
<PAGE>
 
   As filed with the Securities and Exchange Commission on January 19, 1999
 
                                                       Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                --------------
 
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          The Securities Act of 1933
 
                                --------------
 
                         CAREER EDUCATION CORPORATION
            (Exact name of registrant as specified in its charter)
 
                                --------------
 
         Delaware                    8200                    39-3932190
                              (Primary Standard           (I.R.S. Employer
     (State or other      Industrial Classification     Identification No.)
     jurisdiction of              Code No.)
     incorporation or
      organization)
 
                       2800 West Higgins Road, Suite 790
                        Hoffman Estates, Illinois 60195
                                (847) 781-3600
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
 
                                --------------
 
                                JOHN M. LARSON
                     President and Chief Executive Officer
                         Career Education Corporation
2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195, (847) 781-
                                     3600
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
 
                                  Copies to:
        LAWRENCE D. LEVIN, ESQ.                DENNIS V. OSIMITZ, ESQ.
         Katten Muchin & Zavis                     Sidley & Austin
  525 West Monroe Street, Suite 1600          One First National Plaza
        Chicago, Illinois 60661                Chicago, Illinois 60603
            (312) 902-5200                         (312) 853-7000
 
                                --------------
 
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
 
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
 
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
 
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
 
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
 
                        CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
                                                                                Proposed
                                         Amount             Proposed             maximum         Amount of
     Title of each class of               to be              maximum            aggregate       registration
   securities to be registered         registered        offering price      offering price         fee
------------------------------------------------------------------------------------------------------------
<S>                                <C>                 <C>                 <C>                 <C>
                                    2,127,500 shares    $29.375 per share
Common Stock, $.01 par value.....          (1)                 (2)           $62,495,313 (2)      $17,374
</TABLE>
-------------------------------------------------------------------------------
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(1) Includes 277,500 shares to be offered upon exercise of the Underwriters'
    over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
    to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
 
                                --------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We and +
+the Selling Stockholders may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective.     +
+This prospectus is not an offer to sell these securities, and it is not       +
+soliciting an offer to buy these securities in any state where the offer or   +
+sale is not permitted.                                                        +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                 SUBJECT TO COMPLETION, DATED JANUARY 19, 1999
 
                                1,850,000 Shares
 
                           [LOGO OF CAREER EDUCATION]
 
                                  Common Stock
 
                                   --------
 
 The shares of  common stock in  this offering  are being sold  by the Selling
  Stockholders named under "Principal and  Selling Stockholders." We will not
   receive any of the  proceeds from the shares of common  stock sold by the
    Selling Stockholders.  The Underwriters  have an  option to  purchase a
     maximum  of 277,500  additional  shares to  cover over-allotments  of
      shares.
 
Our  common stock  is traded  on The Nasdaq  National Market  under the  symbol
 "CECO." On  January 15,  1999, the last  reported sales  price of  our common
 stock on The Nasdaq National Market was $30.50.
 
Investing in the common stock involves certain risks. See "Risk Factors" on
page 7.
 
<TABLE>
<CAPTION>
                                            Price  Underwriting  Proceeds to
                                              to   Discounts and   Selling
                                            Public  Commissions  Stockholders
                                            ------ ------------- ------------
<S>                                         <C>    <C>           <C>
Per Share..................................  $         $             $
Total...................................... $         $             $
</TABLE>
 
  Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.
 
  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
 
Credit Suisse First Boston
 
         Salomon Smith Barney
 
                                           NationsBanc Montgomery Securities LLC
 
                        Prospectus dated          , 1999
<PAGE>
 
                              [INSIDE FRONT COVER]
 
CAREER
EDUCATION
CORPORATION
LOGO
 
                                                                    BUILDING
                                                                    THE FUTURE
                                                                    OF PRIVATE
                                                                    POST-
                                                                    SECONDARY
                                                                    EDUCATION
 
 Photograph of five students from Allentown Business School walking on campus.
 
                                                      COMPUTER TECHNOLOGIES
 
                                                      VISUAL COMMUNICATION
                                                         AND DESIGN TECHNOLOGIES
 
                                                      BUSINESS STUDIES
 
                                                      CULINARY ARTS
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    1
Risk Factors........................    7
Use of Proceeds.....................   14
Dividend Policy.....................   14
Price Range of Common Stock.........   14
Capitalization......................   15
Unaudited Pro Forma Condensed
 Consolidated Financial Data........   16
Selected Historical Consolidated
 Financial and Other Data...........   20
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   22
</TABLE>
<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Business............................   30
Financial Aid and Regulation........   42
Management..........................   53
Principal and Selling Stockholders..   62
Description of Capital Stock........   64
Shares Eligible for Future Sale.....   65
Underwriting........................   67
Notice to Canadian Residents........   69
Legal Matters.......................   70
Experts.............................   70
Where You Can Find More Information.   70
Index to Financial Statements.......  F-1
</TABLE>
 
                               ----------------
 
                      Notes to Readers of this Prospectus
 
You should keep in mind the following points as you read this prospectus:
 
  .  References in this document to "we," "us," "our," "Company" and "CEC"
     refer to Career Education Corporation and its subsidiaries, including
     all of their schools and campuses.
 
  . The term "school" means a campus or group of campuses known by a single
    brand name (such as The Katharine Gibbs Schools or the Al Collins Graphic
    Design School), the term "campus" means a single location of any school
    (such as the New York campus of The Katharine Gibbs Schools or the Al
    Collins Graphic Design School in Tempe, Arizona) and the term
    "institution" means a main campus and its additional locations, as such
    are defined under regulations of the U.S. Department of Education.
 
  . This offering is for 1,850,000 shares; however, the underwriters have a
    30-day option to purchase up to 277,500 additional shares to cover over-
    allotments. Some of the disclosures in this prospectus would be different
    if the underwriters exercise the option. Unless we tell you otherwise,
    the information in this prospectus assumes that the underwriters will not
    exercise the option.
 
                               ----------------
 
               Special Note Regarding Forward-Looking Statements
 
   This prospectus contains certain "forward-looking" statements that have been
made pursuant to the Private Securities Litigation Reform Act of 1995 which
reflect our expectations regarding our future growth, results of operations,
performance and business prospects and opportunities. Wherever possible, words
such as "anticipate," "believe," "plan," "expect" and similar expressions have
been used to identify these forward-looking statements. These statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to risks and uncertainties,
including those listed under "Risk Factors," which could cause our actual
growth, results, performance and business prospects and opportunities to differ
from those expressed in, or implied by, these statements. We are not obligated
to update or revise these forward-looking statements to reflect new events or
circumstances.
 
                               ----------------
 
   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
 
                                      (i)
<PAGE>
 
                               PROSPECTUS SUMMARY
 
   This summary highlights some of the information in this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
 
                                  The Company
 
   Career Education Corporation is one of the largest providers of private,
for-profit postsecondary education in North America, with approximately 15,900
students enrolled as of October 31, 1998. We operate 12 schools, with 21
campuses located in 13 states and two Canadian provinces. Our schools enjoy
long operating histories and offer a variety of bachelor's degree, associate
degree and non-degree programs in career-oriented disciplines within our core
curricula of:
 
       .  computer technologies
 
       .  visual communication and design technologies
 
       .  business studies
 
       .  culinary arts
 
   We have experienced significant growth both internally and through
acquisitions with our net revenue increasing from $7.5 million in 1994 to $82.6
million in 1997. For the first nine months of 1998, our net revenue was $99.9
million.
 
   CEC was founded in January 1994 by John M. Larson, our President and Chief
Executive Officer, who has over 24 years of experience in the career-oriented
education industry. We were formed to capitalize on opportunities in the large
and highly fragmented postsecondary school industry. Since our inception, we
have completed 12 acquisitions. We have acquired schools that we believe
possess strong curricula, leading reputations and broad marketability but that
have been undermanaged from a marketing and financial standpoint. We seek to
apply our expertise in operations, marketing and curricula development, as well
as our financial strength, to improve the performance of these schools.
 
                            Our Acquisition History
 
<TABLE>
<CAPTION>
                                             Number of  Year    Month    Degree
                  School                     Campuses  Founded Acquired Granting
                  ------                     --------- ------- -------- --------
<S>                                          <C>       <C>     <C>      <C>
Al Collins Graphic Design School
 ("Collins")...............................       1     1978     1/94     Yes
Brooks College ("Brooks")..................       1     1970     6/94     Yes
Allentown Business School ("Allentown")....       1     1869     7/95     Yes
Brown Institute ("Brown")..................       1     1946     7/95     Yes
Western Culinary Institute ("Western").....       1     1983    10/96      No
School of Computer Technology ("SCT")......       2     1967     2/97     Yes
The Katharine Gibbs Schools ("Gibbs")......       7     1911     5/97     Yes(1)
International Academy of Merchandising &
 Design ("IAMD")...........................       2     1977     6/97     Yes
International Academy of Design ("IAD")....       2     1983     6/97      No
Southern California School of Culinary Arts
 ("SCSCA").................................       1     1994     3/98      No
Scottsdale Culinary Institute
 ("Scottsdale")............................       1     1986     7/98     Yes
Harrington Institute of Interior Design
 ("Harrington")............................       1     1931     1/99     Yes
</TABLE>
--------
(1) Two Gibbs campuses do not offer degree programs.
 
                                       1
<PAGE>
 
 
                      Our Business and Operating Strategy
 
   Our company was founded based on a business and operating strategy which we
believe has enabled us to achieve significant improvements in the performance
of our schools. We believe this strategy will enable us to continue to
capitalize on the favorable economic, demographic and social trends which are
driving demand for career-oriented education. These trends include greater
technological skills required for entry-level jobs, increasing numbers of high
school graduates and a greater recognition of the value of higher education.
The key elements of our strategy are:
 
  . Focusing on Core Curricula. Our schools offer educational programs
    principally in four career-related fields of study identified by us as
    areas with highly interested and motivated students, strong entry-level
    employment opportunities and ongoing career and salary advancement
    potential.
 
  . Adapting and Expanding Educational Programs. Each of our schools strives
    to meet the changing needs of its students and the employment markets by
    regularly refining and adapting its existing educational programs,
    selectively duplicating successful programs offered elsewhere in our
    school system and introducing entirely new programs of study.
 
  . Investing for Future Growth. We make substantial investments in our
    infrastructure to prepare us for continued growth. We devote particular
    attention to attracting and retaining both corporate and campus-level
    management, and we focus on employee development to facilitate internal
    promotions. Our investments in facilities and classroom technologies help
    us attract and retain students and prepare them for the increasing
    technical demands of the workplace.
 
  . Emphasizing School Management Autonomy and Accountability. We provide
    significant operating autonomy and appropriate performance-based
    incentives to our campus-level managers. We believe these policies create
    an important sense of personal responsibility for achieving campus
    performance objectives and provide us with a significant advantage in
    recruiting and retaining highly-motivated, entrepreneurial individuals.
 
  . Direct Response Marketing. We seek to increase school enrollment and
    profitability through intensive local, regional and national direct
    response marketing programs specifically crafted for each school to
    maximize its market penetration. We also use the Internet to attract
    potential students and believe this medium will be an increasingly
    important marketing tool.
 
  . Improving Student Retention. We focus substantial attention on student
    retention, as modest improvements in student retention can result in
    meaningful increases in school revenue and profitability. We strive to
    improve retention by treating students as valued customers.
 
  . Emphasizing Employment of Graduates. We devote significant resources to
    graduate placement efforts because we believe that maintaining high
    employment rates for graduates of our schools enhances the overall
    reputation of the schools and their ability to attract new students.
    Approximately 92.5% of our students graduating during the 1998 academic
    year (July 1, 1997 to June 30, 1998) obtained employment related to their
    program of study within six months of graduation.
 
                                       2
<PAGE>
 
                              Our Growth Strategy
 
   We believe we can continue to achieve superior long-term growth in revenue
and profitability through:
 
    . Expanding Existing Operations. We intend to achieve continued growth
      at our existing campuses by executing our business and operating
      strategy.
 
    . Acquiring Additional North American Schools. We continually evaluate
      opportunities to acquire schools in the U.S. and Canada that have
      leading reputations, broad marketability and demonstrated compliance
      with regulatory requirements and accreditation standards. In March
      1998, we hired a Director of Strategic Planning and Development to
      proactively identify and evaluate these opportunities. We seek to
      acquire schools which we believe will benefit from the implementation
      of our business and operating strategy.
 
    . Establishing New Campuses. We expect to open new campuses, most likely
      as additional locations of existing institutions, to capitalize on new
      markets or geographic regions that exhibit strong enrollment potential
      or the opportunity to establish a successful school operation in one
      of our core curricula areas.
 
    . Entering New Service Areas. We plan to develop new services, such as
      distance learning (offering educational products and services through
      video, Internet and other distribution channels), which we believe
      offer strong long-term growth potential. We also plan to expand our
      contract training operations (providing customized training on a
      contract basis for business and government organizations).
 
    . Expanding Internationally. We may also acquire or establish operations
      outside North America where we believe significant opportunities
      exist.
 
                                  Our Address
 
   CEC was incorporated in Delaware on January 5, 1994. Our principal executive
offices are located at 2800 West Higgins Road, Suite 790, Hoffman Estates,
Illinois 60195 and our telephone number is (847) 781-3600. Our web site is
located at http://www.careered.com. Web sites for our schools can be accessed
through hyperlinks at our web site. Information contained in our web site is
not a part of this prospectus.
 
                                  The Offering
 
<TABLE>
<S>                           <C>
Common Stock offered by the
 Selling Stockholders........ 1,850,000 shares
Common Stock outstanding..... 7,152,896 shares (1)
Use of proceeds.............. We will not receive any proceeds from the sale of
                              shares by the Selling Stockholders. See "Use of
                              Proceeds."
Nasdaq National Market
 symbol...................... CECO
</TABLE>
--------
(1) This information is as of December 31, 1998. It excludes 902,384 shares of
    common stock issuable upon the exercise of stock options outstanding at
    December 31, 1998 at a weighted average exercise price of $16.30 per share
    and 194,774 shares reserved for issuance under our stock plans. See
    "Management--Stock Plans" and "Description of Capital Stock."
 
                                       3
<PAGE>
 
                              Recent Developments
 
Acquisitions
 
   On January 4, 1999, we acquired Harrington for $2.9 million, subject to
adjustment. Harrington was founded in 1931 and provides degree and diploma
programs in interior design and related fields at its campus in Chicago,
Illinois. Harrington had a student population of approximately 425 as of
September 30, 1998 and is accredited by the National Association of Schools of
Art and Design.
 
   On December 29, 1998, we entered into an agreement to acquire the Brooks
Institute of Photography. Brooks Institute is an internationally known
photography school founded in 1945 which is located in Santa Barbara,
California. As of June 30, 1998, the school had a student population of
approximately 290, approximately 40% of which was foreign students. The
completion of the proposed acquisition is subject to a number of conditions,
including approval by California state regulators. We cannot assure you that
this acquisition will be completed. Brooks Institute is accredited by the
Accrediting Council for Independent Colleges and Schools.
 
Strategic Relationships
 
   On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
U.S. and Canada in connection with our culinary education programs. We are
developing a curriculum with Le Cordon Bleu for use at our culinary schools,
and the agreement will not take effect until this curriculum is completed and
approved by both of us. We do not expect to implement this curriculum before
May 1999. The initial term of this agreement expires on December 31, 2008.
 
   In January 1999, we began offering professional education loans to students
at our U.S. campuses pursuant to an agreement with Sallie Mae (Student Loan
Marketing Association). This private loan program is available exclusively to
our students and is designed to supplement federal, state and other private
financial aid programs. This program offers variable interest rate loans tied
to the prime rate, determination of eligibility within 24 hours, repayment
deferral until students have been out of school for six months and a single
billing statement with certain other federal student loans serviced by Sallie
Mae.
 
                                       4
<PAGE>
 
 
                 Summary Consolidated Financial and Other Data
 
   You should read the consolidated financial and other operating data below in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. See "Unaudited Pro Forma Condensed
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
<TABLE>
<CAPTION>
                                Year Ended December 31,            Nine Months Ended September 30,
                         ----------------------------------------  ------------------------------------
                                                     1997                               1998
                                             --------------------              ------------------------
                                                           Pro                                 Pro
                           1995      1996    Historical Forma (1)    1997      Historical   Forma (2)
                         --------  --------  ---------- ---------  ----------  ------------ -----------
                                      (Dollars in thousands, except per share data)
<S>                      <C>       <C>       <C>        <C>        <C>         <C>          <C>
Statement of Operations
 Data:
Revenue:
 Tuition and
  registration fees,
  net................... $ 16,330  $ 29,269   $ 74,842  $100,672   $   45,615   $   91,659  $   94,191
 Other, net.............    3,066     4,311      7,756     9,483        5,152        8,257       8,729
                         --------  --------   --------  --------   ----------   ----------  ----------
   Total net revenue....   19,396    33,580     82,598   110,155       50,767       99,916     102,920
Depreciation and
 amortization (3).......    1,330     2,134      8,121    11,562        5,000        9,328       9,522
Income (loss) from
 operations.............      404     2,420      2,315     2,641         (354)       1,047       1,591
Net income (loss) (4)... $     69  $  1,495   $   (880) $    881   $   (1,810)  $       35  $      274
                         ========  ========   ========  ========   ==========   ==========  ==========
Net income (loss)
 attributable
 to common stockholders
 (5).................... $   (804) $    137   $ (9,307) $    713   $   (3,981)  $   (2,392) $      176
                         ========  ========   ========  ========   ==========   ==========  ==========
Net income per diluted
 share attributable
 to common stockholders
 (6)....................                                $   0.12                            $     0.02
                                                        ========                            ==========
Other Data:
EBITDA (7).............. $  1,734  $  4,554   $ 10,436  $ 14,203   $    4,646   $   10,375  $   11,113
EBITDA margin (7).......      8.9%     13.6%      12.6%     12.9%         9.2%        10.4%       10.8%
Cash flow provided by
 (used in):
 Operating activities...      235     5,275       (194)                (4,745)       9,852
 Investing activities...   (3,478)   (9,518)   (45,214)               (39,587)      (8,381)
 Financing activities...    4,566     8,076     56,659                 41,975         (351)
Capital expenditures,
 net....................      897     1,231      3,822                  2,077        3,449
Student population (8)..    3,347     4,537     10,889                 10,951       13,655
Number of campuses (9)..        4         5         18                     18           20
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   September 30,
                                                                       1998
                                                                   -------------
                                                                    (Dollars in
                                                                    thousands)
<S>                                                                <C>
Balance Sheet Data:
Cash..............................................................   $ 19,739
Working capital...................................................     18,739
Total assets......................................................    129,890
Long-term debt....................................................     27,931
Total stockholders' investment....................................     79,976
</TABLE>
--------
(1) Gives effect to (i) our acquisitions of Gibbs, IAMD, IAD and Scottsdale,
    (ii) the use of proceeds from our initial public offering of common stock
    to retire indebtedness and (iii) the conversion of all classes of preferred
    stock into common stock and the exercise of warrants in connection with our
    initial public offering as if they had occurred on January 1, 1997. See
    "Unaudited Pro Forma Condensed Consolidated Financial Data" and Note 2 of
    the Notes to our Consolidated Financial Statements.
(2) Gives effect to (i) our acquisition of Scottsdale, (ii) the use of proceeds
    from our initial public offering of common stock to retire indebtedness and
    (iii) the conversion of all classes of preferred stock into common stock
    and the exercise of warrants in connection with our initial public offering
    as if they had occurred on January 1, 1998. See "Unaudited Pro Forma
    Condensed Consolidated Financial Data" and Note 2 of the Notes to our
    Consolidated Financial Statements.
 
                                       5
<PAGE>
 
(3) Includes depreciation of property and equipment, amortization of goodwill,
    student contracts and covenants not-to-compete and excludes the
    amortization of debt discount and deferred financing costs.
(4) For the year ended December 31, 1997 and the nine months ended September
    30, 1997, net income includes an extraordinary loss of $418, which is net
    of a $233 tax benefit, resulting from the early extinguishment of debt. See
    Note 5 of the Notes to our Consolidated Financial Statements.
(5) Includes reductions to net income (loss) for dividends paid or added to the
    redemption value of preferred stock and the accretion to redemption value
    of preferred stock and warrants. See Note 3 of the Notes to our
    Consolidated Financial Statements.
(6) Pro forma net income per diluted share is based upon the weighted average
    number of common and common stock equivalent shares outstanding totalling
    6,011,000 and 7,269,000 for the year ended December 31, 1997 and the nine
    months ended September 30, 1998, respectively. These numbers include (i)
    outstanding shares of common stock and common stock equivalents, (ii)
    2,869,000 and 368,000 shares, for the respective periods, of common stock
    assumed to have been issued in our initial public offering in order to
    repay indebtedness as if our initial public offering occurred at the
    beginning of each period presented and (iii) approximately 2,280,000 and
    390,000 weighted average shares, for the respective periods, of common
    stock issued upon conversion of preferred stock and the exercise of
    warrants which occurred in connection with our initial public offering.
(7) For any period, EBITDA equals earnings before interest expense, taxes,
    depreciation and amortization (including amortization of debt discount and
    deferred financing costs), and EBITDA margin equals EBITDA as a percentage
    of net revenue. We have included information concerning EBITDA and EBITDA
    margin because we believe they allow for a more complete analysis of our
    results of operations. EBITDA and EBITDA margin should not be considered as
    alternatives to, nor is there any implication that they are more meaningful
    than, any measure of performance or liquidity as promulgated under
    generally accepted accounting principles.
(8) Represents the total number of students attending our schools (a) in the
    case of each full year, as of October 31, or (b) for the nine months ended
    September 30, 1997 and 1998, as of September 30.
(9) Represents the total number of campuses operated by us as of the end of the
    period.
 
                                       6
<PAGE>
 
                                  RISK FACTORS
 
   Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, and all of the other information included in this
prospectus before you decide whether to purchase shares of our common stock.
Any of the following risks could materially adversely affect our business,
results of operation or financial condition and could result in a complete loss
of your investment.
 
Extensive Regulation of U.S. Schools Due to Substantial Dependence on Federal
Funding
 
   We derive a majority of our revenue from U.S. federal student financial aid
programs. To participate in such programs, a U.S. institution must obtain and
maintain authorization by the appropriate state education agencies,
accreditation by an accrediting agency recognized by the Department of
Education, and certification by the Department of Education. As a result, our
U.S. schools are subject to extensive regulation by these agencies. These
regulations cover virtually all phases of our operations, including our
educational programs, facilities, instructional and administrative staff,
administrative procedures, financial operations and financial strength. They
also affect our ability to acquire or open additional schools or change our
corporate structure. These regulatory agencies periodically revise their
requirements and modify their interpretations of existing requirements.
 
   If one of our schools were to violate any of these regulatory requirements,
we could suffer a financial penalty. The regulatory agencies could also place
limitations on or terminate our schools' operations, including our receipt of
federal student financial aid funds, which could have a material adverse effect
on our business, results of operations or financial condition. We believe that
we substantially comply with the requirements of these regulatory agencies, but
we cannot predict with certainty how all of these requirements will be applied,
or whether we will be able to comply with all of the requirements in the
future. Some of the most significant regulatory requirements and risks that
apply to our U.S. schools are described in the following paragraphs. See
"Financial Aid and Regulation."
 
   Legislative Action. The U.S. Congress regularly reviews and revises the laws
governing the federal student financial aid programs and annually determines
the funding level for each of these programs. Any action by Congress that
significantly reduces funding for the federal student financial aid programs or
the ability of our schools or students to participate in these programs could
have a material adverse effect on our business, results of operations or
financial condition. Legislative action may also increase our administrative
costs and burden and require us to modify our practices in order for our
schools to comply fully with applicable requirements, which could have a
material adverse effect on our business, results of operations or financial
condition. See "Financial Aid and Regulation--Nature of Federal Support for
Postsecondary Education in the U.S." and "--Regulation of Federal Financial Aid
Programs for U.S. Schools--Legislative Action."
 
   Financial Responsibility Standards. To participate in the federal student
financial aid programs, an institution must either satisfy certain numeric
standards of financial responsibility or post a letter of credit in favor of
the Department of Education and possibly accept other conditions on its
participation in the federal student financial aid programs. The Department of
Education has determined that we and some of our institutions did not satisfy
the numeric standards and has required us to post letters of credit for eleven
of our institutions totalling approximately $17.6 million. The Department of
Education has also placed limits on the total amount of federal student
financial aid available to students at SCSCA. We intend to file our 1998
financial statements with the Department of Education in early 1999 and to ask
it to release most, if not all, of our outstanding letters of credit and to
increase or eliminate the funding limitation for SCSCA. We cannot assure you
that we or our institutions will satisfy the numeric standards or that the
Department of Education will take any action with respect to the letters of
credit or funding limitation.
 
                                       7
<PAGE>
 
See "Financial Aid and Regulation--Regulation of Federal Financial Aid Programs
for U.S. Schools--Financial Responsibility Standards."
 
   Student Loan Defaults. An institution may lose its eligibility to
participate in some or all of the federal student financial aid programs, if
defaults by its students on their federal student loans exceed specified rates.
None of our schools have student loan default rates that exceed those
thresholds. See "Financial Aid and Regulation--Regulation of Federal Financial
Aid Programs for U.S. Schools--Cohort Default Rates."
 
   The "85/15 Rule." A propriety institution loses its eligibility to
participate in the federal student financial aid programs if it derives more
than 85% of its revenue (on a cash basis) from these programs in any fiscal
year ending before October 1998 or 90% of its revenue (on a cash basis) from
these programs in any fiscal year ending after October 1998. In 1997, none of
our institutions received more than 82% of its revenues (on a cash basis) from
the federal student financial aid programs. See "Financial Aid and Regulation--
Regulation of Federal Financial Aid Programs for U.S. Schools--The "85/15
Rule.' "
 
   Change of Ownership or Control Based on an Acquisition. When we acquire an
institution, the Department of Education and most applicable state education
agencies and accrediting agencies consider that institution to undergo a change
of ownership or control. A change of ownership or control of an institution
under the standards of the Department of Education generally results in the
suspension of the institution's participation in the federal student financial
aid programs until the Department of Education reviews and recertifies the
institution. If we were unable to reestablish the state authorization,
accreditation or Department of Education certification of an institution we
acquired, depending on the size of that acquisition, that failure could have a
material adverse effect on our business, results of operations or financial
condition. See "Financial Aid and Regulation--Regulation of Federal Financial
Aid Programs for U.S. Schools--Change of Ownership or Control."
 
   Change of Ownership or Control Based on this Offering. We believe that this
offering will be considered a change of control under the standards of certain
state education agencies, but not under the standards of the other applicable
state education agencies, the Department of Education or applicable accrediting
agencies. We have submitted a letter to the Department of Education seeking
confirmation that this offering will not be a change of ownership or control
under its standards, but we have not yet received a response to that letter. If
any affected campus were unable to reestablish its state authorization,
depending on the size of the campus, that failure could have a material adverse
effect on our business, results of operations or financial condition. See
"Financial Aid and Regulation--Regulation of Federal Financial Aid Programs for
U.S. Schools--Change of Ownership or Control."
 
   State Authorization and Accreditation. An institution that grants degrees,
diplomas or certificates must be authorized by the relevant education agencies
of the state in which it is located and, in some cases, other states.
Requirements for authorization vary substantially among the states. State
authorization and accreditation by an accrediting agency recognized by the
Department of Education are also required for an institution to participate in
the federal student financial aid programs. Loss of state authorization or
accreditation by any of our campuses, depending on the size of the campus,
could have a material adverse effect on our business, results of operations or
financial condition. See "Financial Aid and Regulation--State Authorization for
U.S. Schools" and "--Accreditation for U.S. Schools."
 
Dependence on Canadian Financial Aid; Potential Adverse Effects of Canadian
Regulation
 
   A substantial majority of students enrolled at our Canadian schools receives
assistance from Canadian governmental financial aid programs. Depending on
their province of residence, Canadian students may receive loans under the
Canada Student Loan Program, the Ontario Student Loans Plan and the Quebec
Loans and Bursaries Program.
 
