S. dollar. The Company does not believe it is subject to material risks from reasonably possible near-term changes in exchange rates.

The fair values and carrying amounts of the Company’s financial instruments, primarily accounts receivable and debt, are approximately equivalent. The Company had outstanding borrowings and one fixed rate debt instrument as of June 30, 2002, with an outstanding balance of $3.6 million and bears interest at 7.13%. This obligation provides for monthly installments of approximately $26,000 with a balloon payment due March 2006. Borrowings under the revolving credit facility bear interest at floating rates based upon market rates. All other financial instruments are classified as current and will be utilized within the next operating cycle.

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders of Education Management Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of Education Management Corporation and subsidiaries as of June 30, 2002, and the related consolidated statements of income, shareholders’ investment, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Education Management Corporation and subsidiaries as of June 30, 2001, and for the two years in the period then ended, were audited by other auditors and whose report dated July 27, 2001 expressed an unqualified opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Education Management Corporation and subsidiaries at June 30, 2002, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 7 to the financial statements, in fiscal 2002 the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”

Pittsburgh, Pennsylvania

August 1, 2002

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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

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Company’s Annual Report on Form 10-K for the year ended June 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Annual Report Form 10-K. See Exhibit 23.02 for further discussion.

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

	As of June 30,
	2001			2002
Assets
Current assets:
Cash and cash equivalents	$	47,072		$	84,477
Restricted cash		218			1,756
Total cash		47,290			86,233
Receivables:
Trade, net of allowances of $17,410 and $24,003		19,626			26,820
Notes, advances and other		2,913			3,558
Inventories		3,528			3,932
Deferred and prepaid income taxes		5,115			12,847
Other current assets		4,703			6,652
Total current assets		83,175			140,042
Property and equipment, net		149,482			191,698
Deferred income taxes and other long-term assets		11,825			10,977
Intangible assets, net of amortization of $8,042 and $10,948		43,058			149,938
Total assets	$	287,540		$	492,655
Liabilities and shareholders’ investment
Current liabilities:
Current portion of long-term debt	$	26		$	25,076
Accounts payable		10,795			17,550
Accrued liabilities		14,692			26,458
Advance payments		48,384			70,588
Total current liabilities		73,897			139,672
Long-term debt, less current portion		53,634			3,500
Deferred income taxes and other long-term liabilities		60			2,906
Commitments and contingencies
Shareholders’ investment:
Common Stock, par value $.01 per share; 60,000,000 shares authorized; 30,479,880 and 35,182,203 shares issued		305			352
Additional paid-in capital		108,463			250,271
Treasury stock, 216,945 and 90,182 shares at cost		(3,596	)		(1,495	)
Retained earnings		54,777			97,091
Accumulated other comprehensive income		—			358
Total shareholders’ investment		159,949			346,577
Total liabilities and shareholders’ investment	$	287,540		$	492,655

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

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

	For the years ended June 30,
	2000		2001		2002
Net revenues	$	307,249	$	370,681	$	500,576
Costs and expenses:
Educational services		201,187		242,313		325,027
General and administrative		66,209		76,716		102,486
Amortization of intangible assets		1,511		1,977		4,096
		268,907		321,006		431,609
Income before interest and taxes		38,342		49,675		68,967
Interest expense, net		726		2,275		1,552
Income before income taxes		37,616		47,400		67,415
Provision for income taxes		15,086		18,422		25,101
Net income	$	22,530	$	28,978	$	42,314
Earnings per share:
Basic	$	.78	$	.97	$	1.28
Diluted	$	.75	$	.93	$	1.23
Weighted average number of shares outstanding (in 000’s):
Basic		28,964		29,742		33,026
Diluted		29,921		31,016		34,479

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

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	For the years ended June 30,
	2000			2001			2002
Cash flows from operating activities:
Net income	$	22,530		$	28,978		$	42,314
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		21,043			26,055			34,064
Deferred credit for income taxes		(1,895	)		(2,728	)		(2,791	)
Changes in current assets and liabilities:
Restricted cash		46			461			(1,538	)
Receivables		(1,237	)		(3,263	)		(1,842	)
Inventories		(978	)		(383	)		(210	)
Other current assets		(1,312	)		(1,458	)		(860	)
Accounts payable		(724	)		(1,161	)		(738	)
Accrued liabilities		2,148			11,567			13,169
Advance payments		8,090			13,318			11,210
Total adjustments		25,181			42,408			50,464
Net cash flows from operating activities		47,711			71,386			92,778
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired		(8,602	)		(12,065	)		(104,396	)
Expenditures for property and equipment		(50,059	)		(47,477	)		(45,400	)
Other items, net		(1,008	)		(1,150	)		(4,441	)
Net cash flows from investing activities		(59,669	)		(60,692	)		(154,237	)
Cash flows from financing activities:
Net activity under revolving credit facilities		27,650			(10,625	)		(28,525	)
Principal payments on debt		(1,666	)		(102	)		(8,756	)
Net proceeds from issuance of Common Stock		1,925			8,246			135,808
Repurchase of Common Stock		(9,238	)		—			—
Net cash flows from financing activities		18,671			(2,481	)		98,527
Effective exchange rate changes on cash		—			—			337
Net change in cash and cash equivalents		6,713			8,213			37,405
Cash and cash equivalents, beginning of year		32,146			38,859			47,072
Cash and cash equivalents, end of year	$	38,859		$	47,072		$	84,477

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

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT

(Dollars in thousands)

	Common Stock at Par Value		Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income		Total
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 options		3		2,126		—			—		—		2,129
Issuance of Common Stock under employee stock purchase 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 options		6		11,265		6,017			—		—		17,288
Issuance of Common Stock under employee stock purchase plan		—		613		120			—		—		733
Balance, June 30, 2001		305		108,463		(3,596	)		54,777		—		159,949
Comprehensive income:
Net income		—		—		—			42,314		—		42,314
Foreign currency translation		—		—		—			—		358		358
Comprehensive income													42,672
Net proceeds from public offering of Common Stock		42		127,583		—			—		—		127,625
Options exchanged in connection with acquisition of a subsidiary		—		2,279		—			—		—		2,279
Exercise of stock options		5		11,251		1,838			—		—		13,094
Issuance of Common Stock under employee stock purchase plan		—		695		263			—		—		958
Balance, June 30, 2002	$	352	$	250,271	$	(1,495	)	$	97,091	$	358	$	346,577

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

40

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 private post-secondary education in North America, based on student enrollment and revenue. EDMC’s Art Institutes, offer programs in the the areas of design, media arts, fashion, and culinary arts. In December 2001, EDMC acquired Argosy Education Group, Inc. (“Argosy”), which provides graduate and undergraduate degree programs in various fields, including psychology, counseling, education, business, law and the health sciences.

As of June 30, 2002, The Art Institutes consisted of 24 schools in 21 major metropolitan areas throughout the United States. Programs at The Art Institutes typically are completed in 18 to 48 months and culminate in a bachelor’s or associate’s degree. Twenty-one Art Institutes currently offer bachelor’s degree programs. In addition, International Fine Arts College (IFAC), offers a master’s degree program in computer animation.

Argosy operates 13 Argosy University campuses and six extension sites in 11 states, as well as Western State University College of Law in California. Through its Argosy Professional Services division, Argosy also provides courses and materials for postgraduate licensure examinations in human services fields and provides continuing education courses for K-12 educators.

In November 2001, EDMC acquired ITI Information Technology Institute Incorporated (“ITI”), a Canadian company offering postgraduate education programs at three Canadian locations (one closed subsequent to June 30, 2002). At June 30, 2002, ITI was operated as a division of Argosy.

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 under two reportable segments: The Art Institutes and Argosy.

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, 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 Company’s U.S. 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 62%, 60% and 65% of the Company’s net revenues in 2000, 2001 and 2002 were indirectly derived from funds distributed under these programs to students at the participating schools, respectively.

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 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

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

participate in Title IV Programs or could be required to repay funds determined to have been improperly disbursed. If one or more of the Company’s schools loses or suffers limited access to Title IV Program funds, that loss could have a materially adverse effect on the results of operations. However, 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 excessive.

Certain schools 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 August 17, 1999, the Company acquired the outstanding stock of the American Business & Fashion Institute in Charlotte, North Carolina, for approximately $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. The school was renamed The New England Institute of Art & 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.

On September 5, 2001, the Company purchased the assets of International Fine Arts College (“IFAC”), located in Miami, Florida for approximately $25.0 million in cash. The acquisition of IFAC resulted in goodwill and intangible assets of approximately $21.7 million and $3.3 million, respectively.

All of the above acquisitions are consistent with the Company’s strategy of entering additional metropolitan areas believed to be attractive to students either through start-up or acquisition.

42

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On November 23, 2001, the Company purchased certain assets of ITI Information Technology Institute Incorporated, a Canadian company, based in Toronto, Ontario, Canada from ITI’s court-appointed receiver. The purchase agreement required EDMC to fund certain operating expenses prior to the closing of the acquisition. The funded expenses and purchase price totaled approximately $6.0 million. The acquisition of ITI resulted in goodwill and intangible assets of approximately $6.3 million and $363,000, respectively. ITI will provide opportunities for the Company to expand into Canada and academic programs in the information technology field.

On December 21, 2001, the Company completed its acquisition of Argosy, a leading private provider of postgraduate professional education. In September 2001, the Company closed in escrow its purchase of 4.9 million shares of Argosy from its controlling shareholder. The aggregate cash purchase price for these shares was $58.8 million. The Company acquired the approximately 1.6 million remaining Argosy shares outstanding for $12.00 per share at the closing of the acquisition of Argosy in December. The total cash paid for Argosy was approximately $79.3 million, exclusive of options exchanged, which resulted in goodwill of $67.2 million and other intangibles of $9.9 million. The acquisition of Argosy broadens EDMC’s presence in the higher education market by expanding education program offerings and adding school locations.

These acquisitions made during fiscal 2002 were accounted for as purchases in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”), which the Company adopted in the first quarter of fiscal 2002. The results of operations for each of the acquired entities have been consolidated as of the respective closing date. The Company is in the process of finalizing third-party valuations of certain tangible and intangible assets for these acquisitions; therefore, the allocation of the purchase price is subject to adjustment.

The following table presents the goodwill and intangible assets acquired with the purchases of IFAC, ITI and Argosy in the year ended June 30, 2002 (in thousands):

	Amount		Weighted Average Useful Life
Goodwill	$	95,215	—
Curriculum		3,295	15
Accreditation		1,840	16
Student contracts and applications		6,929	3
Software		256	3
Title IV		750	16
Trade name		500	—
Total	$	108,785	6

The following table presents pro forma information as if the acquisition of Argosy had been completed at the beginning of the stated periods (unaudited, in thousands, except per share amounts):

		Year ended June 30,
		2001		2002
Revenue	As reported	$	370,681	$	500,576
	Pro forma		423,736		531,035
Net income	As reported	$	28,978	$	42,314
	Pro forma		31,288		39,572
Diluted earnings per share	As reported	$	.93	$	1.23
	Pro forma		1.01		1.15

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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Two of Argosy’s businesses, Western State University College of Law and The Connecting Link, were acquired by Argosy on March 1, 2001, and are included in the fiscal 2001 data above from their acquisition date.

The fiscal 2002 as reported results above include combined net revenue from IFAC and ITI of approximately $16.5 million for the year ended June 30, 2002. The net loss from these entities was approximately $1.4 million for fiscal 2002. Therefore, the results of these entities had a $.04 impact on diluted earnings per share for the year.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed of Argosy at the date of acquisition (in thousands):

As of December 21, 2001
Current assets	$	16,179
Property, plant & equipment		18,674
Intangible assets		9,890
Goodwill		67,191
Other		1,146
Total assets acquired		113,080
Current liabilities		11,627
Long-term debt		11,689
Other		4,608
Total liabilities		27,924
Net assets acquired	$	85,156

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.

The Company recognizes rent expense on a straight-line basis over the term of the lease.

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.

The Company reviews property and equipment for impairment annually under SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS 121”). For the years ended June 30, 2001 and 2002, no impairment has been identified.

Intangible Assets

Intangible assets are recorded at their fair market value as of the acquisition date, as determined by an independent appraiser. The Company uses the straight-line method of amortization for those intangibles with an identifiable useful life. Annually, or more frequently, if necessary, intangible assets are evaluated for impairment, with any resulting impairment charge reflected as an operating expense.

44

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiary, ITI, are measured in the functional currency, Canadian dollars. Accordingly, the assets and liabilities of ITI are translated to U.S. dollars using the exchange rates in effect as of the balance sheet date. Translation adjustments resulting from this process are recorded as a separate component of shareholders’ investment designated as accumulated other comprehensive income in the accompanying consolidated balance sheets. Transaction gains or losses during the year ended June 30, 2002 were not material.

Financial Instruments

The fair values and carrying amounts of the Company’s financial instruments, primarily accounts receivable and debt, are approximately equivalent. The Company has outstanding borrowings and one fixed rate debt instrument as of June 30, 2002, with an outstanding balance of $3.6 million and bears interest at 7.13%. This obligation provides for monthly installments of approximately $26,000 with a balloon payment due March 2006. Borrowings under the revolving credit facility bear interest at floating rates based upon 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 bookstore and restaurant sales. The Company derived 89.6%, 89.8%, and 90.2% of its net revenues from tuition and fees paid by, or on behalf of, its students in 2000, 2001 and 2002, respectively. Net revenues are reduced for student refunds and scholarships. Bookstore and restaurant revenue is recognized when the sale occurs. Advance payments represent that portion of payments received but not earned and are reflected as a current liability in the accompanying consolidated balance sheets. These payments are typically related to future academic periods and are for the most part, refundable.

The Company bills tuition and housing revenues at the beginning of an academic term and recognizes the revenue on a pro rata basis over the term of instruction or occupancy. For most Art Institute programs, the academic and fiscal quarters are the same; therefore, unearned revenue is not significant at the end of a fiscal quarter. However, certain recently acquired schools have programs with class starting and ending dates that differ from the Company’s fiscal quarters. Therefore, at the end of the fiscal quarter, the Company has revenue from these programs that has not yet been earned in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” Unearned tuition revenue of approximately $1.7 million and $1.3 million, related to programs not on The Art Institutes’ quarterly academic calendar, is included with advance payments in the accompanying consolidated balance sheets as of June 30, 2001 and June 30, 2002, respectively.

Argosy’s academic programs follow a semester schedule and several programs continued in session as of June 30, 2002. Accordingly, unearned revenue of approximately $6.3 million related to Argosy is included with advance payments in the accompanying consolidated balance sheet.

Refunds are calculated in accordance with federal, state and accrediting agency standards. Student refunds of approximately $8.9 million and $11.5 million were recorded for 2001 and 2002, respectively.

The trade receivable balances are comprised of individually insignificant amounts due primarily from students throughout the United States and Canada. 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 balances in collection) and establishing a reserve based on the likelihood of collections (in-school receivables having the lowest percentage reserved).

45

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Advertising costs are expensed in the fiscal year incurred and classified as general and administrative expense in the accompanying consolidated income statement. The Company’s advertising expense was $19.7 million, $20.5 million, and $29.2 million for fiscal 2000, 2001 and 2002, respectively.

Amortization of intangibles relates primarily to the values assigned to identifiable intangibles, which arose principally from the acquisitions discussed above (see also Note 7, “Intangible Assets”). These intangible assets are amortized over periods ranging from 8 months to 22 years.

New Accounting Standards

In August 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”), Accounting Principles Board (“APB”) No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”) and APB No. 51, “Consolidated Financial Statements” (“APB 51”). SFAS 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company has adopted SFAS 144 effective July 1, 2002. The Company believes that the adoption of SFAS 144 will not have a material impact on the consolidated Company’s financial position and results of operations.

In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), was issued, and it updates, clarifies and simplifies existing accounting pronouncements. While the technical corrections to existing pronouncements are not substantive in nature, in some instances they may change accounting practice. The provisions of this standard related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of this standard must be applied for financial statements issued on or after May 15, 2002, with early application encouraged. The adoption of SFAS 145 has not had material impact on the Company’s consolidated financial position and results of operations.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) was issued and addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company is currently evaluating the effects of SFAS No. 146 and does not anticipate that the adoption of SFAS 146 will have a material impact on the Company’s consolidated financial position and results of operations.

46

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Supplemental Disclosures of Cash Flow Information

	Year ended June 30,
	2000			2001			2002
	(in thousands)
Cash paid during the period for:
Interest (net of amount capitalized)	$	175		$	2,485		$	771
Income taxes		15,590			11,494			19,885
Noncash investing and financing activities:
Expenditures for property and equipment included in accounts payable		13,161			4,506			9,477
Tax benefit for options exercised		928			9,775			5,869
Stock options exchanged in connection with acquisition of a subsidiary		—			—			2,279
Cash paid for acquisitions:
Fair value of:
Assets acquired	$	11,670		$	15,997		$	152,875
Liabilities assumed		(2,810	)		(2,955	)		(36,280	)
Cash paid		8,860			13,042			116,595
Less: cash acquired		(258	)		(977	)		(9,920	)
Stock options exchanged in connection with acquisition of a subsidiary		—			—			(2,279	)
Net cash paid for acquisitions	$	8,602		$	12,065		$	104,396
Net proceeds from issuance of Common Stock:
Proceeds received per Consolidated Statement of Shareholder’s Investment	$	2,853		$	18,021		$	143,956
Tax benefit for option exercise		(928	)		(9,775	)		(5,869	)
Stock options exchanged in connection with acquisition of a subsidiary		—			—			(2,279	)
Net proceeds from issuance of Common Stock	$	1,925		$	8,246		$	135,808

Reclassifications

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

3.    PUBLIC OFFERING OF COMMON STOCK:

On December 4, 2001, a public offering of the Company’s Common Stock (the “Offering”) closed at $32.50 per share. A total of 5,175,000 shares were sold, including 4,164,681 newly-issued shares sold by the Company and 1,010,319 shares sold by members of the Company’s senior management and board of directors.

In the Offering, the Company received total net proceeds, after deduction of expenses and underwriting discounts payable by the Company, of approximately $127.6 million. On the date the Offering closed, $39.5 million of the proceeds were used to repay the outstanding indebtedness under the Company’s Amended and Restated Credit Agreement (the “Credit Agreement”). The remaining proceeds were used to fund the acquisition of Argosy (see Note 2) and for general corporate purposes.

4.    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.

47

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 in fiscal 2007 and are subject to redemption by the Company at $.01 per Right, subject to adjustment.

5.    EARNINGS PER SHARE:

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

Reconciliation of Diluted Shares

	Year ended June 30,
	2000	2001	2002
	(in thousands)
Basic shares	28,964	29,742	33,026
Dilution for stock options	957	1,274	1,453
Diluted shares	29,921	31,016	34,479

Options to purchase 7,280 and 97,096 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 2001 and 2002, respectively.

6.    PROPERTY AND EQUIPMENT:

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

	2001		2002
	(in thousands)
Assets (asset lives in years)
Land	$	4,300	$	8,740
Buildings and improvements (15 to 30)		51,698		60,532
Furniture and equipment (3 to 10)		136,442		169,441
Library books (3)		4,979		6,790
Leasehold interests and improvements (1 to 20)		60,359		80,362
Construction in progress		3,064		—
Total		260,842		325,865
Less accumulated depreciation		111,360		134,167
	$	149,482	$	191,698

7.    INTANGIBLE ASSETS:

In the first quarter of fiscal 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), under which goodwill is no longer amortized. As required by SFAS 142, an independent appraiser evaluated the intangible assets for impairment as of July 1, 2001 and no impairment existed. In addition, the Company will evaluate the intangible assets for impairment annually (or more frequently, if necessary), with any resulting impairment reflected as an operating expense.

48

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization of intangible assets for the years ended June 30, 2000, 2001 and 2002 was approximately $1.5 million, $2.0 million and $2.9 million, respectively. Additionally, in 2002, approximately $1.2 million of goodwill was written off in connection with the closure of NCPT and the Halifax, Nova Scotia location of ITI. Estimated amortization expense for amortized intangible assets for the next five fiscal years is as follows:

Fiscal years	(in thousands)
2003	$	3,946
2004		3,614
2005		3,475
2006		2,503
2007		1,907

Intangible assets consisted of the following (dollars in thousands):

	As of June 30, 2001					As of June 30, 2002
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Weighted Average Amortization Period (years)
Curriculum	$	2,446	$	(663	)	$	7,567	$	(1,645	)	7
Accreditation		1,646		(195	)		3,486		(433	)	12
Bachelor’s programs		1,100		(52	)		1,100		(125	)	15
Student contracts and applications		—		—			6,929		(1,322	)	3
Software		—		—			256		(55	)	3
Title IV		—		—			750		(30	)	16
Trade names		—		—			500		—		—
Other		2,768		(911	)		2,768		(1,117	)	13
Total	$	7,960	$	(1,821	)	$	23,356	$	(4,727	)	6

Upon adoption of SFAS 142, the Company’s goodwill was net of accumulated amortization of approximately $6.2 million. The changes in the carrying amount of goodwill, by reporting segment, for the year ended June 30, 2002, are as follows (in thousands):

	Art Institutes			Argosy			Total
Balance as of June 30, 2001	$	36,919		$	—		$	36,919
Goodwill related to acquisitions and earnout payments during the current fiscal year		22,119			73,467			95,586
Goodwill written off related to closure of ITI operations in Halifax, Nova Scotia		—			(906	)		(906	)
Goodwill written off related to closure of NCPT		(290	)		—			(290	)
Balance as of June 30, 2002	$	58,748		$	72,561		$	131,309

49

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table is the Company’s disclosure of what reported net income, basic earnings per share and diluted earnings per share would have been if the non-amortization provisions of SFAS 142 had been adopted in all periods presented (in thousands, except per share amounts):

		Year ended June 30,
		2000		2001		2002
Net income	As reported	$	22,530	$	28,978	$	42,314
	Goodwill amortization, net of tax		627		860		—
	Pro forma	$	23,157	$	29,838	$	42,314
Basic earnings per share	As reported	$	.78	$	.97	$	1.28
	Goodwill amortization, net of tax		.02		.03		—
	Pro forma	$	.80	$	1.00	$	1.28
Diluted earnings per share	As reported	$	.75	$	.93	$	1.23
	Goodwill amortization, net of tax		.02		.03		—
	Pro forma	$	.77	$	.96	$	1.23

8.    INDEBTEDNESS:

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

	2001		2002
	(in thousands)
Revolving credit facilities	$	53,525	$	25,000
Mortgage debt, fixed rate of 7.13% with monthly payments of $26,445, including interest, through March 1, 2006		—		3,576
Other indebtedness		135		—
		53,660		28,576
Less current portion		26		25,076
	$	53,634	$	3,500

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 and provided the banks with a security interest in certain owned real estate and the stock of certain subsidiaries. The Credit Agreement provides the Company with the ability to borrow up to $150 million on a revolving basis and $50 million in the form of a term loan and will expire on September 20, 2004. Upon the closing of the Offering, the term loan commitment was no longer available. The security interests were released on May 29, 2002 as the Company has met certain financial covenants. As of June 30, 2002, the interest rate for borrowings under the Credit Agreement was 3.0%. Certain outstanding letters of credit reduce this facility. The Company had approximately $826,000 of letters of credit outstanding as of June 30, 2002, $751,000 of which reduce the facility. The remainder are considered additional indebtedness. The Credit Agreement contains customary covenants that, among other matters, require the Company to meet specified leverage ratio requirements and restrict the repurchase of Common Stock and the incurrence of additional indebtedness. As of June 30, 2002, the Company was in compliance with all covenants under the Credit Agreement.

The Company incurs fees on the unused portion of the Credit Agreement. These fees ranged between 22.5 and 25 basis points of the available borrowings, based upon a measure of leverage as defined in the Credit Agreement.

50

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Year ended June 30,
	2000			2001			2002
	(in thousands)
Outstanding borrowings, end of period	$	64,150		$	53,525		$	25,000
Approximate average outstanding balance throughout the period		15,215			28,048			9,957
Approximate maximum outstanding balance during the period		79,850			64,150			53,750
Weighted average interest rate for the period		7.45	%		6.73	%		4.45	%

As of June 30, 2002, future annual principal payments of debt related to the outstanding mortgage are as follows:

Fiscal years	(in thousands)
2003	$	76
2004		78
2005		84
2006		3,338

9.    COMMITMENTS AND CONTINGENCIES:

The Company and its subsidiaries lease certain classroom, dormitory and office space as well as equipment and automobiles under operating leases that expire on various dates through July 2019. Rent expense under these leases was approximately $33,645,000, $41,054,000, and $52,742,000 respectively for 2000, 2001 and 2002. The approximate minimum future commitments under non-cancelable, long-term operating leases as of June 30, 2002 are reflected below:

Fiscal Years	(in thousands)
2003	$	56,507
2004		51,736
2005		48,711
2006		47,805
2007		46,762
Thereafter		242,453
	$	493,974

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 individual schools and of 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.

51

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.    RELATED PARTY TRANSACTIONS:

The Art Institute of Philadelphia, a division of The Art Institutes International, Inc (“Aii”), which is 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 $2,214,000, $2,267,000 and $2,511,000 for the years ended June 30, 2000, 2001 and 2002, respectively.

Prior to the Company’s acquisition of Argosy, two of Argosy’s subsidiaries were sold to its Chairman, currently an executive officer of EDMC. The sales agreements for the disposition of John Marshall Law School, Inc. and PrimeTech Canada, Inc. required Argosy to fund the obligations of these entities as of the respective closing dates and for specified transition periods, with certain amounts to be reimbursed by the buyer. In connection with these transactions, the accompanying consolidated balance sheets include a receivable of approximately $324,000 as of June 30, 2002, due from the Chairman of Argosy. This balance was collected in full, subsequent to year-end. Any additional amounts determined to have been paid on behalf of these entities will be settled by the first anniversary of the respective dispositions.

11.    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 $1,181,000, $1,939,000 and $1,777,000 for the years ended June 30, 2000, 2001 and 2002, respectively.

The Company’s retirement plan includes an Employee Stock Ownership Plan (ESOP), which enabled eligible employees to have stock ownership in the Company. The ESOP loan has been retired and no additional Company contributions are anticipated. Distribution of shares from the ESOP is made following the retirement, disability or death of an employee. For employees who terminate for any other reason, the vested balance is distributed in accordance with the terms of the ESOP.

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

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

	2001		2002
	(in thousands)
Investment in Federal Perkins Loan Program, net of allowance for estimated future loan losses of $1,252 and $1,300	$	2,918	$	3,022
Cash value of life insurance, net of loan of $781 for 2001; face value of $6,982		2,935		4,050
Deferred income taxes		4,302		—
Other		1,670		3,905
	$	11,825	$	10,977

52

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.    ACCRUED LIABILITIES:

Accrued liabilities consist of the following as of June 30:

	2001		2002
	(in thousands)
Payroll and related taxes	$	10,052	$	13,882
Income and other taxes		640		1,747
Other		4,000		10,829
	$	14,692	$	26,458

14.    INCOME TAXES:

The composition of earnings before taxes between foreign and domestic locations consists of the following for the year ended June 30:

	2000		2001		2002
	(in thousands)
Earnings before taxes
Domestic	$	37,616	$	47,400	$	70,845
Foreign		—		—		(3,430	)
	$	37,616	$	47,400	$	67,415

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

	Year ended June 30,
	2000			2001			2002
	(in thousands)
Current taxes:
Federal	$	14,020		$	18,129		$	23,671
State		2,961			3,021			4,221
Tax benefit on stock options		(928	)		(9,775	)		(5,869	)
Total current taxes		16,053			11,375			22,023
Deferred taxes		(1,895	)		(2,728	)		(2,791	)
Tax benefit on stock options		928			9,775			5,869
Total provision	$	15,086		$	18,422		$	25,101

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

	Year ended June 30,
	2000		2001		2002
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	4.4		3.7		2.7
Goodwill and intangible asset related charges	.4		.5		.6
Nondeductible expenses	.4		.2		.3
Tax liability adjustment	—		—		(1.1	)
Tax credits	—		—		(1.2	)
Increase/(decrease) in valuation allowance	—		—		1.3
Other, net	(.1	)	(.5	)	(.4	)
Effective income tax rate	40.1	%	38.9	%	37.2	%

53

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	2000			2001			2002
	(in thousands)
Deferred income tax—current	$	2,872		$	4,946		$	10,122
Deferred income tax—long term		2,046			4,302			(1,836	)
Net deferred income tax asset	$	4,918		$	9,248		$	8,286
Consisting of:
Allowance for doubtful accounts	$	5,649		$	6,766		$	9,063
Assigned asset values in excess of tax basis		(1,767	)		(1,640	)		(3,337	)
Depreciation		1,687			1,295			(401	)
Foreign and state net operating loss carryforwards		—			2,235			6,979
Financial reserves and other		(651	)		592			(440	)
Valuation allowance		—			—			(3,578	)
Net deferred income tax asset	$	4,918		$	9,248		$	8,286

The Company has not provided any U.S. tax on undistributed earnings or losses of foreign subsidiaries that are reinvested indefinitely outside the United States. As of June 30, 2002, consolidated retained earnings of the Company included approximately $3,430,000 of undistributed losses from these investments.

As of June 30, 2002, the Company had state net operating loss carryforwards of approximately $31,339,000 and foreign net operating loss carryforwards of approximately $8,151,000 that are available to offset certain state and foreign future taxable income. These net operating loss carryforwards expire at varying dates beginning in fiscal 2008.

The valuation allowance for deferred tax assets for fiscal 2002 was $3,578,0000. The net change in valuation allowance for fiscal 2002 was an increase of $874,000. Management assesses the realizability of the deferred tax asset and considers whether it is more likely than not that some or all of the assets will be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which the assets can be utilized. A valuation allowance was recognized on the deferred tax asset related to the foreign net operating loss carryforwards.

15.    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 6,000,000 shares of Common Stock. Options issued to employees under this plan provide for time-based vesting over three years.

The Company also has two non-qualified management stock option plans under which options to purchase 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 representing the fair market value of the shares 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 59,800, 31,712, and 18,780 in 2000, 2001 and 2002, respectively. In 2002, an additional 15,848 shares were issued from treasury under this plan.

54

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 (in thousands, except per share amounts):

	Year ended June 30,
		2000		2001		2002
Net income (in 000’s):	As reported	$	22,530	$	28,978	$	42,314
	Pro forma	$	19,421	$	25,402	$	36,203
Basic EPS:	As reported	$	.78	$	.97	$	1.28
	Pro forma	$	.67	$	.85	$	1.10
Diluted EPS:	As reported	$	.75	$	.93	$	1.23
	Pro forma	$	.65	$	.82	$	1.05

Summary of Stock Options

	2000				2001				2002
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, beginning of year		2,872,653	$	10.11		3,768,991	$	10.25		2,567,974	$	13.30
Granted		1,253,500		9.47		262,000		29.74		1,698,123		27.99
Exercised		270,392		4.44		1,352,519		8.12		630,169		11.71
Forfeited		86,770		12.72		110,498		11.47		81,786		14.86
Outstanding, end of year		3,768,991	$	10.25		2,567,974	$	13.30		3,554,142	$	20.56
Exercisable, end of year		1,403,885				1,122,932				1,164,885
Weighted average fair value of options granted*	$	5.58			$	17.54			$	14.10

* 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:

	2000		2001		2002
Risk-free interest rate	6.45	%	5.79	%	4.09	%
Expected dividend yield	—		—		—
Expected life of options (years)	6		6		4.5
Expected volatility rate	55.0	%	56.0	%	60.0	%

Options Outstanding					Options Exercisable
Range of Exercise Prices	Options	Weighted- Average Remaining Contractual Life (years)	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
$  2.85–$  3.60	28,614	1.75	$	3.10	28,614	$	3.10
7.50–    9.38	906,646	6.88		9.05	536,352		8.82
12.38–  18.50	725,507	6.31		15.37	428,488		15.50
18.80–  28.00	1,212,835	9.24		24.34	22,444		20.52
30.00–  43.87	680,540	9.16		35.46	148,987		38.38
	3,554,142	7.96	$	20.56	1,164,885	$	15.14

55

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16.    SEGMENT REPORTING:

The Company’s principal business is providing post-secondary education. The services of EDMC’s operations are discussed in more detail under Note 1 above, “Ownership and Operations.” In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), EDMC manages its business in relation to the services provided and accordingly has two segments: The Art Institutes and Argosy, which at June 30, 2002 includes ITI. Corporate expenses are allocated to the appropriate segment. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements. These segments are based upon the method by which management makes operating decisions and assesses performance.

