Summary of EDUCATION MANAGEMENT CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks to our business:
• U.S. Department of Education Program Integrity Regulations have negatively impacted our financial results and will likely impact future results.

As described in greater detail in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K, we believe that the U.S. Department of Education's Program Integrity Regulations have negatively impacted our business and will continue to do so in the future. These rules have required us to change certain of our business practices, incur additional costs of compliance and of developing and implementing changes in operations, and have affected student recruitment and enrollment, resulted in changes in or elimination of certain educational programs and have had other significant or material effects on our business.
With the exception of the gainful employment rule, these regulations became effective on July 1, 2011. The gainful employment regulations were scheduled to go into effect on July 1, 2012. However, on June 30, 2012 the U.S. District Court for the District of Columbia vacated the program level metrics and remanded them to the U.S. Department of Education for further action. The Court's decision is subject to appeal by the U.S. Department of Education and could be modified or reversed on appeal. Moreover, the U.S. Department of Education could take further action to address the Court's concerns regarding the regulations and obtain approval to enforce the regulations, or the U.S. Department of Education could issue new regulations regarding gainful employment. We cannot predict what steps the U.S. Department of Education will take in response to the Court's decision, how long those steps will take, or whether those steps will result in the U.S. Department of Education being able to enforce the gainful employment regulations or issuing new regulations. We have implemented a number of initiatives to respond to the gainful employment rules, such as shorter programs and lowering the costs associated with a number of our programs and continue to do so despite the ruling in the APSCU case. However, certain of our programs will be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon program offerings as a result of not meeting prescribed metrics if the gainful employment regulations become effective in their current form. To the extent that our new programmatic offerings do not offset the loss of any of our current programs, the loss of students or restrictions on program eligibility could have a material adverse effect on our student population, business, financial condition, results of operations and cash flows.
• Changes in the availability of PLUS program loans contributed to a reduction in new student projections at The Art Institutes and are likely to adversely impact both continuing and new students in fiscal 2013 and beyond.

As described in greater detail in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K, recent changes in the availability of PLUS program loans have negatively impacted our business, particularly with respect to The Art Institutes, and will continue to do so in the future. During fiscal 2012 we believe that the U.S. Department of Education implemented more stringent underwriting criteria for PLUS program loans. While PLUS program loans for most of fiscal 2012 remained fairly consistent with fiscal 2011, students attending, or interested in attending, our schools experienced a significant decrease in PLUS loan approvals in the fourth quarter of fiscal 2012, and we expect this trend to continue through fiscal 2013. For example, The Art Institutes experienced a 28% and 42% decrease in the number of students using PLUS program loans to fund a portion of their education expense in the fourth quarter of fiscal 2012 and first six months of fiscal 2013, respectively, as compared to their respective prior year periods. Recently, we have taken a number of actions to address this issue, including among other measures, expanding our scholarship programs at The Art Institutes and extending greater amounts of credit to those Art Institute students who are denied PLUS program loans but who still enroll in school. Nevertheless, this change in PLUS loan availability, along with continued economic pressures and a reluctance by parents to incur additional indebtedness, is expected to result in a significant decrease in the number of students using PLUS program loans to finance their education at our Art Institute schools, which will adversely impact the number of students attending those schools in the future. We also increased the maximum length of payment plans from 36 months beyond graduation to 42 months beyond graduation effective in October 2012, which combined with increased lending activity will likely result in higher bad debt expense as a percentage of net revenues in future periods. For example, our bad debt expenses as a percentage of net revenues was 7.1% during the first six months of fiscal 2013, as compared to 5.4% during the first six months of fiscal 2012.

• Investigations of private sector education institutions, student concerns over incurring debt in the current economic climate and negative media have adversely impacted each of our reporting units.

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As described in greater detail in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K, although we believe that there are a number of factors that should contribute to long-term demand for post-secondary education, recently the industry as a whole has been challenged by a number of factors, including the overall negative impact of the current political and economic climate. We and other private sector post-secondary education providers have been subject to increased regulatory scrutiny and litigation in recent years. Furthermore, the current economic climate has impacted the ability of many prospective students to make cash payments to fund their education, and recently there has been a significant amount of negative publicity surrounding the debt that many students incur to pay for a post-secondary education. We believe that the negative publicity surrounding student indebtedness, together with the inability of students to pay cash for their education and the effect of the numerous investigations of the private sector post-secondary industry, has led to a reluctance on the part of some prospective students to enroll in our schools.
• Declines in enrollment in fully-online programs have adversely impacted the current financial results of The Art Institute of Pittsburgh, Argosy University and South University, and may impact our future results.

As described in greater detail in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K, we believe that the non-traditional students who comprise a significant portion of our online student population have been impacted more significantly by the prolonged nature of the current economic downturn. Additionally, we believe that competition for fully-online students has increased over the last several years and that, in general, interest in our programs has been adversely affected by the substantial negative media coverage of our business and industry. These external factors, as well as changes that we have made to our online academic programs, such as the shift to a non-term academic structure for our fully-online programs at Argosy University and South University and changes within our marketing efforts at South University, have impacted the performance of fully-online offerings.
• Potential changes to the 90/10 Rule could impact financial results in fiscal 2013 and beyond.

As described in greater detail in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K, various legislative proposals have been introduced in Congress that would heighten the requirements of the 90/10 Rule. If these proposed changes were adopted, we would have to make material changes to our business to remain eligible to participate in Title IV programs, which could materially and adversely affect our business. In addition, reductions in state-funded student financial aid programs also could adversely impact our compliance with the 90/10 Rule, because tuition revenue derived from such programs is included in the 10% portion of the rule calculation.
Due to the impact of the foregoing factors, our net revenues and average student population declined in fiscal 2012 and in the first six months of fiscal 2013. Our average enrolled student body decreased from 148,100 during the six months ended December 31, 2011 to 130,100 during the six months ended December 31, 2012, and net revenues decreased from $1,419.3 million to $1,264.5 million during the same periods. Although we anticipate these factors will continue to impact us during the remainder of fiscal 2013, we are seeing encouraging demand trends as well as improved retention across our colleges and universities.
The trends described above also have resulted in our business becoming less predictable, which we expect to remain the case for the foreseeable future. Additionally, our cash flows from operations have declined recently as compared to prior reporting periods. In order to address future cash needs, during the second quarter of fiscal 2013 we completed five sale-leaseback transactions with unrelated third parties for net proceeds of $65.1 million. These proceeds were recorded as a cash inflow from investing activities in the six months ended December 31, 2012 and enhanced our unrestricted cash position at December 31, 2012. In addition, through purchasing efficiencies, reprioritizing certain projects and the elimination of others, we believe that our fiscal 2013 capital spending will be between 3.0% and 3.5% of net revenues. We have opened one school location during fiscal 2013 and expect to open one additional school location in fiscal 2013, depending on the timing of regulatory approvals.

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