 
                                       8
<PAGE>
 
   Our Canadian schools must meet certain eligibility standards to administer
these programs and must comply with extensive statutes, regulations and other
requirements. We believe our Canadian schools currently hold all necessary
registrations, approvals and permits and meet all eligibility requirements to
administer these governmental financial aid programs. Our IAD school in Toronto
may be required to share the cost of student loan defaults if defaults by its
students on their Ontario Student Assistance Plan loans exceeds specified
rates. Our Toronto school currently does not have a default rate that exceeds
the applicable threshold. If our Canadian schools cannot meet these and other
eligibility standards or fail to comply with applicable requirements, it could
have a material adverse effect on our business, results of operations or
financial condition.
 
   The Canadian, Ontario and Quebec governments are currently in the process of
changing the legislative, regulatory and other requirements relating to student
financial assistance programs due to political and budgetary pressures.
Although we do not anticipate a significant reduction in the funding for these
programs, any change that significantly reduces funding or the ability of our
schools to participate in these programs could have a material adverse effect
on our business, results of operations or financial condition. See "Financial
Aid and Regulation--Canadian Regulation."
 
Limited Operating History; Risks of Integrating Acquisitions
 
   We have grown rapidly since our incorporation in January 1994. Our rapid
growth could place a strain on our management, operations, employees or
resources. We cannot assure you that we will be able to maintain or accelerate
our current growth rate, effectively manage our expanding operations or achieve
planned growth on a timely or profitable basis. If we are unable to manage our
growth effectively, our business, results of operations or financial condition
could be materially adversely affected. The anticipated benefits of our most
recent acquisitions may not be achieved unless we successfully integrate these
schools into our operations and effectively manage, market and apply our
business strategy to these schools. The difficulties of integration may
initially be increased by the necessity of integrating personnel with disparate
business backgrounds and corporate cultures. Management's focus on the
integration of acquired companies and on the application of our business
strategy to these schools could interrupt, or cause loss of momentum in, our
other ongoing activities, which could have a material adverse effect on our
business, results of operations or financial condition. See "Business--
Overview."
 
History of Losses
 
   Since our inception in 1994, we have experienced a net loss for 1994 and
1997; and a net loss attributable to common stockholders for 1994, 1995 and
1997. To the extent that we earned net income or income attributable to common
stockholders for any prior periods, the amounts earned were not substantial.
See "Selected Historical Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the related notes thereto appearing
elsewhere in this prospectus. We cannot assure that we will be profitable in
the future.
 
Reliance on and Risks of Acquisition Strategy
 
   We expect to continue to rely on acquisitions as a key component of our
growth. From time to time, we engage in, and we are currently engaged in,
evaluations of, and discussions with, possible acquisition candidates,
including evaluations and discussions relating to acquisitions that may be
material in size or scope. We cannot assure that we will continue to be able to
identify suitable acquisition opportunities or to acquire any such schools on
favorable terms. Furthermore, we cannot assure that any acquired schools can be
successfully integrated into our operations or be operated profitably.
Acquisitions involve a number of special risks and challenges, including the
diversion of management's attention, assimilation of the operations and
personnel of acquired schools, adverse short-term effects on reported operating
results, possible loss of key employees and difficulty of presenting a unified
corporate image. Continued growth through acquisition may
 
                                       9
<PAGE>
 
also subject us to unanticipated business or regulatory uncertainties or
liabilities. We cannot assure that any potential acquisition will enhance our
business and will not ultimately have a material adverse effect on us. See
"Business--Growth Strategy."
 
   When we acquire an existing school, we typically allocate a significant
portion of the purchase price to fixed assets, goodwill and intangibles (e.g.,
covenants not-to-compete). For our acquisitions to date, we have amortized
goodwill over a period of 40 years and intangible assets over periods of three
to five years. In addition, our acquisition of a school in the U.S. would be a
change of ownership, which may result in the suspension of that school's
participation in the federal student financial aid programs until it obtains
the Department of Education's approval. If we fail to manage our acquisition
program effectively, it could have a material adverse effect on our business,
results of operations or financial condition. See "--Extensive Regulation of
U.S. Schools Due to Substantial Dependence on Federal Funding," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Aid and Regulation--Regulation of Federal Financial Aid Programs for
U.S. Schools--Opening Additional Schools and Adding Educational Programs."
 
Risks Associated with Expansion Plans
 
   To date, we have added new schools only through acquisitions. However, in
the future we expect to open and operate new schools, most likely as additional
locations of existing schools, but possibly also as separate, freestanding
institutions. Establishing new schools poses unique challenges and would
require us to make investments in management, capital expenditures, marketing
expenses and other resources different, and in some cases greater, than those
required with respect to the operation of acquired schools. To open a new
school, we would be required to obtain appropriate state or provincial and
accrediting agency approvals. In addition, to be eligible for federal student
financial aid programs, such a school would have to be certified by the
Department of Education. We have never established a new school, and we cannot
assure you that we will be able to do so successfully or profitably.
 
   While we expect that our career-oriented school business will continue to
provide the substantial majority of our revenue in the near term, we plan to
expand our contract training business, currently offered to a limited extent by
a few of our schools, and may also decide to provide other education-related
services, such as distance learning. We cannot be certain which, if any, new
service areas we will decide to enter or whether we will succeed in markets
beyond our current career-oriented school business.
 
   Our failure to effectively manage the operations of newly established
schools or service areas, or any diversion of management's attention from our
core career-oriented school operating activities, could have a material adverse
effect on our business, results of operations or financial condition. See
"Business--Growth Strategy" and "Financial Aid and Regulation--Regulation of
Federal Financial Aid Programs for U.S. Schools--Opening Additional Schools and
Adding Educational Programs." We may also consider acquiring or establishing
operations outside of the U.S. and Canada. See "--Risks of International
Operations."
 
Risk Associated with Changes in Market Needs and Technology
 
   Prospective employers of our graduates increasingly demand that their entry-
level employees possess appropriate technological skills. Educational programs
at our schools, particularly programs in computer technologies and visual
communications, must keep pace with these evolving requirements. If we cannot
respond to changes in industry requirements, it could have a material adverse
effect on our business, results of operations or financial condition. See
"Business--Technology."
 
Seasonality
 
   Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our schools experience a seasonal
increase in new enrollments in the fall, traditionally when the largest numbers
of new high school graduates begin postsecondary education. Furthermore,
although we
 
                                       10
<PAGE>
 
encourage year-round attendance at all schools, certain of our schools have
summer breaks for some of their programs. As a result of these factors, total
student enrollment and net revenue are typically highest in the fourth quarter
(October through December) and lowest in the second quarter (April through
June) of our fiscal year. Our costs and expenses do not, however, fluctuate as
significantly on a quarterly basis. We anticipate that these seasonal trends
will continue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality."
 
Highly Competitive Market
 
   The postsecondary education market is highly competitive. Our schools
compete with traditional public and private two-year and four-year colleges and
universities and other proprietary schools. Certain public and private colleges
and universities, as well as other private career-oriented schools, may offer
programs similar to those of our schools. Although tuition at private nonprofit
institutions is, on average, higher than tuition at our schools, some public
institutions are able to charge lower tuition than our schools, due in part to
government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
Some of our competitors in both the public and private sectors have
substantially greater financial and other resources than us. See "Business--
Competition."
 
Risks of International Operations
 
   Although we currently operate only in the U.S. and Canada, we intend to
explore opportunities outside those markets. There may be difficulties and
complexities associated with our expansion into international markets, and we
cannot assure you that our strategies will succeed beyond the U.S. and Canada.
International operations present inherent risks, including currency
fluctuations, varying political and economic conditions, unanticipated changes
in regulation, trade barriers, staffing and management problems and adverse tax
consequences. Also, in expanding internationally, we would be required to
comply with different, and potentially more onerous, regulatory requirements.
We cannot assure you that such factors will not have a material adverse effect
on our business, results of operations or financial condition in the future.
See "Business--Growth Strategy."
 
Significant Ownership and Influence of Principal Stockholder
 
   After the offering Heller Equity Capital Corporation will own approximately
18.2% of our common stock on a fully diluted basis. Heller is currently
entitled to designate, and has designated, two members of our Board of
Directors. As a result, Heller can exercise considerable influence over our
operations and business strategy. See "Management--Arrangements for Nomination
as Director," "Principal and Selling Stockholders" and "Description of Capital
Stock."
 
Possible Need for Additional Financing to Implement Growth Strategy
 
   We believe that funds from operations, cash, investments and borrowings
under our $60 million credit facility pursuant to our credit agreement will be
adequate to fund our current operating plans for the foreseeable future.
However, we may need additional debt or equity financing in order to carry out
our strategy of growth through acquisitions. The amount and timing of such
additional financing will vary principally depending on the timing and size of
acquisitions and the sellers' willingness to provide financing themselves. To
the extent that we require additional financing in the future and are unable to
obtain such additional financing, we may not be able to fully implement our
growth strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
Limitations Under Our Credit Agreement
 
   Our credit agreement limits our ability to take certain actions, including
paying dividends, disposing of assets and incurring certain additional
indebtedness. Accordingly, we may be restricted from taking certain actions
which management believes would be desirable and in the best interests of us
and our stockholders. The
 
                                       11
<PAGE>
 
credit agreement also requires us to maintain specified financial ratios and
satisfy certain financial tests. We were in compliance with all ratios and
financial tests as of December 31, 1998, and believe that we remain in
compliance. However, a breach of any covenants contained in the credit
agreement could result in an event of default under that agreement and allow
the lenders to accelerate the indebtedness, which could have a material adverse
effect on our business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
 
Dependence on Key Personnel
 
   Our success to date has depended, and will continue to depend, largely on
the skills and efforts of John M. Larson, our President and Chief Executive
Officer, William A. Klettke, our Senior Vice President and Chief Financial
Officer, and our other key personnel. Our success also depends, in large part,
upon our ability to attract and retain highly qualified faculty, school
presidents and administrators and corporate management. Due to the nature of
our business, we may have difficulty locating and hiring qualified personnel,
and retaining such personnel once hired. None of our employees is subject to an
employment or noncompetition agreement other than Mr. Larson. We do not
maintain key man life insurance on any of our employees. The loss of the
services of any of our key personnel, or our failure to attract and retain
other qualified and experienced personnel on acceptable terms, could have a
material adverse effect on our business, results of operations or financial
condition. See "Management."
 
Common Stock Price Volatility
 
   The market price for our common stock has fluctuated significantly. Factors
such as quarterly variations in our operating results, announcements of
acquisitions by us or our competitors, new regulations or interpretations of
regulations applicable to our schools, changes in accounting treatments or
principles and changes in earnings estimates by securities analysts, as well as
general political economic and market conditions, could cause the market price
of our common stock to fluctuate significantly. The market price for our common
stock may also be affected by our ability to meet or exceed analysts' or
"street" expectations, and any failure to meet such expectations, even if
minor, could have a material adverse effect on the market price of our common
stock. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of certain companies and that have often
been unrelated to the operating performance of such companies.
 
Antitakeover Effects of Our Certificate of Incorporation and By-Laws
 
   Our Certificate of Incorporation, our By-Laws and Delaware law contain
provisions that may delay, defer or inhibit a future acquisition of us not
approved by our Board of Directors. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our Board of Directors in connection with the transaction. Our Certificate
of Incorporation also permits our Board of Directors to issue shares of
preferred stock with such voting, conversion and other rights as it determines,
without any further vote or action by our stockholders. By using preferred
stock, we could (i) discourage a proxy contest, (ii) make the acquisition of a
substantial block of our common stock more difficult or (iii) limit the price
investors may be willing to pay in the future for shares of our common stock.
In addition, our By-Laws provide that (i) special meetings of our stockholders
may be called only by our Board of Directors and (ii) only two of our six
Directors may be elected at such special meetings. These provisions also could
discourage bids for your shares of common stock at a premium and could have a
material adverse effect on the market price of your shares. See "Description of
Capital Stock."
 
Shares Eligible for Future Sale
 
   The sale of a substantial number of shares of our common stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for our common stock. We currently have approximately 7,152,896
shares of common stock outstanding. Substantially all of these shares are
eligible for immediate sale
 
                                       12
<PAGE>
 
in the public market without restriction unless such shares are held by
"affiliates" of us within the meaning of Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). Upon completion of the offering,
1,615,253 shares will be held by our affiliates. Approximately 1,971,759 shares
of common stock are subject to lock-up agreements between the holders of our
shares and the representatives of the underwriters, pursuant to which the
holders have agreed that they will not, directly or indirectly, sell or
otherwise dispose of any shares of common stock, or securities or other rights
convertible into or exchangeable or exercisable for any shares of common stock,
for 90 days after the date of the offering without the prior written consent of
Credit Suisse First Boston Corporation. Upon expiration of this period
substantially all of the shares subject to the lock-up agreements will be
eligible for sale under Rule 144, subject to volume and other limitations
(other than the holding period requirement) of such rule. An additional 902,384
shares of common stock are issuable at various dates upon exercise of options
granted to certain of our employees, officers, directors and consultants
pursuant to stock option agreements. Our affiliates holding 1,463,007 shares of
our common stock have been granted registration rights. We cannot predict the
effect, if any, that future sales of shares, or the availability of shares for
future sales, will have on the market price of the common stock prevailing from
time to time or on our ability to raise capital through an offering of our
equity securities. See "Description of Capital Stock," "Shares Eligible for
Future Sale" and "Underwriting."
 
Year 2000 Compliance
 
   Most companies face potentially serious problems because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the Year 2000. This problem could force
information systems to either shut down or provide incorrect data and
information. We began the process of identifying the necessary changes to our
computer programs and hardware as well as assessing the progress of our
significant vendors in their remediation efforts in late 1997.
 
   We are unable at this time to fully assess the possible impact on our
financial condition, results of operations and cash flows that may result from
any disruptions to our business caused by Year 2000 problems in any systems
controlled by us or any third party with whom we have a material relationship.
These third parties primarily include the Department of Education, state
education agencies, accrediting agencies, guaranty agencies and student loan
lenders. We do not believe that the cost to remedy our internal Year 2000
problems will have a material adverse effect on our business, results of
operations or financial condition. We cannot assure you, however, that our
systems or those of third parties with whom we interact will be free of Year
2000 problems. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance."
 
                                       13
<PAGE>
 
                                USE OF PROCEEDS
 
   We will not receive any of the proceeds from the sale of common stock by the
Selling Stockholders. If the underwriters exercise their over-allotment option
in full, the net proceeds to us, after deduction of the estimated underwriting
discounts and commissions and offering expenses payable by us, are estimated to
be approximately $      million. If the over-allotment option is exercised, we
will use our net proceeds for general corporate purposes.
 
                                DIVIDEND POLICY
 
   We have never paid a cash dividend on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future and we
plan to retain our earnings to finance future growth. The declaration and
payment of dividends on our common stock are subject to the discretion of our
Board of Directors. Our Board's decision to pay future dividends will depend on
general business conditions, the effect on our financial condition and other
factors our Board may consider to be relevant. Our ability to pay dividends on
our common stock is limited if we are not in compliance with the terms of our
credit agreement or we fail to meet a specified leverage ratio.
 
                          PRICE RANGE OF COMMON STOCK
 
   The following table sets forth the range of high and low sales prices per
share for our common stock as reported on The Nasdaq National Market, where the
stock trades under the symbol "CECO," for the periods indicated. The initial
public offering price of our common stock on January 28, 1998 was $16.00 per
share.
 
<TABLE>
<CAPTION>
                                                                   Price Range
                                                                    of Common
                                                                      Stock
                                                                  -------------
                                                                   High   Low
                                                                  ------ ------
<S>                                                               <C>    <C>
1998:
  First Quarter (from January 28, 1998).......................... $22.12 $17.62
  Second Quarter.................................................  27.50  21.50
  Third Quarter..................................................  26.75  17.37
  Fourth Quarter.................................................  30.00  14.12
1999:
  First Quarter (through January 15, 1999)....................... $30.62 $28.87
</TABLE>
 
   On January 15, 1999, the last sale price of the common stock as reported on
The Nasdaq National Market was $30.50 per share. As of January 15, 1999, there
were 26 holders of record of the common stock.
 
                                       14
<PAGE>
 
                                 CAPITALIZATION
 
   The following table sets forth our cash and cash equivalents and
capitalization (long-term debt plus stockholders' investment) as of September
30, 1998. We will not receive any of the proceeds of the sale of common stock
by the Selling Stockholders. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
thereto included elsewhere in this prospectus.
 
<TABLE>
<CAPTION>
                                                           September 30, 1998
                                                         ----------------------
                                                         (Dollars in thousands)
<S>                                                      <C>
Cash....................................................        $ 19,739
                                                                ========
Long-term debt..........................................        $ 27,931
Stockholders' investment:
  Common stock, $.01 par value, 50,000,000 shares
   authorized;
   7,144,806 shares issued and outstanding (1)..........              71
  Additional paid-in capital............................          95,084
  Foreign currency translation..........................            (823)
  Accumulated deficit...................................         (14,356)
                                                                --------
    Total stockholders' investment......................          79,976
                                                                --------
    Total capitalization................................        $107,907
                                                                ========
</TABLE>
--------
(1) Does not include (i) 907,384 shares of common stock issuable upon the
    exercise of outstanding options at a weighted average exercise price of
    $16.31 per share and (ii) 191,774 shares of common stock reserved for
    issuance under our stock plans. See "Management--Stock Plans," "Description
    of Capital Stock" and Notes 9 and 16 of the Notes to our Consolidated
    Financial Statements.
 
                                       15
<PAGE>
 
           UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
 
   The unaudited pro forma condensed consolidated statements of operations of
CEC for the year ended December 31, 1997 and the nine months ended September
30, 1998 give effect to (i) the acquisitions of Gibbs, IAMD, IAD and Scottsdale
and (ii) events occurring at the time of our initial public offering of common
stock, including the use of proceeds to retire indebtedness, as if they had
occurred at the beginning of each period presented. The unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1997 was prepared from the audited historical statements of operations of CEC
and Scottsdale for the year ended December 31, 1997, and the unaudited
statements of operations of Gibbs for the five months ended May 31, 1997 and
IAMD and IAD for the six months ended June 30, 1997.
 
   The unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 1998 was prepared from the unaudited
historical statements of operations of CEC for the nine months ended September
30, 1998 and Scottsdale for the seven months ended July 31, 1998.
 
   All unaudited pro forma condensed consolidated financial data includes all
adjustments necessary (consisting only of normal recurring entries) for a fair
presentation thereof and, in the opinion of management, have been prepared on
the same basis as the audited financial statements. The unaudited pro forma
financial data are a presentation of historical results with accounting and
other adjustments. The unaudited pro forma financial data do not reflect the
effects of any anticipated changes to be made by us to the historical
operations, are presented for informational purposes only and should not be
construed to be indicating (i) the results of our operations or financial
position that actually would have occurred had the acquisitions and the initial
public offering been consummated as of the date indicated or (ii) the results
of our operations or our financial position in the future.
 
   The unaudited pro forma condensed consolidated financial data reflect the
acquisitions using the purchase method of accounting. The acquired assets and
assumed liabilities of Gibbs, IAMD and IAD are stated at values representing an
allocation of the purchase price based upon the estimated fair market value at
the date of their acquisitions. The acquired assets and assumed liabilities of
Scottsdale are stated at values representing a preliminary allocation of the
purchase price based upon the estimated fair market value at the date of the
acquisition. The final purchase accounting allocations will be determined based
on the final appraised values, which could differ from the estimates used
herein.
 
   The following unaudited pro forma condensed consolidated financial
statements and accompanying notes are qualified in their entirety by reference
to, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements and notes thereto of CEC, Gibbs and Scottsdale and the other
historical financial information included elsewhere in this prospectus.
 
                                       16
<PAGE>
 
                   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                            STATEMENT OF OPERATIONS
 
                 For the Twelve Months Ended December 31, 1997
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                            Historical
                          --------------------------------------------------
                                     Gibbs      IAMD      IAD
                                    (through  (through  (through
                                    May 31,   June 30,  June 30,              Pro Forma
                            CEC      1997)     1997)     1997)    Scottsdale Adjustments       Pro Forma
                          --------  --------  --------  --------  ---------- -----------       ---------
<S>                       <C>       <C>       <C>       <C>       <C>        <C>               <C>
Revenue:
  Tuition and
   registration fees,
   net..................  $ 74,842  $ 11,606  $ 4,119   $ 5,677    $ 4,428    $    --          $ 100,672
  Other, net............     7,756     1,222       63        27        415         --              9,483
                          --------  --------  -------   -------    -------    --------         ---------
    Total net revenue...    82,598    12,828    4,182     5,704      4,843         --            110,155
Operating Expenses:
  Educational services
   and facilities.......    34,620     3,029    1,966     2,177      2,627         --             44,419
  General and
   administrative.......    37,542     8,043    2,091     2,565      1,292         --             51,533
  Depreciation and
   amortization.........     8,121       901      387       470         94       1,589 (1)        11,562
                          --------  --------  -------   -------    -------    --------         ---------
    Total operating
     expenses...........    80,283    11,973    4,444     5,212      4,013       1,589           107,514
                          --------  --------  -------   -------    -------    --------         ---------
Income (loss) from
 operations.............     2,315       855     (262)      492        830      (1,589)            2,641
Interest (expense)
 income, net............    (3,108)     (242)    (103)     (235)        62       2,504 (2)        (1,122)
                          --------  --------  -------   -------    -------    --------         ---------
Income (loss) before
 provision (benefit) for
 income taxes...........      (793)      613     (365)      257        892         915             1,519
Provision (benefit) for
 income taxes...........      (331)      --      (146)      103        --        1,012 (3)           638
                          --------  --------  -------   -------    -------    --------         ---------
Net income (loss) (4)...      (462)      613     (219)      154        892         (97)              881
  Dividends paid or
   accrued on preferred
   stock................    (2,159)      --       --        --         --        2,159 (5)           --
  Accretion to
   redemption value of
   preferred stock and
   warrants.............    (6,268)      --       --        --         --        6,100 (5)          (168)
                          --------  --------  -------   -------    -------    --------         ---------
Net income (loss)
 attributable to common
 stockholders (4).......  $ (8,889) $    613  $  (219)  $   154    $   892    $  8,162         $     713
                          ========  ========  =======   =======    =======    ========         =========
Net income (loss) per
 share attributable to
 common stockholders:
  Basic.................  $ (11.58)                                                            $    0.12
                          ========                                                             =========
  Diluted...............  $ (11.58)                                                            $    0.12
                          ========                                                             =========
Weighted average number
 of shares outstanding:
  Basic.................       768                                               5,149 (6)         5,917
                          ========                                            ========         =========
  Diluted...............       768                                               5,243 (6)(7)      6,011
                          ========                                            ========         =========
</TABLE>
 
                                       17
<PAGE>
 
                   UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                            STATEMENT OF OPERATIONS
 
                  For the Nine Months Ended September 30, 1998
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                   Historical
                             ------------------------
                                         Scottsdale
                                          (through     Pro Forma
                               CEC     July 31, 1998) Adjustments      Pro Forma
                             --------  -------------- -----------      ---------
<S>                          <C>       <C>            <C>              <C>
Revenue:
  Tuition and registration
   fees, net...............  $ 91,659     $ 2,532       $   --         $ 94,191
  Other, net...............     8,257         472           --            8,729
                             --------     -------       -------        --------
    Total net revenue......    99,916       3,004           --          102,920
Operating Expenses:
  Educational services and
   facilities..............    41,419       1,445           --           42,864
  General and
   administrative..........    46,161         821           --           46,982
  Depreciation and
   amortization............     9,328          54           140 (1)       9,522
  Compensation expense
   related to the initial
   public offering.........     1,961         --            --            1,961
                             --------     -------       -------        --------
    Total operating
     expenses..............    98,869       2,320           140         101,329
                             --------     -------       -------        --------
Income (loss) from
 operations................     1,047         684          (140)          1,591
Interest (expense) income,
 net.......................      (987)         12          (144) (2)     (1,119)
                             --------     -------       -------        --------
Income (loss) before
 provision for income
 taxes.....................        60         696          (284)            472
Provision (benefit) for
 income taxes..............        25         --            173 (3)         198
                             --------     -------       -------        --------
Net Income (Loss)..........        35         696          (457)            274
  Dividends paid or accrued
   on preferred stock......      (274)        --            274 (5)         --
  Accretion to redemption
   value
   of preferred stock and
   warrants................    (2,153)        --          2,055 (5)         (98)
                             --------     -------       -------        --------
Net income (loss)
 attributable to
 common stockholders.......  $ (2,392)    $   696       $ 1,872        $    176
                             ========     =======       =======        ========
Net income (loss) per share
 attributable to common
 stockholders:
  Basic....................  $  (0.38)                                 $   0.02
                             ========                                  ========
  Diluted..................  $  (0.38)                                 $   0.02
                             ========                                  ========
Weighted average number of
 shares outstanding:
  Basic....................     6,309                       758 (6)       7,067
                             ========                   =======        ========
  Diluted..................     6,309                       960 (6)(7)    7,269
                             ========                   =======        ========
</TABLE>
 
                                       18
<PAGE>
 
                     NOTES TO UNAUDITED PRO FORMA CONDENSED
                          CONSOLIDATED FINANCIAL DATA
 
   The following notes identify the pro forma adjustments made to the
historical amounts in the unaudited pro forma condensed consolidated financial
data:
 
(1) Depreciation of property and equipment, based on appraised values and
    estimated useful lives (which range from five to 31 years) in excess of the
    historical amounts (which was only recorded from the date of the
    acquisitions to the end of each period), is recorded as an adjustment. The
    adjustment also gives effect to the amortization of goodwill and covenants
    not-to-compete. The historical intangible assets of Gibbs have been
    eliminated because new values were assigned to intangible assets at the
    date of acquisition. Intangible assets recorded in conjunction with the
    acquisitions of Gibbs, IAMD, IAD and Scottsdale include goodwill of
    approximately $30.1 million and covenants not-to-compete of approximately
    $11.0 million. Goodwill is amortized on a straight-line basis over its
    estimated useful life of 40 years. Covenants not-to-compete for the Gibbs,
    IAMD and IAD acquisitions are amortized over their estimated useful lives,
    which range from three to five years, using the sum of years' digits
    method. Amortization expense, reflecting the new values and amortization of
    these intangible assets for the entire periods presented in excess of
    historical amounts, has been recorded as an adjustment.
(2) Reflects (i) additional interest expense (at an imputed average interest
    rate of 9% for the year ended December 31, 1997 and nine months ended
    September 30, 1998) of approximately $1.0 million and $0.5 million for the
    year ended December 31, 1997 and the nine months ended September 30, 1998,
    respectively, associated with debt incurred to finance the acquisitions of
    Gibbs, IAMD, IAD and Scottsdale and (ii) a reduction of interest expense of
    approximately $3.5 million and $0.3 million for the year ended December 31,
    1997 and the nine months ended September 30, 1998, respectively, associated
    with proceeds from our initial public offering used to repay outstanding
    indebtedness, at an assumed weighted average interest rate of 9.0%.
(3) Reflects an adjustment to record a provision for federal and state income
    taxes at an effective income tax rate of 42%.
(4) Excludes the extraordinary loss on early extinguishment of debt of $418,
    which is net of a $233 tax benefit.
(5) Shares of redeemable preferred stock (including accrued paid-in-kind
    dividends) were converted into common stock and substantially all warrants
    were exercised in connection with our initial public offering. Accrued
    dividends and any accretion to redemption value related to those shares of
    preferred stock and warrants, assumed to have been issued at the beginning
    of each period presented to consummate the acquisitions, have been added
    back to net income attributable to common stockholders to derive pro forma
    income attributable to common stockholders. Therefore, such amounts are
    eliminated.
(6) Represents an adjustment of (i) approximately 2,869,000 and 368,000 shares
    of common stock for the year ended December 31, 1997 and the nine months
    ended September 30, 1998, assumed to have been issued in our initial public
    offering to repay indebtedness and (ii) approximately 2,280,000 and 390,000
    shares of common stock for the year ended December 31, 1997 and the nine
    months ended September 30, 1998, related to the conversion of preferred
    stock and exercise of warrants which occurred in connection with our
    initial public offering as if both events occurred at the beginning of each
    period presented.
(7) Includes an adjustment for common stock equivalents of 94,000 shares and
    202,000 shares for the year ended December 31, 1997 and the nine months
    ended September 30, 1998, respectively.
 