Summary information by reportable segment is as follows as of and for the years ended June 30 (in thousands):

	2001								2002
	Art Institutes		Argosy		Corporate		Consolidated		Art Institutes		Argosy		Corporate		Consolidated
Revenue	$	370,681	$	—	$	—	$	370,681	$	457,490	$	43,086	$	—	$	500,576
Depreciation and amortization		26,055		—		—		26,055		30,763		3,301		—		34,064
Income before interest and taxes		49,675		—		—		49,675		67,771		1,196		—		68,967
Capital expenditures		36,271		—		2,551		38,822		41,241		1,522		7,608		50,371
Total assets		261,694		—		25,846		287,540		334,937		131,734		25,984		492,655
Long-lived assets		180,141		—		24,224		204,365		229,796		99,591		23,226		352,613

56

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

On May 9, 2002, the Board of Directors of the Company, on the recommendation of its Audit Committee, engaged Ernst & Young LLP (“E&Y”), replacing Arthur Andersen LLP (“Arthur Andersen”), to serve as the Company’s independent public accountants for the fiscal year ending June 30, 2002. This determination followed the Company’s decision to seek proposals from independent auditors to audit its financial statements.

Arthur Andersen’s reports on the Company’s consolidated financial statements for each of the fiscal years ended June 30, 2001, 2000 and 1999 did not contain an adverse opinion or disclaimer of opinion, and they were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended June 30, 2001, and 2000 and through May 9, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such year. During the same periods, there were also no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities and Exchange Commission. The Company has provided Arthur Andersen with a copy of the foregoing statements and has received a letter from Arthur Andersen stating its agreement with these statements. This letter was an exhibit to the Company’s report on Form 8-K dated May 14, 2002.

During the fiscal years ended June 30, 2001 and 2000 and through the date of the Board’s decision, the Company did not consult E&Y with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters or reportable events as set forth in Item 304 (a) (2) (i) and (ii) of Regulation S-K.

During the period from May 9 through June 30, 2002, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to E&Y’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such year. During the same periods, there were also no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities and Exchange Commission.

57

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 2005 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.

58

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 to E-3 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 35 through 56 of this Form 10-K.

Reports of Independent Auditors

Consolidated Balance Sheets as of June 30, 2001 and 2002

Consolidated Statements of Income for years ended June 30, 2000, 2001 and 2002

Consolidated Statements of Cash Flows for years ended June 30, 2000, 2001 and 2002

Consolidated Statements of Shareholders’ Investment for years ended June 30, 2000, 2001 and 2002

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.

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

(b)    Reports on Form 8-K:

A report on Form 8-K dated May 14, 2002 related to the change in the Company’s certifying accountant, from Arthur Andersen LLP to Ernst & Young LLP. The items listed were Item 4, Changes in Registrant’s Certifying Accountant, and Item 7, Exhibits.

59

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 27, 2002

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

Signature	Title	Date
/S/    ROBERT B. KNUTSON         Robert B. Knutson	Chairman and Chief Executive Officer; Director	September 27, 2002
/S/    ROBERT P. GIOELLA         Robert P. Gioella	President and Chief Operating Officer; Director	September 27, 2002
/S/    JOHN R. MCKERNAN, JR.         John R. McKernan, Jr.	Vice Chairman; Director	September 27, 2002
/S/    ROBERT T. MCDOWELL         Robert T. McDowell	Executive Vice President and Chief Financial Officer	September 27, 2002
/S/    ROBERT H. ATWELL         Robert H. Atwell	Director	September 27, 2002
/S/    JAMES J. BURKE, JR.         James J. Burke, Jr.	Director	September 27, 2002
/S/    WILLIAM M. CAMPBELL, III         William M. Campbell, III	Director	September 27, 2002
/S/    ALBERT GREENSTONE         Albert Greenstone	Director	September 27, 2002
/S/    MIRYAM L. KNUTSON         Miryam L. Knutson	Director	September 27, 2002
/S/    JAMES S. PASMAN, JR.         James S. Pasman, Jr.	Director	September 27, 2002
/S/    DANIEL M. FITZPATRICK         Daniel M. Fitzpatrick	Vice President and Controller	September 27, 2002

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CERTIFICATIONS

I, Robert B. Knutson, certify that:

1.    I have reviewed this annual report on Form 10-K of Education Management Corporation;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Date:  September 27, 2002

/s/    ROBERT B. KNUTSON

Robert B. Knutson

Chief Executive Officer

I, Robert T. McDowell, certify that:

1.    I have reviewed this annual report on Form 10-K of Education Management Corporation;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

Date:  September 27, 2002

/s/    ROBERT T. MCDOWELL

Robert T. McDowell

Chief Financial Officer

61

EXHIBIT INDEX

Exhibit Number	Exhibit	Method of Filing
3.01	Amended and Restated Articles of Incorporation	Incorporated herein by reference to Exhibit 3.01 to the Company’s 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, 1997	Incorporated herein by 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 Company’s 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, 1996, between Education Management Corporation and Mellon Bank, N.A	Incorporated herein by reference to Exhibit 4.02 to the 1997 Form 10-K
4.03	Amendment No. 1, dated November 9, 1999, to the Rights Agreement dated as of October 1, 1996 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent	Incorporated herein by reference to Exhibit 4.01 to the Company’s Quarterly 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 and among the Company, Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management Inc. and Ronald Baron	Incorporated herein by reference to Exhibit 4.02 to the September 30, 1999 10-Q
4.05	Amended and Restated Credit Agreement dated September 20, 2001 among the Company, National City Bank of Pennsylvania as the agent for the other lenders identified therein, and certain banks	Incorporated herein by reference to Exhibit 2 to Schedule 13D filed by Argosy Education Group, Inc. (“Argosy”) on October 9, 2001
4.06	First Amendment to Amended and Restated Credit Agreement, dated February 15, 2002, among the Company, National City Bank of Pennsylvania as the agent for the other lenders identified therein, and certain banks	Filed herewith
4.07	Second Amendment to Amended and Restated Credit Agreement, dated August 19, 2002, among the Company, National City Bank of Pennsylvania as the agent for the other lenders identified therein, and certain banks	Filed herewith

E-1

Exhibit Number	Exhibit	Method of Filing
10.01	Agreement and Plan of Merger dated July 9, 2001 among Argosy, the Company and HAC Inc.	Incorporated herein by reference to Exhibit 2.1 to Argosy’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2001 (the “Argosy May 2001 10-Q”)
10.02	Stock Purchase Agreement dated July 9, 2001 between the Company and Michael C. Markovitz	Incorporated herein by reference to Exhibit 2.2 to the Argosy May 2001 10-Q
10.03	Education Management Corporation Retirement Plan, amended and restated as of August 1, 2001	Filed herewith*
10.04	Education Management Corporation Management Incentive Stock Option Plan, effective November 11, 1993	Incorporated herein by reference to Exhibit 10.05 to the Form S-1*
10.05	EMC Holdings, Inc. Management Incentive Stock Option Plan, effective July 1, 1990	Incorporated herein by reference to Exhibit 10.06 to Amendment No. 1 to the Form S-1, filed on October 1, 1996 (“Amendment No. 1”)*
10.06	Form of Management Incentive Stock Option Agreement, dated various dates, between EMC Holdings, Inc. and various management employees	Incorporated herein by reference to Exhibit 10.07 to Amendment No. 1*
10.07	Form of Amendment to Management Incentive Stock Option Agreement, dated January 19, 1995, among Education Management Corporation and various management employees	Incorporated herein by reference to Exhibit 10.08 to Amendment No. 1*
10.08	Education Management Corporation Deferred Compensation Plan, amended and restated as of January 1, 2002	Filed herewith*
10.09	Education Management Corporation Employee Stock Purchase Plan	Filed herewith*
10.10	2001 Restatement of the Education Management Corporation 1996 Stock Incentive Plan	Incorporated herein by reference to Exhibit A to the Proxy Statement for the Company’s 2001 Annual Meeting*
10.11	Third Amended and Restated Employment Agreement, dated as of September 8, 1999, between Robert B. Knutson and Education Management Corporation	Incorporated herein by reference to Exhibit 10.09 to the 1999 Form 10-K*
10.12	Form of Employment Agreement, dated as of June 4 and September 8, 1999, between certain executives and Education Management Corporation	Incorporated herein by reference to Exhibit 10.10 to the 1999 Form 10-K*
10.13	Employment Agreement dated July 9, 2001 between the Company and Michael C. Markovitz	Filed herewith*

E-2

Exhibit Number	Exhibit	Method of Filing
10.14	Form of EMC-Art Institutes International, Inc. Director’s and/or Officer’s Indemnification Agreement	Incorporated herein by reference to Exhibit 10.17 to the Form S-1*
10.15	Senior Management Team Incentive Compensation Plan	Incorporated herein by reference to Exhibit 10.12 to the 1999 Form 10-K*
10.16	Common Stock Registration Rights Agreement, dated as of August 15, 1996, among Education Management Corporation and Marine Midland Bank, Northwestern Mutual Life Insurance 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	Incorporated herein by reference to Exhibit 10.19 to the 1997 Form 10-K
16.01	Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated May 10, 2002	Incorporated by reference to Exhibit 16 to the Company’s Current Report on Form 8-K dated May 14, 2002.
21.01	Material subsidiaries of Education Management Corporation	Filed herewith
23.01	Consent of Ernst & Young LLP	Filed herewith
23.02	Information Regarding Consent of Arthur Andersen LLP	Filed herewith
99.01	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
99.02	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
99.03	Statement Regarding Western State University College of Law	Incorporated by reference to Exhibit 99 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002

* Management contract or compensatory plan or arrangement.

E-3

REPORT OF INDEPENDENT AUDITORS 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 August 1, 2002. 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.

Pittsburgh, Pennsylvania

August 1, 2002

SCHEDULE II

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

(Dollars in thousands)

	Balance at Beginning of Period		Additions Charged to Expenses		Deductions		Other(a)		Balance at End of Period
Allowance accounts for:
Year ended June 30, 2000
Uncollectible accounts receivable	$	9,367	$	7,551	$	2,986	$	156	$	14,088
Estimated future loan losses		1,155		54		—		—		1,209
Year ended June 30, 2001
Uncollectible accounts receivable	$	14,088	$	9,250	$	6,109	$	181	$	17,410
Estimated future loan losses		1,209		43		—		—		1,252
Year ended June 30, 2002
Uncollectible accounts receivable	$	17,410	$	12,463	$	7,575	$	1,645	$	24,003
Estimated future loan losses		1,252		48		—		—		1,300
Deferred tax asset valuation allowance		—		874		—		2,704		3,578

(a) Allowance for uncollectible accounts receivable and valuation allowance for deferred tax assets acquired in connection with acquisitions of subsidiaries.

S-1

EX-4.06

EXHIBIT 4.06

FIRST AMENDMENT TO AMENDED

AND RESTATED CREDIT AGREEMENT

This First Amendment to Amended and Restated Credit Agreement (the “Amendment”) is dated as of February 15, 2002, and is made by and among EDUCATION MANAGEMENT CORPORATION, (the “Borrower”), the BANKS under the Credit Agreement (as hereafter defined), NATIONAL CITY BANK OF PENNSYLVANIA (the “Agent”), as the Agent for the Banks and Issuing Bank, FIRST UNION NATIONAL BANK, as Syndication Agent, SUNTRUST BANK, as Syndication Agent, FLEET NATIONAL BANK, as Documentation Agent, and THE CHASE MANHATTAN BANK, as Documentation Agent.

RECITALS:

WHEREAS, the Borrower, the Banks and the Agent entered into that certain Amended and Restated Credit Agreement dated as of September 20, 2001 (as amended, modified, extended or restated from time to time, the “Credit Agreement”);

WHEREAS, pursuant to the Credit Agreement, the Borrower was permitted to acquire the ownership interests of Argosy Education Group, Inc., an Illinois corporation, and the Subsidiaries or Argosy, subject to the terms of Section 6.13 of the Credit Agreement;

WHEREAS, the Borrower has requested that the Banks postpone, and under certain circumstances, waive the requirement that certain real property owned by Argosy and its Subsidiaries be mortgaged to the Agent for the benefit of the Banks; and

WHEREAS, the Borrower has also requested a modification of the investments permitted to be made by the Borrower under the Credit Agreement.

NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties hereto agree as follows:

AGREEMENT:

1.    Capitalized terms used herein and not otherwise defined shall have the meanings given to them under the Credit Agreement.

2.    Subsection 6.8(b) of the Credit Agreement is hereby amended and restated as follows:

“(b)    Investments.    The Borrower will not, nor will it permit any Subsidiary to, make any capital contribution to, purchase any stocks, bonds, notes, debentures or other securities of, or make any other investment in any other Person, except (a) existing Subsidiaries;

(b) investments in prime commercial paper rated at least A-1 by Standard and Poor’s Ratings Group (“S&P”) and P-1 by Moody’s Investors Service Inc. (“Moody’s”) which mature not more than 270 days from the date of acquisition; investments in variable rate demand notes and auction rate notes rated at least A-minus by S&P or A-3 by Moody’s which mature not more than one year from the date of acquisition; repurchase agreements and reverse repurchase agreements (i) with any bank (or broker-dealer subsidiary or affiliate of any bank) provided that the institution has capital resources in excess of $500,000,000 and is rated at least A-minus by S&P or A-3 by Moody’s, or (ii) any primary dealer of United States government securities, related to marketable, direct obligations or securities issued or unconditionally guaranteed or insured by the United States of America or any U.S. Government related entity which mature not more then one year from the date of acquisition; domestic and eurodollar time deposits, overnight deposits, bankers’ acceptances and certificates of deposit maintained at or issued by any branch of any bank or trust company organized or licensed under the laws of the United States of America or any state, provided that the institution has capital resources in excess of $500,000,000 and is rated at least A-minus by S&P or A-3 by Moody’s, which mature no more than one year from the date of acquisition; corporate and municipal notes and bonds rated at least A-minus from S&P or A-3 by Moody’s which mature not more than one year from the date of acquisition; mutual funds, including money market mutual finds, which invest primarily in securities listed in the preceding investments in this item (b) and have assets of at least $1,000,000,000; (c) acquisitions permitted by Section 6.13 hereof and (d) up to $10,000,000 of monies invested (or liabilities incurred) subsequent to the Closing Date in joint ventures and strategic investments in the same line of business as the Borrower and its Subsidiaries.”

3.    Subsection 6.13(b) of the Credit Agreement is hereby amended and restated as follows:

“(b)    with respect to the acquisition of Argosy, the Borrower shall provide to the Agent for redelivery to the Banks a certificate of the Borrower that all the conditions precedent set forth in Section 6.1 of the Argosy Purchase Agreement have been met (or a certificate which details the conditions precedent that the Borrower has agreed to waive in whole or in part, which waivers shall be acceptable to the Agent). On the effective date of the Argosy Merger Agreement, the Borrower shall deliver to the Agent for redelivery to the Banks a statement of sources and uses acceptable to the Agent that evidences that after giving effect to the payment of balance of the Consideration under the Argosy Merger Agreement and the fees and expenses in connection therewith, the Borrower shall have at least $20,000,000 of undrawn availability with respect to the Revolving Credit Commitments. Upon receipt by the Agent for redelivery to the Banks of (i) a certificate of the Borrower that all the conditions set forth in Section 7.1 and 7.3 of the Argosy Merger Agreement have been met (or a certificate which details the conditions that the Borrower or HAC have agreed to waive in whole or in part, which waivers shall be acceptable to the Agent), (ii) a certificate evidencing that the Ratio of Total Funded Debt to EBITDA as calculated on a proforma basis for the prior 12 months after giving effect to the Borrower’s acquisition of Argosy, does not exceed 2.25 to 1.00 during the period from the Closing date through the effective date of the Argosy Merger Agreement, and (iii) the statement of the sources and uses provided for above, HAC may effect the purchase of the remaining shares of Argosy not acquired by the Borrower under the Purchase Agreement. Upon HAC’s acquisition of title to the shares of Argosy pursuant to the Argosy Merger Agreement, the

2

Borrower shall promptly cause such ownership interests of Argosy and any other new Material Subsidiary to be subject to the security interest granted under the Pledge Agreement to the Agent for the benefit of the Banks. Other than the owned property of Argosy which is subject to the Encumbrance permitted under Section 6.7(viii), and in the event that the Borrower’s ratio of Total Funded Debt to EBITDA is greater than 1.0 to 1.0, determined as of March 31, 2002 (as set forth in the financial statements delivered by the Borrower to the Agent and the Banks pursuant to Section 5.2(a)), the Borrower shall cause on or before May 15, 2002, a lien to be granted to the Agent for the benefit of the Banks upon all owned property of Argosy and its subsidiaries pursuant to a Mortgage.”

4.    By its execution below, the Borrower acknowledges and agrees that except as amended by this Amendment and the documents executed and delivered in connection herewith or in connection with the Credit Agreement, the Credit Agreement and the other Loan Documents and all obligations thereunder remain in full force and effect with respect to the Bank Indebtedness.

5.    The Credit Agreement, the Loan Documents and all prior amendments and modifications thereto are hereby modified solely to the extent that any of the terms or provisions thereof are irreconcilably inconsistent with the terms and provisions of this Amendment.

6.    The Recitals set forth above are incorporated herein by reference and made a part hereof, and the Borrower represents, warrants and attests to the veracity thereof as well as to the veracity of the representations set forth in the Credit Agreement as of the date hereof (except representations which expressly relate solely to an earlier date or time, which representations shall be true as of the specific dates or times referred to therein).

7.    The Borrower represents that this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforceability of creditors rights generally or by general equitable principles.

8.    Neither this Amendment nor the consummation of the transactions contemplated herein nor the performance by the Borrower of its obligations hereunder will (i) violate any law, rule or regulation or court order to which the Borrower is subject; (ii) conflict with or result in a breach of the Borrower’s articles of incorporation or bylaws or any material agreement or instrument to which any Borrower is subject or by which its properties are bound or (iii) result in the creation or imposition of any lien, security interest or encumbrance on the property of any Borrower, whether now owned or hereafter acquired, other than liens in favor of Agent for the benefit of the Lenders.

9.    This Amendment may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument.

3

10.    This Amendment shall become effective when it has been executed by the Borrower, the Banks and the Agent.

[SIGNATURES BEGIN ON NEXT PAGE]

4

[SIGNATURE PAGE 1 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

Executed as of the day and year first above written.

EDUCATION MANAGEMENT CORPORATION
By:	/s/    Kristen P. Gribble
Name: Title:	Kristen P. Gribble Vice President and Treasurer

[SIGNATURE PAGE 2 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

NATIONAL CITY BANK OF PENNSYLVANIA, individually and as Agent
By:	/s/    John L. Hayes, IV
Name: Title:	John L. Hayes, IV Vice President

[SIGNATURE PAGE 3 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

FIRST UNION NATIONAL BANK, individually and as Syndication Agent
By:	/s/    Patrick J. Kaufmann
Name: Title:	Patrick J. Kaufmann Vice President

[SIGNATURE PAGE 4 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

SUNTRUST BANK, individually and as Syndication Agent
By:	/s/ William H. Crawford
Name: Title:	William H. Crawford Vice President

[SIGNATURE PAGE 5 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

FLEET NATIONAL BANK, individually and as Documentation Agent
By:	/s/ Edward McKenney
Name: Title:	Edward McKenney Senior Vice President

[SIGNATURE PAGE 6 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

J.P. MORGAN CHASE BANK, individually and as Documentation Agent
By:	/s/ Thomas Lillie
Name: Title:	Thomas Lillie Vice President

[SIGNATURE PAGE 7 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

BANK ONE, MICHIGAN
By:	/s/ Glenn A. Currin
Name: Title:	Glenn A. Currin Director

[SIGNATURE PAGE 8 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

FIFTH THIRD BANK
By:	/s/ Christopher S. Helmeci
Name: Title:	Christopher S. Helmeci Vice President

[SIGNATURE PAGE 9 OF 9 TO FIRST AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

AMERISERV FINANCIAL BANK
By:	/s/ Mitchell D. Edwards
Name: Title:	Mitchell D. Edwards Vice President

EX-4.07

EXHIBIT 4.07

SECOND AMENDMENT TO AMENDED

AND RESTATED CREDIT AGREEMENT

This Second Amendment to Amended and Restated Credit Agreement (the “Amendment”) is dated as of August 19, 2002, and is made by and among EDUCATION MANAGEMENT CORPORATION, (the “Borrower”), the BANKS under the Credit Agreement (as hereafter defined), NATIONAL CITY BANK OF PENNSYLVANIA (the “Agent”), as the Agent for the Banks and Issuing Bank, WACHOVIA BANK, as Syndication Agent, SUNTRUST BANK, as Syndication Agent, FLEET NATIONAL BANK, as Documentation Agent, and J.P. MORGAN CHASE BANK, as Documentation Agent.

RECITALS:

WHEREAS, the Borrower, the Banks and the Agent entered into that certain Amended and Restated Credit Agreement dated as of September 20, 2001, as amended by a First Amendment thereto dated as of February 15, 2002 (as amended, modified, extended or restated from time to time, the “Credit Agreement”);

WHEREAS, the Borrower has requested the Banks to increase the amount of Letters of Credit which can be issued under the Credit Agreement and to modify the provisions regarding issuance of such Letters of Credit.

NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties hereto agree as follows:

AGREEMENT:

1.    Capitalized terms used herein and not otherwise defined shall have the meanings given to them under the Credit Agreement.

2.    Subsection 2.3(a) of the Credit Agreement is hereby amended and restated as follows:

“(a)    Issuance of Letters of Credit.    Subject to the terms and conditions of this Credit Agreement and in reliance upon the representations and warranties of the Borrower set forth herein, the Issuing Bank agrees to issue Letters of Credit, upon the request of the Borrower during the Availability Period, for the account of the Borrower and its Subsidiaries in an aggregate Stated Amount not to exceed THIRTY-FIVE MILLION AND 00/100 DOLLARS ($35,000,000) minus any unreimbursed draws of any Letter of Credit; provided, however, the sum of the outstanding principal balance of Revolving Credit Loans, the Swing Loans, the Supplemental Swing Loans, the Stated Amount of issued Letters of Credit and the aggregate unreimbursed draws of any Letter of Credit shall at no time exceed the Revolving

Credit Commitment as the same may be reduced from time to time. The issuance of any Letter of Credit in accordance with the provisions of this Subsection 2.3(a) shall be in accordance with the Issuing Bank’s then current practices relating to the issuance by the Issuing Bank of stand-by and commercial letters of credit, as the case may be, including without limitation, the execution of appropriate application and reimbursement agreements, as well as subject to the satisfaction of each condition set forth in Section 7.1 hereof. No Letter of Credit shall be issued with an expiration date beyond the earlier of the Repayment Date or one year from the date of issuance. Letters of Credit may be issued for the account of the Borrower or for the account of a Subsidiary of the Borrower (upon receipt by the Issuing Bank from the account party of an application for a Letter of Credit and related documents required by the Issuing Bank). Excluding any Letters of Credit issued for the account of Argosy or any of its Subsidiaries for the benefit of DOE, the aggregate amount of all Letters of Credit issued for the account of the Subsidiaries of the Borrower shall not exceed Five Million and 00/100 Dollars ($5,000,000) at any one time outstanding. The Letters of Credit issued for the account of Argosy or any of its Subsidiaries in favor of DOE plus the other Letters of Credit issued for the account of the Subsidiaries of the Borrower shall be included in the Thirty-Five Million and 00/100 Dollars ($35,000,000) aggregate maximum dollar amount of Letters of Credit set forth above. All reimbursement obligations of the Subsidiaries of the Borrower with respect to Letters of Credit issued for the account of such Subsidiaries shall be guarantied by the Borrower pursuant to the Guaranty Agreement. The Borrower shall be listed as a co-applicant with respect to all Letters of Credit issued for the account of Argosy or any of its Subsidiaries for the benefit of DOE.”

3.    Section 5.1 of the Credit Agreement is hereby amended and restated as follows:

“5.1    Use of Proceeds.

Proceeds of the Revolving Credit Loans shall be used by the Borrower (a) to refinance the revolving credit loans, if any, outstanding under the Borrower’s Existing Credit Agreement, (b) for the payment of the purchase price and related expenses in connection with the acquisitions by the Borrower or its Subsidiaries of the ownership interests of Argosy, and (c) for general working capital purposes of the Borrower and its Active Subsidiaries, including but not limited to capital expenditures, the acquisition and development of additional schools, draws to meet DOE regulatory requirements and Permitted Acquisitions. Proceeds of the Term Loans shall be used by the Borrower for the payment of the purchase price and related expenses in connection with the acquisitions by the Borrower or its Subsidiaries of the ownership interests of Argosy. Proceeds of the Swing Loans shall be used by the Borrower to finance its general working capital purposes on a day-to-day basis. Proceeds of the Supplemental Swing Loans shall be used by the Borrower to finance its short term borrowing needs for general corporate purposes. The Letters of Credit may be issued in the aggregate stated principal amount not in excess of Thirty-Five Million and 00/100 Dollars ($35,000,000) at any one time outstanding for general corporate purposes.”

4.    By its execution below, the Borrower acknowledges and agrees that except as amended by this Amendment and the documents executed and delivered in connection herewith or in connection with the Credit Agreement, the Credit Agreement and the other Loan

2

Documents and all obligations thereunder remain in full force and effect with respect to the Bank Indebtedness.

5.    The Credit Agreement, the Loan Documents and all prior amendments and modifications thereto are hereby modified solely to the extent that any of the terms or provisions thereof are irreconcilably inconsistent with the terms and provisions of this Amendment.

6.    The Recitals set forth above are incorporated herein by reference and made a part hereof, and the Borrower represents, warrants and attests to the veracity thereof as well as to the veracity of the representations set forth in the Credit Agreement as of the date hereof (except representations which expressly relate solely to an earlier date or time, which representations shall be true as of the specific dates or times referred to therein).

7.    The Borrower represents that this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforceability of creditors rights generally or by general equitable principles.

8.    Neither this Amendment nor the consummation of the transactions contemplated herein nor the performance by the Borrower of its obligations hereunder will (i) violate any law, rule or regulation or court order to which the Borrower is subject; (ii) conflict with or result in a breach of the Borrower’s articles of incorporation or bylaws or any material agreement or instrument to which any Borrower is subject or by which its properties are bound or (iii) result in the creation or imposition of any lien, security interest or encumbrance on the property of any Borrower, whether now owned or hereafter acquired, other than liens in favor of Agent for the benefit of the Lenders.

9.    This Amendment may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument.

10.    This Amendment shall become effective when it has been executed by the Borrower, the Required Banks and the Agent.

[SIGNATURES BEGIN ON NEXT PAGE]

3

[SIGNATURE PAGE 1 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

Executed as of the day and year first above written.

EDUCATION MANAGEMENT CORPORATION
By:	/s/ Robert T. McDowell
Name:	Robert T. McDowell
Title:	Executive Vice President and CFO

[SIGNATURE PAGE 2 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

NATIONAL CITY BANK OF PENNSYLVANIA, individually and as Agent
By:	/s/ John L. Hayes, IV
Name:	John L. Hayes
Title:	Vice President

[SIGNATURE PAGE 3 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

WACHOVIA BANK, individually and as Syndication Agent
By:	/s/ Patrick J. Kaufmann
Name:	Patrick J. Kaufmann
Title:	Vice President

[SIGNATURE PAGE 4 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

SUNTRUST BANK, individually and as Syndication Agent
By:	/s/ William H. Crawford
Name:	William H. Crawford
Title:	Vice President

[SIGNATURE PAGE 5 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

FLEET NATIONAL BANK, individually and as Documentation Agent
By:	/s/ Edward McKenney
Name:	Edward McKenney
Title:	Senior Vice President

[SIGNATURE PAGE 6 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

J.P. MORGAN CHASE BANK, individually and as Documentation Agent
By:	/s/ John Malone
Name:	John Malone
Title:	Vice President

[SIGNATURE PAGE 7 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

BANK ONE, NA
Successor by Merger to BANK ONE, MICHIGAN
By:	/s/ Patrick F. Dunphy
Name: Title:	Patrick F. Dunphy Director

[SIGNATURE PAGE 8 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

FIFTH THIRD BANK
By:	/s/    Christopher S. Helmeci
Name: Title:	Christopher S. Helmeci Vice President

[SIGNATURE PAGE 9 OF 9 TO SECOND AMENDMENT

TO AMENDED AND RESTATED CREDIT AGREEMENT]

AMERISERV FINANCIAL BANK
By:	/s/    Mitchell D. Edwards
Name: Title:	Mitchell D. Edwards President

EX-10.03

Exhibit 10.03

THE

EDUCATION MANAGEMENT CORPORATION

RETIREMENT PLAN

Table of Contents

Quick-Reference Information
Sponsor	1
Other Participating Employers	1
Plan Administrator	1
Trustee	1
Appeals Authority	1
Length Of Service Required For Benefits (Vesting Schedule)	2
Plan Year Ends Every	2
Plan Number	2
Welcome to the Plan!
Introduction	2
Individual accounts	2
Contributions	3
Payments	3
Plan and summary plan description	3
Ordinary names	3
Effective Date	4
How You Get into the Plan
Introduction	4
The eligibility requirements	4
Actually getting in	4

If things change	5
Trading Off Your Pay For Contributions to the Plan
Introduction	5
How much you can trade off	5
How to do it	5
Possible but unlikely limit	6
Matching Contributions
Introduction	6
Special eligibility rule	6
Rate of match	7
Form of matching contribution	7
Reports	7
Investment	7
Profit Sharing Contributions
Introduction	8
Who shares in profit sharing contributions	8
How much you get	8
Reports	8
The Former ESOP and Employer Stock Accounts
Introduction	9
Who has an employer stock account	9
Who would share in ESOP contributions	9
How much you get	10
Reports	10
Incoming Rollovers
Introduction	10
Direct rollover	10
Indirect rollover	10
Rules applicable to both types of rollover	11
Approval of plan administrator	11
Separate accounting	11
What Happens to the Money While It’s in the Plan
Introduction	11
“Exclusive benefit”	11
Investment	12
Recordkeeping	12
Return of contributions	12
Making Your Own Investment Decisions
Introduction	12
The choices	13
Getting information	13
Implementing your choices	13

Your responsibility	13
When You Retire or Terminate Employment
Introduction	14
Normal retirement after age 65	14
Early retirement after age 55	14
Disability	14
Other termination of employment	14
Forfeitures	15
Some special rules about termination of employment	16
When Payment Is Actually Made
Introduction	16
General rule	16
Your choices about timing	16
Latest possible date to take the money (or stock)	17
How Payment Is Made
Introduction	17
All accounts other than employer stock account	17
Employer stock account	18
Having the money transferred directly to another plan	18
“Put” option	19
How to Claim Your Money or Stock
Introduction	20
Pre-approved payments	20
Making a formal claim	20
Appeal	21
Discretionary authority	21
Payment Before Termination of Employment
Introduction	22
Withdrawal of after-tax contributions	22
Age 59½	22
Age 70½	22
Hardship	22
Borrowing Money From Your Accounts
Introduction	23
Eligibility	23
Number	24
Amount	24
Promissory note	24
Term	24
Interest	24
Source and application of funds	24

Repayment	25
Security	25
Pre-payment	25
Default	25
How to apply	25
In Case of Death
Introduction	26
If you’re married	26
If you’re not married	26
Naming your beneficiary and getting spousal consent	26
Claiming your accounts	27
Child Support, Alimony and Property Division in Divorce
Introduction	27
What a domestic relations order is	28
What happens when a domestic relations order comes in	28
How the Length of Your Service Is Calculated
Introduction	29
12-Month periods	29
Years of service	29
Full-time employees	30
Part-time faculty	30
Other part-time employees	30
Back pay	30
Breaks in service	30
How breaks in service cancel years of service	31
Service with related employers	31
When You Return from Military Service
Introduction	32
Break in service	32
401(k) contributions	32
Matching contributions	33
Profit sharing contributions and ESOP contributions	33
Your “pay”	33
Percentage of entitlement to employer accounts	33
Limits and testing	33
What the Plan Administrator Does
Introduction	34
Reporting and disclosure	34
Bonding	34
Numerical testing	34
Prohibited transactions	34
Expenses	35
Limitation	35
What the Employer Does

Introduction	35
Establishment	35
Contributions	35
Employment records	36
Insurance and indemnification	36
Changing the plan	36
Ending the plan	36
Maximum Amount of 401(k) Contributions
Introduction	37
$10,500 limit	37
If the $10,500 limit is exceeded	37
Utilization test	38
Who the restricted employees are	38
Performing the utilization test	38
If the utilization test reveals a problem	39
Returning excess contributions	40
Combining plans	40
Maximum Amount of Matching Contributions
Introduction	41
Matching contributions by themselves	41
Matching contributions in combination	41
If this test of matching contributions reveals a problem	42
Maximum Amount of Total Contributions
Introduction	42
25% of pay limit	42
If there’s more than one defined contribution plan	43
If there’s also a defined benefit plan	43
Related employers	43
Improvements When The Plan Is Top-Heavy
Introduction	44
Who is in the concentration group	44
Performing the concentration test	45
Changes if the plan is top-heavy	46
Special ESOP Provisions
Introduction	47
The nature of an ESOP	47
Investment	47
“Employer securities”	48
Voting	49
Diversification	49
“Nonterminable” protections and rights	51
Non-allocation under Code section 409(n)	51
Miscellaneous

What “pay” or “compensation” means	52
Leased employees	53
Family and medical leave	53
Changes in vesting schedule	53
Non-Alienation	53
Payments to minors	53
Unclaimed benefits	54
Plan assets sole source of benefits	54
No right to employment	54
Profit sharing and stock bonus plan	54
Merger of plan	54
Protection of benefits, rights, and features from previous edition of plan	54
Governing law	55
No PBGC Coverage	55
“Highly compensated employees.”	55
Statement of ERISA rights	55
Special Arrangements for New Participating Employers
Introduction	56
Illinois Institute of Art	57
New York Restaurant School	57
Art Institutes International Portland, Inc.	57
Massachusetts Communications College	57
Art Institute of Charlotte	58
Art Institute of Las Vegas	58
Art Institute of California	58

QUICK-REFERENCE INFORMATION

Sponsor

Education Management Corporation

300 Sixth Avenue, Suite 800

Pittsburgh, PA 15222

Employer identification number assigned by the IRS: 25-1119571

Other Participating Employers

The other participating employers are listed on Appendix A, which appears at the end of the plan

Plan Administrator

Retirement Committee

c/o Education Management Corporation

300 Sixth Avenue, Suite 800

Pittsburgh, PA 15222

Telephone: (412) 562-0900

Trustee

Fidelity Management Trust Company

82 Devonshire Street

Boston, MA 02109

(Prior to the merger of the ESOP into the Retirement Plan,

the trustee of the assets of the ESOP was:

Marine Midland Bank

One Marine Midland Center, 17th Floor

P. O. Box 4567

Buffalo, NY 14240)

Appeals Authority

Retirement Committee

c/o Education Management Corporation

300 Sixth Avenue, Suite 800

Pittsburgh, PA 15222

Length Of Service Required For Benefits (Vesting Schedule)

Less than 5 years of service 0%

5 years of service 100%

Because the vesting schedule was different before April 1, 2000, two special rules apply:

• First, the change in vesting schedule does not have the effect of reducing anyone’s vesting percentage. For example, if you had 3 years of service before April 1, 2000 and therefore were 20% vested, you remain 20% vested even under the new schedule.

• Second, if you had at least 3 years of service before April 1, 2000, you will always get the better of the old schedule or the new schedule. This means, for example, that after a total of 4 years of service, you will advance to being 40% vested (according to the old schedule) and after 5 years of service, you will advance to being 100% vested (according to the new schedule).

Plan Year Ends Every December 31

Plan Number 001

WELCOME TO THE PLAN!

Introduction.    This is the Retirement Plan sponsored by Education Management Corporation, which we will call “the sponsor.” It is maintained by the sponsor and the other participating employers identified above in the section called “Quick-Reference Information” under the heading “Other Participating Employers.”

Please note:    The sponsor used to maintain two separate plans — the Retirement Plan and the Employee Stock Ownership Plan. To simplify administration and make it easier for you to understand your retirement benefits, they have now been consolidated into a single plan, and this is it.

Individual accounts.    Simply put, the plan consists of a series of individual accounts set up for the employees who are in the plan. Actually, an employee may have a number of different accounts:

• a 401(k) account (if you choose to trade off pay for contributions to the plan),

• a match account (again, if you choose to trade off pay for contributions to the plan),

• a profit sharing account,

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• an employer stock account (if you are eligible to participate in the ESOP portion of the plan), and

• a rollover account (if you roll money into this plan from another plan).

Employees who were in this plan (that is, the Retirement Plan) before May 1, 1992 and who made after-tax employee contributions also have an after-tax contribution account for those after-tax employee contributions.

Contributions.    Money goes into your 401(k) account if you choose to trade off pay for a contribution to the plan. If you do, the employer matches your 401(k) contributions (assuming you have completed one year of service, as described later in the plan); the matching contributions go into your match account.

The employer is permitted (but not required) to make additional contributions—beyond your 401(k) contributions and any matching contributions. Your share of any additional contributions goes into your profit sharing account.

Payments.    While the money is in the plan, it is invested in accordance with your investment instructions (except for any employer stock account, of course, which is invested in employer stock). Then, after you leave the company, you are entitled to all of the money in your 401(k) account (and any rollover account or after-tax employee contribution account, if you have one). Depending on the length of your service, you may be entitled to part or all of the money in your match account and your profit sharing account and the stock in your employer stock account.

Please note:    Federal law may require withholding or other taxes on the money that you are paid from this plan. The plan administrator will naturally comply with any such law. But for the sake of simplicity, we will say here in the plan that you will receive “all the money.” Just keep in mind that “all the money” is before any required withholding or other taxes.

Plan and summary plan description.    The plan document—that’s what this is—sets out the rules for how and when you get into the plan, how and when money goes into your accounts, what happens to the money while it’s in the plan, and how and when you can get the money out.

This plan is written in simple, easy-to-understand language. Therefore, it serves as both the plan document and the “summary plan description” required by federal law.

Ordinary names.    Throughout the plan, we will refer to things by their ordinary names. We will call this plan simply “the plan.” We will call the sponsor which is identified in the section called “Quick-Reference Information” simply “the sponsor.” When we say “employer,” we mean the sponsor or one of the other participating employers—whichever one employs you. When we say “you,” we mean you the employee (or former employee) who participates in the plan. When we say “Code,” we mean the federal Internal Revenue Code of 1986, as in effect from time to time.

There is one exception to this rule. From time to time, we will refer to your “pay” or “compensation.” Unfortunately, those terms have highly technical meanings, which can change for different purposes under the

Retirement Plan    Page 3

plan. The various technical definitions are set forth at the end of the plan under the heading “Miscellaneous.”

Effective Date.    This edition of the plan generally takes effect on August 1, 2001 and applies only to participants who have at least one hour of service on or after that date. We say “generally” because there are a few provisions that take effect on other dates; when those provisions come along, we will say exactly when they take effect.

This restatement of the Education Management Corporation Retirement Plan is conditional upon approval by the Internal Revenue Service. Sometimes, the IRS asks for minor, technical changes in order to give their approval, but if any such changes are made, we will let you know.

HOW YOU GET INTO THE PLAN

Introduction.    Before you can get any benefit from the plan, you have to get into the plan. This part of the plan document explains how you get in.

The eligibility requirements.    There are three requirements in order to be eligible to get into the plan:

• First, you have to be an employee of the employer. Remember, when we say “the employer,” we mean the sponsor or one of the other participating employers—whichever one employs you. Independent contractors are not employees of the employer, nor are workers whose services are leased from a leasing organization (such as “temps”), and they are therefore not eligible for the plan.

• Second, you must be classified by the employer as a salaried, clerical or hourly employee and must not be (a) matriculated in an employer with an enrollment agreement (i.e., a student) or (b) a member of a collective bargaining unit unless the collective bargaining agreement provides for participation in this plan.

• Third, you must have worked for the employer for 30 days.

Any special arrangements that might be made for employees of new participating employers are described at the end of the plan in the section called “Special Arrangements for New Participating Employers.”

Actually getting in.    As soon as you meet all of the eligibility requirements at the same time, you are enrolled in the plan on the first of the next month. Enrollment is automatic; you don’t have to fill out any forms just to get into the plan. But you do have to take action if you want to:

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• trade off pay for contributions to the plan, as explained in the following section called “Trading Off Your Pay for Contributions to the Plan,” or

• direct the investment of your accounts into any investment option other than the default investment option, as explained later in the section called “Making Your Own Investment Decisions,” or

• name a beneficiary for any benefits that may be payable after your death, as explained in the section called “In Case of Death.”

If things change.    If at any time you cease to be an employee of the employer or you cease to be employed in the classification of employees who are eligible to get into the plan, then your participation in the plan ceases immediately and automatically. (If you later return to employment with the employer in the classification of eligible employees, you will participate in the plan again immediately. It may be necessary to take action to re-start your 401(k) contributions, as described in the next section.)

Of course, after you leave the plan, you may still be entitled to receive the money in your account. (We will discuss this later in the section called “When You Retire or Terminate Employment.”) And you remain entitled to direct the investment of the money in your account until it is paid or forfeited.

TRADING OFF YOUR PAY FOR CONTRIBUTIONS TO THE PLAN

Introduction.    You may have heard about plans called “401(k)” plans. That’s what this is. It offers you the opportunity to trade off your pay for contributions to the plan. It is particularly attractive because, under the current federal income tax law, you don’t pay current federal income tax on the amount of pay that you trade off for a contribution to the plan.

Please note:    While free from federal income tax, these amounts are still subject to Social Security tax (FICA) and state and local income tax in Pennsylvania and a few other states.

How much you can trade off.    You can trade off any percentage of your pay, expressed in whole numbers, up to 15% of your pay.

How to do it.    If you would like to trade off some of your pay in return for a contribution to the plan, get in touch with Fidelity, using the toll-free number shown in the materials that you receive from Fidelity. You will authorize the employer to reduce your pay by a certain percentage and, instead of paying it to you in cash, to put that amount into your 401(k) account in the plan.

Retirement Plan    Page 5

There are several simple rules for making contributions by this method (these rules were created by the IRS):

• You must enter into an enforceable agreement with the employer to do this. (This is handled by Fidelity, which forwards your authorization to the employer to be implemented in the payroll system and sends you a confirmation in the mail.)

• The agreement only applies to pay that you earn after the agreement is entered into. (In other words, you can’t make this type of contribution retroactively).

• You can terminate the agreement at any time by notifying Fidelity, but the agreement still applies to all pay that was earned while the agreement was in effect. (In other words, you can’t terminate the agreement retroactively.)

• You can change your agreement at any time, but the change will take effect at the beginning of the following month.

Whenever a contribution is made by this method, you will see it on your pay stub. From this point forward in the plan, we will call these your “401(k) contributions.”

Possible but unlikely limit.    It is possible, though highly unlikely, that contributions under this section of the plan would create a situation where total contributions were greater than the amount permitted as a deduction under the Code. If that were to happen, contributions under this section would be limited (or, if already made, would be returned to the employer) beginning with those that represent the greatest percentage of pay, so that the correction would have the effect of imposing a maximum permissible percentage somewhat lower than 15%. If any contributions made on your behalf under this section of the plan are returned to the employer, of course they will promptly be paid to you and will be treated as taxable income for the year in which they were contributed to the plan.

MATCHING CONTRIBUTIONS

Introduction.    In order to encourage employees to make 401(k) contributions (in other words, to encourage savings for retirement), the employer agrees to make an additional contribution to the plan on your behalf if you make 401(k) contributions. This is called a matching contribution and it is an additional contribution on top of your pay.

Special eligibility rule.    Although you are eligible to make 401(k) contributions on the first of the

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month after 30 days of employment with the employer, you are not eligible for matching contributions until the next January 1 or July 1 after you have completed one year of service. This doesn’t necessarily mean 12 months. You may be credited with a “year of service” after just 900 hours of service. This is explained later in the plan under the heading “How the Length of Your Service Is Calculated.”

Rate of match.    The employer agrees to make an additional contribution to the plan of $1 for every dollar of 401(k) contributions that you choose to make up to 3% of your pay plus $.50 for every dollar of 401(k) contributions from 4% to 6% of your pay. Here is a table showing the match that would apply to various levels of 401(k) contributions:

401(k) Contributions	Match
1%	1	%
2%	2	%
3%	3	%
4%	3.5	%
5%	4	%
6%–15%	4.5	%

Matching contributions are made each pay period. With one exception, the matching contribution is calculated separately for each pay period, based on your 401(k) contributions for that pay period alone, not on a cumulative basis during the plan year. For example, if your rate of 401(k) contributions is less than 6% for a particular pay period (so you’re not getting the maximum available matching contribution), you can’t make it up by boosting your rate to more than 6% in some future pay period. And if your 401(k) contributions reach the dollar limit described later in the plan in the section called “Maximum Amount of 401(k) Contributions” (and therefore stop) before the end of the year, your matching contributions will stop at the same time.

As an exception, however, effective January 1, 1999, if you have maintained a rate of 401(k) contributions of 6% or more throughout the plan year but your matching contributions stop because you reach the dollar limit on 401(k) contributions before the end of the year, the employer will make a “catch-up” matching contribution, as soon as administratively possible at the end of the plan year, in whatever additional amount is necessary to provide you with the maximum available matching contribution for the plan year.

Form of matching contribution.    Matching contributions will ordinarily be made in cash. But there are two possible exceptions. First, the employer is permitted (but not required) to make matching contributions in employer stock. Second, if forfeitures from employer stock accounts are used to make the matching contribution, either in whole or in part, those forfeitures may be applied either in the form of employer stock or by selling the stock and applying them in cash.

Reports.    The employer’s matching contribution is added to your match account. When the employer contributes in this manner, you will see it on your periodic statements from the trustee, Fidelity.

Investment.    To the extent that the matching contribution is made in employer stock, your match account will be shown as invested in employer stock. Keep in mind that this is still your match account, not an “employer stock account,” which is something different that is explained later in the plan in the section called

Retirement Plan    Page 7

“The Former ESOP and Employer Stock Accounts.” You can direct that the employer stock in your match account be sold and the proceeds invested in one or more of the available investment options, as explained later in the section called “Making Your Own Investment Decisions.”

PROFIT SHARING CONTRIBUTIONS

Introduction.    In addition to 401(k) contributions that you choose to make, and the matching contributions that go with them, the employer can make profit sharing contributions whenever it chooses to do so. The employer is under no obligation to contribute to the plan in this manner. If the employer contributes in this manner, its contribution is on top of your pay. That is, the employer makes the contribution out of its own money; you don’t have to trade off any pay to get it. We will call these “profit sharing contributions.”

Who shares in profit sharing contributions.    If the employer makes a profit sharing contribution, the amount is allocated as of the last day of the plan year (currently, December 31) among the individual accounts of all the participants in the plan who meet all three of these requirements:

• you have become eligible to receive matching contributions by the last day of that plan year and

• you completed a year of service during that plan year (see “How the Length of Your Service Is Calculated,” later in the plan, for what constitutes a “year of service”) and

• you were employed by the employer on the last day of the plan year, currently December 31 (or you retired during the year, became disabled during the year or died during the year).

Keep in mind that only employees who have become eligible for matching contributions are entitled to share in profit sharing contributions. If you do not become eligible for matching contributions until January 1, you do not share in the profit sharing contributions for the preceding year.

How much you get.    Profit sharing contributions are divided in proportion to each employee’s pay from the employer during that year—so everybody gets an amount equal to the same percentage of pay added to his or her account.

Reports.    A profit sharing contribution by the employer is added to your profit sharing account. When the employer contributes in this manner, you will see it on your periodic statements from the trustee, Fidelity.

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THE FORMER ESOP AND EMPLOYER STOCK ACCOUNTS

Introduction.    The ESOP loan has been paid off, so no more ESOP contributions by the employer are contemplated (as explained near the end of the plan in the section called “Special ESOP Provisions”). But participants may still have employer stock accounts, reflecting contributions to the ESOP when it was a separate plan, so it is useful to describe employer stock accounts.

Who has an employer stock account.    Not everyone in the plan has an employer stock account. There are two categories of employees who have employer stock accounts:

• Everyone who had an account in the Education Management Corporation Employee Stock Ownership Plan before it was merged into this plan, effective April 7, 1999, still has an employer stock account. It is the same account that he or she had under the ESOP; now it is maintained under this plan instead.

• Everyone who received an allocation of ESOP contributions or forfeitures through the end of 1999 or receives an allocation of ESOP forfeitures after 1999 also has an employer stock account, in which those ESOP contributions or forfeitures are held.

Who would share in ESOP contributions.    Though no more employer contributions are contemplated for the ESOP portion of the plan, this section describes how an employer contribution would be allocated among participants if it were to be made. ESOP contributions would be allocated as of the last day of the plan year (currently, December 31) among the employer stock accounts of employees in the plan who meet all of these requirements:

• You were employed on the last day of the plan year by an employer that participates in the ESOP feature of the plan (or you retired from such an employer during the year, became disabled from such an employer during the year, or died during the year while employed by such an employer).

Please note: Not all employers who participate in the 401(k) feature of the plan participate in the ESOP feature. To find out if your employer participates in the ESOP feature, look at the list of participating employers on Appendix A at the end of this plan: employers that do not participate in the ESOP are denoted with an asterisk.

• You have become eligible to receive matching contributions by the last day of that year.

• You completed a year of service during that plan year (see “How the Length of Your Service Is Calculated,” later in the plan, for what constitutes a “year of service”).

Retirement Plan    Page 9

Keep in mind that only employees who have become eligible for matching contributions are entitled to share in ESOP contributions. If you do not become eligible for matching contributions until January 1, you do not share in any ESOP contributions for the preceding year.

How much you get.    ESOP contributions would be divided in proportion to each eligible employee’s pay from the employer during that year—so everybody would get an amount equal to the same percentage of pay added to his or her employer stock account. (If you are still technically employed by the sponsor or another employer that participates in the ESOP, so that you would be entitled to share in ESOP contributions or forfeitures, but some of your pay comes from another employer that does not participate in the ESOP feature, your pay from both employers would be taken into account for this purpose.)

Reports.    Your share of ESOP contributions would be added to your employer stock account as of the last day of the plan year. You would see the amount on your statements from the trustee, Fidelity.

INCOMING ROLLOVERS

Introduction.    There is one other way that money can come into the plan for you. That is when money is transferred from another plan. It is called a “rollover,” and this section will explain how it works.

Direct rollover.    If you are entitled to get money from a pension, profit sharing or stock bonus plan, and it constitutes an “eligible rollover distribution” under the Code, that plan must offer you the opportunity to have the money transferred directly to another plan (instead of paid to you in cash) if you can find a plan that will take it.

This plan will take a direct transfer of that type, if all of the other rules of this section are met. (This is what the law calls a “direct rollover.”)

Indirect rollover.    Instead of choosing a direct rollover from that other plan to this plan, you may choose to take the money in cash from that other plan. If you do, and you get what the law calls an “eligible rollover distribution,” you can still make a rollover to this plan if:

• you deliver a check to the plan administrator not later than the 60th day after you received the money from the other plan, or

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• put the money in a “conduit” individual retirement account within 60 days after you received the money from the other plan, never make any other contributions to that conduit IRA, and then transfer all of that money to this plan; and

• all of the other rules of this section are met.

The rules of the Code for indirect rollovers are very strict and can be very tricky. This plan does not attempt to explain those rules. You should consult the tax advisor of your choice.

Rules applicable to both types of rollover.    This plan will not accept any rollover that does not comply with the requirements of the Code. Foremost among them is the requirement that the rollover come from a pension, profit sharing or stock bonus plan that is qualified under section 401(a) of the Code.

In addition, this plan is set up to be generally exempt from the joint and survivor annuity rules of the Code. This plan will not accept any transfer of assets from another plan if the effect would be to make this a “transferee plan” subject to those rules.

Approval of plan administrator.    If you would like to make a rollover to this plan, get in touch with the trustee (Fidelity), which can give you the forms. The plan administrator has complete authority to deny any requested rollover if the person requesting the rollover is unable or unwilling to satisfy the plan administrator that the rollover complies with these rules and will not jeopardize the intended status and operation of the plan.

Separate accounting.    If the plan accepts a rollover on your behalf, that rollover will be put into a separate account for you—separate from your 401(k) account, your match account, your profit sharing account and your employer stock account (if any).

WHAT HAPPENS TO THE MONEY WHILE IT’S IN THE PLAN

Introduction.    As required by law, the individual accounts of the employees in the plan are held in trust by the trustee identified at the beginning of the plan in the section called “Quick-Reference Information” under the heading “Trustee.” A trust is a pool of assets held by an individual or company (such as a bank) who is called the “trustee.” All contributions to the plan are paid to the trustee.

“Exclusive benefit”.    The trustee holds the assets of the plan for the exclusive benefit of the employees in the plan—that is, exclusively for the purposes of providing benefits to participants and beneficiaries of the plan and defraying the reasonable expenses of administering the plan.

Retirement Plan    Page 11

Investment.    Assets held by the trustee are invested by the trustee in accordance with the terms of the plan. Except for employer stock accounts, the plan gives you free choice among a number of different investment funds (as described in the following section of the plan). Employer stock accounts are invested in employer stock, as described in more detail near the end of the plan in the section called “Special ESOP Provisions.”

Recordkeeping.    Though the money is all pooled together for investment purposes, you still have one or more individual accounts. The plan administrator is responsible for keeping track of your individual accounts.

The investments are valued daily. But the government requires us to say here that the plan administrator will figure out the total value of the investments of the plan at the end of every year. If the value has gone up since the last valuation, then all of the accounts will be increased in the same proportion. If the value has gone down since the last valuation, then all of the accounts will be decreased in the same proportion. The plan administrator will give you periodic reports of the value of your account.

Return of contributions.    Except for a few unusual circumstances, once the employer puts money into the plan, the money can never come back to the employer. Here are the exceptions:

• If the employer made the contribution by mistake of fact, then it can be returned within 1 year after the contribution was made.

• All contributions by the employer are made on the condition that they are deductible by the employer for federal income tax purposes. If any part of a contribution is disallowed, that part of the contribution can be returned to the employer within 1 year after disallowance of the deduction.

• If this plan fails to qualify initially for favorable tax treatment under the Code, then all contributions can be returned to the employer, as long as an application for determination on the plan was filed with the Internal Revenue Service by the due date of the employer’s return for the taxable year in which the plan was adopted.

MAKING YOUR OWN INVESTMENT DECISIONS

Introduction.    This plan allows you to have considerable control over how your money is invested. This section of the plan will explain how you do it. Keep in mind that this section applies to all of your accounts except your employer stock account, which is invested in employer stock (but can be diversified after

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age 55 and 10 years of participation in the plan), as described in more detail near the end of the plan in the section called “Special ESOP Provisions.”

The choices.    The plan offers a number of choices. They are listed on Appendix B, which is a separate sheet that forms a part of this plan and which also includes a brief description of each alternative (taken from information published by Fidelity).

The choices may change from time to time. When they do, you will be given a new Appendix B showing all of the choices that are in effect after the change is made.

Please note:    If matching contributions are made in employer stock, your match account will be invested in employer stock to that extent, rather than in any of the investments shown on Appendix B. But you may direct the trustee at any time to sell the employer stock and re-invest the proceeds in one or more of the investments shown on Appendix B, as explained below under the heading “Implementing your choices.” Just remember that employer stock is not one of the investment options on Appendix B, so you can never move your money in the other direction—that is, you can never go from any of the investments shown on Appendix B into employer stock.

Getting information.    The plan administrator cannot tell you which investment choice is best for you; that is your decision alone, and the plan administrator is not licensed as an investment advisor.

But the plan administrator will provide you with more specific information about the choices, including exactly what each fund is invested in, who runs each fund, and how each fund has performed in the past. We hope this information will be helpful to you in making your choices.

Implementing your choices.    When you first join the plan, you will make your investment choices by contacting the trustee, Fidelity, at the toll-free number shown in the materials that you receive from Fidelity. After joining the plan, you can change your investment choices whenever you like during normal business hours. Just call Fidelity at the toll-free number shown in the materials that you receive from Fidelity. A representative will guide you through making the change.

If for any reason there is no current investment direction on file for you with the trustee, the plan hereby requires that your accounts (other than your employer stock account, if any) be invested in the Managed Income Portfolio, and neither the plan administrator nor the trustee nor any other fiduciary of the plan shall have any authority or discretion to direct otherwise. The same applies to any portion of your investment direction that becomes out of date, such as if you have chosen a particular fund and that fund is no longer offered (unless a substitute fund is automatically provided).

Your responsibility.    In return for complete freedom to choose how your accounts are invested among the available investment funds, you take complete responsibility for your choices. No one else is responsible for helping you or keeping you from making bad decisions. In fact, no one monitors your decisions at all.

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This plan is designed to take advantage of section 404(c) of the Employee Retirement Income Security Act of 1974, as amended, which means that the plan administrator and the trustee and all other fiduciaries of the plan are relieved of any and all responsibility for the investment decisions that you make.

WHEN YOU RETIRE OR TERMINATE EMPLOYMENT

Introduction.    This is a retirement plan. The purpose is for both you and the employer to save for your retirement. This section will explain when you can get your money (or stock, in the case of an employer stock account).

Normal retirement after age 65.    If your employment with the employer terminates any time on or after your 65th birthday, you are entitled to all the money in your 401(k) account, match account, and profit sharing account, as well as all of the money in your after-tax contribution account and rollover account, if you have them. In addition, you are entitled to all of the stock and cash in your employer stock account (and cash equal to any fractional share of stock).

Early retirement after age 55.    If your employment with the employer terminates any time before age 65 but after age 55 and you have completed at least 5 years of service, you are entitled to all the money in your 401(k) account, match account, and profit sharing account, as well as all of the money in your after-tax contribution account and rollover account, if you have them. In addition, you are entitled to all of the stock and cash in your employer stock account (and cash equal to any fractional share of stock). (To figure out your length of service, see the section entitled “How Your Length Of Service Is Calculated.”)

Disability.    If you become totally and permanently disabled, then you are entitled to all the money in your 401(k) account, match account, and profit sharing account, as well as all of the money in your after-tax contribution account and rollover account, if you have them. In addition, you are entitled to all of the stock and cash in your employer stock account (and cash equal to any fractional share of stock).

For this purpose, “totally and permanently disabled” means that, in the opinion of a physician selected by the plan administrator, you are unable to engage in any substantially gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued and indefinite duration.

Other termination of employment.    If your employment with the employer terminates before normal or early retirement or disability (as just described), you are entitled to receive all the money in your 401(k) account, as well as all of the money in your after-tax contribution account and rollover account, if you

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have them.

In addition, you are entitled to receive part or all of the money in your match account, your profit sharing account, and your employer stock account (if you have them) if you completed enough years of service to become vested. At the beginning of the plan, in the section called “Quick-Reference Information,” under the heading “Length Of Service Required For Benefits,” there is a table showing what percentage of these accounts you get. (To figure out your length of service, see the section entitled “How Your Length Of Service Is Calculated.”)

Forfeitures.    Any portion of your accounts that you are not entitled to when your employment terminates is forfeited. If you are not vested at all, forfeiture occurs when your employment terminates, because you are considered to have taken your entitlement (which is zero) at that time. If you are partially vested, forfeiture occurs (a) whenever you take the portion that you are entitled to or (b) otherwise when you have five consecutive break in service years. (With respect to your employer stock account, forfeitures are taken first from any cash in your account; they are taken from stock allocated to your account only as a last resort.)

If you are later re-employed, the amount of the forfeiture (with no adjustment for subsequent gains, losses, or expenses) will be restored to your accounts if, and only if, you re-pay the full amount that you previously received from the plan. Re-payment must be made within 5 years after you are first re-employed and before you suffer 5 break in service years in a row (as described below under the heading “How The Length Of Your Service Is Calculated”).

The money or stock to restore each of your accounts (match, profit sharing or employer stock) will come from forfeitures from accounts of the same type occurring during the same year when restoration is required, to the extent that such forfeitures are available. If not, forfeitures from different types of accounts may be used. If forfeitures in total are inadequate, the employer will contribute the balance in cash. Effective January 1, 2000, any balance of forfeitures during a plan year in excess of what is necessary to restore accounts during that year will be applied as follows:

• Forfeitures from profit sharing accounts will be applied toward the employer’s obligation to contribute under the plan and allocated in the same manner as required employer contributions, thus reducing the amount of cash contribution necessary from the employer to make the required contributions. (This change was previously made effective December 28, 1999.)

• Forfeitures from matching accounts and employer stock accounts will be applied in one of the following two ways: (i) forfeitures from both types of accounts will be applied toward the employer’s obligation to contribute under the plan and allocated in the same manner as required employer contributions, thus reducing the amount of cash contribution necessary from the employer to make the required contributions or (ii) forfeitures from match accounts will be applied toward the employer’s obligation to make matching contributions and allocated as if they were matching contributions, thus reducing the amount of cash contribution necessary from the employer to make the required matches, and forfeitures from employer stock accounts will be allocated as if they were ESOP contributions. For the 2000 plan year, method (i) will be used. For plan year 2001 and future years, the Retirement Committee will decide before the plan year begins whether method (i) or method (ii) will be used for that plan year. (The Retirement Committee will be exercising its authority to

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change the plan, as described in the section called “What the Employer Does,” under the heading “Changing the plan.”) For plan year 2001 and future years, if for any reason the Retirement Committee has not acted before the plan year begins, method (ii) will be used for that plan year.

Some special rules about termination of employment.    When we say your “employment with the employer terminates,” we mean that you are no longer employed by any employer that participates in the plan nor by any other member of the controlled group of trades or businesses (as described later in the plan under the heading “How The Length Of Your Service Is Determined”). In addition, we mean that you have a “separation from service” that permits you to receive your 401(k) contributions under the rules of section 401(k) of the Code and the regulations under that section.

WHEN PAYMENT IS ACTUALLY MADE

Introduction.    The preceding section described what you are entitled to when you retire or your employment terminates for some other reason. This section will go on to describe when payment is actually made, which depends on a number of factors.

General rule.    Payment is made as soon as administratively possible after your termination of employment. If payment is made because you have become totally and permanently disabled (as described in the preceding section), payment is made as soon as it is determined that you have suffered total and permanent disability. This applies to all your accounts: your 401(k) account, after-tax account, and rollover account (if you have them), as well as your match account, profit sharing account, and employer stock account (to the extent you are vested, of course).

As an exception to the general rule that this edition of the plan applies only to participants who complete at least one hour of service on or after August 1, 2001, this section of the plan will be applied to all participants who have not yet received distribution of their employer stock accounts as of August 1, 2001, no matter when their employment terminated.

Your choices about timing.    If your entitlement is $5,000 or less, you do not have any choices about timing. You must take the money (or stock) when you are first entitled to payment. (For distributions before March 22, 1999, there was an additional rule that your entitlement was never more than $5,000 on the occasion of any previous distribution.) If your entitlement is $5,000 or less, the plan administrator will notify you and, if you don’t initiate a withdrawal by calling the trustee, will direct the trustee to pay you your entitlement.

But if your entitlement is more than $5,000, payment will not be made unless and until you apply for it. This gives you some ability to postpone payment. When you want to take the money (or stock), start the

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process by calling the trustee (Fidelity) at (800) 835-5092. The process is described later in the plan in the section called “How to Claim Your Money or Stock.”

The law says that, after your employment terminates, you must receive the money (or stock) no later than 60 days after the close of the plan year in which your employment terminated (or you attain age 65, if later) unless you choose not to take it. If you don’t apply for the money by that date, we will interpret your silence as your choice not to take the money yet.

Latest possible date to take the money (or stock).    While you have some ability to postpone payment of your benefit, you can’t postpone it forever. Once your employment has terminated and you have reached age 70½, you must at least begin to take the money by April 1 of the following year (that is, April 1 of the year following the year in which your employment with the employer terminates or you attain age 70½, whichever comes later). Then you must take more by the end of that plan year and every following plan year on a schedule that does not extend beyond your life expectancy (or the joint life expectancies of you and your designated beneficiary). Life expectancy is determined by tables issued by the Internal Revenue Service and will be re-determined every year. (Of course, you may take all the money to which you are entitled at any time after age 70½; you need not string it out.)

Please note:    There is a stricter rule for 5% owners. Any employee who is a 5% owner upon attainment of age 70½ must begin to take the money by April 1 of the following year even if he or she remains employed.

The plan administrator will pay you whatever is necessary to comply with this provision of the law (section 401(a)(9) of the Code, including the “minimum incidental death benefit” rules) even if you don’t apply for payment. Payments that are required to be made under this section can not be transferred to another plan in a direct rollover.

HOW PAYMENT IS MADE

Introduction.    When your employment has terminated and the time comes for payment, the next question is, In what form is the payment made? This section will answer that question.

All accounts other than employer stock account.    The form of payment for all accounts other than your employer stock account (if you have one) is payment in a single sum by check made payable to you. (If any of your match account remains invested in employer stock, the trustee will sell the stock and distribute the cash.)

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Please note:    Before August 1, 2001, there was an alternative available for those who were members of the Retirement Plan before May 1, 1992, namely, the purchase of an annuity contract. Due to a change in the regulations, that alternative is eliminated from this edition of the plan, effective with respect to annuity starting dates later than 90 days after you receive notification of this change by way of a “summary of material modifications” (or annuity starting dates on or after January 1, 2003, if that comes first). If that alternative still applies to you and you would like to receive your benefit in the form of an annuity, see the previous edition of the plan in the section called “Alternative Form of Payment for Grandfathered Members.”

Employer stock account.    Now that the stock of Education Management Corporation is publicly traded, the form of payment of your employer stock account is the same form in which your account is invested. That is, any stock in your account is paid in stock, either by having the stock issued in your name and sending the actual stock certificate to you or your account at some institution or, if the trustee can do it, by making a wire transfer to a brokerage account that you designate. Any cash is paid in the form of cash, except that you have the right to demand payment of the cash portion of your account in stock. Any remaining partial share of stock is paid in cash, of course.

You may take payment of your employer stock account in a single payment. Or, if you prefer, you may take your account in annual installments over two, three, four or five years. If you take it in installments, each annual payment is equal to the amount in your account, divided by the number of remaining payments. For example, if you chose to take your employer stock account in annual installments over five years, when the first payment was to be made, there would be 5 remaining payments, so you would get 1/5 of the amount in your account at that time. The next year, there would be 4 remaining payments, so you would get 1/4 of the amount in your account at that time. Eventually, in the fifth year, there would be only 1 remaining payment, so you would get 1/1 (that is, all) of the amount in your account at that time.