                                       19
<PAGE>
 
           SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
   The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected statement of
operations data set forth below for the years ended December 31, 1995, 1996 and
1997 and the balance sheet data as of December 31, 1996 and 1997 are derived
from our audited consolidated financial statements included elsewhere in this
prospectus. Our selected statement of operations data set forth below for the
nine months ended September 30, 1997 and 1998 and the balance sheet data as of
September 30, 1998 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. Our unaudited statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our financial condition and results of
operations for those periods and, in the opinion of management, have been
prepared on the same basis as the audited financial statements. The balance
sheet data as of December 31, 1994 and 1995 and statement of operations data
for the year ended December 31, 1994 are derived from our audited financial
statements which are not included in this prospectus.
<TABLE>
<CAPTION>
                                                                  Nine Months Ended
                                Year Ended December 31,             September 30,
                          --------------------------------------  ------------------
                          1994(1)     1995      1996      1997      1997      1998
                          --------  --------  --------  --------  --------  --------
                                         (Dollars in thousands)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>
Statement of Operations
 Data:
Revenue:
 Tuition and
  registration fees,
  net...................  $  5,794  $ 16,330  $ 29,269  $ 74,842  $ 45,615  $ 91,659
 Other, net.............     1,692     3,066     4,311     7,756     5,152     8,257
                          --------  --------  --------  --------  --------  --------
  Total net revenue.....     7,486    19,396    33,580    82,598    50,767    99,916
Operating Expenses:
 Educational services
  and facilities........     3,074     8,565    14,404    34,620    22,269    41,419
 General and
  administrative........     4,887     9,097    14,622    37,542    23,852    46,161
 Depreciation and
  amortization..........       980     1,330     2,134     8,121     5,000     9,328
 Compensation expense
  related to the initial
  public offering.......       --        --        --        --        --      1,961
                          --------  --------  --------  --------  --------  --------
   Total operating
    expenses............     8,941    18,992    31,160    80,283    51,121    98,869
                          --------  --------  --------  --------  --------  --------
Income (loss) from
 operations.............    (1,455)      404     2,420     2,315      (354)    1,047
Interest expense........       134       311       717     3,108     2,046       987
                          --------  --------  --------  --------  --------  --------
Income (loss) before
 provision for taxes and
 extraordinary item.....    (1,589)       93     1,703      (793)   (2,400)       60
Provision (benefit) for
 income taxes...........       --         24       208      (331)   (1,008)       25
                          --------  --------  --------  --------  --------  --------
Income (loss) before
 extraordinary item.....    (1,589)       69     1,495      (462)   (1,392)       35
Extraordinary loss on
 early extinguishment of
 debt (net of taxes of
 $233)..................       --        --        --       (418)     (418)      --
                          --------  --------  --------  --------  --------  --------
Net income (loss).......  $ (1,589) $     69  $  1,495  $   (880) $ (1,810) $     35
                          ========  ========  ========  ========  ========  ========
Income (loss)
 attributable to common
 stockholders:
 Income (loss) before
  extraordinary item, as
  reported..............  $ (1,589) $     69  $  1,495  $   (462) $ (1,392) $     35
 Dividends on preferred
  stock (2).............      (393)     (777)   (1,128)   (2,159)   (1,444)     (274)
 Accretion to redemption
  value of preferred
  stock and warrants
  (3)...................       --        (96)     (230)   (6,268)     (727)   (2,153)
                          --------  --------  --------  --------  --------  --------
Income (loss) before
 extraordinary item,
 attributable to common
 stockholders...........    (1,982)     (804)      137    (8,889)   (3,563)   (2,392)
Extraordinary loss, net.       --        --        --       (418)     (418)      --
                          --------  --------  --------  --------  --------  --------
Net income (loss)
 attributable to common
 stockholders...........  $ (1,982) $   (804) $    137  $ (9,307) $ (3,981) $ (2,392)
                          ========  ========  ========  ========  ========  ========
Net income (loss)
 attributable to common
 stockholders:
 Basic..................            $  (1.06) $   0.18  $ (12.12) $  (5.18) $  (0.38)
                                    ========  ========  ========  ========  ========
 Diluted................            $  (1.06) $   0.13  $ (12.12) $  (5.18) $  (0.38)
                                    ========  ========  ========  ========  ========
</TABLE>
 
                                       20
<PAGE>
 
<TABLE>
<CAPTION>
                                                               Nine Months
                                                             Ended September
                             Year Ended December 31,               30,
                          ---------------------------------  ----------------
                          1994(1)    1995    1996    1997     1997     1998
                          -------   ------  ------  -------  -------  -------
                                     (Dollars in thousands)
<S>                       <C>       <C>     <C>     <C>      <C>      <C>
Other Data:
EBITDA (4)............... $ (475)   $1,734  $4,554  $10,436  $ 4,646  $10,375
EBITDA margin (4)........   (6.3)%     8.9%   13.6%    12.6%     9.2%    10.4%
Cash flow provided by
 (used in):
 Operating activities.... (1,000)      235   5,275     (194)  (4,745)   9,852
 Investing activities.... (2,372)   (3,478) (9,518) (45,214) (39,587)  (8,381)
 Financing activities....  6,014     4,566   8,076   56,659   41,975     (351)
Capital expenditures,
 net.....................    153       897   1,231    3,822    2,077    3,449
Student population (5)...  1,131     3,347   4,537   10,889   10,951   13,655
Number of campuses (6)...      2         4       5       18       18       20
</TABLE>
 
<TABLE>
<CAPTION>
                                       December 31,
                             -----------------------------------  September 30,
                              1994     1995     1996      1997        1998
                             -------  -------  -------  --------  -------------
                                         (Dollars in thousands)
<S>                          <C>      <C>      <C>      <C>       <C>
Balance Sheet Data:
Cash and cash equivalents... $ 2,642  $ 3,965  $ 7,798  $ 18,906    $ 19,739
Working capital.............     578    1,314    1,379    13,806      18,739
Total assets................  11,704   23,584   36,208   117,617     129,890
Long-term debt..............   2,313    8,034   16,459    64,035      27,931
Redeemable preferred stock
 and warrants...............   8,243   13,628   14,561    40,160         --
Total stockholders'
 investment.................  (1,982)  (2,756)  (2,589)   (7,404)     79,976
</TABLE>
--------
(1) Commencing January 5, 1994, the date of our incorporation.
(2) Represents the dividends paid on, or added to, the redemption value of
    outstanding preferred stock. See Note 3 of the Notes to our Consolidated
    Financial Statements.
(3) See Note 3 of the Notes to our Consolidated Financial Statements.
(4) For any period, EBITDA equals earnings before interest expense, taxes,
    depreciation and amortization (including amortization of debt discount and
    deferred financing costs), and EBITDA margin equals EBITDA as a percentage
    of net revenue. We have included information concerning EBITDA and EBITDA
    margin because we believe they allow for a more complete analysis of our
    results of operations. EBITDA and EBITDA margin should not be considered as
    alternatives to, nor is there any implication that they are more meaningful
    than, any measure of performance or liquidity as promulgated under
    generally accepted accounting principles.
(5) Represents the total student population at our schools (a) in the case of
    each full year, as of October 31 and (b) in the case of the nine months
    ended September 30, 1997 and 1998, as of September 30.
(6) Represents the total number of campuses operated by us as of the end of the
    period.
 
                                       21
<PAGE>
 
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS
 
   You should read the following discussion together with the financial
statements and related notes included elsewhere in this prospectus. The results
discussed below are not necessarily indicative of the results to be expected in
any future periods. This discussion contains forward-looking statements. See
"Special Note Regarding Forward-Looking Statements."
 
Background and Overview
 
   We are one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 15,900 students enrolled as of
October 31, 1998. We operate 12 schools, with 21 campuses located in 13 states
and two Canadian provinces. Our schools enjoy long operating histories and
offer a variety of bachelor's degree, associate degree and non-degree programs
in career-oriented disciplines within our core curricula of (i) computer
technologies, (ii) visual communication and design technologies, (iii) business
studies and (iv) culinary arts.
 
   We have experienced significant growth both internally and through
acquisitions. Net revenue and EBITDA have increased in each of the years we
have operated. Our net revenue increased to $82.6 million in 1997, from $7.5
million in 1994 and EBITDA increased to $10.4 million in 1997, from a loss of
$0.5 million in 1994. For the first nine months of 1998, our net revenue was
$99.9 million. We have invested significant amounts of capital in the hiring of
additional personnel and increased marketing and capital improvements at each
of the schools we have acquired. We have also hired additional corporate staff
to support our continued growth. The increased costs of personnel and marketing
are expensed as incurred and are reflected in general and administrative
expenses. Additional depreciation and amortization is reflected as a result of
the capital improvements.
 
   We believe that EBITDA, while not a substitute for generally accepted
accounting principles' measures of operating results, is an important measure
of our financial performance and that of our schools. Our management believes
that EBITDA is particularly meaningful due principally to the role acquisitions
have played in our development. Our rapid growth through acquisitions has
resulted in significant non-cash depreciation and amortization expense, because
a significant portion of the purchase price of a school acquired by us is
generally allocated to fixed assets, goodwill and other intangible assets. As a
result of our ongoing acquisition strategy, non-cash amortization expense may
continue to be substantial.
 
   Our principal source of revenue is tuition collected from our students. The
academic year is at least 30 weeks in length, but varies both by individual
school and program of study. The academic year is divided by term, which is
determined by start dates which vary by school and program. Payment of each
term's tuition may be made by full cash payment, financial aid and/or an
installment payment plan. If a student withdraws from school prior to the
completion of the term, we refund the portion of tuition already paid which is
attributable to the period of the term that is not completed. Revenue is
recognized ratably over the period of the student's program.
 
   Our campuses charge tuition at varying amounts, depending not only on the
particular school, but also upon the type of program (i.e., diploma, associate
or bachelor's) and the specific curriculum. Each of our campuses typically
implements one or more tuition increases annually.
 
   Other revenue consists of bookstore sales, placement fees, dormitory and
cafeteria fees and restaurant revenue. Other revenue is recognized during the
period services are rendered.
 
   Educational services and facilities expense includes costs directly
attributable to the educational activity of our schools, including salaries and
benefits of faculty, academic administrators and student support personnel.
 
                                       22
<PAGE>
 
Educational services and facilities expense also includes costs of educational
supplies and facilities (including rents on school leases), certain costs of
establishing and maintaining computer laboratories, costs of student housing
and all other physical plant and occupancy costs, with the exception of costs
attributable to our corporate offices.
 
   General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
 
   Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with the previous owners of our schools.
 
Acquisitions
 
   On February 28, 1997, we acquired all of the outstanding capital stock of
SCT for a purchase price of approximately $4.9 million. In addition, we paid
approximately $1.8 million to the former owners of SCT pursuant to non-
competition agreements.
 
   Effective May 31, 1997, we acquired all of the outstanding capital stock of
Gibbs for a purchase price of approximately $19.0 million. In addition, we paid
$7.0 million to the former owner of Gibbs pursuant to a non-competition
agreement.
 
   On June 30, 1997, we acquired all of the outstanding capital stock of IAMD
for an initial purchase price of $3.0 million, which amount was further
increased by $4.7 million during 1998, based on the results of IAMD operations
and the calculation of the final purchase price adjustment. In addition, we
paid $2.0 million to the former owners of IAMD pursuant to covenants not-to-
compete.
 
   Also on June 30, 1997, we acquired all of the capital stock of IAD for a
purchase price of $6.5 million. In addition, we paid $2.0 million to the former
owners of IAD pursuant to covenants not-to-compete.
 
   On March 13, 1998, we acquired all of the outstanding capital stock of SCSCA
for a purchase price of approximately $1.0 million.
 
   On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale. The purchase price was approximately $9.9 million.
 
   On January 4, 1999, we acquired all of the outstanding capital stock of
Harrington for a purchase price of approximately $2.9 million, subject to
adjustment.
 
                                       23
<PAGE>
 
Results of Operations
 
   The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.
 
<TABLE>
<CAPTION>
                                                               Nine Months
                                          Year Ended              Ended
                                         December 31,         September 30,
                                       --------------------   ---------------
                                       1995    1996   1997     1997     1998
                                       -----   -----  -----   ------   ------
<S>                                    <C>     <C>    <C>     <C>      <C>
Revenue:
 Tuition and registration, net.......   84.2%   87.2%  90.6%    89.9%    91.7%
 Other, net..........................   15.8    12.8    9.4     10.1      8.3
                                       -----   -----  -----   ------   ------
  Net revenue........................  100.0   100.0  100.0    100.0    100.0
                                       -----   -----  -----   ------   ------
Operating expenses:
 Educational services and facilities.   44.2    42.9   41.9     43.9     41.5
 General and administrative..........   46.8    43.5   45.5     47.0     46.2
 Depreciation and amortization.......    6.9     6.4    9.8      9.8      9.3
 Compensation expense related to the
  initial public offering............    --      --     --       --       2.0
                                       -----   -----  -----   ------   ------
  Total operating expenses...........   97.9    92.8   97.2    100.7     99.0
                                       -----   -----  -----   ------   ------
Income (loss) from operations........    2.1     7.2    2.8     (0.7)     1.0
Interest expense, net................    1.6     2.1    3.8      4.0      1.0
                                       -----   -----  -----   ------   ------
Income (loss) before provision for
 taxes and extraordinary item........    0.5     5.1   (1.0)    (4.7)     0.0
Provision (benefit) for income taxes.    0.1     0.6   (0.4)    (2.0)     0.0
                                       -----   -----  -----   ------   ------
Income (loss) before extraordinary
 item................................    0.4     4.5   (0.6)    (2.7)     0.0
Extraordinary loss on early
 extinguishment of debt (net of
 taxes)..............................    --      --    (0.5)    (0.9)     0.0
                                       -----   -----  -----   ------   ------
Net income (loss)....................    0.4     4.5   (1.1)    (3.6)     0.0
                                       =====   =====  =====   ======   ======
Net income (loss) attributable to
 common stockholders.................   (4.1)%   0.4% (11.3)%   (7.8)%   (2.4)%
                                       =====   =====  =====   ======   ======
</TABLE>
 
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
 
   Revenue. Net tuition revenue increased 101% from $45.6 million in the first
nine months of 1997 to $91.7 million in the first nine months of 1998, due to
an approximately 21% increase in the average number of students attending the
schools which were owned by us during the 1997 period and tuition increases
effective in 1998 for these schools, as well as added net tuition revenue of
$48.4 million for schools acquired during and after the 1997 period. Other net
revenue increased 60%, from $5.2 million in the first nine months of 1997 to
$8.3 million in the first nine months of 1998, due to an increase in student
population for schools owned during the 1997 period.
 
   Educational Services and Facilities Expense. Educational services and
facilities expense increased 86%, from $22.3 million in the first nine months
of 1997 to $41.4 million in the first nine months of 1998. Of this increase,
$4.7 million was attributable to the increase in student population for schools
owned during the 1997 period and $14.4 million was attributable to the addition
of educational services and facilities for schools acquired during and after
the 1997 period.
 
   General and Administrative Expense. General and administrative expense
increased 94%, from $23.9 million in the first nine months of 1997 to $46.2
million in the first nine months of 1998. The increase was primarily
attributable to $16.3 million of expenses for schools acquired during and after
the 1997 period, costs totalling $2.1 million related to increased personnel at
the corporate level to enhance our infrastructure, and increased advertising
and marketing (including admissions) of $2.6 million for schools owned during
the 1997 period. The increase in advertising and marketing expenses reflected,
in part, the fact that the former owners of the acquired schools had reduced
their expenditures in these areas prior to their acquisition by us.
 
   Depreciation and Amortization Expense. Depreciation and amortization expense
increased 87%, from $5.0 million in the first nine months of 1997 to $9.3
million in the first nine months of 1998. The increase was due
 
                                       24
<PAGE>
 
to increased capital expenditures for schools owned during the 1997 period and
related increased depreciation expense of $0.4 million in the first nine months
of 1998. Additionally, depreciation expense increased $2.1 million due to the
depreciation expense for schools acquired during and after the 1997 period.
Amortization expense increased from $2.0 million in the first nine months of
1997 to $3.8 million in the first nine months of 1998, primarily due to
additional amortization of non-competition agreements and goodwill for the
acquisition of schools after the 1997 period.
 
   Compensation Expense Related to the Initial Public Offering. Pursuant to
certain amended stock option agreements with two stockholders, compensation
expense totalling approximately $2.0 million was recognized upon consummation
of our initial public offering in 1998.
 
   Interest Expense. Interest expense decreased 52% from $2.0 million in the
first nine months of 1997 to $1.0 million in the first nine months of 1998. The
decrease was primarily due to a reduction of indebtedness resulting from the
application of the net proceeds of our initial public offering in February
1998.
 
   Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased from a $1.0 million benefit in the first nine months of 1997 to
a $0.03 million provision in the first nine months of 1998 as a result of
changes in pretax income (loss).
 
   Net Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item increased to a net income of $0.04 million in the first nine
months of 1998 from a net loss of $1.4 million in the first nine months of
1997.
 
   Extraordinary Item. During 1997, we recorded an extraordinary expense of
$0.4 million, net of tax, due to the early retirement of debt related to a
credit facility which was terminated and replaced by our current credit
facility.
 
   Net Income (Loss). Net income (loss) increased to a net income of $0.04
million in the first nine months of 1998 from a net loss of $1.8 million in the
first nine months of 1997.
 
   Net Income (Loss) Attributable to Common Stockholders. Net loss attributable
to common stockholders decreased from $4.0 million in the first nine months of
1997 to $2.4 million in the first nine months of 1998. The primary reason for
this decrease was due to the increase in net income (loss) discussed above.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
   Revenue. Net tuition revenue increased 156% from $29.3 million in 1996 to
$74.8 million in 1997, due to an approximately 18% increase in the average
number of students attending the schools which were owned by us during 1996 and
tuition increases effective in 1997 for these schools, as well as added net
tuition revenue of $34.2 million for schools acquired after 1996. Other net
revenue increased 80%, from $4.3 million in 1996 to $7.8 million in 1997, due
to an increase in student population for schools owned during 1996 and the
addition of $2.0 million from schools acquired after 1996.
 
   Educational Services and Facilities Expense. Educational services and
facilities expense increased 140%, from $14.4 million in 1996 to $34.6 million
in 1997. Of this increase, $5.2 million was attributable to the increase in
student population and associated facility costs for schools owned during 1996
and $15.0 million was attributable to the addition of educational services and
facilities for schools acquired after 1996.
 
   General and Administrative Expense. General and administrative expense
increased 157%, from $14.6 million in 1996 to $37.5 million in 1997. The
increase was primarily attributable to costs totalling $1.1 million related to
increased personnel at the corporate level to enhance our infrastructure and
increased advertising and marketing (including admissions) of $1.9 million for
schools owned during 1996, as well as the addition of
 
                                       25
<PAGE>
 
$17.9 million of expenses for schools acquired after 1996. The increase in
advertising and marketing expenses reflected, in part, the fact that the former
owners of the acquired schools had reduced their expenditures in these areas
prior to their acquisition by us.
 
   Depreciation and Amortization Expense. Depreciation and amortization expense
increased 281%, from $2.1 million in 1996 to $8.1 million in 1997. The increase
was due to increased capital expenditures for schools owned during 1996 and
related increased depreciation expense of $0.2 million in 1997. Additionally,
depreciation expense increased $2.3 million due to the depreciation expense for
schools acquired after 1996. Amortization expense increased from an immaterial
amount in 1996 to $3.5 million in 1997, primarily due to additional
amortization of non-competition agreements for the acquisition of schools after
1996.
 
   Interest Expense. Interest expense increased 333% from $0.7 million in 1996
to $3.1 million in 1997. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools after 1996.
 
   Provision (Benefit) for Income Taxes. The benefit for income taxes increased
from a provision in 1996 of $0.2 million to a benefit of $0.3 benefit in 1997.
 
   Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item decreased to a net loss of $0.5 million in 1997 from net
income before extraordinary item of $1.5 million in 1996, due to the factors
noted above.
 
   Extraordinary Item. During 1997, we recorded an extraordinary expense of
$0.4 million, net of tax, due to the early retirement of debt related to a
credit facility which was terminated and replaced by our current credit
facility.
 
   Net Income (Loss). Net income (loss) decreased to a net loss of $0.9 million
in 1997 from net income of $1.5 million in 1996, due to the factors noted
above.
 
   Net Income (Loss) Attributable to Common Stockholders. Net income
attributable to common stockholders decreased from $0.1 million in 1996 to a
loss of $9.3 million in 1997. The primary reasons for this decrease were the
extraordinary item referred to above; increased dividends on preferred stock,
primarily due to the issuance of additional shares; and increased accretion in
the redemption value of preferred stock and warrants as a result of our growth.
All outstanding preferred stock converted into common stock and all outstanding
warrants were exercised prior to the consummation of our initial public
offering.
 
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
   Revenue. Net tuition revenue increased 79%, from $16.3 million in 1995 to
$29.3 million in 1996, due to an 18% increase in the average number of students
attending the schools which were owned by us during 1995 and tuition increases
effective in 1996 for these schools, as well as added net revenue of $1.1
million for schools acquired in 1996. Other net revenue increased 41%, from
$3.1 million in 1995 to $4.3 million in 1996, due to an increase in student
population for schools owned during 1995 and the addition of $0.1 million from
schools acquired after 1995.
 
   Educational Services and Facilities Expense. Educational services and
facilities expense increased 68%, from $8.6 million in 1995 to $14.4 million in
1996. Of this increase, $5.3 million was attributable to the increase in
student population for schools owned during 1995 and $0.5 million was
attributable to the addition of educational services and facilities for schools
acquired in 1996.
 
   General and Administrative Expense. General and administrative expense
increased 61%, from $9.1 million in 1995 to $14.6 million in 1996. The increase
was attributable to costs totalling $0.7 million related to increased personnel
at the corporate level to enhance the infrastructure and increased advertising
and marketing of $4.3 million for schools owned during 1995, as well as the
addition of $0.5 million of expense for schools acquired in 1996. The increase
in advertising and marketing expenses reflected, in part, the fact that the
former owners of the acquired schools had reduced their expenditures in these
areas prior to their acquisition by us.
 
                                       26
<PAGE>
 
   Depreciation and Amortization Expense. Depreciation and amortization expense
increased 61%, from $1.3 million in 1995 to $2.1 million in 1996. The increase
was due to increased capital expenditures for schools owned during 1995 and
related increased depreciation expense of $0.6 million in 1996. Additionally,
depreciation expense increased $0.1 million due to the depreciation expense for
schools acquired in 1996. Amortization expense increased 14%, from $0.4 million
in 1995 to $0.5 million in 1996, primarily due to additional amortization of
non-competition agreements for the acquisition of schools in 1996.
 
   Interest Expense. Interest expense increased 131%, from $0.3 million in 1995
to $0.7 million in 1996. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools in 1996.
 
   Provision for Income Taxes. The provision for income taxes increased to $0.2
million in 1996 from an immaterial amount in 1995.
 
   Net Income. Net income increased from an immaterial amount in 1995 to $1.5
million in 1996, due to the factors discussed above.
 
   Net Income (Loss) Attributable to Common Stockholders. In 1996, net income
attributable to common stockholders was $0.1 million, as compared to a net loss
attributable to common stockholders of $0.8 million in 1995. This change was
attributable to the factors discussed above, offset in part by increased
dividends on preferred stock and increased accretion in the redemption value of
preferred stock and warrants.
 
Seasonality
 
   Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our schools experience a seasonal
increase in new enrollments in the fall, traditionally when the largest numbers
of new high school graduates begin postsecondary education. Furthermore,
although we encourage year-round attendance at all schools, certain schools
have summer breaks for some of their programs. As a result of these factors,
total student enrollment and net revenue are typically highest in the fourth
quarter (October through December) and lowest in the second quarter (April
through June) of our fiscal year. Our costs and expenses do not, however,
fluctuate as significantly on a quarterly basis. We anticipate that these
seasonal trends will continue.
 
Liquidity and Capital Resources
 
   On February 4, 1998, we sold 3,277,500 of our shares of common stock at
$16.00 per share pursuant to our initial public offering. The net proceeds from
our initial public offering totalling $45.6 million were used to repay
borrowings of $41.5 million under our former credit facility and amounts owed
to former owners of acquired businesses of $4.1 million which were outstanding
at that time. Prior to our initial public offering, we financed our operating
activities through cash generated from operations. Acquisitions were financed
through a combination of additional equity investments and credit facilities.
Net cash provided by operating activities increased to $9.9 million in the
first nine months of 1998 from net cash used of $4.7 million in the first nine
months of 1997, due primarily to increases in depreciation and amortization and
the result of the non-cash compensation expense related to our initial public
offering.
 
   Capital expenditures increased to $3.4 million in the first nine months of
1998 from $2.1 million in the first nine months of 1997. These increases were
primarily due to investments in capital equipment as a result of increasing
student population. Capital expenditures are expected to continue to increase
as new schools are acquired, student population increases and current
facilities and equipment are upgraded and expanded.
 
   Our net receivables as a percentage of net revenue decreased to 14% in 1998
from 26% in 1997. This change was primarily due to student receivables at
acquired schools. Based upon past experience and judgment, we establish an
allowance for doubtful accounts with respect to tuition receivables. When a
student withdraws, the receivable balance attributable to such student is
charged to this allowance for doubtful accounts. Our historical bad debt
expense as a percentage of revenue for the years ended December 31, 1996 and
1997 was 2%.
 
                                       27
<PAGE>
 
   In October 1998, we refinanced our credit agreement. We can borrow up to $60
million under a revolving credit facility ($10 million of which may be drawn in
Canadian Dollars), such amount is reduced by outstanding letters of credit. We
can obtain up to $35 million in letters of credit. The credit agreement matures
on October 26, 2003. Our borrowings under the credit agreement bear interest,
payable quarterly, at either (i) the bank's base or prime rate (depending on
whether the particular loan is denominated in U.S. or Canadian dollars), plus a
specified number of basis points (ranging from 0 to 75), based upon our
leverage ratio or (ii) LIBOR, plus a specified number of basis points (ranging
from 75 to 200) based upon our leverage ratio. Under the credit agreement, we
are required, among other things, to maintain certain financial ratios with
respect to debt to EBITDA and interest coverage and to maintain a specified
level of net worth. We are also subject to limitations on, among other things,
payment of dividends, disposition of assets and incurrence of certain
additional indebtedness. We have pledged the stock of our subsidiaries as
collateral for the repayment of our obligations under the credit agreement. At
December 31, 1998, we had approximately $28.9 million of outstanding letters of
credit and $11.3 million of outstanding borrowings under our credit facility.
As a result, at December 31, 1998, our remaining credit availability under the
credit agreement was approximately $19.8 million.
 
Year 2000 Compliance
 
   The Year 2000 Issue. Most companies face potentially serious problems
because many software applications and operational programs written in the past
may not properly recognize calendar dates beginning in the Year 2000. This
problem could force information systems to either shut down or provide
incorrect data and information. We began the process of identifying the
necessary changes to our computer programs and hardware as well as assessing
the progress of our significant vendors in their remediation efforts in late
1997. The discussion below details our efforts to ensure Year 2000 compliance.
 
   Our State of Readiness. We have identified and evaluated the readiness of
our internal and third party informational and non-informational technology
systems, which, if not Year 2000 compliant, could have a direct major impact on
us. Our evaluation has identified the following areas of concern: (i) our
accounting and financial reporting system, (ii) our student database system,
(iii) the systems of third party vendors which process student financial aid
applications and loans for us, (iv) the Department of Education's systems for
processing and disbursing student financial aid and (v) financial institutions
which provide loans to our students.
 
   Based on our assessment and vendors' representations, we believe that the
systems of our significant third party vendors (financial and accounting
systems, including financial aid) will be Year 2000 compliant by mid-year 1999.
 
   We are highly dependent on student funding provided through federal student
financial aid programs. Processing of student applications for this funding and
actual disbursement of a significant portion of these funds are accomplished
through the Department of Education's computer systems. According to the
Department of Education, its systems should be brought into certifiable
compliance in early 1999.
 
   The Risks of Our Year 2000 Issues. We believe the greatest Year 2000
compliance risk, in terms of magnitude, is that the Department of Education may
fail to complete its remediation efforts in a timely manner and federal student
aid financial program funding for our students could be interrupted for a
period of time. Other than public comments provided by the Department of
Education, we are unable to predict the likelihood of this risk occurring.
 
   Contingency Plans. At this time, we fully expect to be Year 2000 compliant
and are satisfied that our significant vendors are or will be compliant. While
we fully expect all of our informational and non-informational technology
systems to be compliant by the Year 2000, we are beginning to develop
contingency plans in the event one or more of our identified areas of concern
are not compliant. We do not believe that the total costs of such Year 2000
compliance activities will be material.
 
                                       28
<PAGE>
 
New Accounting Standards
 
   In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for the
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. We believe that the
adoption of SFAS 131 will not have a material impact on our future reported
results.
 
   In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than
January 1, 1999. Earlier adoption is permitted. We expense all non-
organizational start-up costs as incurred. At December 31, 1997, we have
unamortized organizational costs of approximately $354,000. We are adopting the
SOP in the fourth quarter of 1998, to be effective as of January 1, 1998.
 
                                       29
<PAGE>
 
                                    BUSINESS
 
   The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual growth, results,
performance and business prospects and opportunities could differ materially
from those expressed in, or implied by, any such forward-looking statements.
See "Special Note Regarding Forward-Looking Statements" and "Risk Factors."
 
Overview
 
   We are one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 15,900 students enrolled as of
October 31, 1998. We operate 12 schools, with 21 campuses located in 13 states
and two Canadian provinces. Our schools enjoy long operating histories and
offer a variety of bachelor's degree, associate degree and non-degree programs
in career-oriented disciplines within our core curricula of (i) computer
technologies, (ii) visual communication and design technologies, (iii) business
studies and (iv) culinary arts. We have experienced significant growth both
internally and through acquisitions with our net revenue increasing from $7.5
million in 1994 to $82.6 million in 1997. For the first nine months of 1998,
our net revenue was $99.9 million.
 
   CEC was founded in January 1994 by John M. Larson, our President and Chief
Executive Officer, who has over 24 years of experience in the career-oriented
education industry. We were formed to capitalize on opportunities in the large
and highly fragmented postsecondary school industry. Since our inception, we
have completed 12 acquisitions. We have acquired schools that we believe
possess strong curricula, leading reputations and broad marketability but that
have been undermanaged from a marketing and financial standpoint. We seek to
apply our expertise in operations, marketing and curricula development, as well
as our financial strength, to improve the performance of these schools.
 
   Our schools offer educational programs principally in four career-related
fields of study--(i) computer technologies (including Internet and intranet
technologies), (ii) visual communication and design technologies, (iii)
business studies and (iv) culinary arts--identified by us as areas with highly
interested and motivated students, strong entry-level employment opportunities
and ongoing career and salary advancement potential.
 
  . Computer Technologies: These programs include PC/LAN, PC/Net, computer
    technical support, computer network operation, computer information
    management and computer programming.
 
  . Visual Communication and Design Technologies: These programs include
    desktop publishing, graphic design, fashion design, interior design,
    graphic imaging, webpage design and animation.
 
  . Business Studies: These programs include business administration and
    business operations.
 
  . Culinary Arts: These programs include culinary arts, culinary arts and
    restaurant management and pastry arts.
 
                                       30
<PAGE>
 
   The schools acquired by us are summarized in the following table:
 
<TABLE>
<CAPTION>
                                                  Year    Month    Principal    Degree
                    School                       Founded Acquired Curricula(1) Granting
                    ------                       ------- -------- ------------ --------
<S>                                              <C>     <C>      <C>          <C>
Al Collins Graphic Design School                  1978     1/94      CT, VC      Yes
 Tempe, AZ
Brooks College                                    1970     6/94        VC        Yes
 Long Beach, CA
Allentown Business School                         1869     7/95      B, CT,      Yes
 Allentown, PA                                                       S, VC
Brown Institute                                   1946     7/95     CA, CT,      Yes
 Mendota Heights, MN                                               E, RTB, VC
Western Culinary Institute                        1983    10/96        CA         No
 Portland, OR
School of Computer Technology                     1967     2/97      CA, CT      Yes
 Fairmont, WV
 Pittsburgh, PA
The Katharine Gibbs Schools                       1911     5/97      B, CT,      Yes
 Boston, MA                                                          S, VC
 Melville, NY
 Montclair, NJ
 New York, NY
 Norwalk, CT (2)
 Piscataway, NJ (3)
 Providence, RI (3)
International Academy of Merchandising & Design   1977     6/97        VC        Yes
 Chicago, IL
 Tampa, FL
International Academy of Design                   1983     6/97        VC         No
 Montreal, PQ
 Toronto, ON
Southern California School of Culinary Arts       1994     3/98        CA         No
 South Pasadena, CA
Scottsdale Culinary Institute                     1986     7/98        CA        Yes
 Scottsdale, AZ
Harrington Institute of Interior Design           1931     1/99        VC        Yes
 Chicago, IL
</TABLE>
--------
(1) The programs offered by our schools include business ("B"), culinary arts
    ("CA"), computer technologies ("CT"), electronics ("E"), radio and
    television broadcasting ("RTB"), secretarial studies ("S") and visual
    communication and design technologies ("VC").
(2) The Gibbs campus in Norwalk, Connecticut is now using the name Gibbs
    College.
(3) Does not offer degree programs.
 
                                       31
<PAGE>
 
Industry Background
 
   Based on estimates for 1996 by the Department of Education's National Center
for Education Statistics (the "NCES"), postsecondary education is a $220
billion industry in the U.S., with over 14 million students obtaining some form
of postsecondary education. Of this total, approximately 2.3 million students
are enrolled in approximately 2,000 proprietary postsecondary schools. Federal
funds available to support postsecondary education exceed $40 billion each year
and have grown steadily over the last two decades. Additionally, the federal
government guaranteed over $92 billion in student loans in 1996 and is expected
to guarantee loans at comparable levels in the future. State, local and private
funds for career-oriented training are also available.
 
   Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:
 
   Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological skills required for entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two
and four year colleges. The U.S. Department of Labor projects that jobs
requiring some form of postsecondary training are expected to increase
approximately 19% between 1996 and 2006. Furthermore, career-oriented schools
generally have the ability to react quickly to the changing needs of the
nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
 
   Increasing Numbers of High School Graduates. Currently, U.S. high school
graduates represent over 2.6 million new prospective postsecondary students
each year, the largest pool of potential enrollees. Over the 18 years prior to
1993, the number of high school graduates had been declining. However, this
trend has changed favorably as children of the "baby boom" generation are
entering their high school years. These members of the "echo boom," as it is
commonly known, are expected to boost enrollment in postsecondary educational
programs to as high as 16.4 million students by 2006, an increase of 14.7% from
approximately 14.3 million in the fall of 1996.
 
   Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. According to the
U.S. Department of Commerce, approximately 65% of all 1996 high school
graduates continued their education that same year, compared with 53% a decade
earlier. The Department of Labor projects the number of jobs requiring at least
an associate degree or higher to grow by more than 14% between 1996 and 2006.
In addition, enrollment in postsecondary programs is expected to increase
substantially as individuals seek to enhance their skills or re-train for new
job requirements. In part because of the recent trend toward corporate
downsizing, the NCES estimates that over the next several years initial
enrollments in postsecondary education institutions by working adults will
increase more rapidly than initial enrollments by recent high school graduates.
The number of adults enrolled in postsecondary education programs in the U.S.
is estimated by the NCES to reach 6.8 million by 1999, or 45% of the total
number of people enrolled.
 
   Recognition of the Value of Postsecondary Education. We believe that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. On
average, a person with an associate's degree earns 25% more than a high school
graduate, while a person with a bachelor's degree earns 54% more than a high
school graduate. Independent research studies have demonstrated that
prospective students consider these benefits in making their education
decisions.
 
                                       32
<PAGE>
 
   Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent years
has forced educational institutions to cut back spending on general operations.
As a result, some schools have become underfunded and overcrowded. This trend
may provide an opportunity for proprietary institutions to serve, at more
competitive prices, the postsecondary education needs of certain individuals
who would have otherwise attended public schools.
 
   Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of military personnel has declined by 32% since
1987, with the aggregate number of individuals on active duty in the military
services declining from 2.2 million in 1987 to 1.5 million in 1996. This has
left an educational void to be filled by other sources, including proprietary
career-oriented schools.
 
   We believe that private, for-profit, career-oriented schools are uniquely
positioned to take advantage of these national trends. We also believe that
similar factors are creating a favorable climate for career-oriented
postsecondary education in Canada and other international markets.
 
Business and Operating Strategy
 
   We were founded based upon a business and operating strategy which we
believe has enabled us to achieve significant improvements in the performance
of our schools. We believe this strategy will enable us to continue to
capitalize on the favorable economic, demographic and social trends which are
driving demand for career-oriented education, thereby strengthening our
position as a premier, professionally managed system of career-oriented
postsecondary educational institutions. The key elements of our business and
operating strategy are as follows:
 
   Focusing on Core Curricula. Our schools offer educational programs
principally in four career-related fields of study: (i) computer technologies
(including Internet and intranet technologies) (offered at 12 campuses); (ii)
visual communication and design technologies (offered at 14 campuses); (iii)
business studies (offered at eight campuses) and (iv) culinary arts (offered at
five campuses). We perceive a growing demand by employers for individuals
possessing skills in these particular fields. We also believe there are many
entry-level positions and ongoing career and salary advancement potential for
individuals who have received advanced training in these areas. We recognize
that these employment opportunities have attracted highly interested and
motivated students. These students include both recent high school graduates
and adults seeking formal training in these fields as well as degrees, diplomas
and certificates evidencing their knowledge and skills. Our experience and
expertise in these attractive areas of study enable us to differentiate ourself
from many of our competitors and to effectively tailor our acquisition and
marketing plans.
 
   Adapting and Expanding Educational Programs. We strive to meet the changing
needs of our students and the employment market. We continually refine and
adapt our courses to ensure that both students and employers are satisfied with
the quality and breadth of our educational programs. Through various means,
including student and employer surveys and curriculum advisory boards comprised
of business and community members, our schools regularly evaluate their program
offerings and consider revisions to existing classes and programs, as well as
the introduction of new courses and programs of study within our core
curricula. We selectively duplicate programs that have been successful
elsewhere in our school system. In 1998, we successfully duplicated eight
programs and plan to continue this curricula transfer in the future. For
example, we introduced computer technology programs at Gibbs similar to those
already offered at Brown and culinary arts programs at Brown like those offered
at Western.
 
   Investing for Future Growth. We make substantial investments in our people,
facilities, management information systems and classroom technologies to
prepare our company for continued growth. We devote particular attention to
attracting and retaining both corporate and school level management, and focus
on employee development in order to facilitate internal promotions. We make
substantial investments in facilities
 
                                       33
<PAGE>
 
and classroom technologies to attract, retain and prepare students for the
increasing technical demands of the workplace. Additionally, we have made
significant investments in our management information systems to standardize
applications and processes across our schools in order to maintain effective
and expedient communication between our schools and corporate management, as
well as to ensure the smooth integration of newly acquired schools.
 
   Emphasizing School Management Autonomy and Accountability. We provide
significant autonomy and appropriate performance-based incentives to our
campus-level managers, which we believe offers important benefits for the
organization. We believe these policies foster an important sense of personal
responsibility for achieving campus performance objectives. We also believe our
willingness to grant local autonomy provides us and our schools with a
significant advantage in recruiting and retaining highly-motivated individuals
with an entrepreneurial spirit. Management of each of our campuses is
principally directed by a campus president and local managers, who are
accountable for the campuses' operations and profitability. Business strategy,
finance and consolidation accounting functions are, however, centralized at our
executive offices in Hoffman Estates, Illinois. When a new school is acquired,
we evaluate the capabilities of existing campus management personnel, and
typically retain a significant portion, which contributes to our ability to
rapidly integrate acquired schools into our system. We also determine the
acquired school's needs for additional or stronger managers in key areas and,
where necessary, take appropriate action by hiring new managers or assigning
experienced staff to the school's campuses.
 
   Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct response
marketing programs designed to maximize each school's market penetration. We
also use the Internet to attract potential students and believe that this
medium will be an increasingly important marketing tool. Because many of our
schools have been significantly undermarketed prior to their acquisition, we
believe that major benefits can result from carefully crafted, targeted
marketing programs that leverage schools' curriculum strength and brand name
recognition. After every school acquisition, we design a marketing program
tailored to the particular school to highlight its strengths and to improve
student lead generation and student enrollment rates. Our management uses a
diversified media, direct response approach, including direct mail, Internet-
based advertising, infomercials, other television-based advertising, newspaper
advertising and other print media, to attract potential students. We place
particular emphasis on high school recruitment because it produces a steady
supply of new students.
 
   Improving Student Retention. We emphasize the retention of students, from
initial enrollment to completion of their courses of study, at each of our
schools. Because, as at any postsecondary educational institution, a
substantial portion of our students never finish their educational programs for
personal, financial or academic reasons, substantial increases in revenue and
profitability can be achieved through modest improvements in student retention
rates. Our costs to keep current students in school are much less than the
expense of the marketing efforts associated with attracting new students;
therefore, student retention efforts, if successful, are extremely beneficial
to operating results. We strive to improve retention by treating students as
valued customers. We consider student retention the responsibility of the
entire staff of each school, from admissions to faculty and administration to
career counseling services, and provide resources and support for the retention
efforts developed by our local school administrators. School personnel
typically employ an approach based upon establishing personal relationships
with students; for example, students may receive a telephone call from a school
counselor or faculty member if they miss classes. In addition, our corporate
staff regularly tracks retention rates at each school and provides feedback and
support to the efforts of local school administrators.
 
   Emphasizing Employment of Graduates. We believe that the high rates of
employment for graduates of our schools enhance the overall reputation of the
schools as well as their ability to attract new students. High placement rates
also lead to low student loan default rates, which are necessary to allow our
schools to continue to participate in the federal student financial aid
programs. We consider student placement to be a high priority and allocate a
significant amount of time and resources to placement services. Due at least in
part to this
 
                                       34
<PAGE>
 
emphasis, 92.5% of our graduates for the 1998 academic year who were available
for employment had found employment relating to their fields of study within
six months of graduation. We are committed to maintaining or improving these
graduate employment rates and newly acquired schools will be expected to meet
similar graduate employment success standards.
 
Growth Strategy
 
   We believe we can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire
additional schools in attractive North American markets. We believe we can
achieve additional growth in the future by establishing new campuses and also
by entering new service areas and expanding internationally.
 
   Expanding Existing Operations. We believe that our existing 21 campuses can
achieve significant internal growth in enrollment, revenue and profitability.
We are executing our business and operating strategy, including all of the
elements described above, to accomplish this growth. We believe that expansion
of operations at our existing schools, along with acquisitions of new schools,
will be the primary generators of our growth in the near term.
 
   Acquiring Additional North American Schools. To date, we have grown by
acquiring new schools in the U.S. and Canada and then applying our expertise in
marketing and school management to increase enrollment, revenue and
profitability at those schools. We expect that this process will continue to be
one of the most important elements of our growth strategy. We have an active
acquisition program and from time to time engage in, and are currently engaged
in, evaluations of, and discussions with, possible acquisition candidates,
including evaluations and discussions relating to acquisitions that may be
material in size or scope. See "Prospectus Summary--Recent Developments" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Acquisitions."
 
   We make selective acquisitions of for-profit, career-oriented schools which
have capable faculty and operations staff, as well as quality educational
programs, which stand to benefit from our educational focus, marketing and
operating strengths. We target schools which we believe have the potential to
generate superior financial performance. Generally, such schools demonstrate
the following characteristics:
 
  . "Schools of Choice"--Possessing leading reputations in career-oriented
    disciplines within local, regional and national markets
 
  . Success--Demonstrating the ability to attract, retain and place students,
    while meeting applicable federal and state regulatory criteria and
    accreditation standards
 
  . Marketable Curricula--Offering programs with high value-added content and
    relevant training to provide students with the skills necessary to obtain
    attractive jobs and advance in their selected fields
 
  . Broad Marketability--Attracting students from each of the high school,
    adult, foreign and contract training market segments
 
  . Attractive Facilities and Geographic Locations--Providing geographically
    desirable locations and modern facilities to attract and prepare students
    for the demands of the increasingly competitive workplace
 
                                       35
<PAGE>
 
   We believe that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the significant
cost of developing new educational programs necessary to meet changing demands
of the employment market. We believe that a substantial number of schools
exhibiting the characteristics described above exist in the U.S. and Canadian
markets and that such schools can be successfully integrated into our marketing
and administrative structure. We believe that competition in Canada is not
currently as intense as in the U.S. Few of the largest U.S. operators of
postsecondary career-oriented schools presently have a significant Canadian
presence. We believe that, given our existing Canadian operations, we are well-
positioned to take advantage of these opportunities.
 
   We analyze potential acquisition targets for their long-term profit
potential, enrollment potential and long-term demographic trends, concentration
of likely employers within the region, level of competition, facility costs and
availability and quality of management and faculty. We carefully investigate
any potential acquisition target for its history of regulatory compliance, both
as an indication of future regulatory costs and compliance issues and as an
indication of the school's overall condition. Significant regulatory compliance
issues in the school's past will generally remove a school from our
consideration as an acquisition candidate.
 
   After we have completed an acquisition, we immediately begin to apply our
business strategy to boost enrollment and improve the acquired schools'
profitability. We assist acquired schools in achieving their potential through
a highly focused and active management role, as well as through capital
contributions. We selectively commit resources to improve marketing,
advertising, administration and regulatory compliance at each acquired school.
Further resources may also be committed to enhance management depth. We retain
acquired schools' brand names to take advantage of their established reputation
in local, regional and national markets as "schools of choice."
 
   By acquiring new schools, we are also able to realize economies of scale in
terms of our management information systems, accounting and audit functions,
employee benefits and insurance procurement. We also benefit from the exchange
of ideas among school administrators regarding faculty development, student
retention programs, recruitment, curriculum, financial aid and student
placement programs.
 
   Establishing New Campuses. Although, to date, we have added new campuses
only through acquisitions, in the future we expect to develop, open and operate
new campuses ourselves. These new campuses will most likely be established as
additional locations of existing institutions, but also may be established as
entirely separate, free-standing institutions. Opening new campuses would
enable us to capitalize on new markets or geographic locations that exhibit
strong enrollment potential and/or the potential to establish a successful
operation in one of our core curricula areas. We believe that this strategy
will allow us to continue to grow rapidly even if appropriate acquisition
opportunities are not readily available. We have not yet developed specific
plans for any new campuses, nor made any determination as to when we will first
develop, open and operate a new campus.
 
   Entering New Service Areas. While we expect that our current career-oriented
school operations will continue to provide the substantial majority of our
revenue in the near term, we plan to develop new education-related services
which we believe offer strong long-term growth potential. Among the service
areas being actively considered is distance learning (offering educational
products and services through video, Internet and other distribution channels).
We also plan to expand our contract training business (providing customized
training on a contract basis for business and government organizations), which
is currently a limited part of the operations of a few of our schools. Although
we have not yet actively targeted the growing market for contract training
services, we believe that contract training can become a much more significant
part of our business.
 
   Expanding Internationally. Although all of our current operations are
located in North America, we believe that trends similar to those impacting the
market for career-oriented postsecondary education in the U.S. and Canada are
occurring outside of North America. As a result, we believe that there may be
significant international opportunities in private, for-profit postsecondary
education. To take advantage of these opportunities, we may at some time in the
future elect to acquire or establish operations outside North America.
 
                                       36
<PAGE>
 
Student Recruitment
 
   Our schools seek to attract students with both the desire and ability to
complete their academic programs. Therefore, to produce interest among
potential students, each of our schools engages in a wide variety of marketing
activities.
 
   We believe that the reputation of our schools in local, regional and
national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. We work to further enhance the qualities that make our schools
"schools of choice" within their geographic locations. Each school's admissions
office is charged with marketing the school's programs through a combination of
admissions representatives, direct mailings and radio, Internet, television and
print media advertising, in addition to providing the information needed by
prospective students to assist them in making their enrollment decisions.
 
   As of December 31, 1998, our schools employed approximately 200 admissions
representatives, each of whom focuses his or her efforts on the following
areas: (i) out-of-area (correspondence) recruiting, (ii) high school recruiting
or (iii) in-house recruiting (local). Correspondence representatives work with
students who live outside of the immediate school area to generate interest
through correspondence with potential enrollees who have learned of the school
through regional or national advertising. We believe we are able to
significantly boost enrollment by targeting students outside of the local
population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on our school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. We
believe that the relationships of our schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of our schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students interested in specific careers to determine the likelihood of
their success in completing their educational programs. The admissions
representatives are full-time, salaried employees of the schools. Regulations
of the Department of Education prevent us from giving our U.S. employees
incentive compensation based, directly or indirectly, upon the number of
students recruited.
 
   We also engage in significant direct mail campaigns. Mailing lists are
purchased from a variety of sources, and brochures are mailed regularly during
the course of the year, with frequency determined by the number of school
starts in a given year. We believe direct mailings offer a fast and cost-
effective way to reach a targeted population.
 
   In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, certain initiatives have been successfully
utilized on a national basis. We have found infomercials to be a particularly
effective tool nationally because their length enables schools to convey a
substantial amount of information about their students, their faculty, their
facilities and, most importantly, their course offerings. We also believe that
the personal flavor of the presentation typical of infomercials is well-suited
to attracting potential applicants. As an additional marketing tool, all of our
schools have established web sites, which can be easily accessed for
information about these schools and their educational programs. Although we
retain independent advertising agencies, we design and produce a portion of our
direct marketing and multi-media advertising and communications in-house,
through Market Direct, Inc., a wholly-owned subsidiary. While a majority of
Market Direct's operations involve designing and producing advertising for us,
Market Direct also provides these services to other businesses outside of the
postsecondary education industry as opportunities arise.
 
   We closely monitor the effectiveness of our marketing efforts. We estimate
that, in 1998, admissions representatives were responsible for attracting
approximately 37% of student enrollments, direct mailings were responsible for
approximately 13%, television, radio and print media advertising were
responsible for approximately 37%, and the remaining approximately 13% was
attributable to various other methods.
 
                                       37
<PAGE>
 
Student Admissions and Retention
 
   The admissions and entrance standards of each school are designed to
identify those students who are best equipped to meet the requirements of their
chosen fields of study. The most important qualifications for students include
a strong desire to learn, passion for their area of interest, initiative and a
high likelihood of successfully completing their programs. These
characteristics are generally identified through personal interviews by
admissions representatives. We believe that a success-oriented student body
results in higher retention and placement rates, increased satisfaction on the
part of students and their employers and lower student default rates on
government loans. To be qualified for admission to one of our schools, each
applicant must have a high school diploma or a General Education Development
(GED) certificate. Many of our schools also require that applicants obtain
certain minimum scores on academic assessment examinations. For 1998,
approximately 39% of entering students at our campuses enrolled directly from
high school.
 
   We recognize that our ability to retain students until graduation is an
important indicator of our success and that modest improvements in retention
rates can result in meaningful increases in school revenue and profitability.
As with other postsecondary educational institutions, many of our students do
not complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of our campuses 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. However, while there may be many contributors, each
campus has one administrative employee specifically responsible for monitoring
and coordinating the student retention efforts. In addition, our corporate
staff regularly tracks retention rates at each campus and provides feedback and
support to appropriate local campus administrators.
 
Curriculum Development and Faculty
 
   We believe that curriculum is the single most important component of our
operations, because students choose, and employers recruit from, career-
oriented schools based on the type and quality of technical education offered.
The curriculum development efforts of our schools are a product of their
operating partnership with students and the business and industrial
communities.
 
   The relationship of each of our schools with the business community plays a
significant role in the development and adaptation of school curriculum. Each
school has one or more program advisory boards composed of members of the local
and regional business community who are engaged in businesses directly related
to the educational offerings provided by the school. These boards provide
valuable input to the school's education department, which allows the school to
keep our programs current and provide graduates with the training and skills
that these employers seek.
 
   We also endeavor to enhance and maintain the relevancy of our curricula by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
We have developed a number of techniques designed both to gain valuable
industry insight for ongoing curriculum development and enhance the overall
student experience. These techniques include (i) classroom discussions with
industry executives, (ii) part-time job placement within a student's industry
of choice, and (iii) classroom case studies that are based upon actual industry
issues.
 
   Our schools are in continuous contact with employers through their faculty,
many of whom are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often permit them to teach the many evening
courses offered by our schools. Unlike traditional four-year colleges,
instructors in our schools are not awarded tenure and are evaluated, in part,
based upon student evaluations. As of December 31, 1998, our schools employed
approximately 1,460 faculty and staff members, of which approximately 32% were
full-time employees and approximately 68% had been hired on a part-time,
adjunct basis.
 
                                       38
<PAGE>
 
School Administration
 
   We provide significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on our belief that success is
driven by performance at the local level through enrollment growth, student
retention rates and placement rates. In addition, each of our schools requires,
to a certain extent, different resources and operating tactics due to a variety
of factors, including curriculum, demographics, geographic location and size.
Management of each of our schools is principally in the hands of a school
president who has accountability for the school's operations and profitability.
Each of our schools has five primary operating departments: admissions,
financial aid, education, placement and accounting.
 
   Business strategy, finance and consolidation accounting functions are
centralized at our corporate headquarters. Our corporate staff develops long-
term and short-term operating strategies for the schools and works closely with
local administrators to accomplish their goals and ensure adherence to our
strategy. We maintain stringent quality standards and controls at both the
corporate and individual school levels. Activities at the corporate level
include regular reporting processes which track the vital statistics of each
school's operations, including leads, enrollments, retention rates, placements,
and financial data. These reports provide real-time data which allow management
to monitor the performance of each campus. Each operating department at the
campus level is also required to compile certain quantitative reports at
regular intervals, including reports on admissions, financial aid, academic
performance and placement.
 
   We use a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
 
Tuition and Fees
 
   Currently, total tuition for completion (on a full-time basis) of a
diploma/certificate program offered by our schools ranges from $5,400 to
$23,000, for completion of an associate degree program ranges from $13,000 to
$23,000, and for completion of a bachelor's degree program ranges from $32,000
to $49,500. In addition to these tuition amounts, students at our schools
typically must purchase textbooks and supplies as part of their educational
programs.
 
   Our institutions bill students for their tuition and other institutional
charges based on the specific instructional format or formats of the school's
educational programs. Each institution's refund policies must meet the
requirements of the Department of Education and such institution's state and
accrediting agencies. Generally, under the Department of Education's
requirements, if a first-time student ceases attendance before the point in
time that is 60% of the period of enrollment for which the student has been
charged, the institution will refund institutional charges based on the amount
of time for which the student was charged but did not attend. After a student
has attended 60% or more of such period of enrollment, the institution will
retain 100% of the institutional charges for that period of enrollment. After
the student's first enrollment period, the institution refunds institutional
charges for subsequent periods of enrollment based on the number of weeks
remaining in the period of enrollment in which the student withdrew. In certain
circumstances, institutions must apply state refund requirements when
determining refunds for students.
 
Graduate Employment
 
   We believe that employment of graduates of our schools in occupations
related to their fields of studies is critical to the reputation of the schools
and their ability to continue to recruit students successfully. We believe that
our schools' most successful form of recruiting is through referrals from
satisfied graduates. A strong placement office is important to maintain and
elevate the school's reputation, as well as managing the rate at which former
students default on their loans.
 
                                       39
<PAGE>
 
   We devote a significant amount of time and resources to student placement,
which we believe to be the ultimate indicator of our success. We believe that
our average placement rate is attractive to prospective students and provides a
competitive advantage. Student placement is a top priority of each of our
schools beginning on the first day of student enrollment. This approach
heightens the students' awareness of the placement department and keeps
students focused on their goal--job placement within their field of choice.
Moreover, each of our schools includes career development instruction in our
curricula, which includes the preparation of resumes, cover letters, networking
and other essential job-search tools. Placement office resources are regularly
available to our graduates. With such assistance, our graduates find employment
with a wide variety of businesses located not only in the schools' local
markets but also regionally and nationally.
 
   Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates. As of
December 31, 1998, approximately 65 employees work in the placement departments
of our campuses. Placement counselors participate in professional
organizations, advisory boards, trade shows and community events to keep
apprised of industry trends and maintain relationships with key employers.
Partnerships with local and regional businesses are established through
internships and curriculum development programs and facilitate placement of
graduates in local and regional businesses. The placement department also
assists current students in finding part-time jobs while attending school.
These part-time placements often lead to permanent positions.
 