After receiving stock from the trustee, it’s yours to keep or sell on the open market, as you see fit. (The stock is publicly traded.)

There is one possible exception to the rule that payment of your employer stock account is made in the same form in which your account is invested. If you are required to take part of your account out of the plan because of the rules explained in the previous section under the heading “Latest possible date to take the money (or stock),” the requirement will be met first by taking money out of accounts other than your employer stock account. But if the requirement cannot be satisfied without taking stock out of your employer stock account, you will be offered the opportunity to take the amount of stock necessary to satisfy the requirement. If you do not do so, however, the trustee will be forced to sell enough stock to satisfy the requirement and then will pay you in cash. (As an exception to the general rule that this edition of the plan applies only to participants who complete at least one hour of service on or after August 1, 2001, this paragraph will be applied to all participants who are required to take distributions on or after August 1, 2001, no matter when their employment terminated.)

Having the money transferred directly to another plan.    Rather than taking the money (or stock) and paying taxes on it when the time comes for payment, you may be able to make a “direct rollover” to another plan. Direct rollovers can be made to plans of these types:

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• a pension, profit sharing or stock bonus plan that is qualified under section 401(a) of the Code, or

• an individual retirement account or individual retirement annuity (IRA), or

• an annuity plan described in section 403(a) of the Code.

This might happen, for example, if you get another job and the plan of your new employer will accept the transfer. Naturally, this plan will not make the transfer if the other plan will not accept it.

• All payments from this plan are eligible for direct rollover except the following:

• any payment to the extent that it is required because you have reached age 70½,

• effective for payments after 1999, any hardship distribution of 401(k) contributions, and

• any payment under an annuity contract that has been purchased for and given to you as described near the end of the plan in the section called “Alternative Form of Payment for Grandfathered Members.”

If the money that you are about to receive is eligible for direct rollover to another plan, the plan administrator will notify you and give you at least 30 days to decide whether you would like to have a direct rollover to another plan. On the other hand, you don’t have to wait 30 days; you may take the money or do the direct rollover as soon as 7 days after receiving notification from the plan administrator, as long as you sign the appropriate form waiving your right to consider your decision for 30 days.

“Put” option.    In the unusual event that the stock of Education Management Corporation that you receive is subject to a restriction under any federal or state securities law, any regulation thereunder, or an agreement affecting the security, that would make the security not as freely tradable as a security not subject to restriction, you are entitled to make Education Management Corporation buy the stock back from you for cash. This is officially known as a “put option” and it also applies to any beneficiary of yours. Here are the rules:

• You can exercise the put option at any time within 60 days after you get the stock or during a corresponding window period of 60 days during the following plan year. (The time will be extended by any period during which Education Management Corporation is prohibited by law from buying the stock back from you.)

• You exercise your put option by notifying Education Management Corporation in writing.

• Education Management Corporation will buy the stock back from you at fair market value, as determined by the ESOP Committee. Or, with the consent of Education Management Corporation, the trustee may buy the stock back from you at fair market value.

• If the stock was distributed to you within a single taxable year and represented your complete entitlement under the plan, payment for your stock will be made in substantially equal installments (at least annually) over a period of not more than 5 years, as chosen by the purchaser, with the first payment within 30 days

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after you exercise the put option. The unpaid installments will bear a reasonable rate of interest and will be adequately secured by the purchaser.

• On the other hand, if the stock is coming to you in installments, payment for your stock will be made within 30 days after you exercise the put option with respect to each installment.

HOW TO CLAIM YOUR MONEY OR STOCK

Introduction.    This section of the plan describes how to get your money when the time comes.

Pre-approved payments.    The plan administrator keeps the trustee (Fidelity) up to date about the employment status, vesting status, etc., of participants in the plan. That means, when the time comes for you to get your money, you can (and should) simply call Fidelity.

Based on the information already in your file from the plan administrator, Fidelity will talk with you about the options that are available. When you decide what you would like to do, Fidelity will provide you with the application forms. Complete and return them to Fidelity. If the information on file at Fidelity shows that you are entitled to payment, Fidelity will simply make the payment:

• For all accounts other than your employer stock account, you can expect to receive payment from Fidelity within 7 to 10 days.

• For your employer stock account, payments will be processed on the 15th of each month and again on the last day of each month. It takes Fidelity about 4 to 6 weeks to issue a paper stock certificate. If you would prefer a wire transfer to a brokerage account of your choosing, ask Fidelity whether wire transfers are available. If so, Fidelity will provide you with the necessary information. Wire transfers (if available) can be made in 7 to 10 days.

Making a formal claim.    If for any reason Fidelity does not give you a payment that you believe you are entitled to, or if you have any other type of claim under the plan, you need to make a formal claim to the plan administrator. Write to the plan administrator at the address shown at the beginning of the plan in the section called “Quick-Reference Information” explaining what you want and why you believe you are entitled to it.

If your claim is granted, the plan administrator will get in touch with Fidelity to make sure that payment is made. If your claim is denied, the plan administrator will respond to you in writing, point out the specific

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reasons and plan provisions on which the denial is based, describe any additional information needed to complete the claim, and describe the appeal procedure.

Appeal.    If your claim is denied and you disagree and want to pursue the matter, you must file an appeal in accordance with the following procedure. You cannot take any other steps unless and until you have exhausted the appeal procedure. For example, if your claim is denied and you do not use the appeal procedure, the denial of your claim is conclusive and cannot be challenged, even in court.

To file an appeal, write to the appeals authority identified at the beginning of the plan in the section called “Quick-Reference Information” stating the reasons why you disagree with the denial of your claim. You must do this within 60 days after the claim was denied. In the appeal process, you have the right to review pertinent documents. You have the right to be represented by anyone else, including a lawyer if you wish. And you have the right to present evidence and arguments in support of your position.

The appeals authority will issue a written decision within 60 days. The appeals authority may, in its sole discretion, decide to hold a hearing, in which case it will issue its decision within 120 days. The decision will explain the reasoning of the appeals authority and refer to the specific provisions of this plan on which the decision is based.

Discretionary authority.    The plan administrator and appeals authority shall have and shall exercise complete discretionary authority to construe, interpret and apply all of the terms of the plan, including all matters relating to eligibility for benefits, amount, time or form of benefits, and any disputed or allegedly doubtful terms. In exercising such discretion, the plan administrator and appeals authority shall give controlling weight to the intent of the sponsor of the plan. All decisions of the appeals authority in the exercise of its authority under the plan (or of the plan administrator absent an appeal) shall be final and binding on the plan, the plan sponsor and all participants and beneficiaries.

PAYMENT BEFORE TERMINATION OF EMPLOYMENT

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Introduction.    Normally, your accounts will be paid after you retire (or your employment terminates for some other reason). But there are a few circumstances in which you can take money out of certain accounts even before your employment has terminated. This part of the plan explains those times.

Withdrawal of after-tax contributions.    If you were a member of this plan (that is, the Retirement Plan) before May 1, 1992 and you made after-tax contributions, you may withdraw all or any portion of those contributions at any time upon request, except that if the value of your after-tax contribution account has declined below the amount of contributions that you made, you may only withdraw the lesser amount, of course.

Age 59½.    When you reach age 59½, you may withdraw all or any portion of your 401(k) account upon request, except that withdrawal may not be made more often than once during each plan year, and the minimum withdrawal is $500.

Age 70½.    After you reach age 70½, you may take all the money in all your accounts at any time upon request, even if you are still employed by the employer.

Hardship.    If you suffer immediate and heavy financial need (whether or not you are still employed by the employer), you may be able to get some or all of your 401(k) contributions out of the plan. There are general eligibility rules, but there is also a “safe harbor.” The “safe harbor” means that you qualify automatically for a hardship withdrawal under particular, narrow circumstances. We will describe the safe harbor eligibility rules first.

Safe harbor.    Under the safe harbor eligibility rules, the following four types of financial need automatically qualify for a hardship withdrawal:

• medical expenses that would be deductible under section 213 of the Code,

• purchase of a principal residence for the employee,

• payment of college or graduate school tuition (for the next school term only) for the employee, spouse, children or other dependents, or

• the need to prevent eviction of the employee or foreclosure on his or her personal residence.

If you have one of those financial needs, you can get a hardship withdrawal (no more than the amount of the financial need, of course), provided that:

• you have obtained all distributions and loans available under all plans of the employer;

• all qualified plans of the employer provide that your 401(k) contributions and employee contributions (if applicable under the plan) will be suspended for at least 12 months following the distribution (this plan so provides if you choose to use this safe harbor); and

• all qualified plans of the employer provide that the 401(k) contributions made during the year of

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the distribution will count against the $10,500 limit on 401(k) contributions (described later in this plan) for the calendar year following the calendar year of the distribution (this plan so provides if you choose to use this safe harbor).

General eligibility rules.    If you do not have one of the four “safe harbor” financial needs, or if you choose not to use the safe harbor, you may still qualify for a hardship withdrawal. The plan administrator will determine whether your financial need is immediate and heavy within the meaning of the plan, taking into account whether the need was predictable and within your control.

The amount of hardship distribution that you can receive from the plan under the general eligibility rules is only that which is necessary to respond to the need after all other resources reasonably available to you have been exhausted. All other resources available to you will be considered to have been exhausted only if you truthfully affirm that the need cannot be met by insurance reimbursement, reasonable liquidation of your assets or assets of your husband or wife or minor children that are reasonably available to you, cessation of 401(k) contributions or employee contributions under any plan of the employer, borrowing from commercial sources or other distributions or non-taxable loans from any employer.

Source of hardship distribution.    A hardship distribution can be made from the contributions that were made by trading off pay. This really means just the contributions, not any earnings on those amounts, except that, if you were a member of the plan before January 1, 1989 and you made 401(k) contributions, then the earnings on those contributions up through December 31, 1988 can be taken into account.

Application.    If you suffer immediate and heavy financial need and want a hardship distribution from the plan, call the trustee (Fidelity). Fidelity will review your circumstances against the requirements of the plan and let you know whether a hardship withdrawal is available and, if so, how much. If you wish to proceed, Fidelity will then provide you with the appropriate forms. Just complete the forms and return them to Fidelity.

BORROWING MONEY FROM YOUR ACCOUNTS

Introduction.    This is a retirement plan, and we do not encourage people to take loans from their accounts. Nevertheless, active employees (not retirees or other former employees) may borrow from their 401(k) account (and after-tax account and rollover account, if any), and this section of the plan will describe how much you can get and how to do it.

Eligibility.    Loans are available only to members of the plan who are receiving a paycheck from the

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employer. For example, loans are available to active employees, employees on paid leave of absence and former employees who are receiving severance pay. But loans are not available to other former employees (such as retirees) or to employees on unpaid leave of absence. In addition, under the law, loans are not available to anyone who is treated as an owner-employee under section 408(d) of ERISA or to the members of their families.

Number.    You may have one home loan (as described below) and one personal loan (as described below) but you may not have more than one of each kind (that is, you may not have more than two loans).

Amount.    The minimum loan is $1,000. The maximum loan is one-half of the sum of your 401(k) account and, if you have them, your rollover account and after-tax contribution account. The amount is judged at the time of your application for the loan.

As an exception, you may never have loans outstanding of more than $50,000 from all plans of the employer and any other members of the same controlled group of trades or businesses. And the limit of $50,000 is reduced by the amount by which you have paid off any loans within the previous twelve months.

EXAMPLE:    In January, you took out a loan of $30,000. By December, you have paid it down to $25,000. Though the present balance is $25,000 and you might think that you could get another $25,000 loan, the amount that you paid off during the past year—$5,000—counts against the $50,000 limit, so you can’t get a loan of more than $20,000 now.

Promissory note.    Loans from the plan must be evidenced by a legally enforceable promissory note.

Term.    You may choose the term of the loan, except that the term for a personal loan may not be more than five years and the term for a home loan may not be longer than twenty years. A “home loan” is a loan that is used to acquire a dwelling unit that, within a reasonable time after the loan is made, will be used as your principal residence. (Home improvement loans, loans to buy a second home, and loans to buy homes for other members of the family do not qualify as loans used to acquire a dwelling unit that will be used as your principal residence.) All other loans are “personal loans.”

Interest.    Loans bear interest at the same rate charged by the employer’s principal bank on loans of the same type. Specifically, loans used to acquire a dwelling unit that will be used as your principal residence bear the same interest rate as mortgage loans. All other loans bear the same rate of interest as secured personal loans. The rate is the rate quoted by the bank on the first business day of the month in which you request the loan.

Source and application of funds.    The money to make a loan is obtained by liquidating investments in your 401(k) account. (If you have a rollover account or after-tax contribution account in addition to your 401(k) account, the money is taken from all of them proportionately.) The promissory note is then considered an asset of that account or accounts. When made, repayments (both principal and interest) are credited proportionately to the account or accounts from which the money was originally taken to make the loan.

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Repayment.    Repayment must be made on a schedule set out in (or attached to) the promissory note, requiring payment of principal and interest in regular, substantially equal installments over the term of the loan. Repayment must be made by payroll deduction from each paycheck.

As an exception, the duty to pay according to the payment schedule will be suspended (but not for more than one year) while you are on a leave of absence without pay. When you return from the leave, the installment payments will resume in the original amount and the term of the loan will be extended by the same number of payments which were suspended. If such an extension would extend the term of the loan beyond five years (in the case of a personal loan) or twenty years (in the case of a home loan), however, a new installment payment schedule will be established instead, under which the new installment payments are sufficient to pay off the remaining balance of the loan by the end of the maximum five- or twenty-year period.

As another exception, the duty to pay according to the payment schedule will be suspended if, and for as long as, you are performing military service within the meaning of the federal Uniformed Services Employment and Reemployment Rights Act of 1994. When you cease to perform such service, the installment payments will resume in the original amount and the term of the loan will be extended by the same number of payments which were suspended.

Security.    As a condition of receiving a loan, you must post collateral by pledging as security for the loan fifty percent of your vested accrued benefit under the plan at the time when the loan is made.

Pre-payment.    You may pay the outstanding balance of a loan at any time without penalty for pre-payment.

Default.    If you fail to make the full amount of any required installment payment by payroll deduction, the loan will be considered in default, and the entire outstanding balance due and payable immediately, on the last day of the calendar quarter following the calendar quarter in which the installment payment was due. This may occur, for example, when your employment with the employer terminates or if you declare bankruptcy.

If your loan goes into default and you do not pay the outstanding balance, the outstanding balance will be considered a “deemed distribution” for tax purposes to the extent provided in regulations of the Internal Revenue Service. When you take a distribution from the plan, the plan administrator will foreclose on your vested accrued benefit that was pledged as security for the loan in order to satisfy the unpaid balance of the loan, effectively offsetting the unpaid balance of the loan against the amount otherwise payable from the plan.

In addition, all loans will be due and payable immediately upon distribution of assets in the event of termination of the plan.

How to apply.    To get the ball rolling, call the trustee (Fidelity) at (800) 835-5092. You will need to know the identification number that the trustee has assigned to this plan for its internal purposes, which is 90094. Fidelity will check on the amount available in your account and talk to you about how much you would like, what the monthly payments would be, and what the length of the loan would be.

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When you are happy with the terms of the loan, Fidelity will generate the loan application and send it to you. All you have to do is sign where indicated and return it to Fidelity. If your loan is approved, you should expect to get a check from the trustee in 7 to 10 days. The payroll department will automatically start to withhold the loan payments from your paycheck.

IN CASE OF DEATH

Introduction.    If you die before your entitlement has been paid (such as while you are still employed by the employer), the plan will pay out all of the money (and stock) in all your accounts under the plan, regardless of how long you have worked for the employer. Whom it is paid to, and how, depends on a number of factors. This section will explain.

Please note:    If you are married at the time of your death, your choice of beneficiary cannot be honored for certain portions of your accounts unless your husband or wife consented before you died, in accordance with the rules explained in this section. This is called “spousal consent” and it is explained in this section under the heading “Naming your beneficiary and getting spousal consent.”

If you’re married.    If you were married at the time of your death, the money (or stock) will be paid to your surviving husband or wife in a single payment, unless, before your death, you named some other beneficiary with the written consent of the husband or wife who survives you (as described below). If the recipient is your surviving husband or wife, he or she may make a direct rollover into an IRA.

Please note:    There is a temporary exception for participants who were members of this plan (that is, the Retirement Plan) before May 1, 1992 and who are married when they die and who die within a certain period. That period ends 90 days after you are notified of the elimination of the option to receive benefits in the form of an annuity (or on January 1, 2003, if that comes first), as provided in this edition of the plan. If you are described in this paragraph and die within that period, your death benefits are governed by the previous edition of the plan, under which some of your accounts are subject to spousal consent and some are not.

If you’re not married.    If you are not married at the time of your death, then the money will be paid to whomever you named as your beneficiary before your death. (If you and your husband or wife die simultaneously, so that you do not have a “surviving spouse,” you will be treated as if you were unmarried at the time of your death, and this paragraph will apply.)

Naming your beneficiary and getting spousal consent.    You can name your beneficiary at any time before your death by completing a form from the plan administrator and returning it to the plan administrator.

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(This function is not handled by Fidelity.) Your beneficiary is whomever you last named on the records of the plan administrator.

Please note:    Only you can change your beneficiary, and you can only do it by filing a new beneficiary designation with the plan administrator. In particular, death or divorce does not automatically change your beneficiary. Whenever there are major changes in your life such as death or divorce, you are well advised to double-check your beneficiary designation with the plan administrator to assure that it remains as you intend.

If you have named a beneficiary in place of your surviving husband or wife, your choice of beneficiary will not be honored unless your surviving husband or wife has consented in writing (or can’t be located). The plan administrator has a form for this purpose, which must be completed, signed by your husband or wife, witnessed by a notary public, and filed with the plan administrator before you die.

If you complete and file the form with the plan administrator and then want to change your mind (that is, you would like to go back to having your husband or wife as your beneficiary), you can withdraw the form just by filing a new beneficiary form with the plan administrator any time before you die.

If money should be paid to a beneficiary, but you have not named a beneficiary or your beneficiary does not survive you, the money will be divided among the people in the first of the following classes that contains a survivor: (a) your surviving husband or wife, (b) your children, (c) your parents, (d) your brothers and sisters, or (e) your estate.

Claiming your accounts.    To claim the money, your husband, wife or other beneficiary should contact the plan administrator, get an application form, and follow the same procedure as you would have done to claim the money. While we expect payment to happen as soon as administratively possible after your death, we must recite here, in accordance with IRS rules, that all of your accounts must be completely paid out not later than five years after your death.

CHILD SUPPORT, ALIMONY AND PROPERTY DIVISION IN DIVORCE

Introduction.    The plan will honor certain court orders made in the context of family law—child support, alimony and division of property in divorce. This means that part of your account may have to be paid to someone else; you may not get all that you are expecting. This section of the plan will explain when and how that can happen.

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What a domestic relations order is.    It is a judgment, decree or order of a court (including approval of a property settlement) made pursuant to state domestic relations law (including a community property law) that provides child support, alimony payments, or marital property rights to your spouse, former spouse, child or other dependent.

The plan will not honor a domestic relations order unless it specifies:

• that it applies to this plan,

• your name and last known mailing address, as well as the name and last known mailing address of anyone else who is supposed to get payments,

• the amount or percentage of your benefits that are supposed to be paid to someone else, or the manner in which the amount or percentage is to be determined, and

• the number of payments or the period to which the order applies.

Also, the plan will not honor a domestic relations order if it attempts to require the plan to:

• provide increased benefits,

• provide any type or form of benefit, or any option, that is not already provided for here in the plan document (except to the extent specifically permitted by the Code), or

• pay to anyone any benefits that are already required to be paid to someone else under a previous domestic relations order.

What happens when a domestic relations order comes in.    When a domestic relations order comes to the plan administrator, the plan administrator will first notify you and everyone else who is supposed to get part of your benefit under the order that the order has come in. The plan administrator will also tell you about the following procedure for deciding whether to honor the order.

Next, the plan administrator will separately account for the benefits that, under the order, would be paid to someone other than you and hold onto them while deciding whether to honor the order.

Next, the plan administrator will decide whether the plan should honor the order, applying the rules that are described in this section of the plan. When the decision is made, the plan administrator will notify you and everyone else who is supposed to get part of your benefit.

If the plan administrator decides that the plan will honor the order, the plan administrator will proceed to make the payments required by the order (or schedule them for future payment, if they are not due yet). If the plan administrator decides that the plan cannot honor the order, the plan administrator will make payment as if there had been no order.

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In the unlikely event that the plan administrator cannot decide whether the plan should honor the order within 18 months after the first payment should have been made under the order, the plan administrator will make payments as if there had been no order until the decision is made, and then make future payments (but no past payments) in accordance with the decision.

HOW THE LENGTH OF YOUR SERVICE IS CALCULATED

Introduction.    The length of your service with the employer can matter for two reasons under the plan: for becoming eligible for matching contributions and for deciding what portion of your account you are entitled to if you leave before retirement or disability. This part of the plan will explain how to calculate the length of your service.

Two notes before we start. First, this section of the plan describes the rules currently in effect. Other rules may have been in effect for earlier periods, such as before ERISA took effect and before the Retirement Equity Act took effect. Those earlier rules continue to apply to service that was rendered before those laws took effect. Second, any special arrangements that might be made for employees of new participating employers are described at the end of the plan in the section called “Special Arrangements for New Participating Employers.”

12-Month periods.    The plan looks at how many hours of service you have in certain 12-month periods.

Becoming eligible for matching contributions.    For the purpose of becoming eligible for matching contributions, the first 12-month period runs from your date of hire to the first anniversary of your date of hire. After that, the 12-month period is the plan year, beginning with the plan year in which the first anniversary of your date of hire occurs.

Portion of your account.    For the purpose of determining what portion of your account you are entitled to if you leave before retirement or disability, the 12-month periods are plan years. At the beginning of the plan, in the section called “Quick-Reference Information,” it shows what the plan year is.

Years of service.    Your length of service is measured in full years. You get credit for a year of service if you complete 900 hours of service during that 12-month period. You get credit for the year whenever you have accumulated 900 hours of service, regardless of what happens during the rest of the year. (This is entirely independent of whether you are working in the classification of employees covered by the plan.)

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However, years of service can be cancelled by breaks in service, as explained below.

Full-time employees.    Full-time employees are credited with 45 hours of service for each week in which they receive credit for one hour of service for performing services for the employer. A full-time employee for this purpose is any employee who works the regularly scheduled full work week as established by normal office hours for the location where the employee is employed.

Part-time faculty.    Part-time faculty are credited with 1.88 hours of service for each one hour of actual classroom time in recognition of the required preparation for classroom time. For this purpose, any faculty member who is assigned to teach less than a full work week will be considered part-time faculty.

Other part-time employees.    Part-time employees other than faculty receive credit for each clock hour for which the employee is paid (or entitled to payment) by the employer. It doesn’t matter how much you are paid for that hour; an overtime hour is still one hour.

Working hours.    Hours of service naturally include hours when you are actually working as an employee.

Non-working hours.    They also include hours when you are still an employee but not working due to vacation, holiday, illness, layoff, jury duty, military service, and leave of absence, if you are paid (or entitled to payment) for those hours by the employer. The number of hours credited for a time when you were not working is the number of regularly scheduled working hours in the period for which you are paid. For example, if a day consists of 8 regularly scheduled working hours and you are paid for a day of vacation, you get credit for 8 hours of service.

As an exception, no more than 501 hours of service will be credited for any one, continuous period during which you were not working (or, in the case of back pay, would not have been working).

As another exception, payments made solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws, and payments that reimburse you for medical expenses, do not result in credit for hours of service.

Back pay.    If for some reason you don’t work for some period but are later granted back pay for that time, hours of service include hours for which you are granted back pay. Credit for hours of service is allocated to the period when the work was (or would have been) performed.

Breaks in service.    If you complete fewer than 100 hours of service during one of these 12-month periods, that is a “break in service.”

The one exception is if you are absent due to pregnancy, birth (or placement for adoption), or caring for a child immediately after birth (or placement). If you don’t have more than 100 hours of service in the year when absence begins but the hours that would normally have been credited for the absence during that year would bring your total over 100, then that 12-month period will not count as a break in service. (If you have more than 100 hours in the year when the absence begins, but you don’t have more than 100 hours in the following

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year, this rule applies to the second year instead. That is to say, if you remain absent during the following year and the hours that would normally have been credited for the absence during the following year would bring your total over 100, then the following year will not count as a break in service.)

How breaks in service cancel years of service.    A break in service cancels your credit for all prior years of service temporarily—until you return to work and complete another year of service.

A break in service cancels your credit for all prior years of service permanently if:

• when the first break in service occurred, you had no entitlement to any portion of any account derived from employer contributions (within the meaning of section 410(a)(5)(D)(iii) of the Code); and

• you have at least 5 break in service years in a row; and

• the number of break in service years is at least equal to your prior years of service.

EXAMPLE:    You accumulate 2 years of service. Then you have 1 break in service. Then you return to work. When you return, you have credit for no years of service (the break in service has temporarily cancelled all prior service credit). But suppose that, after returning to work, you complete another full year of service. Then you regain credit for the first 2 years, and you have credit for a total of 3 years of service.

EXAMPLE:    You accumulate 2 years of service. Then you have 5 consecutive breaks in service. Then you return to work. You have credit for no years of service, but even if you work another full year of service, you will still not regain any of your prior years of service. They were permanently cancelled because you had 5 consecutive breaks in service, which was equal to or greater than your prior service credit.

Service with related employers.    Service with someone other than the employer still counts for the purpose of calculating the length of your service with the employer under this section of the plan if it was performed at a time when the employer maintained this plan and it was performed for:

• a corporation which, at that time, was under common control with the employer under section 414(b) of the Code, or

• a trade or business which, at that time, was under common control with the employer under section 414(c) of the Code, or

• an entity which, at that time, was a member of an affiliated service group with the employer under section 414(m) of the Code, or

• an entity which, at that time, was required to be aggregated with the employer under section 414(o) of the Code (including the regulations under that section).

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Please note: service with related employers does not count for any other purpose under the plan. Specifically, you are not entitled to get into the plan or to get a share of the employer contributions if you are working for anyone other than the employer.

WHEN YOU RETURN FROM MILITARY SERVICE

Introduction.    There are a few special rules to accommodate employees who enter military service and then return to employment with the employer, and they are listed in this section. These rules apply only to employees who are entitled to re-employment under the federal Uniformed Services Employment and Reemployment Rights Act of 1994 (which is called “USERRA”), as it may be amended from time to time, which contains detailed rules about what “military service” is, how long an employee can be absent, when the employee must return, and other conditions such as an honorable discharge. If you do not meet the requirements of USERRA, this section of the plan does not apply to you.

Please note:    It is your responsibility to let the plan administrator know if you are returning from military service, so that this section of the plan can be appropriately applied.

Break in service.    If you are entitled to re-employment and are in fact re-employed in accordance with USERRA, you will not be considered to have incurred a break in service (as described in the preceding section of the plan) by reason of that military service.

401(k) contributions.    You obviously were not in a position to make 401(k) contributions to the plan during your military service. But if you are entitled to re-employment and are in fact re-employed in accordance with USERRA, you are entitled to “make up” those contributions. Here’s how:

• Besides the amount of contributions that you could ordinarily get by trading off your pay for contributions to the plan, you may trade off additional pay (that is, pay for work performed after you are re-employed) for additional contributions to the plan.

• The maximum amount of additional contributions that you can get by trading off your pay is the maximum amount that you could have gotten if you had not been absent in military service.

• You can make these additional 401(k) contributions any time beginning on your re-employment and ending after a period equal to three times your period of military service (or five years, whichever comes first). For example, if your military service lasted 10 months, you can make these additional 401(k) contributions

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over a period of 30 months, beginning with your date of re-employment.

Matching contributions.    If you choose to make the additional 401(k) contributions referred to in the preceding paragraph, your employer contribution account will be credited with the corresponding matching contributions that it would have received if you had not been absent in military service. (Your account will not be credited with investment earnings on those amounts that you might have earned if you had not been absent in military service.)

Profit sharing contributions and ESOP contributions.    If you are entitled to re-employment and are in fact re-employed in accordance with USERRA, your profit sharing account will be credited with the employer profit sharing contributions (and your employer stock account will be credited with the ESOP contributions) that you would have received if you had not been absent in military service. This means contributions only; your account will not be credited with investment earnings on those amounts or forfeitures that you might have received if you had not been absent in military service.

Your “pay”.    For the purpose of this section of the plan, you will be treated as though you received pay at the same rate that you would have received if you had not been absent in military service (including raises, for example, that you would have received if you had not been absent). If the amount of pay cannot be determined with reasonable certainty, you will be treated as though you continued to receive pay during your absence at the same rate as your average rate of pay from the employer during the 12 months before you entered military service.

Percentage of entitlement to employer accounts.    If you are entitled to re-employment and are in fact re-employed in accordance with USERRA, you will be given credit for that period of military service when the plan administrator calculates the percentage of your employer contribution accounts to which you are entitled on the table under the heading “Length Of Service Required For Benefits” in the section called “Quick-Reference Information.”

Limits and testing.    Contributions made under this section of the plan because of USERRA:

• will not be taken into account at all for the purpose of the utilization test described in the section entitled “Maximum Amount of 401(k) Contributions” or the section entitled “Maximum Amount of Matching Contributions”;

• will not cause the plan to fail to meet the requirements in the section entitled “Improvements When the Plan is Top-Heavy”;

• will be subject to the limits in the year when they would have been paid if you had not entered military service (rather than the year in which they are actually paid under this section) for the purpose of the $10,500 limit described in the section entitled “Maximum Amount of 401(k) Contributions” and the section entitled “Maximum Amount of Total Contributions” and will be ignored when applying those limits to the other contributions actually paid for those years.

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WHAT THE PLAN ADMINISTRATOR DOES

Introduction.    The plan administrator has all rights, duties and powers necessary or appropriate for the administration of the plan. Many of those functions are described elsewhere in the plan. This section will mention some others.

Please note:    The description in this section of certain responsibilities imposed by law is solely for convenient reference by the plan administrator and is not intended to alter or increase those duties or transform them into contractual duties.

Reporting and disclosure.    The plan administrator will provide a copy of this plan to each new member of the plan no later than 90 days after joining the plan.

The plan administrator will prepare and file the annual return/report (Form 5500) for the plan each year, if required. For that purpose, the plan administrator will retain an independent qualified public accountant (within the meaning of ERISA) to perform such services as ERISA requires.

After filing the annual return/report, the plan administrator will distribute to all participants and to all beneficiaries receiving benefits the “summary annual report” if required by ERISA.

The plan administrator will furnish to any participant or beneficiary, within 30 days of a written request, any and all information required by ERISA to be provided, including copies of the plan and any associated trust agreements and insurance contracts. The participant must pay the plan the actual cost of copying (unless that is more than the maximum permitted by ERISA, in which case the plan administrator will charge the maximum permitted by ERISA).

Bonding.    The plan administrator will assure that all “plan officials” who are required by ERISA to be covered by a fidelity bond are so covered.

Numerical testing.    It is the responsibility of the plan administrator to monitor compliance with the following sections of the plan regarding (1) the maximum amount of 401(k) contributions, (2) the maximum amount of matching contributions, (3) the maximum amount of total contributions, and (4) top-heavy. It is the plan administrator’s responsibility to take whatever action is required by those sections.

Prohibited transactions.    ERISA prohibits a variety of transactions, most involving “parties in interest.” The plan administrator will not cause the plan to engage in any transaction that is prohibited by ERISA.

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Expenses.    The expenses of administering the plan will be paid out of the plan assets. They may include, for example, fidelity bond premiums, trustee and investment management fees, and professional fees.

If the plan administrator is a full-time employee of the employer, then the plan administrator will not receive any compensation from the plan for serving as plan administrator but will be reimbursed for expenses.

Limitation.    The plan administrator does not have any authority or responsibility to perform any of the functions that are described in the following section as employer functions. Specifically:

• The plan administrator must accept as a fact the employment information furnished by the employer. The plan administrator has no authority or responsibility with regard to the employment relationship, and any disputes over the employment history are strictly between the employer and the employee. To the extent possible, the plan administrator will, of course, give effect under the plan to any new or corrected employment information furnished by the employer.

• The plan administrator has no authority or responsibility for collecting employer contributions.

WHAT THE EMPLOYER DOES

Introduction.    The sponsor and the participating employers have functions entirely different from the administration functions that are performed by the plan administrator. This section will identify those functions.

Establishment.    The sponsor was responsible for establishing the plan in the first place. That included establishing all the terms of the plan as set forth in this document.

Contributions.    The employer contributes to the plan as described above in the sections entitled “Trading Off Your Pay For Contributions To The Plan,” “Matching Contributions,” “Profit Sharing Contributions,” and “The Former ESOP and Stock Accounts.” In addition, the employer may, but does not have to, pay any expenses of the plan, so that they are not charged against the plan assets.