   Based on survey information received from graduating students and employers,
we believe that of the 6,615 students graduating from our schools during the
1998 academic year, 92.5% of the 6,088 available graduates (available graduates
excludes students who are continuing their education, are in active military
service or are disabled or deceased, as well as students from foreign countries
who are legally ineligible to work in the U.S.) obtained employment in fields
related to their program of study within six months following their graduation.
 
   The reputation of Gibbs allows it to charge fees to employers upon placement
of many of its students. Our other schools do not currently receive such
placement fees, nor, we believe, do any of our principal proprietary
competitors. We believe that, as an additional source of revenue, we may be
able to replicate the Gibbs' placement fee program at certain of our other
schools.
 
Technology
 
   We are committed to providing our students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
we ensure that all our schools provide their students with industry-current
computer hardware, computer software and equipment meeting industry-specific
technical standards. In each program, students use the types of equipment that
they will eventually use in their careers of choice. For example, graphic
animation students use sophisticated computer multimedia animation and digital
video editing equipment and supplies, and visual communication and design
technologies students make significant use of technologies for computer-related
design and layout and digital pre-press applications.
 
Employees
 
   As of December 31, 1998, CEC and our schools had a total of approximately
1,200 full-time and 985 part-time employees. Neither CEC nor any of our schools
has any collective bargaining agreements with our employees. We consider our
relations with our employees to be good.
 
Competition
 
   The postsecondary education market is highly fragmented and competitive,
with no single institution having a significant market share. Our schools
compete with traditional public and private two-year and four-year colleges and
universities, other proprietary schools and alternatives to higher education
such as immediate
 
                                       40
<PAGE>
 
employment and military service. Certain private and public colleges and
universities may offer courses of study similar to those of our schools. Some
public institutions are able to charge lower tuition than our schools due in
part to government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
However, tuition at private, non-profit institutions is, on average, higher
than the average tuition rates of our schools. Other proprietary career-
oriented schools also offer programs that compete with those of our schools. We
believe that our schools compete with other educational institutions
principally based upon quality of their educational programs, reputation in the
business community, costs of programs and graduates' ability to find
employment. Some of our competitors in both the public and private sectors may
have substantially greater financial and other resources than us.
 
   Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution's financial responsibility and administrative
capability. As a result, certain career-oriented schools have been forced to
close because they lacked sufficient quality or financial resources or could
not manage the increased regulatory burden. At the same time, despite
increasing demand, potential new entrants face significant barriers to entry
due to the highly regulated nature of the industry and the considerable expense
of start-up operations.
 
Facilities
 
   Our corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and our 21 campuses are located in 13 states and two Canadian
provinces. Each campus contains teaching facilities, including modern
classrooms, laboratories and, in the case of the schools with culinary arts
programs, large, well-equipped kitchens. Admissions and administrative offices
are also located at each campus. Additionally, Brooks' campus includes a
dormitory and student cafeteria, and Western and Scottsdale lease and operate
restaurants in conjunction with their culinary arts program.
 
   We lease all of our facilities, except the primary Gibbs facility in
Montclair, New Jersey, which we own. As of December 31, 1998, we owned
approximately 19,000 square feet and leased approximately 809,000 square feet.
The leases have remaining terms ranging from less than one year to eleven
years.
 
   We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We have plans to lease at least 90,000
additional square feet in 1999 to accommodate our growth. We believe that our
schools can acquire any necessary additional capacity on reasonably acceptable
terms. We devote capital resources to facility improvements and expansions as
necessary.
 
Legal Proceedings
 
   We and our institutions are subject to occasional lawsuits, investigations
and claims arising out of the ordinary conduct of our business, including the
following:
 
   On February 24, 1997, 30 former and current students in Brown's PC/LAN
program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.
(Fourth Judicial District, Hennepin County, Minnesota) against Brown alleging
breach of contract, fraud, misrepresentation, violation of the Minnesota
Consumer Fraud Act, violation of the Minnesota Deceptive Trade Practices Act
and negligent misrepresentation. Plaintiffs allege that Brown failed to provide
them with the education for which they contracted and which had been
represented to them upon enrollment. There are currently 41 plaintiffs, who are
seeking to recover their tuition, interest and costs. Brown believes that all
of these claims are frivolous and without merit and is vigorously contesting
the allegations. Brown's motion for summary judgment was granted in May 1998.
Plaintiffs have appealed the motion and the appeal is pending.
 
   Although outcomes cannot be predicted with certainty, we do not believe that
the above-described matter or any other legal proceeding to which we are a
party will have a material adverse effect on our business, results of
operations or financial condition.
 
                                       41
<PAGE>
 
                          FINANCIAL AID AND REGULATION
 
   Our schools and students in the U.S. and Canada participate in a wide
variety of government-sponsored (federal, state or provincial) financial aid
programs. For this reason, our schools are subject to extensive regulatory
requirements imposed by government funding agencies and other bodies. For the
1997-98 award year (July 1, 1997 to June 30, 1998), we derived approximately
70% of our total net revenue (on a cash basis) from such financial aid received
by our students. We estimate that over 70% of our students receive government-
sponsored financial aid. Our students also finance their education through
family contributions and individual resources.
 
Nature of Federal Support for Postsecondary Education in the U.S.
 
   While many states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use those funds at any institution that has been certified as
eligible by the Department of Education. These federal programs are authorized
by Title IV of the Higher Education Act of 1965, as amended (the "HEA"), and
are collectively referred to as the "Title IV Programs."
 
   Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending the institution and the amount a student can reasonably contribute to
that cost. All recipients of Title IV Program funds must maintain a
satisfactory grade point average and progress in a timely manner toward
completion of their program of study.
 
   Students at our schools receive grants, loans and work opportunities to fund
their education under the following Title IV Programs (although not every
campus participates in all programs): the Federal Family Education Loan
("FFEL") program, the William D. Ford Federal Direct Loan ("FDL") program, the
Federal Pell Grant ("Pell") program, the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, the Federal Perkins Loan ("Perkins")
program and the Federal Work-Study ("FWS") program .
 
   FFEL. Loans made under the FFEL program are federally guaranteed. Loans are
made by banks and other lending institutions, but if a student or parent
defaults on a loan, payment is guaranteed by a federally recognized guaranty
agency, which is then reimbursed by the Department of Education. Students with
financial need qualify for interest subsidies while in school and during grace
periods. Our schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make and guarantee FFEL loans.
 
   FDL. Under the FDL program, students or their parents may obtain loans
directly from the Department of Education rather than from commercial lenders.
The conditions on FDL loans are generally the same as on loans made under the
FFEL program.
 
   Pell. Under the Pell program, the Department of Education makes grants to
students who demonstrate financial need.
 
   FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. An institution is required to make a 25% matching contribution for
all federal funds received under this program.
 
   Perkins. Perkins loans are made from a revolving institutional account, 75%
of which is capitalized by the Department of Education and the remainder by the
institution. Each institution is responsible for collecting payments on Perkins
loans from its former students and lending those funds to currently enrolled
students.
 
   FWS. Under the FWS program, federal funds are used to pay up to 75% of the
cost of part-time employment of eligible students to perform work for the
institution or certain off-campus organizations. The remaining 25% is paid by
the institution or the employer.
 
 
                                       42
<PAGE>
 
Regulation of Federal Financial Aid Programs for U.S. Schools
 
   To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the
Department of Education and certified as eligible by the Department of
Education. The Department of Education will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the Department of Education's
extensive regulations regarding institutional eligibility. An institution must
also demonstrate its compliance to the Department of Education on an ongoing
basis. These standards are applied primarily on an institutional basis, with
an institution defined as a main campus and its additional locations, if any.
Under this definition, each of our U.S. campuses is a separate institution,
except for Gibbs-Piscataway, which is an additional location of Gibbs-
Montclair, and SCT-Fairmont, which is an additional location of SCT-
Pittsburgh. All of our U.S. schools currently participate in the Title IV
Programs, except for Scottsdale and Harrington, which we recently acquired.
 
   The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, Congress has required the Department of Education to
increase its level of regulatory oversight of institutions to ensure that
public funds are properly used. Under the HEA, accrediting agencies and state
licensing agencies also have responsibilities for overseeing institutions'
compliance with Title IV Program requirements. As a result, each of our
institutions is subject to frequent reviews and detailed oversight and must
comply with a complex framework of laws and regulations. Because the
Department of Education periodically revises its regulations and changes its
interpretation of existing laws and regulations, we cannot assure you that the
Department of Education will agree with our understanding of each Title IV
Program requirement. See "--Compliance with Regulatory Standards and Effect of
Regulatory Violations."
 
   Significant factors relating to the Title IV Programs that could adversely
affect us include the following:
 
   Legislative Action. Political and budgetary concerns significantly affect
the Title IV Programs. Congress must reauthorize the HEA approximately every
six years. The most recent reauthorization in October 1998 reauthorized the
HEA for an additional five years (the "1998 HEA Reauthorization"). Congress
reauthorized all of the Title IV Programs in which our schools participate,
generally in the same form and at funding levels no less than for the prior
year. While the 1998 HEA Reauthorization made numerous changes to Title IV
Program requirements, we believe that these changes will not have a material
adverse effect on our business, results of operations or financial condition.
Changes made by the 1998 HEA Reauthorization include (i) expanding the adverse
effects on schools of high student loan default rates, (ii) increasing from
85% to 90% the portion of a proprietary school's revenue that may be derived
each year from the Title IV Programs, (iii) revising the refund standards that
require an institution to return a portion of the Title IV Program funds for
students who withdraw from school, (iv) giving the Department of Education
flexibility to continue an institution's Title IV participation without
interruption in some circumstances following a change of ownership or control,
(v) changing the formula for calculating the interest rate on FFEL and FDL
loans, and (vi) modifying the definition of default from 180 days to 270 days
past due for loans payable in monthly installments. See "--Cohort Default
Rates," "--The "85/15 Rule,' " and "--Change of Ownership or Control."
 
   In addition, Congress reviews and determines federal appropriations for the
Title IV Programs on an annual basis. Congress can also make changes in the
laws affecting the Title IV Programs in those annual appropriations bills and
in other laws it enacts between HEA reauthorizations. Since a significant
percentage of our revenue is derived from the Title IV Programs, any action by
Congress that significantly reduces Title IV Program funding or the ability of
our schools or students to participate in the Title IV Programs could have a
material adverse effect on our business, results of operations or financial
condition. Legislative action may also increase our administrative costs and
require us to adjust our practices in order for our schools to comply fully
with the Title IV Program requirements.
 
                                      43
<PAGE>
 
   Cohort Default Rates. A significant component of Congress' initiative to
reduce abuse in the Title IV Programs has been the imposition of limitations on
institutions whose former students default on the repayment of their federally
guaranteed or funded student loans above specific rates. All of our
institutions have implemented aggressive student loan default management
programs aimed at reducing the likelihood of students failing to repay their
loans in a timely manner. Those programs emphasize the importance of students
meeting loan repayment requirements and provide for extensive loan counseling,
methods to increase student persistence and completion rates and graduate
employment rates, and proactive borrower contacts after students cease
enrollment.
 
   An institution's cohort default rate under the FFEL and FDL programs is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year. An institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer be
eligible to participate in the FFEL or FDL programs, and beginning with fiscal
year 1996 cohort default rates, the Pell program, for the remainder of the
federal fiscal year in which the Department of Education determines that such
institution has lost its eligibility and for the two subsequent federal fiscal
years. An institution whose cohort default rate under the FFEL or FDL program
for any federal fiscal year exceeds 40% may have its eligibility to participate
in all of the Title IV Programs limited, suspended or terminated by the
Department of Education. None of our institutions has FFEL or FDL cohort
default rates of 25% or greater for three consecutive years.
 
   The following table sets forth the FFEL and FDL cohort default rates for our
institutions for federal fiscal years 1994, 1995 and 1996, the most recent
years for which the Department of Education has published such rates:
 
<TABLE>
<CAPTION>
                                                        FFEL and FDL
                                                       Cohort Default
                School                                      Rate
                ------                                 ----------------
                                                       1996  1995  1994
                                                       ----  ----  ----
      <S>                                              <C>   <C>   <C>
      Al Collins Graphic Design School
       Tempe, AZ                                       15.4% 13.8% 19.3%
      Allentown Business School
       Allentown, PA                                    9.7  10.7   7.1
      Brooks College
       Long Beach, CA                                  21.1  17.8  18.3
      Brown Institute
       Mendota Heights, MN                             17.4  18.1  19.6
      Harrington Institute of Interior Design
       Chicago, IL                                      8.9   5.6   0.0
      International Academy of Merchandising & Design
       Chicago, IL                                     13.8  15.5  13.3
       Tampa, FL                                       12.0  13.3  15.0
      The Katharine Gibbs Schools
       Boston, MA                                      16.2  16.9  16.7
       Melville, NY                                    12.7  15.8  17.7
       Montclair, NJ and Piscataway, NJ                14.5  15.8  16.2
       New York, NY                                    17.3  14.5  18.9
       Norwalk, CT                                     16.0  27.0  17.8
       Providence, RI                                  14.9  14.8  13.1
      School of Computer Technology
       Pittsburgh, PA and Fairmont, WV                 12.9  11.2   9.3
      Scottsdale Culinary Institute
       Scottsdale, AZ                                   4.0   6.1   5.6
      Western Culinary Institute
       Portland, OR                                     9.8  14.3  11.4
</TABLE>
 
                                       44
<PAGE>
 
   An institution whose cohort default rate under the FFEL or FDL program
equals or exceeds 25% for any one of the three most recent federal fiscal
years, or whose cohort default rate under the Perkins program exceeds 15% for
any year, may be placed on provisional certification status by the Department
of Education for up to four years. Nine of our institutions have Perkins cohort
default rates in excess of 15% for students who were scheduled to begin
repayment in the 1996-97 federal award year, the most recent year for which
such rates have been calculated. The Perkins cohort default rates for these
nine institutions ranged from 20.7% to 100.0%. To date, the Department of
Education has placed on provisional certification for their Perkins cohort
default rates only two of these institutions, Gibbs-Melville and Gibbs-
Montclair, either alone or in combination with other reasons. Total Perkins
loans disbursed during 1997-98 represented less than 1% of our total net
revenue. See "--Eligibility and Certification Procedures."
 
   Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy specific standards of financial responsibility.
The Department of Education evaluates institutions for compliance with these
standards each year, based on the institution's annual audited financial
statements and following a change of ownership of the institution.
 
   Under new regulations which took effect July 1, 1998, the Department of
Education calculates the institution's composite score based on its (i) equity
ratio, which measures the institution's capital resources, ability to borrow
and financial viability; (ii) primary reserve ratio, which measures the
institution's ability to support current operations from expendable resources;
and (iii) net income ratio, which measures the institution's ability to operate
at a profit. An institution that does not meet the Department of Education's
minimum composite score may demonstrate its financial responsibility by posting
a letter of credit in favor of the Department of Education in an amount equal
to at least 50% of the Title IV Program funds received by the institution
during its prior fiscal year and possibly accepting other conditions on its
participation in the Title IV Programs.
 
   In periodic reviews of our financial statements for 1997 and prior years, as
well as our February 28, 1998 balance sheet reflecting the results of our
initial public offering, the Department of Education has questioned certain
accounting issues and has found that we and certain of our institutions when
measured on an individual basis failed the numeric tests under the Department
of Education's former and current standards of financial responsibility. To
satisfy the Department of Education's concerns, we have posted letters of
credit on behalf of all institutions we have acquired since October 1996. The
Department of Education reduced the number and amount of our letters of credit
in September 1998 following its review of our 1997 financial statements and our
February 28, 1998 balance sheet. The Department of Education also noted that
the funds derived from our initial public offering, shortly after the close of
our 1997 fiscal year, would have a positive effect on our financial
responsibility. As a result, we currently have posted letters of credit
totaling approximately $17.6 million on behalf of the following schools
(representing 11 institutions as defined by the Department of Education):
 
<TABLE>
             <S>           <C> <C>
             .  Gibbs       -- $8.9 million
             . IAMD         -- $3.4 million
             . Scottsdale   -- $1.3 million
             . SCSCA        -- $2.0 million
             . Western      -- $2.0 million
</TABLE>
 
   In addition, in December 1998 when the Department of Education certified
SCSCA to participate in the Title IV Programs under our ownership, it imposed a
condition providing that SCSCA may not disburse more than $2.0 million in Title
IV Program funds during its initial period of certification ending June 30,
2000. We believe the Department of Education added this condition because SCSCA
had not participated in the Title IV Programs under its prior owner. For a
period of time during 1997 and 1998, the Department of Education
 
                                       45
<PAGE>
 
imposed a similar limitation on the total Title IV Program funding at three of
our other schools: Gibbs, SCT and IAMD. In June 1998, the Department of
Education removed the limitation on Title IV Program funding for these three
schools.
 
   We believe our 1998 audited financial statements will conform with generally
accepted accounting principles and demonstrate that we and most if not all of
our institutions satisfy the Department of Education's composite score for
financial responsibility, without any conditions. We intend to file our 1998
financial statements with the Department of Education early in 1999 and to ask
it to release most, if not all, of our outstanding letters of credit and to
increase or eliminate the Title IV Program funding limitation for SCSCA. We
cannot assure you that we or our institutions will satisfy the numeric
standards or that the Department of Education will take any action with respect
to the letters of credit or funding limitation.
 
   Under a separate standard of financial responsibility, an institution that
has made late student refunds in either of its last two fiscal years must post
a letter of credit with the Department of Education in an amount equal to 25%
of the total Title IV Program refunds paid by the institution in its prior
fiscal year. Based on this standard, we currently have posted a total of
$120,000 in letters of credit with respect to two Gibbs campuses and one IAMD
campus.
 
   Change of Ownership or Control. When we acquire an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
change of ownership resulting in a change of control ("change of control") as
defined by the Department of Education. Upon a change of control, an
institution's eligibility to participate in the Title IV Programs is generally
suspended until it has applied for and been recertified by the Department of
Education as an eligible institution under our ownership, which requires that
the institution also reestablish its state authorization and accreditation. The
time required to act on such an application may vary substantially. Pending
recertification by the Department of Education, the institution may receive and
disburse Title IV Program funds to its students only if those funds were
committed prior to the change of control. If an institution is recertified
following a change of control, it will be on a provisional basis. See "--
Eligibility and Certification Procedures."
 
   The 1998 HEA Reauthorization provides that the Department of Education may
provisionally and temporarily certify an institution undergoing a change of
control under certain circumstances while the Department of Education reviews
the institution's application. The Department of Education has not yet issued
regulations or guidance regarding how it will interpret or apply this amendment
to the HEA.
 
   Each of the U.S. institutions we have acquired has undergone a certification
review under our ownership and has been certified to participate in the Title
IV Programs, with the exception of Scottsdale and Harrington. We acquired
Scottsdale in July 1998 and expect to receive Department of Education
certification in January 1999. We acquired Harrington in January 1999 and have
recently submitted a preliminary application to the Department of Education.
Seven of our U.S. institutions are presently participating in the Title IV
Programs under provisional certification and the remaining eight have been
granted regular certification.
 
   Certain types of transactions by a school or its parent corporation can also
cause a change of control. The Department of Education, the state education
agencies and the accrediting agencies that accredit our schools have their own
definitions of when a transaction is deemed a change of control. With respect
to a publicly traded corporation, such as us, Department of Education
regulations provide that a change of control occurs when there is an event that
would obligate that corporation to file a Current Report on Form 8-K with the
Securities and Exchange Commission disclosing a change of control. Most of the
states and accrediting agencies include the sale of a controlling interest of
common stock in the definition of a change of control. A change of control
under the definition of one of these agencies would require the affected
institution to reaffirm its state authorization or accreditation. The
requirements to obtain such reaffirmation from the states and accrediting
agencies with jurisdiction over our schools vary widely.
 
                                       46
<PAGE>
 
   We believe that this offering will be a change of control under the
standards of the Arizona State Board for Private Postsecondary Education
("ASBPPE") and the Illinois State Board of Education ("ISBE"), but will not be
a change of control under the standards of any other applicable state education
agencies, the accrediting agencies that accredit our schools, or the Department
of Education. We have submitted a letter to the Department of Education seeking
confirmation that this offering will not be a change of control under its
standards, but we have not yet received a response to our letter. As a result,
Collins and Scottsdale, our only campuses in Arizona, and IAMD-Chicago, our
only campus authorized by ISBE, will be required to be reauthorized by ASBPPE
and ISBE, respectively. We believe that this offering will not affect the
ability of those three campuses to participate in the Title IV Programs unless
ASBPPE or ISBE fails to reauthorize any of those campuses in a timely manner.
The failure of any of those campuses to reobtain state authorization could have
a material adverse effect on our business, results of operations or financial
condition. We believe this offering will not affect the ability of our other
institutions to participate in the Title IV Programs.
 
   The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.
 
   Opening Additional Schools and Adding Educational Programs. The HEA
generally requires that proprietary institutions be fully operational for two
years before applying to participate in the Title IV Programs. However, under
the HEA and applicable regulations, an institution that is certified to
participate in the Title IV Programs may establish an additional location and
apply to participate in the Title IV Programs at that location without
reference to the two-year requirement, if such additional location satisfies
all other applicable eligibility requirements. Our expansion plans are based,
in part, on our ability to open new campuses as additional locations of our
existing institutions.
 
   Generally, an institution that is eligible to participate in the Title IV
Programs may add a new educational program without Department of Education
approval if that new program leads to an associate level or higher degree and
the institution already offers programs at that level, or if it prepares
students for gainful employment in the same or related occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets certain minimum length requirements. If an
institution erroneously determines that an educational program is eligible for
the Title IV Programs, the institution would likely be liable for repayment of
the Title IV Program funds provided to students in that educational program. We
do not believe that current Department of Education regulations will create
significant obstacles to our plans to add new programs.
 
   Certain state education agencies and accrediting agencies with jurisdiction
over our campuses also have requirements that may, in certain instances, limit
our ability to open a new campus, acquire an existing campus, establish an
additional location of an existing institution or begin offering a new
educational program. We do not believe that these standards will have a
material adverse effect on our expansion plans.
 
   The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of our institutions,
would cease being eligible to participate in the Title IV Programs if, on a
cash accounting basis, it derived more than 85% of its revenue for any fiscal
year from the Title IV Programs. Any institution that violates this rule
becomes ineligible to participate in the Title IV Programs as of the first day
of the fiscal year following the fiscal year in which it exceeds 85%, and is
unable to apply to regain its eligibility until the next fiscal year. If one of
our institutions violated the 85/15 Rule and became ineligible to participate
in the Title IV Programs but continued to disburse Title IV Program funds, the
Department of Education would require the institution to repay all Title IV
Program funds received by the institution after the effective date of the loss
of eligibility.
 
   We have calculated that, since this requirement took effect in 1995, none of
our institutions has derived more than 83% of its revenue (on a cash basis)
from the Title IV Programs for any fiscal year, and that for 1997 the range for
our institutions was from approximately 46% to approximately 82%. The 1998 HEA
Reauthorization increased the percentage of applicable revenue that a for-
profit institution can derive from the
 
                                       47
<PAGE>
 
Title IV Programs from 85% to 90%. We regularly monitor compliance with this
requirement to minimize the risk that any of our institutions would derive more
than the maximum percentage of its revenue from the Title IV Programs for any
fiscal year. If an institution appeared likely to approach the maximum
percentage threshold, we would evaluate making changes in student funding and
financing to ensure compliance with the rule.
 
   Administrative Capability. The Department of Education assesses the
administrative capability of each institution that participates in the Title IV
Programs under a series of separate standards. Failure to satisfy any of the
standards may lead the Department of Education to find the institution
ineligible to participate in the Title IV Programs or to place the institution
on provisional certification as a condition of its participation. One standard
which applies to programs with the stated objective of preparing students for
employment requires the institution to show a reasonable relationship between
the length of the program and the entry-level job requirements of the relevant
field of employment. We believe we have made the required showing for each of
our applicable programs. Short-term educational programs that provide less than
600 clock hours of instruction must demonstrate that 70% of all students who
enroll in such programs complete them within a prescribed time and 70% of the
graduates of such programs obtain employment in the occupation for which they
were trained within a prescribed time. Certain of the Gibbs institutions offer
such short-term programs, but students enrolled in these programs represent a
small percentage of our total enrollment. To date, the applicable institutions
have been able to establish that their short-term educational programs meet the
required completion and placement percentages.
 
   Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL and FDL programs is 25% or greater for
any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. Two of our institutions
have been placed on provisional certification or determined by the Department
of Education to lack administrative capability due to their Perkins default
rates, either alone or in conjunction with other reasons. See "--Cohort Default
Rates" and "--Eligibility and Certification Procedures."
 
   An additional standard prohibits an institution from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to any person or entity
engaged in any student recruitment, admission or financial aid awarding
activity. We believe that our current compensation plans are in compliance with
HEA standards, although the regulations of the Department of Education do not
establish clear criteria for compliance.
 
   Eligibility and Certification Procedures. The HEA and its implementing
regulations require each institution to apply to the Department of Education
for continued certification to participate in the Title IV Programs at least
every six years, or when it undergoes a change of control, opens an additional
location or raises the highest academic credential it offers. The Department of
Education may place an institution on provisional certification status if it
finds that the institution does not fully satisfy all of the eligibility and
certification standards. The Department of Education may withdraw an
institution's provisional certification without advance notice if the
Department of Education determines that the institution is not fulfilling all
material requirements, and may more closely review an institution that is
provisionally certified if it applies for approval to open a new location or
make any other significant change. Provisional certification does not otherwise
limit an institution's access to Title IV Program funds.
 
   An institution seeking certification to participate in the Title IV Programs
after a change of control will be provisionally certified for a limited period,
following which the institution must reapply for continued certification. If at
that time the institution satisfies all conditions for full certification, the
Department of Education will recertify the institution and remove the
provisional status. Otherwise, the Department of Education may recertify the
institution on a continued provisional basis. Each institution that we have
acquired and that has been certified by the Department of Education for
participation in the Title IV Programs under our ownership was initially
certified on a provisional basis. Five of our institutions remain on
provisional certification status because the initial period of their
provisional certification has not expired. Two institutions
 
                                       48
<PAGE>
 
have been recertified by the Department of Education upon the expiration of
their initial provisional period, but remain on provisional status for other
reasons. Gibbs-Melville is on provisional certification status because its
Perkins cohort default rate at the time of the Department of Education's review
was above 30%, and the institution was told that it would remain on provisional
certification until it reduced its Perkins default rate below 30%. Gibbs-
Montclair is on provisional certification status because its Perkins cohort
default rate is above 30% and because of other reasons that we believe are now
fully resolved.
 
   Compliance with Regulatory Standards and Effect of Regulatory Violations.
Our schools are subject to audits and program compliance reviews by various
external agencies, including the Department of Education, state education
agencies, guaranty agencies 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,
and the resulting audit report submitted to the Department of Education for
review. If the Department of Education or another regulatory agency determined
that one of our institutions improperly disbursed Title IV Program funds or
violated a provision of the HEA or the Department of Education's regulations,
that institution could be required to repay such funds, and could be assessed
an administrative fine. The Department of Education could also subject the
institution to heightened cash monitoring, under which the institution's
federal funding requests are more carefully reviewed by the Department of
Education, or the Department of Education could transfer the institution from
the advance system of receiving Title IV Program funds to the reimbursement
system, under which a institution must disburse its own funds to students and
document the students' eligibility for Title IV Program funds before receiving
such funds from the Department of Education. Violations of Title IV Program
requirements could also subject us or our schools to other civil and criminal
penalties.
 
   Significant violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the Department of Education
to limit, suspend or terminate the participation of the affected institution in
the Title IV Programs. Generally, such a termination extends for 18 months
before the institution may apply for reinstatement of its participation. There
is no proceeding pending to fine any of our institutions or to limit, suspend
or terminate any of our institutions' participation in the Title IV Programs,
and we have no reason to believe that any such proceeding is contemplated. Any
such action that substantially limited our schools' participation in the Title
IV Programs could have a material adverse effect on our business, results of
operations or financial condition.
 
State Authorization for U.S. Schools
 
   We are subject to extensive regulation in each of the 13 states in which we
currently operate schools and in certain other states in which our schools
recruit students. Each of our campuses must be authorized by the applicable
state agency or agencies to operate and grant degrees or diplomas to its
students. In addition, state authorization is required for an institution to
become and remain eligible to participate in the Title IV Programs. Currently,
each of our U.S. campuses is authorized by the applicable state agency or
agencies.
 
   The level of regulatory oversight varies substantially from state to state.
In some states, the campuses are subject to licensure by an agency that
regulates proprietary schools 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 other operational
matters. State laws and regulations may limit our ability 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 Department of Education. We believe that each of our
campuses is in substantial compliance with state authorizing and licensure
laws. If any one of our campuses lost its state authorization, the campus would
be unable to offer its programs and we would be forced to close that campus.
Closing one of our campuses for any reason could have a material adverse effect
on our business, results of operations or financial condition.
 
                                       49
<PAGE>
 
Accreditation for U.S. Schools
 
   Accreditation is a non-governmental process through which an institution
submits to a qualitative review by an organization of peer institutions.
Accrediting agencies primarily examine the academic quality of the
institution's instructional programs, and a grant of accreditation is generally
viewed as confirmation 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.
 
   Accreditation by an accrediting agency recognized by the Department of
Education is required for an institution to be certified to participate in the
Title IV Programs. Accrediting agencies must adopt certain standards in
connection with their review of postsecondary institutions to be recognized by
the Department of Education. All of our U.S. campuses are accredited by an
accrediting agency recognized by the Department of Education. Thirteen of our
campuses are accredited by the Accrediting Council for Independent Colleges and
Schools ("ACICS"), four of our campuses are accredited by the Accrediting
Commission of Career Schools and Colleges of Technology ("ACCSCT"), one of our
campuses is accredited by the Accrediting Commission for Community and Junior
Colleges of the Western Association of Schools and Colleges and one of our
campuses is accredited by the National Association of Schools of Art and
Design. In addition, four of our campuses' interior design programs are
accredited by the Foundation for Interior Design Education Research and two of
our campuses' culinary arts programs are accredited by the American Culinary
Federation Educational Institute Accrediting Commission, accrediting agencies
which are not recognized by the Department of Education.
 
   An accrediting agency may place a campus on "reporting" status to monitor
one or more specified areas of performance. A campus placed on reporting status
is required to report periodically to its accrediting agency on that campus'
performance in the specified areas. ACICS has placed five campuses (IAMD-
Chicago, IAMD-Tampa, Gibbs-Boston, Gibbs-Melville, and Gibbs-Providence) on
financial reporting status, and one campus (Gibbs-Montclair) on placement
reporting status. ACCSCT has placed two campuses (Brown and Collins) on
completion and placement reporting status. Each of these campuses has submitted
all requested data in the identified area to its accrediting agency. The
placement of these eight campuses on reporting status by their accrediting
agencies has not had a material adverse effect on our business, results of
operations or financial condition, and we do not believe that it will have that
effect in the future.
 
Canadian Regulation
 
   Depending on their province of residence, our Canadian students may receive
loans under the Canada Student Loan Program, the Ontario Student Loans Plan and
the Quebec Loans and Bursaries Program. Canadian schools must meet certain
eligibility standards to administer these programs and must comply with
extensive statutes, rules, regulations and requirements. We believe our
Canadian schools currently hold all necessary registrations, approvals and
permits and meet all eligibility requirements to administer these governmental
financial aid programs. If our Canadian schools cannot meet these and other
eligibility standards or fail to comply with applicable requirements, it could
have a material adverse effect on our business, results of operations or
financial condition.
 
   Ontario. The Ontario Ministry of Education and Training provides financial
assistance to eligible students through the Ontario Student Assistance Plan
("OSAP"). This plan includes two main components, the Canada Student Loan
Program and the Ontario Student Loans Plan. For our IAD school in Toronto to
maintain its right to administer OSAP it must, among other things, be
registered and in good standing under the Ontario Private Vocational Schools
Act and abide by the rules, regulations and administrative manuals of the
Canada Student Loan Program, Ontario Student Loans Plan and other OSAP-related
programs. In order to attain initial eligibility, our IAD school in Toronto had
to establish that it had (i) been in good standing under the Ontario Private
Vocational Schools Act for at least 12 months, (ii) offered an eligible program
for at least 12 months, and (iii) graduated at least one class in an eligible
program that satisfied specific requirements with respect to
 
                                       50
<PAGE>
 
class size and graduation rate. Pursuant to Ontario Ministry rules, during the
first two years of initial eligibility, our IAD school in Toronto had its
administration of OSAP independently audited, and full eligibility was not
granted until these audits confirmed that the school was properly administering
OSAP. Our IAD school in Toronto has been granted full eligibility. Under
Ontario Ministry rules, our Toronto school must advise the Ontario Ministry
before the school takes any material action that may result in its failure or
inability to meet any rules, regulations or requirements related to OSAP.
 
   In order for our IAD school in Toronto to establish a new branch, it must
obtain OSAP-designation from the Ontario Ministry. We do not believe that
OSAP's requirements will create significant obstacles to our plans to acquire
additional institutions or open new branches in Ontario.
 
   Our IAD school in Toronto may submit applications for loans only to students
enrolled in educational programs that have been designated as OSAP-eligible by
the Ontario Ministry. To be eligible, among other things, a program must be
registered with the Private Vocational Schools Unit of the Ontario Ministry,
must be of a certain minimum length and must lead to a diploma or certificate.
We do not anticipate that these program approval requirements will create
significant problems with respect to our plans to add new educational programs.
 
   Under Ontario Ministry rules, an institution cannot automatically acquire
OSAP designation through the acquisition of other OSAP-eligible institutions.
When there is a change of ownership, including a change in controlling
interest, in a non-incorporated OSAP-eligible institution, the Ontario Ministry
will require evidence of the institution's continued capacity to properly
administer the program before extending OSAP designation to the new owner. We
do not believe that this offering will be considered a change of ownership for
purposes of OSAP. Given that the Ontario Ministry periodically revises its
regulations and other requirements and changes its interpretations of existing
laws and regulations, we cannot assure you that the Ontario Ministry will agree
with our understanding of each requirement.
 
   Our IAD school in Toronto is required to audit its OSAP administration
annually and the Ontario Ministry is authorized to conduct its own audits of
our administration of these programs. We have complied with these requirements
on a timely basis. Based on the most recent annual compliance audits, our IAD
school in Toronto is in substantial compliance with OSAP requirements and we
believe that the school continues to be in substantial compliance with these
requirements.
 
   The Ontario Ministry has the authority to take any measures it deems
necessary to protect the integrity of the administration of OSAP. If the
Ontario Ministry deems a failure to comply to be minor, the Ontario Ministry
will advise us of the deficiency and provide us with an opportunity to remedy
it. If the Ontario Ministry deems the failure to comply to be serious in
nature, the Ontario Ministry has the authority to: (i) condition our continued
OSAP designation upon our meeting specific requirements during a specific time
frame; (ii) suspend our OSAP designation; or (iii) revoke our OSAP designation.
When the Ontario Ministry determines that any non-compliance in our OSAP
administration is serious, the Ontario Ministry has the authority to contract
with an independent auditor, at our expense, to conduct a full audit in order
to quantify the deficiencies and to require repayment of all loan amounts. In
addition, the Ontario Ministry may impose a penalty up to the amount of the
damages assessed in the independent audit.
 
   Adopting a practice similar to that of the Department of Education, the
Ontario Ministry now calculates for each school student loan default rates on
the basis of incidences of default (expressed as a percentage of the total
number of loans issued to students attending that school). Beginning with loans
issued in the 1998-99 award year (August 1, 1997 to July 31, 1998),
institutions with a 1997 default rate which is 15 percentage points or more
above the 1997 provincial average of 23.5% will be required to share the cost
of defaults. In the 1999-2000 award year, this policy will also apply to
institutions with a 1997 default rate 10 percentage points or more above 23.5%.
Our IAD school in Toronto had an average program-wide total default rate for
1998 of 23.8%.
 
                                       51
<PAGE>
 
   We may only operate a private vocational school in Ontario if the school is
registered under the Ontario Private Vocational Schools Act. Upon payment of
the prescribed fee and satisfaction of the conditions prescribed by the
regulations under the Ontario Private Vocational Schools Act and by the Private
Vocational Schools Unit of the Ontario Ministry, an applicant or registrant
such as our IAD school in Toronto is entitled to registration or renewal of
registration to conduct or operate a private vocational school unless: (i) the
school cannot reasonably be expected to be financially responsible in the
conduct of the private vocational school; (ii) the past conduct of the officers
or directors provides reasonable grounds for belief that the operations of the
school will not be carried on in accordance with relevant law and with
integrity and honesty; (3) it can reasonably be expected that the course or
courses of study or the method of training offered by the school will not
provide the skill and knowledge requisite for employment in the vocation or
vocations for which the applicant or registrant is offering instruction; or
(iv) the applicant is carrying on activities that are, or will be, if the
applicant is registered, in contravention of the Ontario Private Vocational
Schools Act or the regulations under that Act. An applicant for registration to
conduct or operate a private vocational school is required to submit with the
application a bond in an amount determined in accordance with the regulations
under the Ontario Private Vocational Schools Act. Our IAD school in Toronto is
currently registered under the Ontario Private Vocational Schools Act for both
of its locations, and we do not believe that there will be any impediment to
renewal of such registrations on an annual basis.
 
   The Ontario Private Vocational Schools Act provides that a "registration" is
not transferable. However, the Private Vocational Schools Unit of the Ontario
Ministry takes the position that a purchase of shares of a private vocational
school does not invalidate the school's registration under the Ontario Private
Vocational Schools Act. We do not believe that this offering will invalidate
the registrations of our IAD school in Toronto.
 
   If our IAD school in Toronto is convicted of violating the Ontario Private
Vocational Schools Act or the regulations under that Act, the corporation can
be fined up to $CDN 25,000.
 
   Quebec. Our Quebec students may receive loans under the Quebec Loans and
Bursaries Program subject to certain student eligibility criteria. Under an Act
Respecting Private Education, our IAD school in Montreal may not operate as a
private educational institution without holding a permit issued by the Quebec
Minister of Education. Permits cannot be transferred without the written
authorization of the Quebec Minister and we must notify that Minister of any
amalgamation, sale or transfer affecting our Quebec school. The Quebec Minister
can modify or revoke our permit in certain circumstances, such as if we do not
comply with the conditions, restrictions or prohibitions of the permit or if we
are to become insolvent. We must be provided with a chance to present our views
before our permit can be revoked.
 
   We do not believe that this offering will be considered a "sale or transfer"
affecting our IAD school in Montreal, for the purposes of applicable law;
however, because the Quebec Minister periodically revises its legal
requirements and changes its interpretation of existing law, we cannot assure
you that the Quebec Minister will agree with our understanding of each
requirement. We also do not believe that there will be any impediment to
renewal of the permit issued to our IAD school in Montreal or that the Quebec
Minister's requirements will create significant obstacles to our plans to open
new branches or add new educational programs at our IAD school in Montreal, or
to acquire additional schools in Quebec.
 
   The Canadian, Ontario and Quebec governments are currently in the process of
changing the legislative, regulatory and other requirements relating to student
financial assistance programs due to political and budgetary pressures.
Although we do not anticipate a significant reduction in the funding for these
programs, any change that significantly reduces funding or the ability of our
schools to participate in these programs could have a material adverse effect
on our business, results of operations or financial condition.
 
                                       52
<PAGE>
 
                                   MANAGEMENT
 
Directors and Executive Officers
 
   The following table sets forth certain information with respect to our
executive officers and directors:
 
<TABLE>
<CAPTION>
          Name           Age                           Position
          ----           ---                           --------
<S>                      <C> <C>
John M. Larson..........  47 President, Chief Executive Officer, Secretary and Director
William A. Klettke......  46 Senior Vice President, Chief Financial Officer and Treasurer
Robert E. Dowdell.......  53 Director
Thomas B. Lally.........  54 Director
Wallace O. Laub.........  73 Director
Keith K. Ogata..........  44 Director
Patrick K. Pesch........  42 Director
</TABLE>
 
   John M. Larson has served as our President and Chief Executive Officer and
one of our Directors since January 1994. From July 1993 until our formation,
Mr. Larson served as a consultant to Heller Equity Capital Corporation
("Heller"), working with Heller to establish CEC. From January through May
1993, Mr. Larson served as the Eastern Regional Operating Manager of
Educational Medical, Inc., which provides career-oriented postsecondary
education. From 1989 until 1993, Mr. Larson served as the Senior Vice President
of College Operations of Phillips Colleges, Inc., overseeing a nationwide
system of 58 schools, which offered a wide range of academic programs. From
March through September 1989, he served as Senior Vice President of Operations
for the Geneva Companies, a mergers and acquisitions firm. From 1980 to 1989,
Mr. Larson was Vice President of Marketing at National Education Centers, Inc.,
a subsidiary of National Education Corporation, where he managed the entire
admissions program, including marketing and advertising efforts, with a team of
approximately 500 employees. Mr. Larson has also served in marketing positions
with DeVry Inc., at its Chicago and Kansas City campuses. Mr. Larson received a
Bachelor's of Science in Business Administration from the University of
California at Berkeley and has completed the Executive Management Program at
Stanford University.
 
   William A. Klettke has served as our Senior Vice President and Chief
Financial Officer since March 1996. From 1987 until 1995, Mr. Klettke was
Executive Vice President and Chief Financial Officer for ERO, Inc., a licensed
distributor of children's toys. In these positions, Mr. Klettke was responsible
for finance, accounting, management information systems, human resources,
forecasting, treasury, legal, acquisitions and two operating subsidiaries. From
1976 to 1987, Mr. Klettke served in various positions with The Enterprise
Companies (a paint and coatings manufacturer), a subsidiary of Insilco,
starting as an accountant and progressing to Senior Vice President of Finance
and Administration. Mr. Klettke is a Certified Public Accountant and holds
Bachelor's of Arts degrees in Psychology and Sociology from Baker University, a
Bachelor's of Science in Accounting from Illinois State University and a
Master's Degree in Management from Northwestern University.
 
   Robert E. Dowdell has been one of our Directors since our inception in
January 1994. From 1989 to present, Dowdell has served as Chief Executive
Officer and director of Marshall & Swift, L.P., a publishing company. Mr.
Dowdell is also a director of ADMS, a software provider and LaQuinta Spring,
L.P., in which he is the general partner.
 
   Thomas B. Lally has been one of our Directors since January 28, 1998. Mr.
Lally was designated to be a director by Heller. He has been the President of
Heller since 1996 and an Executive Vice President of Heller Financial, Inc.
("HFI"), the parent of Heller, since 1994, with direct responsibility for the
asset quality oversight of HFI's portfolio of loan and equity investments. Mr.
Lally joined HFI in 1974.
 
   Wallace O. Laub has been one of our Directors since October 1994. Mr. Laub
was a co-founder of National Education Centers, Inc., where he served as
Executive Vice President and director from 1955 to 1993. From 1981 to 1990, Mr.
Laub served as a director of the Distance Education Training Council, a trade
association and accrediting agency for distance education companies. Mr. Laub
is now retired.
 
                                       53
<PAGE>
 
   Keith K. Ogata has been one of our Directors since January 28, 1998. Mr.
Ogata is currently president of, and a private investor in, 3-K Financial
Corporation. From 1995 to 1997, Mr. Ogata served as President of National
Education Centers, Inc., a subsidiary of National Education Corporation. From
1991 to June 1997, he served as Vice President, Chief Financial Officer and
Treasurer of National Education Corporation, with responsibility for finance,
accounting, treasury, tax, mergers and acquisitions, human resources, investor
and public relations and information systems.
 
   Patrick K. Pesch has been one of our Directors since 1995. Mr. Pesch was
designated as director by Heller. Since 1992, Mr. Pesch has served as a Senior
Vice President of HFI, and also as an officer of Heller, managing a portfolio
of loan and equity investments, as well as serving as a credit officer of one
of HFI's principle business units. Mr. Pesch also serves as a director of
Kimpex, Inc., a Canadian company and as an officer and director of Amersig
Graphics, Inc.
 
   None of our executive officers or directors are related to one another.
 
Certain Other Significant Employees of the Company
 
   The following table sets forth certain information with respect to certain
other significant employees of the Company:
 
<TABLE>
<CAPTION>
Name                                                 Position
----                                                 --------
<S>                               <C>
J. Patrick Andrews............... Director of Advertising
Jon R. Coover.................... National Director of Marketing
Mari-Ann Deering................. Director of Human Resources
Nick Fluge....................... Managing Director
John Fraccaro.................... Director of Information Technology
Jacob P. Gruver.................. Managing Director
Patricia Kapper.................. Director of Education
James R. McEllhiney.............. Director of Regulatory Compliance
Carol A. Menck................... Managing Director
Robert W. Nachtsheim............. Controller
Steve B. Sotraidis............... Managing Director
Todd H. Steele................... Director of Strategic Planning and Development
Mark J. Tobin.................... Director of Student Finance
</TABLE>
 
   J. Patrick Andrews has served as our Director of Advertising since October
1995. From 1994 until he joined our corporate management, Mr. Andrews was
Advertising Manager for two of our schools, Collins and Brooks. For
approximately 12 years prior to joining us, Mr. Andrews managed the advertising
and marketing functions for Spartan, a 2,800 student school in Tulsa, Oklahoma.
Mr. Andrews holds a Bachelor's of Arts in Journalism from the University of
South Carolina and a Masters in Marketing from the University of Texas.
 
   Dr. Jon R. Coover has served as our National Director of Marketing since May
1997, after serving for 14 months as Director of Education at our largest
school, Brown. Dr. Coover's background in private career education includes
holding positions as Vice President of Marketing for the Rasmussen Business
Colleges, Minneapolis, Minnesota; Vice President of Operations at Virginia
College, Birmingham, Alabama; President of Dominion College, Roanoke, Virginia;
President of Nettle Junior College, Sioux Falls, South Dakota; Co-Director of
New York Restaurant School in New York City; and Regional Director with DeVry
Institute of Technology. Dr. Coover holds a Bachelor's of Science in Business
Administration and an M.B.A. from California Western University and a Ph.D. in
Business from California Coast University.
 
   Mari-Ann Deering has served as our Director of Human Resources since July
1998. Ms. Deering joined our corporate management with 19 years of human
resources experience in the veterinary pharmaceutical industry. Ms. Deering
served as the Director of Human Resources--North America for Fort Dodge Animal
Health, Overland Park, Kansas (a division of American Home Products) from 1997
until 1998. She was Vice
 
                                       54
<PAGE>
 
President of Human Resources and Administration of Southwest Technologies, a
medical device company, from 1996 until 1997. Her prior experience also
includes 16 years in human resource management with Sanofi Animal Health from
1979 until 1995 where her final position was Vice President of Human Resources.
Ms. Deering holds a Bachelor's of Science degree in Business Administration
from AVILA College, Kansas City, Missouri and an M.B.A. from Rockhurst College,
Kansas City, Missouri.
 
   Nick Fluge has served as one of our Managing Directors since July 1997. Mr.
Fluge has served as Director and President of Western since 1989. From 1984
until 1988, Mr. Fluge was Director of Retail/Restaurants and a member of the
management team of Western. With over 20 years of experience in the
hospitality/foodservice industry and as a Certified Culinary Educator with the
American Culinary Federation, Mr. Fluge has chaired American Culinary
Federation Food Salons, judged wine competitions and written columns for
various periodicals, including The National Culinary Review. Mr. Fluge has been
a Team Leader for the Accrediting Commission of Career Schools and Colleges of
Technology (ACCSCT) since 1992. Mr. Fluge is a member of the Oregon Department
of Education--Career College Division. Mr. Fluge holds a Bachelor's of Science
degree in Political Science from Portland State University.
 
   John Fraccaro has served as our Director of Information Technology since
March 1998. Mr. Fraccaro has held Consulting and Principal Consulting positions
with New Resources Corporation from 1997 until 1998 and with Coopers & Lybrand
L.L.C. from 1993 until 1996. Mr. Fraccaro was a Director of Information
Technology for Sara Lee Hosiery from 1996 until 1997 and Manager of Database
Development and Support for Kraft General Food from 1990 until 1993. Mr.
Fraccaro has held several positions with software vendors including
ComputerVision, Ingres and CompuGraphic. Mr. Fraccaro holds a Bachelor's of
Science in Education from Northern Illinois University.
 
   Jacob P. Gruver has served as one of our Managing Directors since May 1997.
From August 1994 to May 1997, Mr. Gruver served as our Director of Finance.
From 1989 until joining our management team, Mr. Gruver was Vice President and
Controller of Wyoming Technical Institute in Laramie, Wyoming, a moderately
sized career-oriented school. In such positions, he managed all financial
functions, including budgeting and implementation of management
information/financial systems. From 1978 to 1989, Mr. Gruver audited career-
oriented schools and other clients at a regional public accounting firm in
Laramie, Wyoming. Mr. Gruver received a Bachelor's of Science in Accounting
from National College.
 
   Patricia Kapper, Ed.D, has served as our Director of Education since August
1997. From 1990 until joining our management team, Dr. Kapper was Dean of
Academic Affairs (Chief Academic Officer) of DeVry Institute of Technology,
Addison, Illinois. From 1986 until 1990, Dr. Kapper held academic management
positions with Milwaukee Area Technical College, from 1984 to 1986 as Associate
Dean of Business and Graphic and Applied Arts and from 1986 to 1990 as Dean of
Business and Graphic Arts. Dr. Kapper holds a Bachelor's of Arts in Business
Education from the University of Wisconsin--Eau Claire, a Master's of Science
in Teaching from the University of Wisconsin--Whitewater, and a doctorate in
Adult Education from Northern Illinois University.
 
   James R. McEllhiney has served as our Director of Regulatory Compliance
since August 1997. Mr. McEllhiney served as our Director of Education from
August 1994 until August 1997. Prior to joining our corporate management in
August 1994, Mr. McEllhiney was the Vice President of Academic Affairs for
Phillips Colleges, Inc. In this position, Mr. McEllhiney managed regulatory
compliance, including processing change of ownership applications for over 60
acquisitions, and oversaw corporate educational administration for this group
of 92 schools. From 1975 to 1988, Mr. McEllhiney managed regulatory compliance
and served as Chief Academic Officer for MetriData Computing, a 40 unit career-
oriented school company. Prior to joining MetriData, Mr. McEllhiney was an
instructor and Academic Dean at Northwood Institute. Mr. McEllhiney holds a
Bachelor's of Science in Education and a Master's of Science in Psychology from
Indiana State University.
 
                                       55
<PAGE>
 
   Carol A. Menck has served as one of our Managing Directors since January
1999. From 1997 to 1999, Ms. Menck served as the President of The School of
Computer Technology--Pittsburgh with oversight responsibility over the campus
in Fairmont. From 1993 until joining us, Ms. Menck was Director of an ITT
Technical Institute. From 1991 until 1993, she served as Director of Phillips
Junior College--Spokane, Washington. From 1987 to 1991 she served as President
of Bradford School--Portland, Oregon. From 1976 until 1987, she held various
positions at Trend Colleges--Vancouver, Washington. Her final position at Trend
was Operations Manager. Ms. Menck received a Bachelor's of Arts in Political
Science from Gonzaga University in Spokane, Washington and a Juris Doctorate
from Gonzaga Law School in Spokane, Washington.
 
   Robert W. Nachtsheim has served as our Controller since December 1995. Mr.
Nachtsheim joined our corporate management with 19 years of accounting and
financial analysis experience in multiple industries. From 1993 until 1995, Mr.
Nachtsheim served as Controller for Century 21 North Central, Inc., overseeing
the financial performance of 600 midwestern Century 21 franchises. His prior
experience includes six years as the Director of Financial Analysis and
Reporting for Newark Electronics, a nationwide electronics distributor, and 11
years with Amoco Corporation in various accounting positions. Mr. Nachtsheim
holds a Bachelor's of Science in Accountancy from the University of Missouri
and an M.B.A. in Finance from DePaul University.
 
   Steve B. Sotraidis has served as one of our Managing Directors since July 1,
1997. Mr. Sotraidis joined our administrative management team in June 1994. Mr.
Sotraidis joined Brooks College in 1970 and has managed Brooks' overall
operations since 1975. Mr. Sotraidis holds a Bachelor's of Science in
Psychology and completed two years of graduate work in Industrial Psychology at
California State University at Long Beach.
 
   Todd H. Steele has served as our Director of Strategic Planning and
Development since March 1998. Mr. Steele served as a director from our
inception in January 1994 until March 1998. From December 1996 until joining
our management team, he served as a Vice President of Baker, Fentress & Co., an
investment company, making equity investments in private companies. From May
1990 to November 1996, he served as a Vice President of HFI and Heller, also
making equity investments in private companies. Mr. Steele holds a Bachelor's
of Arts in Economics from Northwestern University and an M.B.A. in finance from
the University of Chicago.
 
   Mark J. Tobin has served as our Director of Student Finance since March
1996. Mr. Tobin joined DeVry, Inc., in 1984 and, from 1989 until joining our
corporate management, Mr. Tobin was Director of Student Finance for DeVry, Inc.
In that position, Mr. Tobin was responsible for student finance policy
development, technical and operations assistance and performance monitoring for
the DeVry Institutes of Technology and the Keller Graduate School of
Management. From 1984 to 1989, Mr. Tobin held corporate financial aid
management positions at DeVry, Inc. Prior to his tenure at DeVry, Inc. from
1984 until 1996, Mr. Tobin was Director of Financial Aid at Carthage College
from 1978 until 1984 and Marian College from 1973 until 1978. Mr. Tobin holds a
Bachelor's of Arts in Psychology from Northeastern Illinois State College and a
Master's of Education degree in Student Personnel Work in Higher Education from
Loyola University of Chicago.
 
Board of Directors
 
   Our Board of Directors is divided into three classes with staggered three-
year terms. The terms of Messrs. Dowdell and Pesch expire at the annual meeting
of our stockholders in 1999, the terms of Messrs. Laub and Ogata expire at the
annual meeting of our stockholders in 2000, and the terms of Messrs. Lally and
Larson expire at the annual meeting of our stockholders in 2001. At each annual
meeting of our stockholders, the successors to the directors whose terms expire
will be elected for a three-year term.
 
Arrangements for Nomination as Director
 
   We have entered into an agreement with Heller pursuant to which Heller is
entitled to designate two individuals for nomination to our Board of Directors.
This agreement provides that we will cause these Heller
 
                                       56
<PAGE>
 
designees to be nominated and solicit proxies from our stockholders to vote in
favor of them, and will appoint the Heller designees to the Compensation and
Audit Committees of the Board. The number of directors Heller is entitled to
designate will be reduced to one if Heller no longer owns at least 25% of our
capital stock, and the agreement will terminate if Heller no longer owns at
least 10% of our capital stock. Messrs. Pesch and Lally are the current
designees of Heller.
 
Committees of the Board of Directors
 
   The Board of Directors has established an Audit Committee and a Compensation
Committee. Both the Audit Committee and the Compensation Committee are
currently composed entirely of directors who are not our officers or employees.
 
   The Audit Committee generally has responsibility for recommending
independent auditors to the Board of Directors for selection, reviewing the
plan and scope of the annual audit, reviewing our audit and control functions
and reporting to the full Board of Directors regarding all of the foregoing.
The members of the Audit Committee are Messrs. Dowdell, Lally, Ogata and Pesch.
 
   The Compensation Committee generally has responsibility for recommending to
the Board guidelines and standards relating to the determination of executive
compensation, reviewing our executive compensation policies and reporting to
the Board of Directors regarding the foregoing. The Compensation Committee also
has responsibility for administering our incentive compensation plans,
determining the number of options to be granted to our executive officers
pursuant to such plans and reporting to the Board of Directors regarding the
foregoing. The members of the Compensation Committee are Messrs. Lally, Laub
and Pesch.
 
Compensation of Directors
 
   All directors who are not employees are paid an annual fee of $6,000 and are
paid $1,000 for each board meeting attended and $500 for each board committee
meeting attended. Non-employee directors are also reimbursed for their
reasonable out-of-pocket expenses incurred in attending board and committee
meetings. In addition, the Career Education Corporation 1998 Non-Employee
Directors' Stock Option Plan provides for annual option grants to each director
who is not an employee. See "--Stock Plans--Career Education Corporation 1998
Non-Employee Directors' Stock Option Plan."
 