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Employment records.    Since the plan administrator does not employ the employees who are members of the plan and does not keep employment records, it is the responsibility of the employer to provide to the plan administrator whatever information the plan administrator needs to apply the rules of the plan.

Insurance and indemnification.    The employer will provide fiduciary liability insurance to, or otherwise indemnify, every employee of the employer who serves the plan in a fiduciary capacity against any and all claims, loss, damages, expense, and liability arising from any act or failure to act in that capacity unless there is a final court decision that the person was guilty of gross negligence or willful misconduct.

Changing the plan.    The sponsor has the right to change the plan in any way and at any time and does not have to give any reason for doing so. These changes can be retroactive.

For example, the plan names the plan administrator, the trustee, and the appeals authority (they’re all shown at the beginning of the plan in the section called “Quick-Reference Information”). The sponsor has the right to amend the plan to replace any of those individuals or firms at any time and without giving any reason.

Exceptions.    The Code says that no amendment can be adopted that would make it possible for the assets of the plan to be used for, or diverted to, purposes other than the exclusive benefit of participants and beneficiaries, and the plan adopts that language but only to the extent (and with the same meaning) required by the Code.

The plan also adopts, but only to the extent and with the same meaning required by the Code, the Code prohibition on amendments which have the effect of reducing the “accrued benefit” of any member of the plan (including the provision of the Code which imposes the same prohibition on amendments eliminating or reducing an early retirement benefit or a retirement-type subsidy or eliminating an optional form of payment).

Changes made by the sponsor may be made by resolution of the board of directors of the sponsor adopted in accordance with the by-laws of the sponsor. Alternatively, changes that do not materially increase the liability of the sponsor or any participating employer under the plan may be made by the Retirement Committee of the sponsor, as long as any such amendment is reflected in a writing that is formally designated as an amendment to this plan, is adopted by the unanimous consent of the members of the Retirement Committee, and is broadly applicable to participants under the plan (rather than targeted at any individual or small group of participants). For this purpose, the decision to admit a new participating employer will be considered as not materially increasing the liability of the sponsor or any participating employer under the plan.

Ending the plan.    The plan has no set expiration date; when it was established, it was not intended to be temporary. Nevertheless, the sponsor has the right to end the plan (in whole or in part) at any time and without giving a reason for doing so. The procedure for the sponsor to end the plan is the same as for changing the plan, as described in the preceding paragraph. In addition, any participating employer may withdraw from participation in the plan at any time and without giving a reason for doing so.

If there is a “termination” or “partial termination” of the plan within the meaning of Treasury Regulation 1.411(d)-2 (sorry, but it’s too difficult to try to describe what that is, particularly because it is not the same as ending the plan) or a complete discontinuance of contributions, everyone who is affected by the termination

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or partial termination or complete discontinuance of contributions and who is still a member of the plan at that time will automatically be advanced to 100% on the table at the beginning of the plan in the section called “Quick-Reference Information” under the heading “Length Of Service Required For Benefits,” regardless of their length of service. For this purpose, those whose employment previously terminated at a time when their percentage was zero will be considered to have been “cashed out” at zero and will no longer be considered participants.

MAXIMUM AMOUNT OF 401(K) CONTRIBUTIONS

Introduction.    The Code puts a couple of different limits on the amount that you can cause the employer to contribute to the plan by trading off your pay. This part of the plan describes them.

$10,500 limit.    Contributions that you cause the employer to make by trading off your pay cannot be more than $10,500 in any one calendar year. And we are not talking just about this plan. This limit applies to any and all plans of any and all employers, including 401(k) plans, simplified employee pension plans, and 403(b) tax-sheltered annuities.

The $10,500 figure applies to the year 2001. But the IRS changes it from time to time according to the cost-of-living, and the new figure automatically applies here. The plan administrator can tell you what the exact figure is for each year. In the paragraphs that follow, however, we’ll keep saying “$10,500” just because it’s easier that way.

If the $10,500 limit is exceeded.    There are two ways in which the $10,500 limit might be exceeded. First, although this plan prohibits 401(k) contributions of more than $10,500, a mistake might be made. In that case, as soon as the mistake is discovered, the plan administrator will simply return any and all 401(k) contributions that were more than $10,500 for a given plan year, adjusted for any income or loss experienced while the excess was in the plan.

Second, although 401(k) contributions to this plan are not more than $10,500, you might have worked for some other employer during part of the year and the total of 401(k) contributions made to this plan and the plan of that other employer might be more than $10,500. In that case, you may withdraw all or part of the excess from this plan (not more than the 401(k) contributions that were actually made to this plan, of course), as long as you give the plan administrator written notice which is received by the plan administrator no later than March 15 of the calendar year following the year in which the excess 401(k) contributions were made. Then the plan administrator will return the amount that you have designated, adjusted for any income or loss experienced while the excess was in the plan.

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Utilization test.    How much employees at the top of the organization can trade off pay for contributions depends on how much all the other employees trade off their pay for contributions. You only have to worry about this if you are at the top of the organization. We will call these people “restricted employees.”

Who the restricted employees are.    The restricted employees are determined each year. They are anybody who owned 5% or more of the employer during that year or the preceding year. They are also anybody who had compensation from the employer during the preceding year of more than $85,000. (That’s the figure for 2001. The figure changes slightly from year to year according to the cost-of-living. The plan administrator can tell you what the exact figure is each year.)

Special rules for former employees.    Former employees are considered restricted employees if they were restricted any time after age 55 or they were restricted when they left the employer.

Special rule for non-resident aliens.    Non-resident aliens who have no U.S.-source income are not taken into account at all when applying this part of the plan.

Performing the utilization test.    First, the plan administrator will identify all the restricted employees who are eligible to choose 401(k) contributions to the plan for the plan year being tested (whether or not they have chosen to trade off pay for contributions). The plan administrator will figure, separately for each such employee, what percent of pay he or she has traded off for contributions. For employees who have chosen not to trade off pay for contributions, this percentage will be zero. The plan administrator will then average all of those percentages.

Second, the plan administrator will focus on the year before the year being tested, identifying those individuals who were not restricted employees but were eligible to choose 401(k) contributions to the plan for that plan year (whether or not they chose to trade off pay for contributions). The plan administrator will figure, separately for each such employee, what percent of pay he or she traded off for contributions during the preceding year. Once again, for employees who chose not to trade off pay for contributions, this percentage will be zero (except to the extent that the employer chooses to make “qualified nonelective contributions” as described below). The plan administrator will then average all of those percentages. (As an exception for 1997 only, instead of using the year before the year being tested, the administrator may use the year being tested.)

Please note:    In calculating these averages, the plan administrator may take advantage of any special rules provided in the law or in published guidance from the IRS. For example, for plan years beginning after 1998, the plan administrator may exclude from the calculation entirely individuals who are not restricted employees and who have neither attained age 21 nor completed one year of service with the employer, as long as the coverage rules of section 410(b) of the Code can be met without taking those individuals into account. Alternatively, the plan administrator may consider all individuals who have neither attained age 21 nor completed one year of service with the employer, whether they are restricted employees or not, as a separate plan for this purpose, as long as the coverage rules of section 410(b) of the Code would be met by both this plan and the separate plan.

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In calculating these percentages, the plan administrator will take into account only pay that, but for the choice to trade it off for contributions to the plan, would have been received by the employee in the appropriate plan year or is attributable to services performed in that plan year and would have been received by the employee within 2½ months after the end of the plan year. In addition, 401(k) contributions will be taken into account for a plan year only if not contingent on participation or performance of services after the end of the plan year and actually paid to the trustee not later than 12 months after the end of the plan year.

If the average for the employees who are not restricted was less than 2% in the preceding year, the average for the restricted employees in the year being tested cannot be more than twice that percentage. If the average for the employees who are not restricted was between 2% and 8% in the preceding year, the average for the restricted employees in the year being tested cannot be more than 2 percentage points higher. If the average for the employees who are not restricted was more than 8% in the preceding year, the average for the restricted employees in the year being tested cannot be more than 1.25 times that percentage.

If the utilization test reveals a problem.    If the average for the restricted employees is higher than it should be, the plan administrator will correct the problem by paying the contributions back to the restricted employees, as follows.

Step 1—Calculating the total amount to be returned.    The plan administrator will take the restricted employee with the highest percentage of 401(k) contributions and figure out how much of that employee’s 401(k) contributions would have to be returned to that employee so that his or her percentage would be reduced enough to solve the problem for the whole group, but not more than would make the percentage of that employee’s 401(k) contributions equal the percentage for the restricted employee with the second-highest percentage.

If the problem has not been solved for the group as a whole, then the plan administrator will figure out how much of the 401(k) contributions of both of those people (the restricted employee with the highest percentage and the employee with the second-highest percentage) would have to be returned so that their percentage would be reduced enough to solve the problem for the whole group, but not more than would make the percentage for those two employees equal the percentage for the restricted employee with the third-highest percentage.

If the problem has not been solved for the group as a whole, the plan administrator will keep doing this until the problem is solved. Then the administrator will complete step one by totalling the dollar amount of the contributions that would have to be returned to solve the problem. That is the total amount that will have to be returned.

Step 2—Calculating how much is returned to each restricted employee.    Now the administrator will take the restricted employee with the highest dollar amount of 401(k) contributions and return that employee’s 401(k) contributions to him or her until (a) the total amount that has to be returned (as determined in step one) has been returned or (b) the dollar amount of that employee’s 401(k) contributions has been reduced to the dollar amount of the restricted employee with the second-highest dollar amount of 401(k) contributions.

If the total amount that has to be returned has not yet been returned, then the plan administrator will

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return the 401(k) contributions of those two employees (the restricted employee with the highest dollar amount and the employee with the second-highest dollar amount) to those two employees until (a) the total amount that has to be returned (as determined in step one) has been returned or (b) the dollar amount of those two employees’ 401(k) contributions has been reduced to the dollar amount of the restricted employee with the third-highest dollar amount of 401(k) contributions.

If the total amount that has to be returned (as determined in step one) has not yet been returned, the plan administrator will keep doing this until the total amount that has to be returned has been returned. It is understood that, after returning 401(k) contributions by this method, if the utilization test were to be run again, it might still not be passed, but the IRS has stated in Notice 97-2 that this is the method to be used and when this method has been followed, the utilization test is considered to have been satisfied.

Returning excess contributions.    The concept of returning any excess contributions (due to either the $10,500 limit or the limitation on restricted employees) is simply to reverse the contributions—as if they had never been made. If the contributions had never been made, of course, the employee would have received those amounts as pay and would have had to pay federal income tax on them. So you have to pay income tax on them when you get them back.

When you get the excess contributions back depends on why you are getting them back:

• If you are getting them back because of the $10,500 limit, you will get them back (including the allocable income or loss) by April 15 of the following year. The returned contributions are included in your taxable income for the previous year (the year when they were contributed), while the income on them is included in your taxable income for the year when you actually receive it.

• If you are getting them back because of the utilization test, you will get them back (including allocable income or loss) by the end of the following plan year. The returned contributions and any allocable income are included in your taxable income for the year in which you actually receive them. (The only exception is the unlikely event that you get them back before March 15 of the following year, in which case they are included in your taxable income for the previous year.)

The allocable income or loss is that portion of the total income or loss for the year for your 401(k) account which bears the same proportion to the total as the excess 401(k) contributions for the year bear to the account balance of your 401(k) account at the end of the year (minus the income (or plus the loss) on that account for the year).

The amount of excess contributions returned to you because of the annual dollar limit will be reduced by any excess contributions previously returned to you because of the limitation on restricted employees for the plan year beginning with or within your taxable year. And the amount of excess contributions returned to you because of the limitation on restricted employees will be reduced by any excess contributions previously returned to you because of the annual dollar limit for your taxable year ending with or within the plan year.

Combining plans.    If two or more plans are aggregated for purposes of section 401(a)(4) of the Code or section 410(b) of the Code (other than section 410(b)(2)(A)(ii)), then all 401(k) contributions made

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under both plans will be treated as made under a single plan, for the purpose of this section of the plan. (Of course, the aggregated plans must comply with sections 401(a)(4) and 410(b) as though they were a single plan.) In addition, if a restricted employee is eligible to trade off contributions under two or more plans of the employer, those cash-or-deferred arrangements will be treated as a single arrangement, unless the applicable rules would prohibit permissive aggregation of those arrangements.

MAXIMUM AMOUNT OF MATCHING CONTRIBUTIONS

Introduction.    Besides limiting the amount of 401(k) contributions that can be made on behalf of restricted employees, the Code also limits the amount of matching contributions that can be made for restricted employees—both by themselves and when considered in combination with the 401(k) contributions. This part of the plan describes these additional limitations.

Matching contributions by themselves.    The plan administrator will test the matching contributions by themselves by running the same test as described in the preceding section (“Maximum Amount of 401(k) Contributions”), taking into account only those employees who have satisfied the special eligibility rule for matching contributions and using matching contributions rather than their 401(k) contributions.

Matching contributions in combination.    If the utilization test for 401(k) contributions (described in the preceding section of the plan) and the utilization test for matching contributions (described in the preceding paragraph of this section) both show that the average for the restricted employees is more than 1.25 times the average for all other employees (after any corrective distributions), then the plan administrator must run this additional test.

Step 1.    The plan administrator will add the average percentage for the restricted employees under the trade-off test (already calculated under the preceding section of the plan) and the average percentage for the restricted employees under the matching test (already calculated under the preceding paragraph of this section).

Step 2.    The plan administrator will look at the average percentage for all other employees under the trade-off test (already calculated under the preceding section of the plan) and the average percentage for all other employees under the matching test (already calculated under the preceding paragraph of this section) and

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identify which is larger.

Step 3.    The plan administrator will take the larger number in Step 2 and multiply by 1.25, then take the smaller number and either add 2 percentage points or double it (whichever produces the lower number), and then add those two numbers together.

Step 4.    The plan administrator will take the smaller number in Step 2 and multiply by 1.25, then take the larger number and either add 2 percentage points or double it (whichever produces the lower number), and then add those two numbers together.

Step 5.    The plan administrator will see if the number in Step 1 is larger than both the number in Step 3 and the number in Step 4. If it is larger than both of them, the test is failed. If it is smaller than either of them, the test is passed.

If this test of matching contributions reveals a problem.    If the matching contributions fail the tests in this section (either by themselves or in combination with the 401(k) contributions), then the plan administrator will return the excess matching contributions in the same manner as under the preceding section of the plan (which specifies how excess 401(k) contributions are returned). Alternatively, the employer may, but is not required to, solve the problem in whole or in part by making additional “qualified nonelective contributions” to the 401(k) accounts of employees who are not restricted, as described in the preceding section of the plan, as long as those contributions satisfy the requirements of Reg. § 1.401(m)-1(b)(5).

MAXIMUM AMOUNT OF TOTAL CONTRIBUTIONS

Introduction.    Federal law sets a limit on how much money can go into your accounts in this plan in any one year. This section describes the limit. You don’t have to worry about this, though; the plan administrator will pay attention to this section and make sure that the limit is not exceeded.

25% of pay limit.    The total of employer contributions, employee contributions (if applicable), and forfeitures allocated to your accounts for any one plan year cannot be more than 25% of your compensation from the employer (or $30,000, whichever is less). (As the $30,000 figure rises in accordance with the cost of living, the new figure will automatically be applied here.)

As an exception, forfeitures of stock that was acquired with the proceeds of an exempt loan will not count against the limit if no more than one-third of the employer contributions to this plan for a year which are deductible under section 404(a)(9) of the Code are allocated to highly compensated employees—all within the

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meaning of section 415(c)(6) of the Code.

If this limitation would be exceeded as a result of the allocation of forfeitures, a reasonable error in estimating your annual compensation, a reasonable error in determining the amount of 401(k) contributions that may be made on your behalf within this limitation, or any other facts and circumstances that the Commissioner of Internal Revenue finds justifies relief under this paragraph, the excess amounts otherwise allocable to your account for that plan year will be used to reduce employer contributions for the next plan year (and succeeding plan years, as necessary) for you, as long as you are covered by the plan at the end of that plan year. However, if you are not covered by the plan at the end of that plan year, the excess amounts will be held unallocated in a suspense account for that plan year and allocated and reallocated in the next plan year to all of the remaining participants in the plan in accordance with the rules set forth in subparagraph Treas. Reg. § 1.415-6(b)(6)(i). Furthermore, the excess amounts will be used to reduce employer contributions for the next plan year (and succeeding plan years, as necessary) for all of the remaining participants in the plan.

And, though it may never apply, the IRS requires us to say that the $30,000 limit is reduced by employer contributions allocated to any individual medical account which is part of a pension or annuity plan and contributions on behalf of a member of the concentration group, as described below under the heading “Improvements When the Plan Is Top-Heavy,” to a separate account for post-retirement medical benefits pursuant to Code section 419A(d) prior to the employee’s separation from service.

If there’s more than one defined contribution plan.    All “defined contribution” plans of the employer (that’s what this is) are considered to be one plan, so that, if the employer runs any other defined contribution plans, the limit applies to the total contributions under all of those plans. These may be plans qualified under section 401(a) of the Code, annuity plans under section 403(a), annuity contracts under section 403(b), or simplified employee pension plans under section 408(k). But the limitation of this section of the plan will be applied first to the other plan or plans, reducing the annual additions under those plans to elimination before any reduction is applied under this plan.

“Employee contributions” does not include rollover contributions from another plan and does not include employee contributions to a simplified employee pension plan that are excludable from gross income under section 408(k)(6) of the Code.

If there’s also a defined benefit plan.    Due to a change in the law, this section no longer applies, beginning with the 2000 plan and limitation year.

Related employers.    For the purpose of this section of the plan, all related employers are considered to be a single employer to the extent required by Code sections 414(b), (c), (m), and (o) and 415(h).

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IMPROVEMENTS WHEN THE PLAN IS TOP-HEAVY

Introduction.    The plan administrator has to monitor the plan year by year to see if the benefits of the plan are concentrated in a group of employees that we will call the “concentration group.” If so, the plan is said to be “top-heavy” and several improvements are automatically made in the plan for that year. This section of the plan describes what the plan administrator does to figure out if the plan is top-heavy and what improvements are made if it is.

Please note:    This plan has never been top-heavy and is unlikely ever to become top-heavy. But the IRS makes us put these provisions in the document just in case.

Who is in the concentration group.    The plan administrator will first figure out who is in the concentration group for a given plan year. This is what the plan administrator will do:

Officers.    List each officer on the last day of each of the five preceding plan years and how much he or she made each year. Delete from the list anyone who did not make more than ½ the defined benefit dollar limit in section 415 of the Code for that year.

Find the highest number of employees of the employer at any time during the five preceding plan years, excluding employees who have not completed 6 months of service, employees who normally work less than 17½ hours per week, employees who normally work during not more than 6 months during any year, employees who have not attained age 21, and employees included in a collective bargaining unit. And then delete from the list of officers as follows:

• If the number of employees is less than 30, delete all but the 3 officers having the greatest aggregate compensation during those five years.

• If the number of employees is more than 30 but less than 500, take 10 percent of that number, round to the next highest whole number, and then delete all but the resulting number of officers having the greatest aggregate compensation during those five years.

• If the number of employees is more than 500, delete all but the 50 officers having the greatest aggregate compensation during those five years.

Everybody left on the list is in the concentration group.

5% Owners.    List all employees who owned more than 5% of the value of the stock or voting power of the stock of the employer on the last day of the preceding plan year. All those people are in the concentration group.

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1% Owners.    Separately for each of the five preceding years, list all employees who owned more than 1% (but not more than 5%) of the value of the stock or voting power of the stock of the employer on the last day of each year. Delete anyone who did not make more than $150,000 that year. (That figure is adjusted for the cost of living every year.) Everybody left on the list is in the concentration group.

½% Owners.    Separately for each of the five preceding years, list all employees who owned more than ½% of the value of the stock or voting power of the stock of the employer at any time during those five plan years. Delete the entry for any year if the employee did not make more than the defined contribution dollar limit in 415 that year. Select the 10 entries having the highest ownerships. (In case of a tie in ownership, the one with the higher compensation wins.) Those ten people are in the concentration group.

Performing the concentration test.    To test for top-heaviness, the plan administrator will identify all pension, profit sharing and stock bonus plans of the employer in which any member of the concentration group participated in any of the preceding five years. (This includes plans that have previously been terminated if they were maintained at any time during those five years.) In addition, if any of those plans relies on the existence of some other plan in order to meet the coverage or nondiscrimination rules, then that other plan will also be thrown into the test. All of them will be tested together as if they were one plan.

Defined benefit plans.    For each defined benefit plan, the plan administrator will calculate the present value of each participant’s accrued benefit as of the valuation date coincident with or last preceding the end of the last plan year, as if the participant terminated on the valuation date, using the same actuarial assumptions for all plans. This will include the value of nonproportional subsidies and accrued benefits attributable to nondeductible employee contributions (whether voluntary or mandatory). If there is no uniform accrual method under all such defined benefit plans, the plan administrator will determine the accrued benefit by applying the slowest accrual rate permitted under the “fractional rule” of Code section 411(b)(1)(C).

Defined contribution plans.    For each defined contribution plan (including this one), the plan administrator will calculate the account balance of each participant, as of the valuation date coincident with or last preceding the end of the last plan year. This will include contributions due by the last day of the last plan year.

Add-backs.    For both defined benefit and defined contribution plans, the plan administrator will add back in the value of all distributions made in those five years, except to the extent already taken into account.

Exclusions.    The plan administrator will exclude from the total all accrued benefits and account balances of persons who were members of the concentration group for prior years but are not members of the concentration group for the year being tested. The plan administrator will also exclude from the total all rollovers except those which (1) were not made at the initiative of the employee or (2) came from a plan of an employer required to be aggregated with this employer under section 414 of the Code.

Concentration percentage.    The plan administrator will divide the total accrued benefits and account balances of the members of the concentration group by the total accrued benefits and account balances of everyone in the plans. If the result is more than 60%, all the plans are top-heavy. If the result is 60% or less, none of the plans are top-heavy.

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Exception.    If the percentage is more than 60%, but would not be more than 60% if another plan were added to the group of plans that are being tested (and that plan is one which could be added without taking the group out of compliance with the coverage and nondiscrimination rules), then none of the plans are top-heavy.

Changes if the plan is top-heavy.    There are three changes that apply for a particular plan year if the plan is top-heavy for that year.

Benefits in the event of termination of employment before retirement.    If the plan is top-heavy for a particular year, then the schedule at the beginning of the plan in the section called “Quick-Reference Information” under the heading “Length Of Service Required For Benefits” may be changed for everyone who has at least one hour of service after the plan became top-heavy.

• If that schedule provides for 100% after 5 years of service, it is changed to 100% after 3 years of service.

• If it provides for gradually increasing percentages from 3 to 7 years of service, it is changed to provide the same progression but from 2 to 6 years of service.

• If it already provides a schedule which is better than 100% after 3 years or graded from 2 to 6 years, then there is no change in the schedule.

If, in a future year, the plan is no longer top-heavy, the schedule in “Quick-Reference Information” is reinstated, except that the reinstatement of the original schedule is treated as an amendment to the plan subject to the two limitations described below in the “Miscellaneous” section under the heading “Changes in the Vesting Schedule.”

Minimum contribution.    For a year when the plan is top-heavy, each member of the plan who is not a member of the concentration group will receive an employer contribution on top of his pay of at least 3%, with three exceptions:

• The percentage is not required to be greater than the highest percentage received for that year by anyone who is a member of the concentration group. In figuring that percentage, contributions made by trading off pay are counted as contributions, as are matching contributions.

• If the employer also maintains a defined benefit plan that is top-heavy and that plan provides that the concentration requirements will be met by providing the minimum required accrual in that defined benefit plan, then there is no minimum contribution required in this plan.

• If the employer also maintains a defined benefit plan that is top-heavy and that plan does not provide that the concentration requirements will be met by providing the minimum required accrual in that defined benefit plan, then the minimum contribution in this plan is 5%.

The minimum contribution requirement applies to everyone in the plan who has not separated from

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service by the end of the plan year, including those who have not completed 900 hours of service during the year and those who have not chosen to trade off pay for contributions. The minimum contribution requirement cannot be met by counting contributions made by trading off pay or matching contributions.

Maximum amount of total contributions.    Due to a change in the law, this subsection no longer applies, effective with the 2000 plan and limitation year.

SPECIAL ESOP PROVISIONS

Introduction.    Since the Education Management Corporation Employee Stock Ownership Plan has been merged into this plan (the Education Management Corporation Retirement Plan), there are a number of special provisions from the Employee Stock Ownership Plan that need to be preserved in this plan. This section contains them.

The nature of an ESOP.    This type of ESOP borrows money from a bank and uses it to buy stock of the sponsor—Education Management Corporation. The stock is held as collateral for the loan. Then, from year to year, the employer makes cash contributions to the plan that are used to pay down the loan.

As the loan is paid down each year, a corresponding amount of stock no longer needs to be held as collateral for the loan. The stock that is released is allocated among the employer stock accounts of the employees who are in the plan.

Over time, the idea is that the loan will be completely paid off, which means that all of the stock will be released and allocated to the accounts of the employees in the plan. As a matter of fact, in this plan, that has already happened: the loan has been paid off and the stock has all been allocated to the employer stock accounts of the employees in the plan.

Investment.    Investments of employer stock accounts are made at the direction of the plan administrator. Since this is in part an ESOP, however, the assets of the employer stock accounts must be invested primarily in stock of Education Management Corporation. (If any future ESOP contributions are made or dividends are paid, the trustee must use them to buy more stock of Education Management Corporation to the extent that stock is available on terms that the plan administrator considers prudent.)

Technically, this includes any “qualifying employer security” within the meaning of section 407(d)(5) of ERISA that also meets the requirements of section 409(l) of the Code. This includes common stock issued by Education Management Corporation that is readily tradable on an established securities market, as well as noncallable preferred stock (as long as it is convertible at any time into readily tradable common stock and the

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conversion price was reasonable when the noncallable preferred stock was acquired by this plan). The full definition is set out later in this section, but we will call this simply “stock” or “employer stock.”

Purchases of stock must be made at a price which, in the judgment of the plan administrator, does not exceed the fair market value of the stock. Sales of stock may be made to any person, except that if the buyer is a “disqualified person” under section 4975(e)(2) of the Code, the sales price may not be less than the fair market value of the stock and no commission can be charged on the sale. All sales will comply with section 408(e) of ERISA.

There may also be a small amount of cash in employer stock accounts. It may be invested in bank accounts, certificates of deposit, securities, short-term funds maintained by the trustee, or any other kind of investment in accordance with the trust agreement, or it may simply be held in cash.

“Employer securities”.    We said earlier that the stock must constitute “employer securities” under Code section 409(l). Here is the text of Code section 409(l) so there is no doubt about what we mean:

“(1)  IN GENERAL.—The term ‘employer securities’ means common stock issued by the employer (or by a corporation which is a member of the same controlled group) which is readily tradable on an established securities market.

“(2)  SPECIAL RULE WHERE THERE IS NO READILY TRADABLE COMMON STOCK.—If there is no common stock which meets the requirements of paragraph (1), the term ‘employer securities’ means common stock issued by the employer (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of—

“(A)  that class of common stock of the employer (or of any other such corporation) having the greatest voting power, and

“(B)  that class of common stock of the employer (or of any other such corporation) having the greatest dividend rights.

“(3)  PREFERRED STOCK MAY BE ISSUED IN CERTAIN CASES.—Noncallable preferred stock shall be treated as employer securities if such stock is convertible at any time into stock which meets the requirements of paragraph (1) or (2) (whichever is applicable) and if such conversion is at a conversion price which (as of the date of the acquisition by the tax credit employee stock ownership plan) is reasonable. For purposes of the preceding sentence, under regulations prescribed by the Secretary, preferred stock shall be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence.

“(4)  APPLICATION TO CONTROLLED GROUP OF CORPORATIONs.—

“(A)  IN GENERAL.—For purposes of this subsection, the term “controlled group of corporations” has the meaning given to such term by section 1563(a) (determined without regard to subsections (a)(4) and (e)(3)(C) of section 1563 ).

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“(B)  WHERE COMMON PARENT OWNS AT LEAST 50 PERCENT OF FIRST TIER SUBSIDIARY.—For purposes of subparagraph (A), if the common parent owns directly stock possessing at least 50 percent of the voting power of all classes of stock and at least 50 percent of each class of nonvoting stock in a first tier subsidiary, such subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the first tier subsidiary were the common parent) shall be treated as includible corporations.

“(C)  WHERE COMMON PARENT OWNS 100 PERCENT OF FIRST TIER SUBSIDIARY.—For purposes of subparagraph (A), if the common parent owns directly stock possessing all of the voting power of all classes of stock and all of the nonvoting stock, in a first tier subsidiary, and if the first tier subsidiary owns directly stock possessing at least 50 percent of the voting power of all classes of stock, and at least 50 percent of each class of nonvoting stock, in a second tier subsidiary of the common parent, such second tier subsidiary (and all other corporations below it in the chain which would meet the 80 percent test of section 1563(a) if the second tier subsidiary were the common parent) shall be treated as includible corporations.

“(5)  NONVOTING COMMON STOCK MAY BE ACQUIRED IN CERTAIN CASES.—Nonvoting common stock of an employer described in the second sentence of section 401(a)(22) shall be treated as employer securities if an employer has a class of nonvoting common stock outstanding and the specific shares that the plan acquires have been issued and outstanding for at least 24 months.”

Voting.    In a number of instances, you may be entitled to direct how the stock in your employer stock account is voted when votes of the shareholders of Education Management Corporation are taken. This section applies equally to any beneficiary of yours who may have an account under the plan. Here they are:

• If any class of stock in the plan is required to be registered under section 12 of the Securities Exchange Act of 1934, as amended, then you are entitled to instruct the plan administrator how to vote the stock in your employer stock account to the extent required under section 409(e) of the Code.

• As to any stock acquired by the ESOP with the proceeds of a loan with respect to which the lenders exclude from federal taxable income a portion of the interest pursuant to section 133 of the Code, you are entitled to instruct the plan administrator how to vote the stock in your employer stock account, to the extent required under section 133(b)(7)(A) of the Code.

• In any event, you are entitled to direct the plan administrator how to vote the stock in your employer stock account with respect to any vote of shareholders on any corporate merger, consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets, or a similar transaction, to the extent required by Sections 401(a)(22) and 409(e) of the Code and regulations thereunder.

If you do not instruct the plan administrator how to vote the stock in your employer stock account (or if there is any stock that is not allocated to the accounts of the members of the plan), the plan administrator is entitled to instruct the trustee how to vote the stock, assuming that the instructions of the plan administrator are consistent with ERISA.

Diversification.    If you have reached age 55 and you have participated in the ESOP for at least ten years, you may choose to have some of the stock in your employer stock account sold and the proceeds transferred

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to your profit sharing account here in the plan, where it will be invested in accordance with the investment instructions then in effect for your profit sharing account. This is called “diversification.”

In measuring your period of participation in the ESOP, your participation in the ESOP while it was a separate plan before April 7, 1999 will obviously count; participation in this consolidated plan on and after April 7, 1999 will also count. And since the ESOP was only established effective January 1, 1989, ten years of participation in the ESOP obviously can’t happen until the end of 1998.

Your “window of opportunity.”    The opportunity to diversify your employer stock account begins as soon as you have attained age 55 and completed 10 years of participation in the plan (or upon the adoption of this edition of the plan, if later). For example, once this edition of the plan is adopted, if you have already completed 10 years of participation in the plan, it begins on your 55th birthday. On the other hand, if you reach age 55 before you have completed 10 years of participation in the plan, it begins after you have completed 10 years of participation.

The opportunity continues for the rest of that plan year (the plan year in which you attained age 55 and completed 10 years of participation) and then for the next six full plan years.

EXAMPLE:    Your participation in the ESOP began effective January 1, 1989. You remain a participant through December 31, 1998, so that, as of January 1, 1999, you have completed 10 years of participation in the plan. This edition of the plan is adopted on April 7, 1999. Then you attain age 55 on September 12, 1999. You may diversify the investment of your employer stock account beginning on September 12, 1999. The opportunity continues for the rest of the 1999 and then for the next six full plan years — the years 2000, 2001, 2002, 2003, 2004 and 2005.

What portion of your account can be diversified.    There’s a formula to determine what portion of your account can be diversified. It is:

• 25% (or, in the case of the last year in which you can diversify, 50%) of the number of shares of stock that have ever been allocated to your account as of the most recent December 31 minus

• the number of shares that you have previously asked to have diversified under this section.

EXAMPLE:    You may diversify the investment of your employer stock account beginning on September 12, 1999. As of December 31, 1998, the total number of shares of stock ever allocated to your account was 100 shares. That means you may diversify up to 25 shares of stock beginning on September 12, 1999.

EXAMPLE CONTINUED:    Suppose you choose to diversify 10 shares of stock in January of the year 2000. You still have the opportunity to diversify through the year 2005. Suppose that no additional shares are allocated to your account. Since the total number of shares ever allocated to your account is 100 and you have previously chosen to diversify 10 shares, you may diversify up to 15 more shares at any time through the year 2005.