Compensation Committee Interlocks and Insider Participation
 
   Thomas B. Lally, Wallace O. Laub, Patrick K. Pesch and Scott D. Steele, who
resigned as a director on January 23, 1998, served as the members of the
Compensation Committee during 1998. Scott Steele resigned due to time
constraints imposed by his work for Electra Fleming, Inc., of which Mr. Steele
serves as a principal, and because of a general policy of Electra Fleming
against its principals serving on the boards of publicly-held corporations in
which Electra Fleming (or an affiliate) has an equity interest.
 
   We entered into a Registration Rights Agreement with Heller, dated as of
February 3, 1998. Under this agreement, Heller is entitled, subject to certain
exceptions, to demand that we register shares of common stock held by Heller on
up to three occasions and to cause us to register such shares in any
registration by us for our own account or for the account of other security
holders.
 
Executive Compensation
 
   The following table sets forth information with respect to all compensation
paid by us for services rendered during the fiscal years ended December 31,
1997 and 1998, to our Chief Executive Officer and our other executive officer
(each, a "Named Executive Officer").
 
                                       57
<PAGE>
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                      Annual           Long Term
                                   Compensation       Compensation
                                ------------------    ------------
                                                       Securities
    Name and Principal                                 Underlying   All Other
        Positions          Year Salary($) Bonus($)     Options(#)  Compensation
    ------------------     ---- --------- --------    ------------ ------------
<S>                        <C>  <C>       <C>         <C>          <C>
John M. Larson,
 President and Chief
  Executive Officer....... 1998 $308,333  $       (1)   180,000     $ 7,659(2)
                           1997 $229,167  $143,000       21,105     $17,018(3)
William A. Klettke,
 Senior Vice President and
 Chief Financial Officer.. 1998 $169,167  $       (1)    45,000     $ 6,491(4)
                           1997 $152,500  $ 47,580        9,844     $ 6,771(5)
</TABLE>
--------
(1) Bonuses for 1998 have not yet been finalized.
(2) Includes $6,000 in 401(k) matching contributions by the Company and $1,659
    in term life insurance premium payments by the Company.
(3) Includes $8,594 in 401(k) matching contributions by the Company and $8,424
    in term life insurance premium payments by the Company.
(4) Includes $6,400 in 401(k) matching contributions by the Company and $91 in
    term life insurance premium payments by the Company.
(5) Includes $6,100 in 401(k) matching contributions by the Company and $671 in
    term life insurance premium payments by the Company.
 
                             OPTION GRANTS IN 1998
 
   The following table contains information concerning the grant of stock
options by us to our Named Executive Officers during 1998.
 
<TABLE>
<CAPTION>
                                    Percentage
                         Number of   of Total                         Potential Realizable Value
                           Shares    Options                          at Assumed Annual Rates of
                         Underlying Granted to                         Stock Price Appreciation
                          Options   Employees  Exercise or                for Option Term (2)
                          Granted   in Fiscal  Base Price  Expiration ---------------------------
          Name            (#) (1)      Year      ($/Sh)       Date       5% ($)       10% ($)
          ----           ---------- ---------- ----------- ---------- ------------ --------------
<S>                      <C>        <C>        <C>         <C>        <C>          <C>
John M. Larson..........   60,000      10.4%     $16.00    1/28/2008  $    603,739 $    1,529,993
                          120,000      20.9%     $26.25    7/28/2008  $    990,509 $    2,510,144
William A. Klettke......   15,000       2.6%     $16.00    1/28/2008  $    150,935 $      382,498
                           30,000       5.2%     $26.25    7/28/2008  $    247,627 $      627,536
</TABLE>
--------
(1) These options were granted under the Career Education Corporation 1998
    Employee Incentive Compensation Plan. Each of these options is an incentive
    stock option and vests in five equal annual installments on each of the
    first five anniversaries of the date grant. See "--Stock Plans--Career
    Education Corporation 1998 Employee Incentive Compensation Plan."
(2) Potential realizable value is presented net of the option exercise price,
    but before any federal or state income taxes associated with exercise, and
    is calculated assuming that the fair market value on the date of the grant
    appreciates at the indicated annual rates, compounded annually, for the
    term of the option. The 0%, 5% and 10% assumed rates of appreciation are
    mandated by the rules of the Securities and Exchange Commission and do not
    represent our estimate or projection of future increases in the price of
    our common stock. Actual gains are dependent on the future performance of
    our common stock and the option holder's continued employment throughout
    the vesting periods. The amounts reflected in the table may not necessarily
    be achieved.
 
                                       58
<PAGE>
 
                         FISCAL YEAR-END OPTION VALUES
 
   The following table contains information regarding the Named Executive
Officers' unexercised options as of December 31, 1998. Neither of the Named
Executive Officers exercised any options during 1998.
 
<TABLE>
<CAPTION>
                         Number of Shares
                            Underlying
                        Unexercised Options    Value of Unexercised in-the-Money
                        as of December 31,        Options as of December 31,
                              1998(#)                     1998($)(1)
                     ------------------------- ---------------------------------
       Name          Exercisable/Unexercisable     Exercisable/Unexercisable
       ----          ------------------------- ---------------------------------
<S>                  <C>                       <C>
John M. Larson.....       131,878/185,840            $3,689,796/$1,465,142
William A. Klettke.         19,104/51,774                $466,923/$426,074
</TABLE>
--------
(1) The value per option is calculated by subtracting the exercise price of the
    option from the closing price of our common stock of $30.00 per share on
    December 31, 1998.
 
Employment Agreement
 
   We have entered into an Employment and Non-Competition Agreement with Mr.
Larson, dated as of October 9, 1997, which has an initial term ending July 31,
2000. This agreement is subject to successive, automatic employer extensions if
we give written notice at least 90 days prior to the expiration date. The
agreement provides for an initial base salary of $250,000 plus bonus
compensation established by our Board of Directors. Effective July 29, 1998,
Mr. Larson's base salary was increased to $350,000 per annum. The agreement
provides for continuation of salary, bonus and benefits for one year following
Mr. Larson's termination of employment with us, other than termination by us
for "Cause" (as defined in the agreement) or termination by Mr. Larson without
"Good Reason" (as defined in the agreement). Good Reason includes a Change of
Control (as defined in the agreement) of us. The agreement also prohibits Mr.
Larson from disclosing confidential information and prohibits him from engaging
in activities competitive with us for a period which includes the term of his
employment with us or service as one of our directors and continues for two
years thereafter. However, if Mr. Larson's employment with us is terminated by
us without "Cause" or by Mr. Larson for "Good Reason," the non-competition
period will expire on the later of the termination of Mr. Larson's service as a
director with us or six months after the termination of his employment. In such
case, we may extend the non-competition period up to an additional 18 months if
we pay Mr. Larson's base salary, a portion of his bonus and benefits during
this additional period. If the term of the agreement expires and we refuse its
renewal or Mr. Larson refuses its renewal for Good Reason, the non-competition
period will expire on the later of the termination of Mr. Larson's employment
or the termination of his service as a director. In such case, we may extend
the non-competition period for up to an additional two years if we pay Mr.
Larson's base salary, a portion of his bonus and benefits during this
additional period.
 
Stock Plans
 
 Career Education Corporation 1995 Stock Option Plan
 
   Effective August 1, 1995, our Board of Directors adopted the Career
Education Corporation 1995 Stock Option Plan (the "1995 Plan"), pursuant to
which options to acquire shares of common stock may be granted to employees,
advisors, consultants and non-employee directors as may be determined by a
committee of the Board of Directors (the "Option Committee"). As of December
31, 1998, options to acquire 145,022 shares of common stock were outstanding
under the 1995 Plan, and an additional 12,990 shares of common stock were
reserved for issuance under the 1995 Plan. The Compensation Committee of the
Board of Directors serves as the Option Committee and administers the 1995 Plan
and determines with respect to each grant the number of shares subject to the
option, the exercise price, the period of the option and the time at which the
option may be exercised, as well as any terms and conditions of the option
amount. Exercise prices may not be less than the fair market value of our
common stock as determined by the Option Committee as of the date of issuance
of each stock option. Options may be granted as either (i) incentive stock
options (as defined in the Internal
 
                                       59
<PAGE>
 
Revenue Code), for which the option price must be at least 100% of the fair
market value of the shares subject to the option on the grant date (110% in the
case of an option granted to a person holding more than 10% of the voting power
of all classes of our stock (a "10% Holder")) and which are not exercisable
after ten years from the grant date (five years in the event of an option
granted to a 10% Holder), or (ii) non-qualified stock options, which are not
subject to such restrictions.
 
 Career Education Corporation 1998 Employee Incentive Compensation Plan
 
   Our Board of Directors has adopted, and our stockholders have approved, the
Career Education Corporation 1998 Employee Incentive Compensation Plan (the
"Employee Plan"). The Employee Plan is a flexible plan that provides the
Compensation Committee of the Board of Directors (the "Compensation Committee")
broad discretion to fashion the terms of the awards to provide eligible
participants with stock-based and performance-related incentives as the
Committee deems appropriate. The Employee Plan permits the issuance of awards
in a variety of forms, including: (i) nonqualified and incentive stock options
for the purchase of common stock, (ii) stock appreciation rights, (iii)
restricted stock, (iv) deferred stock, (v) bonus stock and awards in lieu of
obligations, (vi) dividend equivalents, (vii) other stock-based awards and
(viii) performance awards and cash incentive awards. Options granted will
provide for the purchase of common stock at prices determined by the
Compensation Committee.
 
   The persons eligible to participate in the Employee Plan are officers,
employees and consultants of us or any of our subsidiaries who, in the opinion
of the Committee, contribute to the growth and success. The purpose of the
Employee Plan is to promote our overall financial objectives by motivating
eligible participants to achieve long-term growth in stockholder equity and to
retain the association of these individuals. The Employee Plan is administered
by the Compensation Committee.
 
   The Employee Plan provides for the award of up to 600,000 shares of common
stock. At the discretion of the Compensation Committee, shares of common stock
subject to an award under the Employee Plan that remain unissued upon
termination of such award, are forfeited or are received by us as consideration
for the exercise or payment of an award may be reissued under the Employee
Plan. In the event of a stock dividend, stock split, recapitalization, sale of
substantially all of our assets, reorganization or other similar event, the
Compensation Committee will adjust the aggregate number of shares of common
stock subject to the Employee Plan and the number, class and price of shares
subject to outstanding awards.
 
 Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan
 
   Our Board of Directors has adopted, and our stockholders have approved, the
Career Education Corporation 1998 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan"). The Directors' Plan grants nonqualified stock options
for the purchase of common stock to directors who are not our employees.
 
   The purpose of the Directors' Plan is to promote our overall financial
objectives by motivating directors to achieve long-term growth in our
stockholder equity, to further align the interest of such directors with those
of our stockholders and to retain the association of these directors. The
Directors' Plan is administered by the Compensation Committee.
 
   The Directors' Plan provides for the award of up to 200,000 shares of common
stock. The Directors' Plan provides for (i) the grant of an option to purchase
8,000 shares of common stock to each participant who is a non-employee director
on January 28, 1998 or, if after such date, the date such individual is first
elected or appointed as a non-employee director and (ii) a grant of an option
to purchase 3,000 shares of common stock on the date of each regular annual
stockholder meeting after the effective date of the Directors' Plan to each
participant who is a non-employee director upon such date and either is
continuing as a non-employee director subsequent to the meeting or who is
elected at such meeting to serve as a non-employee director (other than a
meeting in the year of such participant's initial election or appointment).
Options granted under the Directors' Plan provide for the purchase of common
stock at the fair market value on the date of grant and become exercisable in
three equal annual installments, commencing on the date of grant. No stock
option granted under the Directors' Plan may be exercisable later than the
tenth anniversary date of its grant.
 
                                       60
<PAGE>
 
 Career Education Corporation 1998 Employee Stock Purchase Plan
 
   Our Board of Directors has adopted, and our stockholders have approved, the
Career Education Corporation 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), effective as of April 1, 1998. A total of 500,000 shares of
common stock have been reserved for issuance under the Stock Purchase Plan. The
Stock Purchase Plan permits our eligible employees to purchase common stock
through payroll deductions with all such deductions credited to an account
under the Stock Purchase Plan.
 
   The Stock Purchase Plan operates on a calendar year basis. To be eligible to
participate in the Stock Purchase Plan, an employee must file all requisite
forms prior to a specified due date known as a "Grant Date." Initially, the
first day of each calendar quarter of each year (January 1, April 1, July 1 and
October 1) will be a Grant Date and the last day of each calendar quarter of
each year (March 31, June 30, September 30 and December 31) will be an Exercise
Date (an "Exercise Date"). However, the determination of the Grant Dates and
the Exercise Dates are completely within the discretion of the Compensation
Committee of the Board of Directors. On each Exercise Date, participants'
payroll deductions credited to their accounts will be automatically applied to
the purchase price of common stock at a price per share equal to 85% of the
fair market value of our common stock on the Exercise Date. Employees may end
their participation in the Stock Purchase Plan at any time during an offering
period, and their payroll deductions to date will be refunded. Participation
ends automatically upon termination of employment. Payroll deductions may not
exceed $5,000 for any employee in any purchase period. No more than 25,000
shares in the aggregate may be issued to all participants in any purchase
period.
 
   Employees are eligible to participate in the Stock Purchase Plan if they are
customarily employed by us or a designated subsidiary. No person will be able
to purchase common stock under the Stock Purchase Plan if such person,
immediately after the purchase, would own stock possessing 5% or more of the
total combined voting power or value of all outstanding shares of all classes
of our stock.
 
Limitation of Liability and Indemnification Matters
 
   Our Certificate of Incorporation contains provision which eliminate the
personal liability of our directors to us or our stockholders for monetary
damages for breach of their fiduciary duty as a director to the fullest extent
permitted by the Delaware General Corporation Law except for liability (i) for
any breach of their duty of loyalty to us or our stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit. These provisions will not affect
a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
 
   Our Certificate of Incorporation also contains provisions which require us
to indemnify our directors, and permit us to indemnify our officers and
employees, to the fullest extent permitted by Delaware law, including those
circumstances in which indemnification would otherwise be discretionary, except
that we are not obligated to indemnify any such person (i) with respect to
proceedings, claims or actions initiated or brought voluntarily by any such
person and not by way of defense, or (ii) for any amounts paid in settlement of
an action indemnified against by us without our prior written consent. We have
obtained directors' and officers' liability insurance and has entered into
indemnity agreements with each of our directors providing for the
indemnification described above.
 
                                       61
<PAGE>
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
   The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1998 and as adjusted to
reflect the sale of the shares of common stock being offered hereby by: (i)
each person (or group of affiliated persons) known by us to beneficially own
more than 5% of the outstanding shares of common stock, (ii) each of our
directors, (iii) each of our Named Executive Officers, (iv) each of the Selling
Stockholders and (v) all of our directors and executive officers as a group.
Unless otherwise indicated below, the persons in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
 
<TABLE>
<CAPTION>
                           Shares of Common         Number of
                          Stock Beneficially        Shares of    Shares of Common Stock
                          Owned Prior to the      Common Stock  Beneficially Owned After
                             Offering (1)         Being Offered     the Offering (1)
                          ------------------------------------- ---------------------------
                            Number       Percent     Number        Number        Percent
                          -----------    ---------------------- -------------- ------------
<S>                       <C>            <C>      <C>           <C>            <C>
Heller Equity Capital
 Corporation (2)........    2,549,944       35.6    1,086,937        1,463,007       20.4
Electra Investment Trust
 P.L.C. and Electra
 Associates, Inc. (3)...      962,511       13.5      700,000          262,511        3.7
John M. Larson..........      165,350(4)     2.3       30,000          135,350        1.9
William A. Klettke (5)..       52,307          *          --            52,307          *
Robert E. Dowdell (6)...      101,441        1.4          --           101,441        1.4
Thomas B. Lally (7).....        6,333          *          --             6,333          *
Wallace O. Laub (8).....       32,151          *          --            32,151          *
Keith K. Ogata (7)......       30,333          *          --            30,333          *
Patrick K. Pesch (9)....       10,133          *          --            10,133          *
Mark A. Bounds..........       16,063          *        6,000           10,063          *
Brian A. Demkowicz......        3,012          *        1,000            2,012          *
John M. Goense..........       45,179          *       10,000           35,179          *
Howard E. Jessen........       45,179          *       10,000           35,179          *
John H. Underwood.......       16,063          *        6,063           10,000          *
All directors and
 executive officers as a
 group
 (7 persons)............      398,048        5.4       30,000          368,048        5.0
</TABLE>
--------
*  Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission. The number of shares beneficially owned
    by a person and the percentage ownership of that person includes shares of
    common stock subject to options held by that person that are currently
    exercisable or exercisable within 60 days of December 31, 1998 (including
    options that will become exercisable upon consummation of the offering).
(2) The address of Heller is 500 West Monroe Street, Chicago, Illinois 60661.
(3) Electra Investment Trust P.L.C. and Electra Associates, Inc. are affiliated
    entities, and their address is c/o Electra Investment Trust P.L.C., 65
    Kingsway, London, England WC2B 6QT.
(4) Includes 149,718 shares of common stock which may be acquired by Mr. Larson
    upon the exercise of currently exercisable stock options. Mr. Larson has
    also agreed to offer up to 20,000 additional shares in the over-allotment
    option.
(5) Includes 22,104 shares of common stock which may be acquired by Mr. Klettke
    upon the exercise of currently exercisable stock options.
 
                                       62
<PAGE>
 
(6) Includes 2,834 shares of common stock held by Mr. Dowdell, as Custodian for
    Brian M. Dowdell under the Uniform Transfers to Minors Act; 2,834 shares of
    common stock held by Mr. Dowdell, as Custodian for Sharon T. Dowdell under
    the Uniform Transfers to Minors Act; 3,825 shares of common stock held by
    Robert E. Dowdell Defined Benefit Plan and Trust, under Agreement dated
    12/9/96; and 47,313 shares of common stock which may be acquired by Mr.
    Dowdell upon the exercise of currently exercisable stock options.
(7) Includes 5,333 shares of common stock which may be acquired upon the
    exercise of currently exercisable stock options.
(8) Includes 10,668 shares of common stock which may be acquired upon the
    exercise of currently exercisable stock options.
(9) Includes 2,700 shares of common stock held by Mr. Pesch's individual
    retirement account, 1,100 shares of common stock held by Cathy Pesch's
    individual retirement account (Cathy Pesch is Mr. Pesch's spouse), 1,000
    shares of common stock held in a joint account with Cathy Pesch and 5,333
    shares of common stock which may be acquired upon the exercise of currently
    exercisable stock options.
 
                                       63
<PAGE>
 
                          DESCRIPTION OF CAPITAL STOCK
 
   Our authorized capital stock consists of 50,000,000 shares of common stock,
$.01 par value per share, and 1,000,000 shares of preferred stock, $.01 par
value per share.
 
   The following summary does not purport to be complete and is subject to, and
qualified by applicable law, and the provisions of our Certificate of
Incorporation and Bylaws that are included as exhibits to the registration
statement of which this prospectus is a part.
 
Common Stock
 
   As of December 31, 1998, 7,152,896 shares of common stock were outstanding
and held by 27 holders of record. Subject to the rights of holders of preferred
stock, the holders of outstanding shares of common stock are entitled to share
ratably in dividends declared out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
lawfully determine. Each holder of common stock is entitled to one vote for
each share held. Subject to the rights of holders of any outstanding preferred
stock, upon our liquidation, dissolution or winding up, any assets legally
available for distribution to stockholders as such are to be distributed
ratably among the holders of our common stock at that time outstanding. All
shares of common stock currently outstanding are, and all shares of common
stock offered by hereby when duly issued and paid for will be, fully paid and
nonassessable, not subject to redemption and assessment and without conversion,
preemptive or other rights to subscribe for or purchase any proportionate part
of any new or additional issues of any class or of securities convertible into
stock of any class.
 
Preferred Stock
 
   Preferred stock may be issued by us in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
our Certificate of Incorporation, as the Board of Directors determines. The
rights, preferences, limitations and restrictions of different series of
preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The Board of Directors may authorize the
issuance of preferred stock which ranks senior to our common stock with respect
to the payment of dividends and the distribution of assets on liquidation. In
addition, the Board of Directors is authorized to fix the limitations and
restrictions, if any, upon the payment of dividends on common stock to be
effective while any shares of preferred stock are outstanding. The Board of
Directors, without stockholder approval, may issue preferred stock with voting
and conversion rights which could adversely affect the voting power of the
holders of common stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of us. We have no present
intention to issue shares of preferred stock.
 
Certain Corporate Provisions
 
   We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless either (i) prior to the date at which the stockholder
became an interested stockholder the Board of Directors approved either the
business combination or the transaction in which the person becomes an
interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes an interested stockholder or
(iii) the business combination is approved by the Board of Directors and by
two-thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder) at a meeting of the stockholders (and not
by written consent) held on or subsequent to the date of the business
combination. An "interested stockholder" is a person who, together with
affiliates and
 
                                       64
<PAGE>
 
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset based transactions and other transactions resulting in a
financial benefit to the interested stockholder. A business combination by us
with Heller or Electra would not be prohibited by Section 203.
 
   Our Certificate of Incorporation and By-Laws contain a number of provisions
relating to corporate governance and to the rights of stockholders. Certain of
these provisions may be deemed to have a potential "anti-takeover" effect in
that such provisions may delay, defer or prevent a change of control of us.
These provisions include (i) a requirement that stockholder action may be taken
only at stockholder meetings; (ii) notice requirements in the By-Laws relating
to nominations to the Board of Directors and to the raising of business matters
at stockholders meetings; and (iii) the classification of the Board of
Directors into three classes, each serving for staggered three year terms. See
"Management--Directors and Executive Officers."
 
Transfer Agent and Registrar
 
   The transfer agent and registrar for our common stock is Harris Trust and
Savings Bank.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
   Upon completion of the offering, we will have an aggregate of approximately
7,182,896 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options.
Substantially all of these shares will be freely tradable without restriction
or further registration under the Securities Act, unless held by our
"affiliates," as that term is defined in Rule 144 promulgated under the
Securities Act. Upon completion of the offering 1,615,253 shares will be held
by our affiliates.
 
   All Selling Stockholders, directors, executive officers and certain of our
other current stockholders have agreed with the underwriters that, for a period
of 90 days from the date of this prospectus, they will not offer to sell or
otherwise sell, dispose of or grant rights with respect to any shares of common
stock, now owned or hereafter acquired directly by such holders or with respect
to which they have the power of disposition, otherwise than with the prior
written consent of Credit Suisse First Boston Corporation. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701 of the Securities Act, shares
subject to lock-up agreements will not be salable until the agreements expire
or unless prior written consent is received from Credit Suisse First Boston
Corporation. Any early waiver of the lock-up agreements by the underwriters,
which, if granted, could permit sales of a substantial number of shares and
could adversely affect the trading price of our shares, may not be accompanied
by an advance public announcement by us. See "Underwriting."
 
   In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned "restricted shares" for at least one year, including
persons who may be deemed our "affiliate," would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the number of shares of common stock then outstanding or the average
weekly trading volume of our common stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us. In
addition, a person who is not deemed to have been our affiliate at any time
during the 90 days preceding a sale, and who has beneficially owned for at
least two years the shares proposed to be sold, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above. We
are unable to estimate accurately the number of restricted shares that will be
sold under Rule 144 because this will depend in part on the market price for
our common stock, the personal circumstances of the seller and other factors.
 
                                       65
<PAGE>
 
   Upon consummation of the offering, options to purchase 865,487 shares of
common stock will be issued and outstanding, of which options to purchase
280,978 shares of common stock will be exercisable. See "Management--Stock
Plans."
 
Registration Rights
 
   Under a registration rights agreement, Electra is entitled, subject to
certain exceptions, to demand that we register shares of common stock held by
Electra on up to two occasions (plus, in certain circumstances, one additional
occasion) and to cause us to register such shares in any registration by us for
our own account or for the account of other security holders. Additionally, at
any time that we are eligible to use Commission Form S-3 for registration of
securities, Electra will be entitled, subject to certain exceptions, to cause
us to register 964,073 shares held by Electra on registration statement on Form
S-3. Upon consummation of the offering, Electra will hold 262,511 shares
covered by the registration rights agreement.
 
   Under a registration rights agreement, Heller will be entitled, subject to
certain exceptions, to demand that we register shares of common stock held by
Heller on up to three occasions and to cause us to register such shares in any
registration by us for our own account or for the account of other security
holders. Additionally, at any time that we are eligible to use Form S-3 for
registration of securities, Heller will be entitled, subject to certain
exceptions, to cause us to register shares held by Heller on a registration
statement on Form S-3. Upon consummation of the offering, Heller will hold
1,463,007 shares which will be covered by the registration rights agreement.
See "Management--Compensation Committee Interlocks and Insider Participation."
 
                                       66
<PAGE>
 
                                  UNDERWRITING
 
   Under the terms and subject to the conditions contained in an Underwriting
Agreement dated       , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, Salomon Smith Barney Inc. and NationsBanc
Montgomery Securities LLC are acting as representatives, have severally but not
jointly agreed to purchase from the Selling Stockholders the following
respective numbers of shares of common stock. Their obligations are subject to
certain conditions contained in the Underwriting Agreement.
 
<TABLE>
<CAPTION>
                                                                       Number of
      Underwriter                                                       Shares
      -----------                                                      ---------
      <S>                                                              <C>
      Credit Suisse First Boston Corporation..........................
      Salomon Smith Barney Inc........................................
      NationsBanc Montgomery Securities LLC...........................
      Legg Mason Wood Walker, Incorporated............................
                                                                       ---------
          Total....................................................... 1,850,000
                                                                       =========
</TABLE>
 
   The Underwriting Agreement provides that the underwriters will be obligated
to purchase all the shares of common stock in this offering (other than those
shares covered by the over-allotment option described below) if any are
purchased. The Underwriting Agreement provides that, in the event of a default
by an underwriter, in certain circumstances the purchase commitments of non-
defaulting underwriters may be increased or the Underwriting Agreement may be
terminated.
 
   We and a Selling Stockholder have granted to the underwriters an option,
expiring at the close of business on the 30th day after the date of this
prospectus, to purchase up to 277,500 additional shares at the public offering
price, less the underwriting discount and commissions, all as set forth on the
cover page of this prospectus. Such option may be exercised only to cover over-
allotments in the sale of the shares of common stock. To the extent such option
is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
 
   We and the Selling Stockholders have been advised by the representatives
that the underwriters propose to offer shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and, through the representatives, to certain dealers at such price
less a concession of $   per share, and the underwriters and such dealers may
allow a discount of $   per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the representatives.
 
   The following table summarizes the compensation to be paid to the
underwriters by the Selling Stockholders and us, and the expenses payable by
us.
 
<TABLE>
<CAPTION>
                                                                   Total
                                                            -------------------
                                                             Without    With
                                                     Per      Over-     Over-
                                                    Share   allotment allotment
                                                   -------- --------- ---------
<S>                                                <C>      <C>       <C>
Underwriting Discounts and Commissions paid by
 CEC.............................................. $        $         $
Expenses payable by CEC........................... $        $         $
Underwriting Discounts and Commissions paid by
 Selling Stockholders............................. $        $         $
</TABLE>
 
   We, our executive officers and directors and certain other of our current
stockholders have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of our common stock or securities or
other rights convertible into or exchangeable or exercisable for any shares of
our common stock without the prior written consent of Credit Suisse First
Boston
 
                                       67
<PAGE>
 
Corporation, for a period of 90 days after the date of this prospectus, except
that such restrictions will not apply to (i) our ability to grant employee or
director stock options pursuant to the terms of a plan in effect on the date of
this prospectus or issuance of common stock pursuant to the exercise of such
options and (ii) issuances of common stock to Le Cordon Bleu pursuant to its
agreement with us.
 
   The underwriters have reserved for sale, at the public offering price, up to
60,000 shares of our common stock in this offering for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing such shares of our common stock in this offering. The number of
shares available for sale to the general public in this offering will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same terms as the other shares offered hereby.
 
   We and the Selling Stockholders have agreed to indemnify the underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the underwriters may be required to
make in respect thereof.
 