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EXAMPLE CONTINUED:    Suppose you diversify another 15 shares during the year 2001. You have now diversified 25 shares, so you are at the limit of 25%. But in the year 2005, the limit rises to 50%, so during the year 2005, you may diversify up to another 25 shares (for a total of 50 shares out of 100).

How.    Call the trustee (Fidelity) whenever you are eligible to diversify. The trustee will verify your eligibility against the information provided by the plan administrator, calculate the number of shares that are available to be diversified, and take your direction to diversify part or all of those shares.

What happens.    After receiving your call, the trustee (Fidelity) will take out of your employer stock account the number of shares that you have chosen to diversify. It will then sell them as soon as administratively possible on the open market. The money that it receives from selling those shares will be deposited in your profit sharing account here in the plan, where it will automatically be invested in accordance with the investment instructions then in effect for your profit sharing account.

“Nonterminable” protections and rights.    With one exception, stock will never be subject to a put, call or other option or a buy-sell or similar arrangement while held by and when distributed from this plan. The exception is that stock may be subject to a put option to the extent provided earlier in the plan in the section called “How Payment Is Made” under the heading “‘Put’ Option.”

This prohibition remains effective despite the fact that the ESOP loan has been repaid and regardless of whether the plan remains an ESOP in the future. And the provision of the plan regarding put options also remains effective despite the fact that the ESOP loan has been repaid and regardless of whether the plan remains an ESOP in the future.

Non-allocation under Code section 409(n).    While there is no stock acquired in a transaction for which the seller has elected favorable tax treatment under section 1042 of the Code that remains unallocated at the present time, this section expresses a rule that was applied when the stock was allocated, for historical purposes only.

No employer securities, or other assets attributable to or in lieu of such employer securities, acquired in such a transaction may be allocated directly or indirectly, to the Accounts of:

• such seller;

• any individual who is related to the seller (within the meaning of Section 267(b) of the Code), or

• any other individual who owns (directly or by attribution, after the application of section 318(a) of the Code applied without regard to the employee trust exception in section 318(a)(2)(B)(i) of the Code) more than 25% of (A) any class of outstanding stock of the employer or any affiliate, or (B) the total value of any class of outstanding stock of the employer or of any affiliate.

The restriction on allocations to persons described in the first or second bullet points shall apply only

Retirement Plan    Page 51

during a nonallocation period which shall begin on the date of the section 1042 sale and end on the later of (A) the tenth (10th) anniversary of the date of the section 1042 sale, or (B) the date of the allocation attributable to the last payment of principal and/or interest on the exempt loan incurred with respect to the section 1042 sale.

The restriction on allocation to persons described in the second bullet point shall not apply to participants who are lineal descendants of the seller, except that the aggregate amount allocated to the benefit of all such lineal descendants during the nonallocation period shall not exceed 5% of the employer securities (or other amounts attributable to or in lieu thereof) held by the trust attributable to a section 1042 sale of employer securities to the trust by any person who is related (within the meaning of section 267(c)(4) to such lineal descendants.

An individual shall be restricted under the third bullet point if he or she is described by that clause at any time during the one-year period ending on the date of the section 1042 sale or as of the date employer securities are allocated to participants.

MISCELLANEOUS

What “pay” or “compensation” means.    With the three exceptions noted below in this section, when we refer to your “pay” or “compensation” we mean your taxable wages for the purpose of federal income tax as shown in the box labelled “Wages, Tips, Other Compensation” on your W-2, plus any amounts excluded solely because of the nature or location of the services provided. The period used to determine your pay or compensation for a plan year is the plan year.

Adding back salary reduction amounts.    “Pay” or “compensation” also includes salary reduction amounts under a cafeteria plan (Code section 125), a 401(k) plan (Code section 402(e)(3)), a tax-sheltered annuity (Code section 403(b)), a simplified employee pension plan (Code section 402(h)) or an eligible deferred compensation plan of a tax-exempt organization (Code section 457).

“Pay” or “compensation” also includes salary reduction for qualified transportation fringes (Code section 132(f)) effective January 1, 2001 for the purpose of the limit described under the heading “Maximum Amount of Total Contributions” and for the purpose of the rules described under the heading “Improvements When the Plan Is Top-Heavy” and effective January 1, 2002 for all other purposes.

Excluding extraordinary items.    For all purposes except the limit described under the heading “Maximum Amount of Total Contributions” and the rules described under the heading “Improvements When the Plan Is Top-Heavy,” “pay” or “compensation” does not include:

Page 52    The Education Management Corporation

• reimbursements or other expense allowances,

• fringe benefits (cash and non-cash),

• moving expenses,

• deferred compensation, or

• welfare benefits.

$170,000 limit on compensation.    As required by section 401(a)(17) of the Code, compensation in excess of $170,000 (adjusted for the cost of living) is not taken into account for any purpose under this plan.

Leased employees.    If the employer previously leased your services from a leasing organization but later you become employed by the employer itself, your length of service includes your service as a leased employee if it was performed at a time when the employer maintained this plan. (When we say “employer,” we include related employers, as described above under the heading “How The Length of Your Service Is Calculated”.) For this purpose, service as a leased employee is service performed under primary direction or control by the employer, pursuant to an agreement between a leasing organization and the employer, regardless of how long you performed that service.

Family and medical leave.    Any leave to which you are entitled under the federal Family and Medical Leave Act of 1993 will not result in the loss of any “employment benefit” provided by this plan that had accrued prior to the leave and that would not have been lost if you had remained actively at work during the leave.

Changes in vesting schedule.    If the schedule shown at the beginning of the plan in the section called “Quick-Reference Information” under the heading “Length of Service Required for Benefits” is ever changed, there are two limitations. First, the change will never reduce the percentage that applies to your account based on employer contributions that were made on top of your pay through the end of the last year before the change was adopted (or became effective, if later). Second, if you have 3 or more years of service when the change is adopted (or becomes effective, if later), you may nevertheless choose to stay under the schedule that was in effect before the change was made.

Non-Alienation.    With the two exceptions provided here, your right to benefits under the plan cannot be assigned or alienated. This means you cannot sell your interest in the plan or pledge it as security for a loan. No creditor of yours can take away your interest in the plan. This provision of the plan is intended to comply with, and apply just as broadly and as stringently as, section 206(d) of ERISA and section 401(a)(13) of the Code.

The first exception is qualified domestic relations orders described in the section entitled “Child Support, Alimony and Division of Property in Divorce.” The second exception is that, effective August 5, 1997, the plan may offset against your benefit any amount that you are ordered or required to pay to the plan in the circumstances set forth in section 206(d)(4) of ERISA.

Payments to minors.    If the proper recipient of money from the plan is a minor, or if the plan administrator believes the recipient to be legally incompetent to receive it, the plan administrator may direct that the payment be made instead to anyone who has authority over the affairs of the recipient, such as a parent, guardian, or other relative.

Retirement Plan    Page 53

Payment made in this manner will entirely satisfy the obligation of the plan to pay the money, and the plan administrator will have no responsibility to see what happens to the money after it is paid.

Unclaimed benefits.    People are expected to claim their money from the plan when their employment terminates. It is your responsibility to make the claim; the plan administrator does not have any responsibility to track you down.

If you still haven’t claimed your money by the time when it must be paid, the plan administrator will make a reasonable effort to locate you (such as inquiring of the employer, sending a letter to your last known address, and inquiring of the Social Security Administration). If the plan administrator still can’t find you, the plan administrator will set up an interest-bearing account with a financial institution in your name in order to get your money out of the plan. If no financial institution will set up an account in your name without your participation, the plan administrator will have to assume that you are dead and pay the money in accordance with the death provisions of the plan.

Plan assets sole source of benefits.    The plan assets (held in the trust fund or by an insurance company) are the only source of benefits under the plan. The employer and plan administrator are not responsible to pay benefits from their own money, nor do they guarantee the sufficiency of the trust fund or insurance contracts in any way.

No right to employment.    Many of the requirements of the plan depend on your employment status, particularly how long you have worked for the employer. But your employment status is purely a matter between you and your employer; the plan does not change anything. The fact that your rights under the plan might be different if your employment history were different does not give you any different employment rights than if the plan had never existed.

Profit sharing and stock bonus plan.    This plan is intended to qualify under section 401(a) of the Code as a profit sharing plan with a qualified cash-or-deferred arrangement and, to the extent of the employer stock accounts, as a stock bonus plan.

Merger of plan.    The Code requires that the plan contain the following provision (which is also a requirement of ERISA). However, the interpretation and application of this provision are quite different from what it appears to say, and we intend that it be interpreted and applied no more strictly than required by the regulations under the Code:

The plan may not merge or consolidate with, or engage in a transfer of assets or liabilities with, any other plan unless the benefit that each participant in this plan would receive if both plans terminated immediately after the transaction is no less than the benefit that the participant would have received if this plan had terminated immediately before the transaction.

Protection of benefits, rights, and features from previous edition of plan.    Since this document constitutes an amendment and restatement of the plan, it must preserve, to the minimum extent required

Page 54    The Education Management Corporation

by section 411(d)(6) of the Code and Treasury Regulation 1.411(d)-4, all benefits, rights and features required by that Code section and regulation to be protected against reduction. While we believe that this document preserves all such benefits, rights and features, as a failsafe we recite here that the terms of all such benefits, rights, and features, to the extent entitled to protection under this restatement of the plan, are hereby incorporated by reference from the prior plan document.

Governing law.    The plan is subject to ERISA and therefore governed exclusively by federal law except where ERISA provides otherwise. If state law ever applies to the interpretation or application of the plan, it shall be the law of the state where the employer has its principal place of business.

No PBGC Coverage.    This plan is not covered by the plan termination insurance system established under Title IV of ERISA and administered by the Pension Benefit Guaranty Corporation. As a defined contribution, individual account plan, it is not eligible for coverage under the law.

“Highly compensated employees.”    In the section called “Maximum Amount of Total Contributions,” under the heading “25% of pay limit,” reference is made to “highly compensated employees.” That phrase means any employee who owned 5% or more of the employer during the year in question or the preceding year, as well as any employee who had compensation from the employer during the preceding year of more than $85,000. (The dollar figure changes slightly from year to year according to the cost-of-living. The plan administrator can tell you what the exact figure is for this year.) Non-resident aliens who have no U.S.-source income are not taken into account when applying this definition.

Statement of ERISA rights.    Regulations of the federal government require that the following “Statement of ERISA Rights” appear in this document, and we are reproducing it here with quotation marks. Not all of the statement is necessarily accurate or applies to this plan. Neither the employer nor the plan administrator takes any responsibility for the accuracy or completeness of this statement, which is made to you by the federal government, not by anyone connected with the plan:

“As a participant in this plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all plan participants shall be entitled to:

“Examine, without charge, at the plan administrator’s office and at other specified locations, such as worksites and union halls, all plan documents, including collective bargaining agreements and copies of all documents filed by the plan with the U.S. Department of Labor, such as detailed annual reports and plan descriptions.

“Obtain copies of all plan documents and other plan information upon written request to the plan administrator. The administrator may make a reasonable charge for the copies.

“Receive a summary of the plan’s annual financial report. The plan administrator is required by law to furnish each participant with a copy of this summary annual report.

“Obtain a statement telling you whether you have a right to receive a pension at normal retirement age

Retirement Plan    Page 55

(age 65) and if so, what your benefits would be at normal retirement age if you stopped working under the plan now. If you do not have a right to a pension, the statement will tell you how many more years you have to work to get a right to a pension. This statement must be requested in writing and is not required to be given more than once a year. The plan must provide the statement free of charge.

“In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your plan, called ‘fiduciaries’ of the plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including your employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a pension benefit or exercising your rights under ERISA. If your claim for a pension benefit is denied in whole or in part you must receive a written explanation of the reason for the denial. You have the right to have the plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the plan administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If you have a claim for benefits which is denied or ignored, in whole or in part [and you have exhausted the plan’s claim and appeal procedure], you may file suit in a state or federal court. If it should happen that plan fiduciaries misuse the plan’s money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest office of the Pension and Welfare Benefits Administration, U. S. Department of Labor, listed in your telephone directory, or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, U. S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210.”

Service of legal process may be made on the plan administrator or any trustee.

SPECIAL ARRANGEMENTS FOR NEW PARTICIPATING EMPLOYERS

Introduction.    When a new school joins the EDMC family, it is sometimes appropriate to make special arrangements for the employees of that school, in order to bring them into this plan in a way that harmonizes with the plan that they were in before. If a special arrangement is made, this section describes it.

Page 56    The Education Management Corporation

Illinois Institute of Art.    In determining the length of your service for getting into this plan (that is, the Retirement Plan) effective January 1, 1996 and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of Ray College of Design from January 1, 1995 to November 8, 1995 are taken into account as hours of service under the plan to the same extent as if Ray College of Design had been a participating employer during that period.

New York Restaurant School.    In determining the length of your service for getting into this plan (that is, the Retirement Plan) effective January 1, 1997 and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of New York Restaurant School, Inc. from January 1, 1996 to August 2, 1996 are taken into account as hours of service under the plan to the same extent as if New York Restaurant School, Inc. had been a participating employer during that period.

In addition, any individual who was an employee of New York Restaurant School, Inc. immediately prior to August 2, 1996 and was eligible to participate in the New York Restaurant School, Inc. 401(k) Profit Sharing Plan and becomes an employee eligible to participate in this plan by reason of New York Restaurant School’s becoming a participating employer on or about August 2, 1996 is eligible to participate in this plan effective September 1, 1996 notwithstanding the semi-annual entry dates otherwise provided in the section entitled “How You Get Into the Plan.”

Art Institutes International Portland, Inc.    In determining the length of your service for getting into this plan (that is, the Retirement Plan) effective April 1, 1998 and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of Bassist College from January 1, 1997 to February 26, 1998 are taken into account as hours of service under the plan to the same extent as if Bassist College had been a participating employer during that period.

Massachusetts Communications College.    The requirement of one year of service in order to join this plan (that is, the Retirement Plan) shall not apply to any employee who, immediately prior to January 1, 2000, was an employee of Massachusetts Communications College and a participant in the Massachusetts Communications College 401(k) Plan and Trust.

In addition, in determining the length of your service for getting into this plan (that is, the Retirement Plan) effective January 1, 2000 and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of Massachusetts Communications College from January 1, 1999 through December 31, 1999 are taken into account as hours of service under the plan to the same extent as if Massachusetts Communications College had been a participating employer during that period.

In addition, if hours of service by employees of Massachusetts Communications College for years before 1999 can be substantiated by December 31, 2000, then in determining the length of your service for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of Massachusetts Communications College for years before 1999 will be taken into account as hours of service under the plan to the same extent as if Massachusetts Communications College had been a participating employer during that period. As an exception, no more than five years of service will be credited under this paragraph to any employee who upon entering this plan is a “restricted employee” as described in the section called “Maximum Amount of 

401(k) Contributions.”

Retirement Plan    Page 57

Art Institute of Charlotte.    The requirement of one year of service in order to join this plan (that is, the Retirement Plan) shall not apply to any employee who, immediately prior to January 1, 2000, was an employee of the American Business & Fashion Institute, Inc. and a participant in the American Business & Fashion Institute, Inc. 401(k) Profit Sharing Plan.

In addition, in determining the length of your service for getting into this plan (that is, the Retirement Plan) effective January 1, 2000 and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of the American Business & Fashion Institute, Inc. from January 1, 1999 through December 31, 1999 are taken into account as hours of service under the plan to the same extent as if the American Business & Fashion Institute, Inc. had been a participating employer during that period.

In addition, if hours of service by employees of the American Business & Fashion Institute, Inc. for years before 1999 can be substantiated by December 31, 2000, then in determining the length of your service for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of the American Business & Fashion Institute, Inc. for years before 1999 will be taken into account as hours of service under the plan to the same extent as if the American Business & Fashion Institute, Inc. had been a participating employer during that period. As an exception, no more than five years of service will be credited under this paragraph to any employee who upon entering this plan is a “restricted employee” as described in the section called “Maximum Amount of 401(k) Contributions.”

Art Institute of Las Vegas.    In determining the length of your service for the purpose of eligibility to receive matching contributions and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of the Interior Design Institute, Inc. before it was acquired by Education Management Corporation are taken into account as hours of service under the plan to the same extent as if the Interior Design Institute, Inc. had been a participating employer during that period. As an exception, no more than five years of service will be credited under this paragraph to any employee who upon entering this plan is a “restricted employee” as described in the section called “Maximum Amount of 401(k) Contributions.”

Art Institute of California.    In determining the length of your service for the purpose of eligibility to receive matching contributions and for deciding what portion of your account you are entitled to if you leave before age 65, hours of service in the employ of LJAAA, Inc. before it was acquired by Education Management Corporation are taken into account as hours of service under the plan to the same extent as if LJAAA, Inc. had been a participating employer during that period. As an exception, no more than five years of service will be credited under this paragraph to any employee who upon entering this plan is a “restricted employee” as described in the section called “Maximum Amount of 401(k) Contributions.”

Page 58    The Education Management Corporation

APPENDIX A TO THE

EDUCATION MANAGEMENT CORPORATION

RETIREMENT PLAN

Participating Employers As of August 1, 2001

(* denotes employer that does not participate in ESOP feature)

The Art Institute of Atlanta, Inc. 6600 Peachtree Dunwoody Road 100 Embassy Row Atlanta, GA 30328 TAIC, Inc.* d/b/a The Art Institute of California 10025 Mesa Rim Road San Diego, CA 92121 (effective January 1, 2001) The Art Institute of Charlotte, Inc.* 1515 Mockingbird Lane, Suite 600 Charlotte, NC 28209 (effective January 1, 2000) The Art Institute of Colorado, Inc. 1200 Lincoln Street Denver, CO 80203 The Art Institute of Dallas, Inc. 8080 Park Lane, Suite 100 Dallas, TX 75231 The Art Institute of Ft. Lauderdale, Inc. 1799 SE 17th Street Ft. Lauderdale, FL 33316 The Art Institute of Houston, Inc. 1900 Yorktown Houston, TX 77056 The Art Institutes International at San Francisco, Inc.* 1170 Market Street San Francisco, CA 94102 (effective December 19, 1997) The Art Institute of Las Vegas, Inc.* 4225 S. Eastern Avenue, Suite 4 Las Vegas, NV 89119 (effective July 1, 2001) The Art Institute of Los Angeles, Inc.* Santa Monica Business Park, Building S 2900 31st Street, Suite 150 Santa Monica, CA 90405 (effective January 13, 1997) The Art Institute of Los Angeles —Orange County, Inc.* 3601 West Sunflower Avenue Santa Ana, CA 92704 (effective January 1, 2000) The Art Institutes International Minnesota, Inc.* 15 South 9th Street LaSalle Building Minneapolis, MN 55402 (effective January 28, 1997) The Art Institute of Pittsburgh 420 Boulevard of the Allies Pittsburgh, PA 15219 The Art Institute of Philadelphia, Inc. 1622 Chestnut Street

Retirement Plan    Page 59

Philadelphia, PA 19103 The Art Institute of Phoenix, Inc.* 2233 West Dunlap Avenue Phoenix, AZ 85021 The Art Institute of Portland, Inc.* 2000 Southwest Fifth Avenue Portland, OR 97201 (effective April 1, 1998) The Art Institute of Seattle, Inc. 2323 Elliott Avenue Seattle, WA 98121 The Art Institute of Washington, Inc.* The Ames Center 1820 N. Fort Meyer Drive Arlington, VA 22209 (effective January 1, 2000) The Art Institute OnLine, Inc.* 420 Boulevard of the Allies Pittsburgh, PA 15219 The Illinois Institute of Art, Inc.* 350 North Orleans, Suite 136-L Chicago, IL 60654 The Illinois Institute of Art at Schaumburg, Inc.* 1000 Plaza Drive, Suite 1000 Schaumburg, IL 60173 Massachusetts Communications College* 142 Berkeley Street Boston, MA 02116 (effective January 1, 2000) NCPT, Inc. 6600 Peachtree Dunwoody Road 100 Embassy Row Atlanta, GA 30328 The National Center for Professional Development —University Division, Inc. 6600 Peachtree Dunwoody Road 100 Embassy Row Atlanta, GA 30328 The New York Restaurant School, Inc.* 75 Varick Street, 16th Floor New York, NY 10013

Page 60    The Education Management Corporation

APPENDIX B TO THE

EDUCATION MANAGEMENT CORPORATION

RETIREMENT PLAN

Investment Options Effective July 6, 2001

Managed Income Portfolio (Fidelity).     This is a commingled pool of the Fidelity Group Trust for Employee Benefit Plans. Its objective is to preserve principal while earning interest income. It invests in investment contracts offered by major insurance companies and other approved financial institutions and in certain types of fixed income securities. A small portion of the fund is invested in a money market fund to provide daily liquidity.

Fidelity Intermediate Bond Fund.    This is a mutual fund that invests in all types of U. S. and foreign bonds, including corporate or U. S. government issues. Normally, it selects bonds considered medium to high quality (“investment grade”) while maintaining an average maturity of 3 to 10 years. These bond prices will go up and down more than those of short-term bonds.

Invesco Equity Income Fund.    This is a mutual fund that seeks to provide current income. Capital growth is an additional, but secondary, objective of the fund. Normally, at least 65% of the fund’s assets are invested in dividend-paying common stocks. Up to 10% of its assets may be invested in stocks which do not pay dividends. The rest may be invested in corporate and other types of bonds.

Spartan U. S. Equity Index Fund.    This fund, managed by Bankers Trust, seeks to provide investment results that correspond to the total return of common stocks publicly traded in the United States. In seeking this objective, the fund attempts to duplicate the composition and total return of the S&P 500. The fund uses an “indexing” approach and allocates its assets similarly to those of the index. The fund’s composition may not always be identical to that of the S&P 500.

Fidelity Freedom Funds.    These are mutual funds that invest in a combination of Fidelity equity, fixed-income, and money market funds. They allocate their assets among those funds according to an asset allocation strategy that becomes increasingly conservative as each Freedom Fund approaches its target retirement date. The Freedom Funds are:

Fidelity Freedom 2000 Fund—targeted to investors expecting to retire around 2000.

Fidelity Freedom 2010 Fund—targeted to investors expecting to retire around 2010.

Fidelity Freedom 2020 Fund—targeted to investors expecting to retire around 2020.

Fidelity Freedom 2030 Fund—targeted to investors expecting to retire around 2030.

Fidelity Freedom 2040 Fund—targeted to investors expecting to retire around 2040.

Fidelity Freedom Income Fund—targeted to investors who have retired.

Please note:    The Fidelity Freedom Funds replace three other Fidelity funds that were previously available—Fidelity Asset Manager, Fidelity Asset Manager: Growth, and Fidelity Asset Manager: Income. Effective July 6, 2001, no money may be contributed or transferred to those three Asset Manager funds.

Please note also:    If you have chosen any of those three Asset Manager funds—Fidelity Asset Manager, Fidelity Asset Manager: Growth, or Fidelity Asset Manager: Income—as the destination for new contributions going into the plan, then effective July 6, 2001, those new

Retirement Plan    Page 61

contributions will automatically be re-directed by Fidelity into the Fidelity Freedom Fund that corresponds to your birth date, as shown on the table in the following paragraph.

Please note, finally:    Participants with money in any of those Asset Manager funds—Fidelity Asset Manager, Fidelity Asset Manager: Growth, and Fidelity Asset Manager: Income—are urged to move the money into other investment options available under the plan. Any money remaining in any of those three Asset Manager funds at September 30, 2001 (that is, 90 days later) will automatically be transferred by Fidelity into the Fidelity Freedom Fund that corresponds to your birth date, as shown on this table:

Year of Birth	Fidelity Freedom Fund
1900-1934	Freedom Income
1935-1940	Freedom 2000
1941-1950	Freedom 2010
1951-1960	Freedom 2020
1961-1970	Freedom 2030
1971-1980	Freedom 2040

Fidelity Magellan Fund.    This is a growth mutual fund that seeks long-term capital appreciation by investing in the stocks of both well-known and lesser known companies with potentially above-average growth potential and a correspondingly higher level of risk. Securities may be of foreign, domestic, and multinational companies.

Fidelity Growth Company Fund.    This is a mutual fund that seeks long-term capital appreciation by investing primarily in common stocks and securities convertible into common stocks. It may invest in companies of any size with above-average growth potential, though growth is most often sought in smaller, less well known companies in emerging areas of the economy. The stocks of small companies often involve more risk than those of larger companies.

Ariel Fund.    This is a mutual fund managed by Ariel Capital Management, Inc. It seeks long-term capital appreciation. It normally invests 80% of its assets in equity securities with market capitalizations under $1.5 billion. It may invest the remaining 20% in investment grade debt securities. It seeks environmentally responsible companies; it may not invest in issuers primarily involved in the manufacture of weapons systems, nuclear energy or tobacco.

Franklin Small Cap Growth Fund A.    This is a mutual fund managed by Franklin Advisers, Inc. It seeks to increase the value of investments over the long term through capital growth. It invests primarily in equity securities of small capitalization growth companies, which generally have market capitalizations of less than $1.5 billion at the time of the investment. The fund may also invest up to 25% of its assets in foreign securities, which involve special risks, including economic and political uncertainty and currency fluctuation.

Fidelity Diversified International Fund.    This is a mutual fund whose objective is capital growth. It normally invests at least 65% of total assets in foreign securities. It normally invests primarily in common stocks. Stocks are selected by using a computer-aided quantitative analysis supported by fundamental analysis. In exchange for greater potential rewards, foreign investments, especially in emerging markets, involve greater risks than U. S. investments and as with any investment, share price and return will fluctuate. The risks in foreign investments include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations.

Page 62    The Education Management Corporation

EX-10.08

Exhibit 10.08

THE

EDUCATION MANAGEMENT CORPORATION

DEFERRED COMPENSATION PLAN

TABLE OF CONTENTS

Welcome to the Plan!	1
Participation	1
Salary Deferrals	3
Company Credits	4
Investment Credits	6
Deferral of Gain from the Exercise of Stock Options	7
Lack of Funding	9
Payment of Benefits	10
Hardship Withdrawals	12
Administration, Claims and Appeals	13
Miscellaneous	14

WELCOME TO THE PLAN!

Introduction.    This is the plan document for the Education Management Corporation Deferred Compensation Plan. This is an unfunded, non-qualified deferred compensation arrangement. The purpose is to allow additional retirement savings for a select group of management or highly compensated employees in view of the restrictions on the contributions that can be made, or benefits that can be accrued, for these employees under tax-qualified retirement plans of the employer.

Ordinary names.    In this document, we will call things by their ordinary names. Education Management Corporation will be called “the company.” This plan will simply be called “the plan.” When we say “you,” we mean employees who are eligible to participate in the plan and choose to do so. When we say “the Code,” we mean the Internal Revenue Code of 1986, as amended.

Effective date.    This document amends and restates the plan effective January 1, 2002. This amendment and restatement does not attempt to describe the rules that were in effect under the plan before that date and therefore does not apply to any participant whose employment with the employer terminated before that date (any such participant’s rights being governed by the terms of the plan as in effect when his termination of employment occurred).

PARTICIPATION

Committee discretion.    The Retirement Committee has complete discretion to select employees for participation in this plan.

Current criteria.    At present, the Retirement Committee has exercised its discretion to make eligible:

• outside directors of the company, with respect to their director’s fees and gain on the exercise of stock options,

• school presidents, and

• executive employees of the company and designated subsidiaries who earn $150,000 or more per year.

Deferred Compensation Plan    Page 1

Legal limitation.    Despite the discretion of the Retirement Committee and the current criteria just described, no employee will be selected for participation or continued as a participant in this plan if, due to the employee’s participation, the plan would fail to qualify as primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, within the meaning of sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended.

Participation agreement.    Participation is not automatic if and when you satisfy the current criteria. Instead, employees who satisfy the current criteria will be notified of their eligibility and offered the opportunity to participate. If you wish to participate, you must complete and file with the administrator of the plan a written participation agreement.

If you choose to make salary deferrals, the participation agreement will reflect your choice. But in any event, the participation agreement will (i) confirm your participation, (ii) indicate your initial choice with regard to investment credits on any company credits that may be made, (iii) indicate your choice as to the form of payment and (iv) designate your beneficiary.

Annual determination.    Eligibility to participate is determined annually. The fact that you were eligible to participate (and did participate) in one year does not automatically entitle you to participate in any future year.

Your participation agreement, however, is “evergreen.” It remains in effect and governs your choices under the plan during those years when you do participate in the plan, unless and until you change it.

Changing your participation agreement.    Except for changes with regard to investment credits (which we will explain in just a moment), you change your participation agreement by completing and filing a new one with the administrator of the plan. Changes reflected in a new participation agreement will take effect as follows:

• A change in the amount of salary deferrals, if filed with the administrator by December 15 of one calendar year, will take effect with the following calendar year (otherwise, with the second following calendar year).

• A change in the form of payment will take effect with respect to amounts credited to you in calendar years after the calendar year in which the change is filed with the administrator.

• A change of beneficiary will take effect immediately upon filing with the administrator.

With regard to investment credits, you change your choices in the same manner as under the Retirement Plan—by calling Fidelity at (800) 835-5092 during normal business hours—and the changes take effect as soon as Fidelity processes them.

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SALARY DEFERRALS

Introduction.    You may choose to defer a certain percentage of your salary and/or bonus into the plan. If you do, that amount will not be paid to you currently in cash but will be credited to a bookkeeping account in your name under the plan. (With regard to outside directors, references in this section to “salary” will be understood as referring to director’s fees.)

Amount.    There are two possible elements of your choice to defer.

Ordinary deferral of salary.    First, you may defer a fixed, whole percentage of your salary and/or bonus. The amount of deferral must be at least 1% of your compensation or $1,000, whichever is less. The amount may not be more than 100% of your compensation. Alternatively, you may defer a fixed dollar amount, as long as the amount is within those limits.

Supplemental deferral based on amounts returned under Retirement Plan.    Second, entirely separate from the percentage described in the preceding paragraph (and assuming you have not already chosen to defer 100% of your compensation, of course), you may defer an additional amount of salary equal to all or a portion of any elective contributions (plus interest) that are returned to you from the Education Management Corporation Retirement Plan (we’ll just call it the “Retirement Plan”) by reason of the non-discrimination requirements of law.

That is to say, in a given calendar year, elective contributions made under the Retirement Plan in the preceding year may be returned to you (with interest) because of the non-discrimination requirements of law. If you have elected supplemental deferral under this paragraph, while the elective contributions (and interest) will still be returned to you in cash from the Retirement Plan, an offsetting additional deferral will be taken from your current salary under this plan. The net economic effect will be that the amount remains deferred, but under this plan instead of under the Retirement Plan. You may elect to defer any whole percentage of any such return of elective contributions, from zero to 100%.

Written election.    In order to defer compensation into the plan, you must complete and file with the administrator of the plan a written election. The written election will specify the percentage and whether it applies to salary or bonus or both. The election will also specify whether you wish to defer an additional amount equal to all or any portion of any elective contributions (and interest) that may be returned to you in the particular calendar year.

Timing.    In order to defer for a particular calendar year, you must complete and file the written election with the administrator of the plan no later than December 15 of the preceding calendar year.

With respect to the additional deferral equal to all or a portion of the elective contributions that may

Deferred Compensation Plan    Page 3

be returned under the Retirement Plan, the timing may require more explanation. An election made by December 15 of Year 1 applies to compensation earned in Year 2. In the case of supplemental deferrals equal to contributions that are returned under the Retirement Plan, the supplemental deferral occurs in Year 2 based on elective contributions that are returned in Year 2 and the deferral is made from compensation earned and otherwise payable in Year 2.

This is so even though the contributions returned from the Retirement Plan in Year 2 were made to the Retirement Plan in Year 1. An election of supplemental deferral under this plan must therefore be made before it is known whether elective contributions will be returned from the Retirement Plan at all. The election will therefore be contingent—applicable only if and when elective contributions are in fact returned under the Retirement Plan.

COMPANY CREDITS

Introduction.    Whether or not you choose to defer salary and/or bonus, you may receive company credits under the plan in the following circumstances.

Matching contributions.    If you made elective contributions under the Retirement Plan that generated the maximum matching contribution under the Retirement Plan (or your matching contributions did not reach the maximum because your elective contributions reached the dollar limit before the end of the year), you may be entitled to a company credit under this section.

If so, you are entitled to a credit under this section if the amount of matching contributions that you received under the Retirement Plan was limited:

• by section 401(a)(17) of the Code (which limits compensation taken into account under the Retirement Plan to a stated amount, which is $170,000 in 2000, for example) or

• by section 402(g) of the Code (which limits elective contributions under the Retirement Plan to a stated amount, which is $10,500 in 2000, for example).

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If so, the company will credit you under this plan with an amount equal to the additional matching contribution that you would have received under the Retirement Plan if you had not been so limited.

EXAMPLE 1—Not eligible for company matching credit.  It is 2000. Your compensation is $200,000 (although only $170,000 can be taken into account under the Retirement Plan). You make elective contributions under the Retirement Plan of 4% of compensation. You receive no credit under this section of this plan, because you did not make elective contributions under the Retirement Plan that generated the maximum matching contribution under the Retirement Plan, nor did your matching contributions reach the maximum because your elective contributions reached the dollar limit.

EXAMPLE 2—Eligible and limited by 401(a)(17).  It is 2000. Your compensation is $200,000 (although only $170,000 can be taken into account under the Retirement Plan). You make elective contributions under the Retirement Plan of 6% of compensation, which generate the maximum matching contribution of 4.5% (that is, 4.5% of $170,000, which is $7,650). If the compensation that is taken into account under the Retirement Plan were not limited to $170,000, your matching contribution would have been $9,000 (that is, 4.5% of $200,000). Therefore, under this section of this plan, you receive a company credit equal to the difference—$9,000 minus $7,650, or $1,350.

EXAMPLE 3—Eligible and limited by 402(g).  It is 2000. Your compensation is $170,000. You make elective contributions under the Retirement Plan of 10% of compensation, a percentage calculated to generate the maximum matching contribution. But your elective contributions reach the limit of $10,500 well before the end of the year (whenever your cumulative compensation during the year reaches $105,000), at which point they stop. When your elective contributions stop, so do the matching contributions, which up to that point have accumulated to $4,725. Effective January 1, 1999, under the Retirement Plan a “catch-up” matching contribution is made at the end of the year to bring your matching contributions up to the maximum of $7,650; that adjustment relieves you of the effect of your elective contributions stopping before the end of the year. But before 1999 (and if that “catch-up” provision is ever eliminated), you would get a credit under this section equal to the “catch-up” amount (that is, the maximum of $7,650 minus your actual matching contributions of $4,725, or 2,925).

Discretionary contributions and forfeitures.    Your share of company discretionary contributions and forfeitures under the Retirement Plan may be limited by either or both of two legal limits—the limit on compensation that may be taken into account (in 2000, $170,000) and the limit under section 415 of the Code on total allocations of contributions and forfeitures. If so, the company will credit you under this plan with the discretionary contributions and/or forfeitures that you would have received under the Retirement Plan (if the Retirement Plan had not been subject to those two legal limits) but did not receive under the Retirement Plan. (These are credits of cash, not stock, even if they relate to forfeitures from employer stock accounts under the Retirement Plan.)

Deferred Compensation Plan    Page 5

INVESTMENT CREDITS

Introduction.    The amount that you are entitled to receive under the plan is a function of the salary deferrals that you make, the company credits that you receive under the plan, and investment credits. This section will explain the system of investment credits.

Hypothetical investments.    Investment credits are calculated as if the amounts standing to your credit under the plan were invested in one or more of a variety of mutual or collective funds (listed below). While we call them investment “credits,” you realize of course that they may be either positive or negative, depending on the performance of the funds that are used as measuring devices.

In addition, we want to emphasize that, for legal reasons, the amounts standing to your credit under the plan are nothing more than bookkeeping entries that measure the extent of the company’s contractual obligation to pay you under the terms of the plan. That includes the investment credits. You do not have any right to, or interest in, any assets that the company may set aside for this purpose or investment gains on them.

Your choice.    You do, however, have a choice as to the mutual or collective funds that will be used as the measuring stick for the investment credits that will be added to your account. When you first become eligible to participate, you will be asked to choose from among the funds offered under the Retirement Plan. Those choices are shown on Appendix B to the Retirement Plan, which is incorporated here by reference as it may be in effect from time to time. As an exception, the Managed Income Portfolio (Fidelity) is not available under this plan.

If for any reason there is no current choice on file for you, the plan hereby requires that the measuring stick be the Fidelity Intermediate Bond Fund, and neither the plan administrator nor any other fiduciary of the plan shall have any authority or discretion to direct otherwise. The same applies to any portion of your choice that becomes out of date, such as if you have chosen a particular fund and that fund is no longer offered (unless a substitute fund is automatically provided).

The choice that you make for the amounts currently standing to your credit under the plan need not be the same as the choice you make for future credits. But choices among the funds are not permitted in increments smaller than 10% of the amount to which they apply.

As noted above, you may change your choice with regard to investment credits at any time by calling Fidelity during normal business hours at (800) 835-5092.

Statements.    The administrator of the plan will provide annual statements showing the amounts standing to your credit under the plan. The statements will separately account for salary deferrals, different

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types of company credits, and investment credits. But you may inquire about your balance or get a statement at any time by calling Fidelity at (800) 835-5092. Or you can visit the Fidelity website at www.401k.com.

DEFERRAL OF GAIN FROM THE EXERCISE OF STOCK OPTIONS

Introduction.    If you hold a stock option under the company’s 1996 Stock Incentive Plan, then entirely apart from the system of salary deferrals, company credits and investment credits which has been described up to this point, you may choose to defer under this plan the gain that you would otherwise realize upon the exercise of that stock option. If you do, the stock that you would otherwise have received upon exercise of the stock option will not be paid to you currently but will be credited to a bookkeeping account in your name under the plan for payment to you (or your beneficiary) at a future date.

Written election.    In order to defer gain from the exercise of a stock option into the plan, you must complete and file with the administrator of the plan a written election. The written election will specify either (a) the particular options from which the gain will be deferred under this plan, regardless of when the option is exercised, or (b) the particular exercises from which the gain will be deferred under this plan, identified by a date or range of dates, or (c) a combination of both.

For example, you may elect to defer under this plan the gain from (a) the exercise of all non-qualified stock options granted under the 1996 Stock Incentive Plan, but none of the incentive stock options, or (b) all exercises of stock options during a stated calendar year, or (c) all exercises of non-qualified stock options granted under the 1996 Stock Incentive Plan that occur during a particular calendar year.

Please note:    As explained in more detail below, the purpose of this section of the plan is to postpone federal income taxation on the element of gain from exercising a stock option—taxation that would otherwise occur when you exercise the option. Since federal income taxation of the gain at exercise applies to non-qualified stock options but not to incentive stock options, you may reasonably conclude that this section should only be used with respect to non-qualified stock options.

Timing.    You may make the election to defer under this section of the plan at any time. But the election will apply only to exercises that satisfy both of the following conditions:

• the exercise occurs in a calendar year following the calendar year in which the election was filed with the administrator of this plan, and

• the exercise occurs at least six months after the election was filed with the administrator of this plan.

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For example, if an election is filed with the plan administrator on February 15, 2002, it cannot apply to any exercises that occur before January 1, 2003. If an election is filed with the administrator on October 15, 2002, it cannot apply to any exercises that occur before April 15, 2003.

Once filed with the plan administrator, an election under this section of the plan is irrevocable.

Exercising the option.    If you have elected to defer under this section of the plan, do not initiate an exercise of your stock option through Mellon Investor Services (or the then-current transfer agent). Instead, please contact Human Resources to initiate the process, in order to assure that the option stock is not issued to you, as we will explain here.

Upon exercise, you will not receive the shares of stock that represent the element of gain from exercising the stock option. When we say “the element of gain from exercising the stock option,” we mean the excess of the value of the stock that you would receive by exercising the stock option over the amount that you had to pay to exercise the stock option (either in cash or in stock). This is the amount on which you would ordinarily be taxed if you did not use this section of this plan.

EXAMPLE:    You have the option to buy 100 shares of company stock at an option price of $20. The stock has a current market value of $25. You exercise your option by paying $2,000 and, in return, would ordinarily receive 100 shares of stock valued at $2,500. In this example, $2,000 worth of that stock represents a return of your purchase price; $500 worth of stock represents the element of gain from exercising the stock option. In this example, the gain from exercising the option consists of 20 shares of stock ($500 worth of stock at $25 per share equals 20 shares).

EXAMPLE:    The facts are the same as the previous example, except that you exercise by using a cashless method such as “exercise and sell to cover,” meaning that you are treated as if you exercised the option by buying 100 shares at $20, costing $2,000, and then sold 80 shares at $25 to cover the cost of exercising the option (selling 80 shares at $25 raises $2,000). That would likewise leave you with 20 shares as the element of gain from exercising the option.

Upon exercise, instead of receiving the shares of stock that represent the element of gain from exercising the option, you will receive a credit under this plan, expressed as the number of shares of stock that represent the element of gain. In the examples above, you would receive a credit under this plan equal to 20 shares of stock. We will call these “stock credits” in the remainder of this plan. As with all other amounts deferred under this plan, stock credits represent nothing more than the company’s unfunded, unsecured promise to pay the shares to you at a future date, in accordance with the terms of this plan. You do not own the stock unless and until it is paid to you pursuant to the terms of this plan.

Dividends.    You do not earn investment credits on shares of stock that are credited to your account under this section of the plan. Instead, if dividends are payable on the stock for which the stock credit under this plan is a substitute, then your account under this plan will receive additional credits, expressed in shares of company stock, equal to the value of the dividends. Alternatively, if you so choose by written election made

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and filed with the plan administrator before a dividend is declared, you may receive a current cash payment from the company equal to the dividend in the same manner as if you actually owned the stock that stands to your credit under this plan.

LACK OF FUNDING

Introduction.    We say “credits” in this document deliberately, because this plan involves nothing more than a contractual promise by the company to pay deferred compensation when (and in the amounts) determined under the terms of the plan. Legally, the plan is unfunded and unsecured, as this section will explain.

Unfunded, unsecured promise to pay.    This plan is unfunded and has no assets. The promise of benefits under the plan is no more than a contractual obligation of the company to be satisfied from its general assets. Participation in the plan gives you nothing more than the company’s contractual promise to pay deferred compensation when due in accordance with the terms of this plan.

Salary deferral.    Just to make the point clear once again, if you choose to defer salary under the plan, the amount that you choose to defer is not an “employee contribution” and is not an asset of yours or of the plan. It reflects nothing more than a re-structuring of your compensation arrangement, whereby current compensation is somewhat less and deferred compensation is somewhat more.

Reserves.    The company is not required to segregate, maintain or invest any portion of its assets by reason of its contractual commitment to pay deferred compensation under this plan. If the company nevertheless chooses to establish and invest a reserve (as a matter of prudent management of its contractual liability), such reserve remains an asset of the company in which no participating employee has any right, title or interest. Employees entitled to deferred compensation under this plan have the status of general unsecured creditors of the company.

Rabbi trust.    Though not required to do so, the company may establish (and has in fact established) a so-called rabbi trust (so named because it was invented by a synagogue and first approved by the IRS for a rabbi). Here is how the rabbi trust works:

• The rabbi trust is held by a financial institution as trustee under a detailed, written trust agreement.

• The company contributes cash to the rabbi trust at whatever times and in whatever amounts it chooses. Please note that this applies only to salary deferrals, company credits, and investment credits. If you use this plan to defer the element of gain from the exercise of a stock option, and therefore receive stock credits under this plan, no stock is transferred to, or held in, the rabbi trust.

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• The assets of the trust are considered to be assets of the company. For example, the investment earnings of the trust are taxable income to the company under the “grantor trust” rules. As noted in the previous section of this plan, no participant or beneficiary of the plan has any right, title or interest in the assets of the rabbi trust.

• But under the terms of the rabbi trust, the assets may be used only for the purpose of paying benefits under this plan, barring bankruptcy of the company (or similar events), in which event the assets of the rabbi trust are available not just to participants and beneficiaries of this plan but to all other creditors of the company as well.

• To the extent that payments are made to participants and beneficiaries by the trustee from the rabbi trust, those payments are considered payments by the company under the plan and satisfy the company’s obligation under the plan.

The trustee of the rabbi trust is Fidelity Management Trust Company, which is why the plan refers you to Fidelity for information about your account and to change your choices about investment credits.

PAYMENT OF BENEFITS

Introduction.    This section of the plan explains when you are entitled to payment under the plan, how much, and in what form.

Normal retirement.    If your employment with the company terminates on or after your 65th birthday, you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits and stock credits (if any).

Early retirement.    If your employment with the company terminates on or after your 55th birthday and you have completed at least 5 years of service with the company (with the meaning of the Retirement Plan), you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

Disability.    If you become totally and permanently disabled while still employed by the company, you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

For this purpose, total and permanent disability means that you are unable to engage in any substantial gainful activity by reason of any physical or mental impairment which is expected to result in death or be of a

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long, continued and indefinite duration, as certified by a written opinion of a physician selected by the administrator of the plan.

Death.    If you die while still employed by the company, your beneficiary is entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

Other termination of employment.    If your employment with the company terminates under any circumstances other than those previously listed in this section, you are entitled to receive all of your salary deferral credits and investment credits on them, as well as all of your stock credits (if any). You are also entitled to receive all of the company credits and investment credits on them if you have completed at least 3 years of service (within the meaning of the Retirement Plan). If you have not completed at least 3 years of service (within the meaning of the Retirement Plan), you are not entitled to receive any of the company credits and investment credits on them, with one exception.

Form of payment.    Payment of salary deferral credits, company credits and investment credits on both is made in cash. Payment of stock units is made in stock. In either case, payment may be made:

• in a single payment or

• in annual installment payments over a period that you choose, as long as it is at least 2 years and not more than 10 years.

If you choose installment payments, the unpaid balance of your entitlement will remain in the plan and will remain subject to investment credits. The amount of each annual payment will be the balance then standing to your credit under the plan multiplied by a fraction which is 1 divided by the number of remaining payments.

Payment will be made in the form indicated on your original participation agreement. As an exception, you may change the form of payment by indicating a different choice on a subsequent participation agreement, but the new choice will apply only to amounts credited to you under the plan after the new participation agreement is filed with the administrator of the plan.

When payment is made.    Ordinarily, payment is made (or, in the case of installments, begun) as soon as administratively feasible after the event triggering payment.

On your participation agreement, however, you may choose for payment (or, in the case of installments, the start of payments) to be delayed for a fixed period or until a fixed date.

If you die before payment is made in full, the balance of your entitlement will be paid to your beneficiary as soon as administratively feasible.

Your beneficiary.    Your beneficiary is the individual or entity designated on the last participation agreement that was completed and filed with the administrator of the plan before your death. Please note that separation or divorce does not automatically change your designation of beneficiary. It is your responsibility

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to keep your designation current based on your current circumstances.

If no designated beneficiary survives you, your estate will be considered your beneficiary. This might occur if you fail to name a beneficiary or if all of your designated beneficiaries die before you do.

If your beneficiary is a minor or legally incompetent, the administrator may, in its discretion, make payment to a legal or natural guardian, other relative, court-appointed representative, or any other adult with whom the minor or incompetent resides. Any payment made in good faith by the administrator will fully discharge the obligation of the plan with regard to that payment, and the administrator will have no duty or responsibility to see to the proper application of any such payment.

Forfeitures.    If your employment terminates as described above under the heading “Other termination of employment” and you are not entitled to 100% of your company credits (and investment credits on them), the balance will be retained on the books of the plan until you have a “Break in Service” within the meaning of the Retirement Plan but will then be permanently forfeited.

That is to say, if you return to employment before incurring a “Break in Service,” the forfeiture amount will remain in your account and you may be able to earn additional entitlement to that amount with additional years of service. But if you return after incurring a “Break in Service,” the forfeiture amount will have been removed from your account and you will never be able to earn any additional entitlement to that amount.

HARDSHIP WITHDRAWALS

Introduction.    Besides the events described in the preceding section of the plan—all of which involve termination of employment with the company—there is one circumstance in which you may be able to withdraw from the plan while still employed.

Administrator’s discretion.    The administrator of the plan has discretion to grant an in-service withdrawal in the circumstance where you establish hardship. But hardship withdrawal is limited to your salary deferral credits and stock credits (if any). That means no company credits and no investment credits on either salary deferral credits or company credits.

Hardship.    For this purpose, hardship means severe financial hardship to you resulting from:

• a sudden and unexpected illness or accident of you or a dependent (within the meaning of section 152(a) of the Code),

• loss of your property due to casualty, or

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• other similar extraordinary and unforeseeable circumstances arising as a result of events beyond your control.

The need to send a child to college and the desire to purchase a home do not qualify for a hardship withdrawal.

Amount available.    The amount available is not more than is reasonably necessary to satisfy the need after exhaustion of other sources such as:

• reimbursement or compensation by insurance or otherwise,

• liquidation of other assets (except to the extent that such liquidation would itself create a hardship), and

• cessation of salary deferrals under this plan.

ADMINISTRATION, CLAIMS AND APPEALS

Introduction.    The administrator of the plan is the Retirement Committee appointed by the board of directors of the company. The administrator has all rights, duties and powers necessary or appropriate for the administration of the plan.

Claims.    To claim your money (or stock) under the plan, file a written claim with the administrator (c/o Education Management Corporation, 300 Sixth Avenue, Pittsburgh, PA 15222). The plan administrator will respond in writing within 90 days and, if the claim is denied, point out the specific reasons and plan provisions on which the denial is based, describe any additional information needed to complete the claim, and describe the appeal procedure.

Appeal.    If your claim is denied and you disagree and want to pursue the matter, you must file an appeal in accordance with the following procedure. You cannot take any other steps unless and until you have exhausted the appeal procedure. For example, if your claim is denied and you do not use the appeal procedure, the denial of your claim is conclusive and cannot be challenged, even in court.

To file an appeal, write to the administrator stating the reasons why you disagree with the denial of your claim. You must do this within 60 days after the claim was denied. In the appeal process, you have the right to review pertinent documents. You have the right to be represented by anyone else, including a lawyer if you wish. And you have the right to present evidence and arguments in support of your position.

Deferred Compensation Plan    Page 13

The administrator will ordinarily issue a written decision within 60 days. The administrator may extend the time to 120 days as long as it notifies you of the extension within the original 60 days. The administrator may, in its sole discretion, hold a hearing. The decision will explain the reasoning of the administrator and refer to the specific provisions of this plan on which the decision is based.

Discretionary authority.    The administrator shall have and shall exercise complete discretionary authority to construe, interpret and apply all of the terms of the plan, including all matters relating to eligibility for benefits, amount, time or form of benefits, and any disputed or allegedly doubtful terms. In exercising such discretion, the administrator shall give controlling weight to the intent of the company in establishing the plan. All decisions of the administrator in the exercise of its appellate authority under the plan (or in the exercise of its claims authority, absent an appeal) shall be final and binding on the plan, the company and all participants and beneficiaries.

MISCELLANEOUS

No guarantee of tax consequences.    While the company is pleased to be able to offer this plan for those employees who are eligible for it and wish to take advantage of it, the plan does not qualify for any program under which the Internal Revenue Service would issue an advance ruling or other determination on the federal tax consequences of the plan. This is particularly true of the feature under which the element of gain on the exercise of a stock option may be deferred under this plan—a relatively recent innovation on which the IRS has not yet spoken (when this edition of the plan was adopted). The company does not guarantee the tax consequences of the plan; consult your own tax advisor.

Integration.    This plan document represents the totality of the company’s commitment to provide deferred compensation under this plan. There are no other writings, nor are there any oral representations or understandings, that reflect, add to, subtract from, or alter the terms of this document.

Amendment and termination.    Although the plan was not established with the intention that it be temporary or expire on a certain date, the company reserves the right, in its sole discretion, to amend or terminate the plan at any time, for any reason (or no reason), without notice, retroactively or prospectively.

As the only exception to the foregoing authority to amend or terminate, the company may not amend or terminate the plan in such a way as to reduce the balance that stands to the credit of any participant as of the date of adoption of any such amendment or termination, including salary deferral credits, company credits, and investment credits earned up to that time.

Expenses.    The expenses of the plan will be borne by the company.

Non-alienation.    As required by the Internal Revenue Service, your right to benefits under this plan

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is not subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment or any other type of alienation, whether initiated by you or by creditors of you or your beneficiary. Any attempt at alienation will simply be void.

Limitation of liability.    No director, officer, or other employee of the company shall be personally liable for any action taken or omitted in connection with this plan and its administration unless attributable to his own fraud or willful misconduct.

The company hereby agrees to provide insurance to, or otherwise indemnify, every director, officer, and other employee of the company who serves the plan in an administrative or fiduciary capacity against any and all claims, loss, damages, expense, and liability arising from any act or failure to act in that capacity unless there is a final court decision that the person was guilty of gross negligence or willful misconduct.

Applicable law.    This plan will be construed according to the law of the Commonwealth of Pennsylvania to the extent not pre-empted by ERISA.

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EX-10.09

Exhibit 10.09

THE

EDUCATION MANAGEMENT CORPORATION

EMPLOYEE STOCK PURCHASE PLAN

Table of Contents

Stock Purchase	1
Introduction	1
Eligibility	1
Offering periods	1
Discount	1
Investment amounts	2
Account	2
Taxation issues	2
Insider trading	2
Employee’s account with Mellon Investor Services	2
Questions and Answers	3
Other Information	5
Administration	5
Stock subject to the ESPP	5
Miscellaneous	5
Adjustments upon changes in common stock	5
Tax issues	5
Restrictions on resale of common stock	6
Available information	6

This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

STOCK PURCHASE

Introduction.    The Education Management Corporation (EDMC) 1996 Employee Stock Purchase Plan (ESPP) presents you with an opportunity to conveniently acquire stock ownership in EDMC at a discount through payroll deduction.

The ESPP enables you to purchase shares of EDMC Common Stock at a 15% discount through payroll deduction. You may invest from 1% up to 5% of your Base Pay. (For the purposes of the ESPP, your “Base Pay” is your regular, straight-time earnings, excluding payments for overtime, shift premium, bonuses and other special payments, commissions and other incentive payments.) You will not have to pay any brokerage fees related to those purchases.

EDMC has arranged with Mellon Investor Services to maintain individual employee accounts for participants. Mellon will maintain the accounts and mail a statement to the participant following each transaction.

If you have questions, please contact your local Human Resources or benefits representative. You may also obtain information by logging on to the Mellon website at https://espp.melloninvestor.com or by calling Mellon at 1-(888)396-6557.

Participation by eligible employees is entirely voluntary and EDMC will make no recommendations to its employees regarding participation in the ESPP.

Eligibility.    You are eligible to participate if you are a regular full-time or part-time employee of EDMC, or any of its subsidiaries, and you are customarily scheduled to work at least 300 or more hours per year. Student workers cannot participate in the Plan. No employee who owns 5% or more of EDMC’s Common Stock (calculated as if the employee owned all shares of Common Stock that he or she could purchase during the current Offering Period) is eligible to participate in the ESPP. No member of the Committee is eligible to participate in the ESPP.

Offering periods.    The Plan will allow eligible employees to purchase up to 750,000 shares of Common Stock, no more than 150,000 shares during the first year. Assuming that there would be sufficient shares available for purchase in a given year, there will be four quarterly Offering periods each year, corresponding with the calendar quarters beginning on January 1, April 1, July 1 and October 1, except that the first Offering period will begin on February 1, 1997. The Offering Commencement Date shall be the first day of each Offering Period. The Offering Termination Date shall be the last day of each Offering Period, (March 31, June 30, September 30 and December 31).

Discount.    Under the ESPP, for any Offering Period, shares of EDMC stock are purchased with your payroll deductions on each Offering Termination Date at a 15% discount from the lesser of (a) the closing stock price at the Offering Commencement Date of such Offering Period or, (b) the closing stock price at the Offering Termination Date of such Offering Period. To show you how this discount would work, consider the following hypothetical example: if, during an Offering Period from April 1-June 30, the closing stock price

Stock Purchase Plan    Page 1

on April 1 is $15, and the closing stock price on June 30 is $18, you would purchase shares at $12.75 per share (85% of $15). If, on the other hand, during the same period the shares closed at $18 on April 1, and $15 on June 30, you would still purchase the shares at 85% of the lowest price, or $12.75.

Investment amounts.    You may invest as little as 1% of your base pay, or as much as 5% of your base pay each Offering Period through payroll deduction. No employee may purchase Common Stock under the ESPP during an Offering Period to the extent that such purchase would cause the fair market value of the shares purchased by such employee under the ESPP during a calendar year to exceed $25,000 (determined on the first day of such Offering Period). You may not make any change to your payroll deduction during an Offering Period, but you may contact Mellon to terminate your payroll deduction or to elect a new payroll deduction for subsequent Offering Periods prior to the Offering Commencement Date. Shares of stock purchased through this Plan are always vested.

Account.    To enroll in the plan, please log on to Mellon’s website at https://espp.melloninvestor.com or call Mellon at 1-(888)396-6557. Each quarter, you will receive a statement of your account from Mellon Investor Services telling you how many shares are in your account and what their value is on the date of the statement. If you wish to sell any of the shares in your account, you will do so directly with Mellon Investor Services and you will be responsible for any selling expenses.

Taxation issues.    There are some important federal income tax issues to be aware of with ESPP. This summary is limited to employees who are United States citizens and who hold purchase rights and shares of Common Stock as capital assets. The Plan is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. Under such a plan, no taxable income is reportable by you upon the purchase of shares for federal income tax purposes. However, you must pay federal income and Federal Insurance Contributions Act (“FICA”) taxes on amounts that are deducted from your Base Pay to purchase Common Stock under the ESPP (i.e., payroll deductions are on an “after-tax” basis). You will recognize taxable income in the year in which there is a disposition of the shares. The amount and type of the taxable income will depend on whether you make a qualifying or disqualifying disposition of the purchased shares. A qualifying disposition will occur if the sale or other disposition of the shares is made after you have held the shares for (I) more than two years after the Offering Commencement Date of the Offering Period in which the shares were purchased and (ii) more than one year after the actual purchase date. A disqualifying disposition is any sale or other disposition which is made prior to the satisfaction of both of the minimum holding period requirements. For further details on the tax consequences of a qualifying or non-qualifying disposition of stock see the “Other Information” section at the end of this section.

Insider trading.    Remember that there is an EDMC policy regarding insider trading that states that it is illegal to buy or sell EDMC stock or other securities if you have knowledge of material information about EDMC that has not been publicly disclosed. The full policy was issued by the EDMC Law Department on December 23, 1996. Your participation in the ESPP is covered by this policy. Certain other restrictions on the ability to transfer shares may apply to certain employees. Consult the “Other Information” section for further details.

Employee’s account with Mellon Investor Services.    Mellon Investor Services will open and maintain accounts for participants in the ESPP and will allocate on behalf of EDMC employees whole and fractional shares of the total subscribed EDMC Common Stock purchased. EDMC will pay all fees to Mellon on purchases made through payroll deduction. Mellon Investor Services commissions and charges in connection with sales or purchases made other than by payroll deduction will be payable by you. Only purchases made through payroll deduction qualify for the 15% purchase price discount.

Page 2    The Education Management Corporation

EDMC will send to Mellon as soon as possible following the end of each Offering Period a list of the amounts deducted for each participant. Upon receipt of that information, Mellon Investor Services will allocate full and fractional shares to each employee’s account based on the appropriate subscribed shares and discounted purchase price. Mellon Investor Services will maintain on its books an ESPP account for each participant and mail a statement of account following each transaction.

Stock dividends and/or any stock splits with respect to shares held in the employee’s account will be credited to the account without charge. Any cash dividends will be reinvested in additional shares of EDMC Common Stock on the last day of the Offering Period in which the dividend is paid using the same 15% discount that applies to purchases of Common Stock with your payroll deductions. (Note: EDMC’s Dividend Policy states “ …EDMC currently intends to retain future earnings, if any, to fund the development and growth of the business and does not anticipate paying any cash dividends in the foreseeable future.”)

At any time, you may instruct Mellon to sell a part or all of the full and fractional interest in shares held in your account. Upon request, Mellon will mail to you the proceeds, less the brokerage commissions and any transfer taxes, registration fees or other normal charges which are customarily paid by sellers of shares. The relationship between you and Mellon is the normal relationship of a broker and client. EDMC does not assume any responsibility in this respect. There will be no charge to you for Mellon’s custody of stock certificates, or in connection with notices, proxies or other such material.

QUESTIONS AND ANSWERS

Q. Is there a guarantee against loss under the ESPP?

No. There is no guarantee against loss due to market fluctuations. The investor, in seeking the benefits of share ownership, must also accept the risks.

Q. How is the ESPP different from our 401(k) plan?

Unlike the 401(k) plan, your contributions to the ESPP are made with after-tax dollars. Therefore, your contribution to the ESPP will not reduce your annual W-2 income. Also, unlike the 401(k) plan, you may sell your stock at any time without paying an early withdrawal penalty. In addition, EDMC shares are not available for purchase through our 401(k).

Q. Can I change the amount of my payroll deduction?

You may not change the amount of your payroll deduction during an Offering Period. However, you can change the amount of your deduction for subsequent Offering Periods, or decide not to participate in subsequent Offering Periods. If you withdraw from participation during an Offering Period, but prior to the Offering Termination Date, your contributions will be returned to you. However, you will not be able to participate in the ESPP for a year after your withdrawal.

Q. Are there any transfer restrictions?

Stock Purchase Plan    Page 3

Yes. You cannot transfer or pledge your right to receive shares. If you wish to transfer or pledge your shares you will need to take delivery of the shares. Consult “Other Information” at the end of this section for other transfer restrictions that may be applicable to you.

Q. Will I automatically receive stock certificates when I purchase shares under the ESPP?

No. Certificates for shares of EDMC Common Stock purchased through the ESPP will be held by Mellon Investor Services in “street name”, but can be delivered to you upon written request. The number of shares credited to your account under the ESPP will be shown on your statement of account. This feature protects against loss, theft, or destruction of the stock certificates.

Q. Will I have the same rights as any other shareholder of EDMC?

Yes. The rights include the right to vote and the right to receive information generally sent to shareholders, including the annual report and proxy statement.

Q. How will I be able to access information about my account?

You may access Mellon’s website at https://espp.melloninvestor.com or you may dial 1-(888) 396-6557 to use Mellon’s automated voice response system 24 hours per day. You may also speak with a customer service representative by calling this same number Monday through Friday from 8 a.m. through 7 p.m. eastern time.

Q. Can I continue in the ESPP after I leave the Company?

No. If your employment with EDMC terminates for any reason other than death, your participation in the ESPP will cease immediately. EDMC will refund to you the amount of payroll deductions credited to your account.

If your employment with EDMC terminates by reason of your death, your beneficiary may elect, by written notice delivered to EDMC prior to the earlier of the last day of the Offering Period in which you die or the 60th day after the date of your death, to either (I) withdraw all of the payroll deductions credited to your account, or (ii) use the payroll deductions to purchase Common Stock on the last day of the Offering Period. If EDMC does not receive the beneficiary’s written election, the beneficiary will be deemed to have automatically elected to withdraw your payroll deductions.

Q. What kinds of records do I need to keep for tax purposes?

It is very important to keep all statements that Mellon Investor Services sends to you since the information on the statements will verify your actual cost of the shares of stock. When you sell the stock, you will need to know your cost in order to compute the proper amount of gain or loss on the sale.

Q. Can I name a beneficiary for my account?

Yes. You may designate a beneficiary to receive any payroll deductions that have not been applied toward the purchase of Common Stock upon your death by filing a beneficiary designation form with EDMC. You may change your beneficiary designation at any time. If you die and you have not designated a beneficiary, such cash will be delivered to the executor or administrator of your estate or, if EDMC is not

Page 4    The Education Management Corporation

aware of the appointment of any executor or administrator, to your spouse or to any one or more of your dependents as EDMC may determine in its sole and absolute discretion.

OTHER INFORMATION

Administration.    The ESPP is administered by a committee of the Board of directors of EDMC comprised of at least two persons (the “Committee”). Within the limits of the ESPP, the Committee establishes rules and procedures for the ESPP, interprets and construes the provisions of the ESPP and takes any other action that may be necessary to properly administer the ESPP.

The Board has appointed the Compensation Committee of the Board to serve as the Committee under the ESPP with respect to nonexecutive officers of EDMC. The full board serves as the Committee with respect to executive officers of EDMC.

The Compensation Committee currently consists of James J. Burke, Jr., William M. Campbell III, James S. Pasman, Jr. and Albert Greenstone. In addition to the foregoing individuals, the members of the Board are Robert H. Atwell, Miryam L.Knutson, Robert B. Knutson and John R. McKernan, Jr.

Stock subject to the ESPP.    A total of 750,000 shares of Common Stock are reserved for issuance under the ESPP to eligible employees of EDMC. No more than 150,000 shares of Common Stock may be issued under the ESPP in connection with purchases of Common Stock during the period beginning on February 1, 1997 and ending on December 31, 1997. The shares of Common Stock to be offered under the ESPP are authorized and unissued shares or issued shares that have been reacquired by EDMC and held in its treasury.

Miscellaneous.    The ESPP is not a “qualified” plan within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended, and it is not subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended.

Adjustments upon changes in common stock.    The number and kind of shares subject to, and the purchase price of, outstanding stock purchase rights, and the number of shares of Common Stock remaining available for issuance under the ESPP, may be appropriately adjusted to reflect the impact of certain significant events involving EDMC, such as mergers, recapitalizations and stock splits.

Tax issues.    If you sell Common Stock acquired under the ESPP in a qualifying disposition, you will recognize long-term capital gain (or loss) equal to the difference between the amount realized on the disposition (generally, the sale price net of transaction costs) and your tax basis in the Common Stock (generally, the purchase price paid for the Common Stock). In addition, you will recognize as ordinary income (rather than capital gain) an amount equal to the lesser of (I) 15% of the fair market value of the Common Stock on the first day of the calendar quarter in which it was acquired, or (ii) the difference between the fair market value of the Common Stock on the date of its disposition and the purchase price paid for the Common Stock.

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If you sell Common Stock acquired under the ESPP in a disqualifying disposition, you will recognize ordinary income equal to the difference between (I) the fair market value of the Common Stock at the time it was purchased (determined by reference to the NASDAQ National Market system price on the first day of the calendar quarter), and (ii) the purchase price paid for the Common Stock. You will recognize this amount of ordinary income even if the amount realized on the disqualifying disposition is less than the value of the Common Stock at the time that you purchased the Common Stock. If the amount realized on the disqualifying disposition exceeds the value of the Common Stock as of the day it was purchased, you also will recognize short-term or long-term capital gain, depending upon how long the Common Stock was held, in an amount equal to such excess.

Each employee of EDMC is urged to consult his or her own personal tax advisor with respect to the application of the federal income tax laws to his or her personal circumstances, changes in these laws and the possible effect of other taxes.

Restrictions on resale of common stock.    The provisions of the ESPP do not impose restrictions upon the resale of the Common Stock acquired by employees under the ESPP. Under the federal securities laws, however, persons who are deemed to be “affiliates” of EDMC are restricted in the resale of Common Stock owned by them (whether acquired under the ESPP or otherwise). For this purpose, an “affiliate” of EDMC is any person who controls EDMC, is controlled by, or is under common control with EDMC, whether directly or indirectly through one or more intermediaries. A corporation’s “affiliates” would usually include all persons whose security holdings are substantial enough to affect the corporation’s management. Also, all directors and executive or policy-making officers are presumed to be “affiliates”.

In general, unless specifically registered for resale, shares owned by “affiliates” can be sold only in compliance with Rule 144 of the Securities and Exchange Commission or another applicable exemption from registration. Among other things, Rule 144 imposes limitations on the amount of securities sold by an ‘affiliate” in any three-month period and requires that sales be conducted through a broker.

In addition, employees who are insiders are subject to the reporting and short-swing profit forfeiture provisions of Section 16 of the Securities Exchange Act of 1934, as amended. Section 16(a) contains reporting requirements applicable to insiders. Section 16(b) sets forth rules concerning short-swing profit forfeiture that may require an insider to disgorge to EDMC profits realized upon the sale and purchase or purchase and sale of Common Stock within any six-month period.

If an employee has any questions about the impact of Rule 144 or Section 16 on his or her participation in the ESPP, he or she should consult with Robert T. McDowell at the address or telephone number set forth on the last page of this section or, if appropriate, personal legal counsel.

Available information.    EDMC will provide without charge to each participant in the ESPP, upon written or oral request, a copy of the documents incorporated by reference into the Registration Statement on form S-8 relating to the ESPP, other than certain exhibits to such documents. Such documents are incorporated by reference into the Prospectus relating to the ESPP which meets the requirements of Section 10(a) of the Securities Act of 1933, as amended (the “Section 10(a) Prospectus”).

EDMC will also provide without charge to each participant, upon written or oral request, a copy of any or all of the following:

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(I) all previously furnished ESPP information documents that constitute part of the Section 10(a) Prospectus; and

(ii) EDMC’s Annual Report to Stockholders for its latest fiscal year.

Requests for any of the above information or for additional information concerning the ESPP and its administrators, should be directed to Robert T. McDowell, Executive Vice President and Chief Financial Officer of EDMC, at the following address and telephone number:

Education Management Corporation

300 Sixth Avenue, Suite 800

Pittsburgh, PA 15222

(412) 562-0900

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EX-10.13

Exhibit 10.13

EMPLOYMENT AGREEMENT

JULY 9, 2001

The parties to this Employment Agreement (this “Agreement”) are Education Management Corporation, a Pennsylvania corporation (the “Company”) and Michael C. Markovitz, Ph.D. (the “Executive”). The Executive is presently the Chairman of Argosy Education Group, Inc, an Illinois corporation (“Argosy”). As of the date this Agreement is signed, the Company, HAC Inc., an Illinois corporation and a wholly-owned subsidiary of the Company, and Argosy have entered into an Agreement and Plan of Merger pursuant to which Argosy will become a wholly-owned subsidiary of the Company, subject to the fulfillment of certain terms and conditions (the “Merger Agreement”). The parties wish to provide for the employment of the Executive as an officer of the Company and of the surviving company in the Merger from and after the date of the closing of the Company’s acquisition of Argosy pursuant to the Merger Agreement (the “Effective Date”). This Agreement will become operative solely upon the closing of the Merger Agreement, as it may be amended.

Accordingly, the parties, intending to be legally bound, agree as follows:

1.    Position and Duties.    During the term of the Executive’s employment under this Agreement, the Company shall employ the Executive and the Executive shall serve the Company and one or more of its direct or indirect subsidiaries as an executive officer. As of the Effective Date, the Executive shall be the Chairman of Argosy University and the Chairman of the surviving corporation in the Merger. In addition, the Executive shall be invited to attend and participate in (but not to vote at) all meetings of the Company’s Board of Directors. He shall report to the Chief Executive Officer of the Company and otherwise shall be subject to the direction and control of the Board of Directors of the Company. The Executive shall use his best efforts to promote the Company’s interests and he shall perform his duties and responsibilities faithfully, diligently and to the best of his ability, consistent with sound business practices. The Executive shall devote his full working time to the business and affairs of the Company, but may

engage in such activities that do not, in the reasonable opinion of the Board of Directors of the Company, violate Section 8 or materially interfere with the performance of his obligations to the Company under this Agreement; provided, however, that it is understood that the Executive may spend a limited amount of his working time on the operations and affairs of John Marshall Law School, Inc. and PrimeTech Canada, Inc. for as long as Executive is the owner of such entities. The Executive shall perform his duties under this Agreement in Chicago, Illinois with the likelihood of regular travel to and from the Company’s principal executive offices in Pittsburgh, Pennsylvania.

2.    Term of Employment.    The term of the Executive’s employment by the Company or any direct or indirect subsidiary of the Company under this Agreement shall be for a period of three (3) years commencing on the Effective Date, subject to earlier termination under Section 5 or Section 6 or extension of such term as described in the next sentence. The Executive’s employment under this Agreement shall renew automatically for successive one-year periods, unless at least one hundred eighty (180) days prior to the third or any subsequent anniversary of the Effective Date (each such anniversary referred to herein as an “Expiration Date”) either party shall have given notice to the other party that the term of employment shall terminate on that anniversary date. The term during which the Executive is employed pursuant to this Agreement shall be referred to herein as the “Employment Term.”

3.    Compensation.

3.1.    Base Salary.    During the Employment Term, the Executive shall be entitled to receive a base salary (“Base Salary”) at the annual rate of not less than $225,000 for services rendered to the Company or any of its direct or indirect subsidiaries and payable in substantially equal biweekly installments. The Executive’s Base Salary under this Section 3.1 shall be increased on each July 1 during the Employment Term, beginning on July 1, 2002, by the percentage increase, if any, in the United States Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers—all items, for the Chicago Metropolitan Area during the immediately preceding twelve (12) months. The Executive’s Base Salary shall be subject to further increases, if any, as may be approved at any time by the Board of Directors of

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the Company in its discretion, on the recommendation of the Compensation Committee of the Board of Directors.

3.2.    Incentive Compensation.    During the Employment Term, the Executive also shall be entitled to receive incentive compensation (a “Bonus”) in such amounts and at such times as the Board of Directors of the Company (or a duly authorized Compensation Committee of the Board, if applicable) may determine in its discretion to award to him under any incentive compensation or other bonus plan or plans for senior executives of the Company as may be established by the Company from time to time (collectively, the “Executive Bonus Plan”). The amount of any Bonus payable to the Executive under the Executive Bonus Plan shall be paid to the Executive in accordance with the terms of the Executive Bonus Plan. In accordance with the provisions of the Executive Bonus Plan and generally subject to the discretion of the Board of Directors, the Executive shall have an annual target bonus opportunity (a “Bonus Opportunity”). For the Company’s fiscal year ending June 30, 2002, the Executive’s Bonus Opportunity shall be not less than $180,000, but the actual bonus amount earned and payable shall be contingent on the Executive meeting or exceeding performance standards and goals to be established by the Board of Directors of the Company (or the Compensation Committee, if applicable). For fiscal years beginning after June 30, 2002, the Executive’s Bonus Opportunity shall be determined by the Board of Directors of the Company (or a duly authorized Compensation Committee of the Board, if applicable) in its discretion.

4.    Expenses and Other Benefits.

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

4.2.    Employee Benefits.    During the Employment Term, the Executive shall be entitled to participate in and to receive benefits as a senior executive under all of the Company’s

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employee benefit plans, programs and arrangements, as they may be duly amended, approved or adopted by the Board of Directors of the Company as of the Effective Date and from time to time thereafter, including any retirement plan, profit sharing plan, savings plan, life insurance plan, health insurance plan, stock-based compensation or incentive plan, accident or disability insurance plan and any vacation policy.

5.    Termination of Employment.

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

5.2.    Termination by the Company.

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

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

(i)    The Executive is given a notice from the Board of Directors of the Company that identifies with reasonable specificity the grounds for the proposed termination of the Executive’s employment and notifies the Executive that he shall have an opportunity to address the Board of Directors with respect to the alleged grounds for termination at a meeting of

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the Board called and held for the purpose of determining whether the Executive engaged in conduct described in Section 5.2. The notice shall, except as is otherwise provided in the last sentence of this Subsection (i), provide the Executive with thirty (30) days from the day such notice is given to cure the alleged grounds of termination contained in this Agreement. The Board of Directors shall determine, reasonably and in good faith, whether the Executive has effectively cured the alleged grounds of termination. If the grounds for termination are limited to acts or conduct described in Subsections (ii) or (iii) of Section 5.2(a), and in the reasonable good faith opinion of the Board of Directors those grounds may not reasonably be cured by the Executive, then the notice required by this Section 5.2(b)(i) need not provide for any cure period; and

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

5.3.    Termination by the Executive.    The Executive may terminate his employment under this Agreement with or without Good Reason (as defined below). If such termination is with Good Reason, the Executive shall give the Company notice, which shall identify with reasonable specificity the grounds for the Executive's resignation and provide the Company with thirty (30) days from the day such notice is given to cure the alleged grounds for resignation contained in the notice. In the event that the Executive fails to give such notice and the Executive's employment under this Agreement in fact terminates at the initiation of the Executive, such termination shall be deemed a termination by the Executive without Good Reason. For purposes of this Agreement, “Good Reason” shall mean any of the following to which the Executive shall not consent in writing: (i) a reduction in the Executive's Base Salary, (ii) a reduction in the amount of the Executive's annual Bonus Opportunity of more than 20% of

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the Applicable Base Period Bonus Opportunity (as defined below), including a material change in the individual performance goals applicable to the Executive’s annual Bonus Opportunity that (A) as of the date of such change, makes achievement of those goals highly unlikely even if the Executive performs his obligations under this Agreement, and (B) would result in a reduction in the annual Bonus Opportunity of more than such 20% amount, (iii) a relocation of the Executive’s primary place of employment to a location more than fifty (50) miles from his place of employment as described in Section 1, (iv) the reassignment of the Executive to a position that is not an officer level position or the assignment of duties that are not consistent with such a position, or (v) on or after a Change in Control (as defined in Section 7.3(d)), in addition to those events stated above, a material reduction in the Executive’s actual annual Bonus or any diminution in offices, titles, status or reporting requirements in the Executive’s specific corporate officer position from those in effect as of one hundred eighty (180) days prior to the Change in Control, other than an insubstantial and inadvertent act that is remedied by the Company promptly after receipt of notice given by the Executive. For purposes of this Agreement, “Applicable Base Period Bonus Opportunity” means (A) with respect to the annual Bonus Opportunity for any fiscal year ending on or prior to June 30, 2004, the annual Bonus Opportunity in effect for fiscal year 2002, and (B) with respect to the annual Bonus Opportunity for any fiscal year ending after June 30, 2004, the average annual Bonus Opportunity in effect for the three preceding fiscal years.

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

6.    Disability.    The Executive shall be determined to be “Disabled” (and the provisions of this Section 6 shall be applicable) if the Executive is unable to perform his duties under this Agreement on essentially a full-time basis for six (6) consecutive months by reason of a physical or mental condition (a “Disability”) and, within thirty (30) days after the Company gives notice

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to the Executive that it intends to replace him due to his Disability, the Executive shall not have returned to the performance of his duties on essentially a full-time basis. Upon a determination that the Executive is Disabled, the Company may replace the Executive without breaching this Agreement; provided, however, that this Agreement shall not terminate until the Expiration Date next following the date that the Executive is determined to be Disabled. Prior to such Expiration Date, the Executive shall continue to be entitled to the compensation and benefits provided in Sections 3 and 4; provided, however, that the Company shall be entitled to offset against the amounts payable by the Company to the Executive under this Agreement the amount of benefits received by the Executive from third parties under long-term disability plans carried by the Company (if any) and that in no event shall the total annual obligation of the Company under this Agreement to make Base Salary payments to the Executive during a period of his Disability be greater than an amount equal to two-thirds (2/3) of the Executive’s Base Salary, beginning in the year in which the Executive is replaced in accordance with this Section 6, and continuing until the earlier of the year in which the Expiration Date occurs or the year in which the Executive dies.

7.    Compensation Upon Termination.

7.1.    Death.    If the Executive’s employment under this Agreement is terminated by reason of his death, the Company shall continue to pay the Executive’s Base Salary at the rate in effect at the time of his death to such person or persons as the Executive shall have designated for that purpose in a notice filed with the Company, or, if no such person shall have been so designated, to his estate, for a period of six (6) months after the Executive’s date of death. The Company also shall pay to such person(s) or estate, (a) the amount of the Executive’s Accrued Obligations (as defined below), and (b) an amount equal to one-twelfth (1/12) of the Executive’s average annual Bonus paid or payable under Section 3.2 with respect to the most recent three (3) full fiscal years or, if greater, the most recent twelve (12)-month period (in each case, determined by annualizing the bonus paid or payable with respect to any partial fiscal year) (the “Average Bonus”), that amount being payable in each of the six (6) months following the Date of Termination. Any amounts payable under this Section 7.1 shall be exclusive of and in addition

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to any payments which the Executive’s widow, beneficiaries or estate may be entitled to receive pursuant to any pension plan, profit sharing plan, employee benefit plan, or life insurance policy maintained by the Company. For purposes of this Agreement, the Executive’s “Accrued Obligations” means, as of the Date of Termination, any accrued but unpaid Base Salary, accrued Bonus (including (1) any accrued but unpaid Bonus (if any) with respect to the fiscal year prior to the year in which the Date of Termination occurs, and (2) the amount of the Executive’s Average Bonus multiplied by a fraction, the numerator of which is the number of days from the first day of the fiscal year of the Company in which such termination occurs through and including the Date of Termination and the denominator of which is 365 (the “Pro Rata Bonus”)) and any accrued but unpaid cash entitlements.

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

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

(a)    Termination Prior to a Change in Control.

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

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

(B)    a cash amount equal to the sum of (1) one-twelfth (1/12) of the Executive’s Base Salary at the highest rate in effect at any time during the twelve (12)-month

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period prior to the Date of Termination, and (2) one-twelfth (1/12) of the Executive’s Average Bonus, that total amount being payable in each of the twelve (12) months following the month in which the Date of Termination occurs;

(C)    all welfare benefits, including (to the extent applicable) medical, dental, vision, life and disability benefits pursuant to plans maintained by the Company under which the Executive and/or the Executive’s family is eligible to receive benefits and/or coverage, shall be continued for the twelve (12)-month period following the Date of Termination, with such benefits provided to the Executive at no less than the same coverage level as in effect as of the Date of Termination and the Executive shall pay any portion of such cost as was required to be borne by key executives of the Company generally on the Date of Termination; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 7.3(a)(i)(C) may be discontinued prior to the end of the period provided in this Subsection (C) to the extent, but only to the extent, that the Executive receives substantially similar benefits from a subsequent employer;

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

(E)    notwithstanding any provisions of any applicable stock option plan and agreement(s) to the contrary, any nonvested stock options granted by the Company to the Executive and held by the Executive as of the Date of Termination, to the extent those options were not forfeited under the terms of the applicable plan and agreement(s) prior to the Date of Termination, shall continue to vest pursuant to the vesting schedule applicable to such options during the twelve (12)-month period following the Date of Termination.

(ii)    Conditions to Receipt of Severance Benefits under Section 7.3(a).    As a condition to receiving any Severance Benefits (other than any Accrued Obligations) to which the Executive may otherwise be entitled under this Section 7.3(a) only, the Executive shall execute a release (the “Release”), in a form and substance reasonably satisfactory to the

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Company, of any claims, whether arising under Federal, state or local statute, common law or otherwise, against the Company and its direct or indirect subsidiaries which arise or may have arisen on or before the date of the Release, other than any claims under this Agreement or any rights to indemnification from the Company and its direct or indirect subsidiaries pursuant to any provisions of the Company’s (or any of its subsidiaries’) articles of incorporation or by-laws or any directors and officers liability insurance policies maintained by the Company. If the Executive fails or otherwise refuses to execute a Release within a reasonable time after the Company’s request to do so, the Executive will not be entitled to any Severance Benefits or any other benefits provided under this Agreement and the Company shall have no further obligations with respect to the payment of the Severance Benefits. In addition, if, following a termination of employment that gives the Executive a right to the payment of Severance Benefits under Section 7.3(a), the Executive engages in any activities that would have violated any of the covenants in Section 8.3 (had those covenants been applicable), the Executive shall have no further right or claim to any Severance Benefits (other than any Accrued Obligations) to which the Executive may otherwise be entitled under this Section 7.3(a) from and after the date on which the Executive engages in such activities and the Company shall have no further obligations with respect to the payment of the Severance Benefits.

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

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

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

(B)    a cash amount equal to twenty-four (24) times the sum of (1) one-twelfth (1/12) of the Executive’s Base Salary at the highest rate in effect at any time

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during the twelve (12)-month period prior to the Date of Termination, and (2) one-twelfth (1/12) of the Executive’s Average Bonus, that total amount being payable in a single lump sum cash payment within thirty (30) days of the Date of Termination;

(C)    all welfare benefits, including (to the extent applicable) medical, dental, vision, life and disability benefits pursuant to plans maintained by the Company under which the Executive and/or the Executive’s family is eligible to receive benefits and/or coverage, shall be continued for the twenty-four (24) month period following the Date of Termination, with such benefits provided to the Executive at no less than the same coverage level as in effect as of the Date of Termination and the Executive shall pay any portion of such cost as was required to be borne by key executives of the Company generally on the Date of Termination; provided, however, that, notwithstanding the foregoing, the benefits described in this Section 7.3(b)(i)(C) may be discontinued prior to the end of the period provided in this Subsection (C) to the extent, but only to the extent, that the Executive receives substantially similar benefits from a subsequent employer;

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

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

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

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

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

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

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

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Agreement), beneficially owning shares or securities representing 50% or more of either the Company Common Stock or Company Voting Securities; or

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

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

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

(v)    Approval by the shareholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation or other entity, with respect to which immediately following such sale or other disposition more than 50% of, respectively, the shares of common stock (or similar equity security) of such corporation or other entity and the combined voting power of the securities of such corporation or other entity entitled

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to vote generally in the election of directors, in each case calculated on a fully-diluted basis in accordance with generally accepted accounting principles after giving effect to such sale or other disposition, is then beneficially owned, directly or indirectly, by the shareholders of the Company immediately prior to such approval.

7.4.    No Mitigation.    The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Section 7 by seeking other employment or otherwise, and, except as otherwise expressly provided in Sections 7.3(a)(i)(C) and 7.3(b)(i)(C), the amounts of compensation or benefits payable or otherwise due to the Executive under this Section 7 or other provisions of this Agreement shall not be reduced by compensation or benefits received by the Executive from any other employment he shall choose to undertake following termination of his employment under this Agreement; provided, however, that the Executive’s entitlement to Severance Benefits or Change in Control Severance Benefits, as the case may be, shall be subject to his compliance with the covenants set forth in Section 8.

7.5.    Certain Additional Payments by the Company.

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

(b)    Subject to the provisions of Section 7.5(c), all determinations required to be made under this Section 7.5, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the Company’s regular outside independent

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public accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the Date of Termination, if applicable, or such earlier time as is requested by the Company. The initial Gross-Up Payment, if any, as determined pursuant to this Section 7.5, shall be paid to the Executive within 5 business days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-Up Payments that have not been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made under this Section 7.5(b). In the event that the Company exhausts its remedies pursuant to Section 7.5(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

(c)    The Executive shall notify the Company of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment under the terms of this Section 7.5. This notice shall be given as soon as practicable but no later than ten business days after the later of either (i) the date the Executive has actual knowledge of the claim, or (ii) ten days after the Internal Revenue Service issues to the Executive either a written report proposing imposition of the Excise Tax or a statutory notice of deficiency with respect to the Excise Tax, and shall apprise the Company of the nature of the claim and the date on which the claim is requested to be paid. The Executive shall not pay the claim prior to the expiration of the thirty-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to the claim is due). If the Company notifies the Executive prior to the expiration of the above period that it desires to contest the claim, the Executive shall: (A) give the Company any information

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reasonably requested by the Company relating to the claim, (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including accepting legal representation with respect to the claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith in order to effectively contest the claim, (D) permit the Company to participate in any proceedings relating to the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 7.5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of the claim and may, at its sole option, either direct the Executive to request or accede to a request for an extension of the statute of limitations with respect only to the tax claimed, or pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the claim and sue for a refund, the Company shall advance the amount of the required payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to any advance or with respect to any imputed income in relation to any advance; and further provided that any extension of the statute of limitations requested or acceded to by the Executive at the Company’s request and relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to the contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable under the Agreement and the Executive shall be

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entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d)    If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.5(c), the Executive becomes entitled to receive any refund with respect to the claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7.5(c)) promptly pay to the Company the amount of that refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.5(c), a determination is made that the Executive shall not be entitled to any refund with respect to the claim and the Company does not notify the Executive of its intent to contest such denial of refund prior to the expiration of thirty days after the determination, then the advance shall be forgiven and shall not be required to be repaid and the amount of the advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

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

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

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

8.    Restrictive Covenants.

8.1.    Confidentiality.    The Executive recognizes that the services to be performed by him under this Agreement are special, unique and extraordinary in that, by reason of his employment with the Company or an Affiliate (as defined below), he may acquire confidential information and trade secrets concerning the operation of the Company or an Affiliate, the use or disclosure of which could cause the Company or an Affiliate substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. For purposes of this Section 8, the term “Affiliate” means any direct or indirect subsidiary of the Company, including any individual, partnership, firm, corporation or other business organization or entity that controls, is controlled by, or is under common control with, the Company. Accordingly, during the Employment Term and at all times thereafter, the Executive covenants and agrees with the Company that he shall not at any time, except in the performance of his obligations to the Company under this Agreement or with the prior written consent of the Board of Directors of the Company, directly or indirectly, disclose any secret or confidential information that he may learn or has learned by reason of his association with the Company, or any predecessors to their business, or use any such information to the detriment of the Company or an Affiliate. The term “confidential information” includes information not previously disclosed to the public or to the trade by the Company’s management or otherwise known by the public or the trade with respect to the Company’s products, facilities and methods, research and development, trade secrets and other intellectual property, systems, patents and patent applications, procedures, manuals, confidential reports, product price lists, customer lists, financial information (including the revenues, costs or profits associated with any of the Company’s products), business plans, prospects or opportunities; provided, however, that the term “confidential information” shall not

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include, and the Executive shall have no obligation under this Agreement with respect to, any information that (a) becomes generally available to the public other than as a result of a disclosure by the Executive or his agent or other representative or (b) becomes available to the Executive on a non-confidential basis from a source other than the Company or any Affiliate. The Executive shall have no obligation under this Agreement to keep confidential any of the confidential information to the extent that a disclosure of it is required by law or is consented to by the Company; provided, however, that if and when such a disclosure is required by law, the Executive promptly shall provide the Company with notice of such requirement, so that the Company may seek an appropriate protective order.

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

8.3.    Non Competition.    During the Employment Term and, except as provided in the last sentence of this Section 8.3, for a period of one (1) year after the Date of Termination, the Executive shall not, unless he receives the prior written consent of the Company, directly or indirectly, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to, participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, or engage in any activity or capacity (collectively, the “Competitive Activities”) with respect to any individual, partnership, limited liability company, firm, corporation or other business organization or entity (each, a “Person”), that is engaged

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directly or indirectly in the ownership or operation of proprietary post-secondary schools or that is in competition with any of the business activities of the Company or its direct or indirect subsidiaries either (i) anywhere in the United States or (ii) in any other country in which the Company or its direct or indirect subsidiaries conduct, or actively intend to conduct, business as of the Date of Termination; provided, however, that the foregoing (a) shall not apply with respect to any line-of-business in which the Company or its direct or indirect subsidiaries was not engaged on or before the Expiration Date or the Date of Termination, as the case may be, and (b) shall not prohibit the Executive from (i) lecturing or teaching, whether paid or unpaid, and whether for a competitor of the Company or otherwise; (ii) writing or publishing academic materials for a Person that is not a competitor of the Company, or (iii) owning, or otherwise having an interest in, less than one percent (1%) of any publicly-owned entity or three percent (3%) or less of any private equity fund or similar investment fund that invests in education companies, provided the Executive has no active role with respect to any investment by such fund in any Person referred to in this Section 8.3. It is further understood and acknowledged that Executive’s ownership of John Marshall Law School, Inc. and PrimeTech Canada, Inc. shall not be considered to be violations of this Section 8.3. The Executive shall not be subject to the covenants contained in this Section 8.3 and such covenants shall not be enforceable against the Executive from and after the date that the Executive’s employment is terminated (i) by the Company without Cause, (ii) by the Executive for Good Reason or (iii) in anticipation of or within two (2) years after a Change in Control.

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

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

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

9.    Miscellaneous.

9.1.    Assignment; Successors; Binding Agreement.    This Agreement may not be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party, except that any right, title or interest of the Company arising out of this Agreement may be assigned to any corporation or entity controlling, controlled by, or under common control with the Company, or succeeding to the business and substantially all of the assets of the Company or any affiliates for which the Executive performs substantial services; provided, however, that no such assignment shall relieve the Company of its obligations

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hereunder without the express written consent of the Executive. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legatees, devisees, personal representatives, successors and assigns.

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

9.3.    Entire Agreement.    No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement, has been made by either party which is not set forth expressly in this Agreement. Further, this Agreement shall amend and supersede any and all previously existing employment or consulting agreements between the Executive and the Company or any of its direct or indirect subsidiaries or affiliates.

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

9.5.    Arbitration.    In the event of any dispute, controversy or claim between the Company and the Executive arising out of or relating to the interpretation, application or enforcement of any provision of this Agreement (other than with respect to provisions under Section 8 of this Agreement), either the Company or the Executive may, by written notice to the other, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they do not agree on an arbitrator or arbitrators within 30 days after one party has notified the other of his or its desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the “AAA”) in Pittsburgh, Pennsylvania. The determination reached in such arbitration shall be final and binding on all parties without any right of appeal or further

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dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Pittsburgh, Pennsylvania, and shall be conducted in accordance with the Commercial Arbitration Rules of the AAA.

9.6.    Consent to Jurisdiction and Service of Process.    In the event of any dispute, controversy or claim between the Company and the Executive arising out of or relating to the interpretation, application or enforcement of the provisions of Section 8 or Section 9.5, the Company and the Executive agree and consent to the personal jurisdiction of the Court of Common Pleas for Allegheny County, Pennsylvania and/or the United States District Court for the Western District of Pennsylvania for resolution of the dispute, controversy or claim, and that those courts, and only those courts, shall have exclusive jurisdiction to determine any dispute, controversy or claim related to, arising under or in connection with Section 8 of this Agreement. The Company and the Executive also agree that those courts are convenient forums for the parties to any such dispute, controversy or claim and for any potential witnesses and that process issued out of any such court or in accordance with the rules of practice of that court may be served by mail or other forms of substituted service to the Company at the address of its principal executive offices and to the Executive at his or her last known address as reflected in the Company’s records.

9.7.    Resignation from Board.    Upon a termination of the Executive’s employment under this Agreement for any reason, the Executive shall, if requested by the Company’s Board of Directors, promptly resign as a member of the Board of Directors of the Company or its direct or indirect subsidiaries.

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

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

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

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

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

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

24

instrument or statute or regulation are referred to as amended or supplemented from time to time (and, in the case of a statute or regulation, to any successor provision).

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

EDUCATION MANAGEMENT CORPORATION
By:	/s/ Robert B. Knutson
Name:	Robert B. Knutson
Title:	Chairman and Chief Executive Officer

EXECUTIVE
By:	/s/ Michael C. Markovitz
Name:	Michael C. Markovitz, Ph.D.

26

EX-21.01

EXHIBIT 21.01

MATERIAL SUBSIDIARIES

Name of Subsidiary	Jurisdiction of Incorporation
The Art Institutes International, Inc.	Pennsylvania
The Art Institute of Atlanta, Inc.	Georgia
The Art Institute of California—Los Angeles, Inc.	California
The Art Institute of California—Orange County, Inc.	California
TAIC, Inc.
d/b/a The Art Institute of California—San Diego	California
TAIC—San Francisco, Inc.     d/b/a The Art Institute of California—San Francisco	California
The Art Institute of Charlotte, Inc.	North Carolina
The Art Institute of Colorado, Inc.	Colorado
The Art Institute of Dallas, Inc.	Texas
The Art Institute of Fort Lauderdale, Inc.	Florida
The Art Institute of Houston, Inc.	Texas
The Illinois Institute of Art, Inc.	Illinois
The Illinois Institute of Art at Schaumburg, Inc.	Illinois
The Art Institute of Las Vegas, Inc.	Nevada
The Art Institutes International Minnesota, Inc.	Minnesota
The New England Institute of Art & Communications, Inc.	Massachusetts
The Art Institute of New York City, Inc.	New York
The Art Institute of Phoenix, Inc.	Arizona
The Art Institute of Portland, Inc.	Oregon
The Art Institute of Seattle, Inc.	Washington
The Art Institute of Washington, Inc.	District of Columbia
International Fine Arts College, Inc.	Florida
Argosy Education Group, Inc.	Illinois
Academic Review, Inc.	Illinois
Association for Advanced Training in the Behavioral Sciences	California
The Connecting Link, Inc.	Georgia
Western State University of Southern California	California

EX-23.01

EXHIBIT 23.01

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-20057, 333-20073, 333-31398, 333-76096, 333-76654, 333-85518) of Education Management Corporation and Subsidiaries of our report dated August 1, 2002, with respect to the consolidated financial statements and schedules of Education Management Corporation and Subsidiaries included in this Annual Report on Form 10-K for the year ended June 30, 2002.

Pittsburgh, Pennsylvania

September 26, 2002

EX-23.02

EXHIBIT 23.02

Information Regarding Consent of Arthur Andersen LLP

Section 11(a) of the Securities Act of 1933, as amended (the “Securities Act”), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement.

Education Management Corporation dismissed Arthur Andersen LLP (“Arthur Andersen”) as its independent auditors, effective May 9, 2002. For additional information, see the Company’s Current Report on Form 8-K dated May 14, 2002. After reasonable efforts, the Company has been unable to obtain Arthur Andersen’s written consent to the incorporation by reference into the Company’s registration statements (Form S-8 File Nos. 333-20057, 333-20073, 333-31398, 333-76096, 333-76654 and 333-85518) and the related prospectuses (the “Registration Statements”) of Arthur Andersen’s audit report with respect to the Company’s consolidated financial statements as of June 30, 2001 and for the two years in the period then ended. Under these circumstances, Rule 437a under the Securities Act permits the Company to file the Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without a written consent from Arthur Andersen. As a result, with respect to transactions in the Company’s securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report is filed with the Securities and Exchange Commission, Arthur Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen or any omissions of a material fact required to be stated therein and thus no claim could be asserted against Arthur Andersen under Section 11(a) of the Securities Act.

EX-99.01

Exhibit 99.01

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Annual Report of Education Management Corporation, a Pennsylvania corporation (the “Company”), on Form 10-K for the year ending June 30, 2002 as filed with the Securities and Exchange Commission (the “Report”), I, Robert B. Knutson, Chief Executive Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/    ROBERT B. KNUTSON

Robert B. Knutson

Chief Executive Officer

September 27, 2002

EX-99.02

Exhibit 99.02

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Annual Report of Education Management Corporation, a Pennsylvania corporation (the “Company”), on Form 10-K for the year ending June 30, 2002 as filed with the Securities and Exchange Commission (the “Report”), I, Robert T. McDowell, Chief Executive Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/S/    ROBERT T. MCDOWELL

Robert T. McDowell

Chief Financial Officer

September 27, 2002