   The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions, penalty
bids and "passive" market making in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids for and purchases of our common stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of our common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when our common stock originally sold by such syndicate
member is purchased in a stabilizing transaction or syndicate covering
transaction to cover syndicate short positions. In "passive" market making,
market makers in our common stock who are underwriters or prospective
underwriters may, subject to certain limitations, make bids for or purchases of
our common stock until the time, if any, at which a stabilizing bid is made.
Such stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be higher than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
 
                                       68
<PAGE>
 
                          NOTICE TO CANADIAN RESIDENTS
 
Resale Restrictions
 
   The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of common stock are
effected. Accordingly, any resale of our common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of our common stock.
 
Representations of Purchasers
 
   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such common stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
 
Rights of Action (Ontario Purchasers)
 
   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
 
Enforcement of Legal Rights
 
   All of the Company's directors and officers as well as the experts named
herein and the Selling Stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Company or such persons. All or a substantial
portion of the assets of the Company and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the Company or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such Company or persons outside of Canada.
 
Notice to British Columbia Residents
 
   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of common stock acquired on the same date
and under the same prospectus exemption.
 
Taxation and Eligibility for Investment
 
   Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
 
                                       69
<PAGE>
 
                                 LEGAL MATTERS
 
   The validity of our common stock offered hereby and certain other legal
matters will be passed upon for us by Katten Muchin & Zavis, Chicago, Illinois.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Sidley & Austin, Chicago, Illinois.
 
                                    EXPERTS
 
   The consolidated financial statements of CEC and its subsidiaries as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and the financial statements of Scottsdale Culinary
Institute, Inc. as of December 31, 1996 and 1997, and for each of the two years
in the period ended December 31, 1997, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
 
   The consolidated financial statements of The Katharine Gibbs Schools, Inc.
as of December 31, 1995 and 1996 and for the two years then ended included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and is included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
   This prospectus is part of a registration statement we filed with the SEC.
This prospectus does not contain all of the information contained in the
registration statement and all of the exhibits and schedules thereto. For
further information about us, please see the complete registration statement.
Summaries of agreements or other documents in this prospectus are not
necessarily complete. Please refer to the exhibits to the registration
statement for complete copies of such documents.
 
   We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Exchange Act. The Exchange Act file number
for our SEC filings is 0-23245. You may read and copy any document we file at
the following SEC public reference rooms:
 
  450 Fifth Street, N.W.    Seven World Trade Center  Room 3190
  Judiciary Plaza           Suite 1300                Citicorp Center
  Room 1024                 New York, NY 10048        500 West Madison Street
  Washington, D.C. 20549                              Suite 1400
                                                      Chicago, IL 60661
 
   You may also inspect and copy our SEC filings, the complete registration
statement and other information at the offices of The Nasdaq Stock Market
located at 1735 K Street, N.W., Washington, D.C. 20006-1500.
 
   You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
 
   We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements, and other information regarding
issuers that file electronically.
 
                                       70
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Consolidated Financial Statements of Career Education Corporation and
 Subsidiaries:
  Report of Independent Public Accountants................................   F-2
  Consolidated Balance Sheets as of December 31, 1996 and 1997 and
   September 30, 1998 (unaudited).........................................   F-3
  Consolidated Statements of Operations for the years ended December 31,
   1995, 1996 and 1997, and the nine months ended September 30, 1997
   (unaudited) and September 30, 1998 (unaudited).........................   F-6
  Consolidated Statements of Cash Flows for the years ended December 31,
   1995, 1996 and 1997, and the nine months ended September 30, 1997
   (unaudited) and September 30, 1998 (unaudited).........................   F-7
  Consolidated Statements of Stockholders' Investment for the years ended
   December 31, 1995, 1996 and 1997, and the nine months ended September
   30, 1998 (unaudited)...................................................   F-8
  Notes to Consolidated Financial Statements..............................  F-10
Consolidated Financial Statements of The Katharine Gibbs Schools, Inc. and
 Subsidiaries:
  Report of Independent Auditors..........................................  F-35
  Consolidated Balance Sheets as of December 31, 1995 and 1996............  F-36
  Statements of Consolidated Operations for the years ended December 31,
   1995 and 1996..........................................................  F-37
  Statements of Shareholder's Deficiency for the years ended December 31,
   1995 and 1996..........................................................  F-38
  Statements of Consolidated Cash Flows for the years ended December 31,
   1995 and 1996..........................................................  F-39
  Notes to Consolidated Financial Statements..............................  F-40
Unaudited Condensed Consolidated Financial Statements of The Katharine
 Gibbs Schools, Inc. and Subsidiaries:
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and
   May 31, 1997...........................................................  F-45
  Unaudited Condensed Consolidated Statements of Operations for the six
   months ended June 30, 1996 and five months ended May 31, 1997..........  F-46
  Unaudited Condensed Consolidated Statements of Cash Flows for the six
   months ended June 30, 1996 and five months ended May 31, 1997..........  F-47
  Notes to Unaudited Condensed Consolidated Financial Statements..........  F-48
Financial Statements of Scottsdale Culinary Institute, Inc.:
  Report of Independent Public Accountants................................  F-49
  Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
   (unaudited)............................................................  F-50
  Statements of Operations and Retained Earnings for the years ended
   December 31, 1996 and 1997 and the six months ended June 30, 1997
   (unaudited) and 1998 (unaudited).......................................  F-51
  Statements of Cash Flows for the years ended December 31, 1996 and 1997
   and for the six months ended June 30, 1997 (unaudited) and 1998
   (unaudited)............................................................  F-52
  Notes to Financial Statements...........................................  F-53
</TABLE>
 
                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders of
Career Education Corporation:
 
   We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1996 and 1997 and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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 Career
Education Corporation and Subsidiaries as of December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
Arthur Andersen LLP
 
Chicago, Illinois
February 13, 1998 (except
 with respect to the matters
 discussed in the fourth,
 fifth, sixth, seventh,
 eighth, ninth, tenth and
 eleventh paragraphs of Note
 16, as to which the dates
 are March 13, 1998, May 13,
 1998, July 31, 1998,
 September 8, 1998, October
 5, 1998, October 26, 1998,
 October 29, 1998 and
 January 4, 1999)
 
                                      F-2
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                            December 31,
                                     ---------------------------
                                                    1997
                                             -------------------
                                                      Pro Forma
                                                       (Notes 2   September 30,
                                      1996    Actual   and 15)        1998
                                     ------- -------- ----------  -------------
                                                      (Unaudited)  (Unaudited)
<S>                                  <C>     <C>      <C>         <C>
               ASSETS
CURRENT ASSETS:
  Cash.............................. $ 7,798 $ 18,906  $ 21,199     $ 19,739
  Receivables--
    Students, net of allowance for
     doubtful accounts of $455,
     $1,516 and $3,800 at December
     31, 1996 and 1997 and September
     30, 1998, respectively.........  2,159   10,812   10,812         13,130
    From former owners of acquired
     businesses.....................     523      --        --           --
    Stockholder.....................     100      --        --           --
    Other...........................     120    1,346     1,346        1,297
  Inventories.......................     213      634       634          658
  Prepaid expenses and other current
   assets...........................     725    1,598     1,598        3,728
  Deferred offering costs...........     --     2,900       --           --
  Deferred income tax assets........     194      406       406        1,208
                                     ------- --------  --------     --------
      Total current assets..........  11,832   36,602    35,995       39,760
                                     ------- --------  --------     --------
PROPERTY AND EQUIPMENT, net of
 accumulated depreciation and
 amortization.......................  19,560   45,555    45,555       45,086
INTANGIBLE ASSETS, net..............   3,407   33,579    33,579       44,169
OTHER ASSETS........................   1,409    1,881     1,881          875
                                     ------- --------  --------     --------
TOTAL ASSETS........................ $36,208 $117,617  $117,010     $129,890
                                     ======= ========  ========     ========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(Continued)
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                             December 31,
                                      --------------------------
                                                     1997
                                              ------------------
                                                      Pro Forma
                                                       (Notes 2   September 30,
                                       1996   Actual   and 15)        1998
                                      ------- ------- ----------  -------------
                                                      (Unaudited)  (Unaudited)
<S>                                   <C>     <C>     <C>         <C>
    LIABILITIES AND STOCKHOLDERS'
              INVESTMENT
CURRENT LIABILITIES:
  Current maturities of long-term
   debt.............................. $ 2,676 $ 3,888  $ 3,888       $   652
  Book overdraft.....................     683     --       --            --
  Accounts payable...................     502   3,580    3,580         4,549
  Accrued expenses--
    Payroll and related benefits.....     678   1,605    1,605           --
    Accrued offering costs...........     --    2,447      --            --
    Other............................   1,658   3,800    3,800         7,557
  Deferred tuition revenue...........   4,256   7,476    7,476         8,263
                                      ------- -------  -------       -------
      Total current liabilities......  10,453  22,796   20,349        21,021
                                      ------- -------  -------       -------
LONG-TERM DEBT, net of current
 maturities shown above..............  13,783  60,147   16,112        27,279
OTHER LONG-TERM LIABILITIES..........     --      703      703         1,027
DEFERRED INCOME TAX LIABILITIES......     --    1,215    1,215           587
COMMITMENTS AND CONTINGENCIES........
REDEEMABLE PREFERRED STOCK AND
 WARRANTS
  Redeemable Series A preferred
   stock, $0.01 par value; 50,000
   shares authorized; 7,852 shares
   outstanding at December 31, 1996
   and 1997, respectively, at
   liquidation value (stated value
   plus accumulated dividends), and
   no shares outstanding at September
   30, 1998..........................   9,432  10,112      --            --
  Redeemable Series B preferred
   stock, $0.01 par value; 1,000
   shares authorized; no shares
   outstanding.......................     --      --       --            --
  Redeemable Series C preferred
   stock, $0.01 par value; 5,000
   shares authorized; 4,954 shares
   outstanding at December 31, 1996
   and 1997, at liquidation value
   (stated value plus accumulated
   dividends), and no shares
   outstanding at September 30, 1998.   4,259   4,784      --            --
  Redeemable Series D preferred
   stock, $0.01 par value; 25,000
   shares authorized; none and 22,500
   shares outstanding at December 31,
   1996 and 1997, at liquidation
   value (stated value plus
   accumulated dividends), and no
   shares outstanding at September
   30, 1998..........................     --   22,175      --            --
  Warrants exercisable into 257,690
   shares of Class D common stock at
   December 31, 1996, and 202,297
   shares of Class D common stock at
   December 31, 1997, at an exercise
   price of $0.01 per share, at
   estimated redemption value; and no
   warrants outstanding at September
   30, 1998..........................     870   2,659      --            --
  Warrants exercisable into 32,947
   shares of Class E common stock at
   December 31, 1997, at an exercise
   price of $0.01 per share, at
   estimated redemption value; and no
   warrants outstanding at September
   30, 1998..........................     --      430      430           --
                                      ------- -------  -------       -------
      Total redeemable preferred
       stock and warrants............  14,561  40,160      430           --
                                      ------- -------  -------       -------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(Continued)
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                          December 31,
                                   -----------------------------
                                                   1997
                                            --------------------
                                                      Pro Forma
                                                       (Notes 2   September 30,
                                    1996     Actual    and 15)        1998
                                   -------  --------  ----------  -------------
                                                      (Unaudited)  (Unaudited)
<S>                                <C>      <C>       <C>         <C>
STOCKHOLDERS' INVESTMENT:
  Class A common stock, $0.01 par
   value; 5,625,600 shares
   authorized; 49,224 shares
   issued and outstanding at
   December 31, 1996 and 1997; and
   no shares outstanding at
   September 30, 1998.............       1         1        --           --
  Class B common stock, $0.01 par
   value; 937,600 shares
   authorized; 47,818 shares
   issued and outstanding at
   December 31, 1996 and 1997; and
   no shares outstanding at
   September 30, 1998.............     --          1        --           --
  Class C common stock, $0.01 par
   value; 937,600 shares
   authorized; 655,382 shares
   issued and outstanding at
   December 31, 1996 and 1997; and
   no shares outstanding at
   September 30, 1998.............       7         7        --           --
  Class D common stock, $0.01 par
   value; 937,600 shares
   authorized; no shares issued
   and outstanding at , December
   31, 1996 and 1997 and September
   30, 1998.......................     --        --         --           --
  Class E common stock, $0.01 par
   value; 1,875,200 shares
   authorized; 15,452 and 16,380
   shares issued and outstanding
   at December 31, 1996 and 1997;
   and no shares outstanding at
   September 30, 1998.............     --        --         --           --
  Common stock, $0.01 par value;
   50,000,000 shares authorized;
   7,042,995 pro forma and
   7,144,806 actual shares issued
   and outstanding at December 31,
   1997, and September 30, 1998...     --        --          70           71
  Warrants........................     --      4,777        --           --
  Additional paid-in capital......      60        71     90,392       95,084
  Foreign currency translation....     --       (297)      (297)        (823)
  Accumulated deficit.............  (2,657)  (11,964)   (11,964)     (14,356)
                                   -------  --------   --------     --------
      Total stockholders'
       investment.................  (2,589)   (7,404)    78,201       79,976
                                   -------  --------   --------     --------
TOTAL LIABILITIES AND
 STOCKHOLDERS'
 INVESTMENT....................... $36,208  $117,617   $117,010     $129,890
                                   =======  ========   ========     ========
</TABLE>
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-5
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                             For the Nine
                               For the Years Ended           Months Ended
                                  December 31,               September 30,
                             -------------------------  -----------------------
                              1995     1996     1997       1997        1998
                             -------  -------  -------  ----------- -----------
                                                        (Unaudited) (Unaudited)
<S>                          <C>      <C>      <C>      <C>         <C>
REVENUE:
 Tuition and registration
  fees, net................. $16,330  $29,269  $74,842    $45,615     $91,659
 Other, net.................   3,066    4,311    7,756      5,152       8,257
                             -------  -------  -------    -------     -------
     Total net revenue......  19,396   33,580   82,598     50,767      99,916
OPERATING EXPENSES:
 Educational services and
  facilities................   8,565   14,404   34,620     22,269      41,419
 General and
  administrative............   9,097   14,622   37,542     23,852      46,161
 Depreciation and
  amortization..............   1,330    2,134    8,121      5,000       9,328
 Compensation expense
  related to the initial
  public offering...........     --       --       --         --        1,961
                             -------  -------  -------    -------     -------
     Total operating
      expenses..............  18,992   31,160   80,283     51,121      98,869
                             -------  -------  -------    -------     -------
     Income from operations.     404    2,420    2,315       (354)      1,047
INTEREST EXPENSE............     311      717    3,108      2,046         987
                             -------  -------  -------    -------     -------
     Income (loss) before
      provision for income
      taxes and
      extraordinary item....      93    1,703     (793)    (2,400)         60
PROVISION (BENEFIT) FOR
 INCOME TAXES...............      24      208     (331)    (1,008)         25
                             -------  -------  -------    -------     -------
 Income (loss) before
  extraordinary item........      69    1,495     (462)    (1,392)         35
EXTRAORDINARY LOSS ON EARLY
 EXTINGUISHMENT OF DEBT,
 net of taxes of $233.......     --       --      (418)      (418)        --
                             -------  -------  -------    -------     -------
NET INCOME (LOSS)........... $    69  $ 1,495  $  (880)   $(1,810)    $    35
                             =======  =======  =======    =======     =======
INCOME (LOSS) ATTRIBUTABLE
 TO COMMON STOCKHOLDERS:
 Income (loss) before
  extraordinary item........ $    69  $ 1,495  $  (462)   $(1,392)    $    35
 Dividends on preferred
  stock.....................    (777)  (1,128)  (2,159)    (1,444)       (274)
 Accretion to redemption
  value of preferred stock
  and warrants..............     (96)    (230)  (6,268)      (727)     (2,153)
                             -------  -------  -------    -------     -------
     Income (loss) before
      extraordinary item
      attributable to common
      stockholders..........    (804)     137   (8,889)    (3,563)     (2,392)
 Extraordinary loss.........     --       --      (418)      (418)        --
                             -------  -------  -------    -------     -------
     Net income (loss)
      attributable to common
      stockholders.......... $  (804) $   137  $(9,307)   $(3,981)    $(2,392)
                             =======  =======  =======    =======     =======
INCOME (LOSS) PER SHARE
 ATTRIBUTABLE TO COMMON
 STOCKHOLDERS:
 Basic--
   Income (loss) before
    extraordinary item...... $ (1.06) $  0.18  $(11.58)   $ (4.64)    $ (0.38)
   Extraordinary loss....... $   --   $   --   $ (0.54)   $ (0.54)    $   --
                             -------  -------  -------    -------     -------
     Net income (loss)...... $ (1.06) $  0.18  $(12.12)   $ (5.18)    $ (0.38)
                             =======  =======  =======    =======     =======
 Diluted--
   Income (loss) before
    extraordinary item...... $ (1.06) $  0.13  $(11.58)   $ (4.64)    $ (0.38)
   Extraordinary loss....... $   --   $   --   $ (0.54)   $ (0.54)    $   --
                             -------  -------  -------    -------     -------
     Net income (loss)...... $ (1.06) $  0.13  $(12.12)   $ (5.18)    $ (0.38)
                             =======  =======  =======    =======     =======
WEIGHTED AVERAGE SHARES
 OUTSTANDING:
 Basic......................     755      761      768        768       6,309
                             =======  =======  =======    =======     =======
 Diluted....................     755    1,030      768        768       6,309
                             =======  =======  =======    =======     =======
PRO FORMA (unaudited):
 Income (loss) attributable
  to common stockholders--
   Income (loss) before
    extraordinary item
    attributable to common
    stockholders, as
    reported................ $  (804) $   137  $(8,889)   $(3,563)    $(2,392)
   Dividends on preferred
    stock...................     777    1,128    2,159      1,444         274
   Accretion to redemption
    value of preferred stock
    and warrants............      96      230    6,100        698       2,055
                             -------  -------  -------    -------     -------
 Pro forma income (loss)
  before extraordinary item
  attributable to common
  stockholders.............. $    69  $ 1,495  $  (630)   $(1,421)    $   (63)
 Extraordinary loss.........     --       --      (418)      (418)        --
                             -------  -------  -------    -------     -------
     Pro forma net income
      (loss) attributable to
      common stockholders... $    69  $ 1,495  $(1,048)   $(1,839)    $   (63)
                             =======  =======  =======    =======     =======
 Pro forma diluted income
  (loss) per share
  attributable to common
  stockholders--
   Income (loss) before
    extraordinary item...... $  0.05  $  0.78  $ (0.20)   $ (0.51)    $ (0.01)
   Extraordinary item....... $   --   $   --   $ (0.14)   $ (0.15)    $   --
                             -------  -------  -------    -------     -------
   Net income (loss)........ $  0.05  $  0.78  $ (0.34)   $ (0.66)    $ (0.01)
                             =======  =======  =======    =======     =======
 Pro forma diluted weighted
  average number of common
  and common stock
  equivalent shares
  outstanding...............   1,529    1,909    3,048      2,788       6,699
                             =======  =======  =======    =======     =======
</TABLE>
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-6
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                            For the Nine
                              For the Year Ended            Months Ended
                                  December 31               September 30,
                            -------------------------  -----------------------
                             1995    1996      1997       1997        1998
                            ------  -------  --------  ----------- -----------
                                                       (Unaudited) (Unaudited)
<S>                         <C>     <C>      <C>       <C>         <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
 Net income (loss)........  $   69  $ 1,495  $   (880)   $(1,810)   $     35
 Adjustments to reconcile
  net income (loss) to net
  cash provided by (used
  in) operating
  activities--
   Depreciation,
    amortization and debt
    discount..............   1,351    2,188     8,239      5,083       9,328
   Warrants issued to a
    bank..................     --       --        180        180         --
   Deferred income taxes..     --      (208)   (1,013)    (1,008)       (918)
   Extraordinary loss on
    early extinguishment
    of debt...............     --       --        418        418         --
   Compensation expense
    related to the initial
    public offering.......     --       --        --         --        1,961
   Gain on sale of
    property and
    equipment.............     --       --        --         --          (14)
   Changes in operating
    assets and
    liabilities, net of
    acquisitions--
     Receivables, net.....    (869)     385    (5,208)    (6,116)     (2,145)
     Inventories, prepaid
      expenses and other
      current assets......    (213)    (237)   (3,959)    (1,196)        975
     Accounts payable.....     118     (138)    4,808      2,297         748
     Accrued expenses and
      other liabilities...    (233)     752       392       (611)        279
     Deferred tuition
      revenue.............      12    1,038    (3,171)    (1,982)       (397)
                            ------  -------  --------    -------    --------
      Net cash provided by
       (used in) operating
       activities.........     235    5,275      (194)    (4,745)      9,852
                            ------  -------  --------    -------    --------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
 Business acquisitions,
  net of cash.............  (1,622)  (8,250)  (39,855)   (36,054)     (4,964)
 Acquisition and
  organizational costs....    (959)     --     (1,516)    (1,450)       (244)
 Purchase of property and
  equipment, net..........    (897)  (1,231)   (3,822)    (2,077)     (3,449)
 Other assets.............     --       (37)      (21)        (6)        (56)
 Proceeds from sale of
  property and equipment..     --       --        --         --          332
                            ------  -------  --------    -------    --------
      Net cash used in
       investing
       activities.........  (3,478)  (9,518)  (45,214)   (39,587)     (8,381)
                            ------  -------  --------    -------    --------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
 Issuance of common stock.      30      --         30         30         180
 Issuance of warrants.....     --       --      4,789      4,788         --
 Issuance of redeemable
  preferred stock and
  warrants................   5,070      --     17,556     17,782         --
 Redemption of preferred
  stock...................    (200)     --        --         --          --
 Dividends paid on
  preferred stock.........    (207)    (495)     (495)      (372)        (47)
 Equity and debt financing
  costs...................    (535)    (553)   (1,021)    (1,190)     (6,868)
 Book overdraft...........     --       683      (683)      (683)        --
 Payments of long-term
  debt....................  (6,363)  (1,309)     (513)      (276)     (4,021)
 Net proceeds (payments
  on) from revolving
  credit facility.........   6,771    1,500    (8,239)    (8,239)        --
 Proceeds from term loan
  facility................     --     8,250     3,400      3,400         --
 Repayments of term loan
  facility................     --       --    (11,650)   (11,650)        --
 Net proceeds (payments
  on) from revolving loans
  under Credit Agreement..     --       --     39,985     25,885     (24,485)
 Proceeds from issuance of
  term loans under Credit
  Agreement...............     --       --     15,000     12,500         --
 Payments on term loans
  under Credit Agreement..     --       --     (1,500)       --      (13,500)
 Proceeds from initial
  public offering.........     --       --        --         --       52,440
 Payments of amounts due
  and notes payable to
  former owners of
  acquired businesses.....     --       --        --         --       (4,050)
                            ------  -------  --------    -------    --------
      Net cash provided by
       (used in) financing
       activities.........   4,566    8,076    56,659     41,975        (351)
                            ------  -------  --------    -------    --------
EFFECT OF EXCHANGE RATE
 CHANGES ON CASH..........     --       --       (143)         7        (287)
                            ------  -------  --------    -------    --------
NET INCREASE (DECREASE) IN
 CASH.....................   1,323    3,833    11,108     (2,350)        833
CASH, beginning of year...   2,642    3,965     7,798      7,798      18,906
                            ------  -------  --------    -------    --------
CASH, end of year.........  $3,965  $ 7,798  $ 18,906    $ 5,448    $ 19,739
                            ======  =======  ========    =======    ========
SUPPLEMENTAL DISCLOSURES
 OF CASH FLOW INFORMATION:
 Cash paid for--
   Interest...............  $  327  $   407  $  3,008    $ 1,944    $  1,234
   Taxes, excluding a
    refund of $900 in
    1998..................     --        80     2,446      2,306         974
                            ======  =======  ========    =======    ========
NON-CASH INVESTING AND
 FINANCING ACTIVITIES:
 Accretion to redemption
  value of preferred stock
  and warrants............  $   96  $   230  $  6,268    $  (727)   $ (2,153)
 Dividends on preferred
  stock added to
  liquidation value.......     570      632     1,663     (1,072)       (227)
                            ======  =======  ========    =======    ========
SUPPLEMENTAL DISCLOSURE OF
 NON-CASH SHAREHOLDERS'
 ACTIVITIES:
</TABLE>
    On February 4, 1998, all Class A, B, C, and E common stockholders and all
series of redeemable preferred stockholders converted their shares into
3,849,304 shares of common stock in connection with the IPO. The value of the
redeemable preferred stock at the date on conversion was $38,775,752.
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-7
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
 
<TABLE>
<CAPTION>
                                                                     Common Stock
                   -------------------------------------------------------------------------------------------------------------
                       Class A           Class B            Class C            Class D          Class E          Common Stock
                   ----------------  ----------------  ------------------  ---------------- ----------------  ------------------
                   5,625,600  $0.01   937,600   $0.01   937,600    $0.01    937,600   $0.01 1,875,200  $0.01  50,000,000  $0.01
                     Shares    Par     Shares    Par     Shares     Par      Shares    Par    Shares    Par     Shares     Par
                   Authorized Value  Authorized Value  Authorized  Value   Authorized Value Authorized Value  Authorized  Value
                   ---------- -----  ---------- -----  ---------- -------  ---------- ----- ---------- -----  ---------- -------
<S>                <C>        <C>    <C>        <C>    <C>        <C>      <C>        <C>   <C>        <C>    <C>        <C>
BALANCE, December
31, 1994.........    49,224   $ 492    47,818   $ 478    655,382  $ 6,554     --      $--        --    $ --         --   $   --
 Issuance of
 stock...........       --      --        --      --         --       --      --       --      7,726      78
 Dividends paid..       --      --        --      --         --       --      --       --        --      --         --       --
 Dividends on
 preferred stock
 for the year....       --      --        --      --         --       --      --       --        --      --         --       --
 Preferred stock
 and warrant
 accretion.......       --      --        --      --         --       --      --       --        --      --         --       --
 Net income......       --      --        --      --         --       --      --       --        --      --         --       --
                    -------   -----   -------   -----   --------  -------     ---     ----   -------   -----  ---------  -------
BALANCE, December
31, 1995.........    49,224     492    47,818     478    655,382    6,554     --       --      7,726      78        --       --
 Issuance of
 stock...........       --      --        --      --         --       --      --       --      7,726      77        --       --
 Dividends paid..       --      --        --      --         --       --      --       --        --      --         --       --
 Dividends on
 preferred stock
 for the year....       --      --        --      --         --       --      --       --        --      --         --       --
 Preferred stock
 and warrant
 accretion.......       --      --        --      --         --       --      --       --        --      --         --       --
 Net income......       --      --        --      --         --       --      --       --        --      --         --       --
                    -------   -----   -------   -----   --------  -------     ---     ----   -------   -----  ---------  -------
BALANCE, December
31, 1996.........    49,224     492    47,818     478    655,382    6,554     --       --     15,452     155        --       --
 Issuance of
 warrants........       --      --        --      --         --       --      --       --        --      --         --       --
 Exercise of
 warrants........       --      --        --      --         --       --      --       --        928       9        --       --
 Dividends paid..       --      --        --      --         --       --      --       --        --      --         --       --
 Dividends on
 preferred stock
 for the period..       --      --        --      --         --       --      --       --        --      --         --       --
 Preferred stock
 and warrant
 accretion.......       --      --        --      --         --       --      --       --        --      --         --       --
 Net loss........       --      --        --      --         --       --      --       --        --      --         --       --
                    -------   -----   -------   -----   --------  -------     ---     ----   -------   -----  ---------  -------
BALANCE, December
31, 1997.........    49,224     492    47,818     478    655,382    6,554     --       --     16,380     164        --       --
 Preferred stock
 and warrant
 accretion.......       --      --        --      --         --       --      --       --        --      --         --       --
 Dividends paid..       --      --        --      --         --       --      --       --        --      --         --       --
 Options granted.       --      --        --      --         --       --      --       --        --      --         --       --
 Conversion of
 stock...........   (49,224)   (492)  (47,818)   (478)  (655,382)  (6,554)    --       --    (16,380)   (164) 3,849,304   38,493
 Sales of common
 stock...........       --      --        --      --         --       --      --       --        --      --   3,277,500   32,775
 Options
 exercised.......       --      --        --      --         --       --      --       --        --      --      18,002      180
 Foreign currency
 translation.....       --      --        --      --         --       --      --       --        --      --         --       --
 Net income......       --      --        --      --         --       --      --       --        --      --         --       --
                    -------   -----   -------   -----   --------  -------     ---     ----   -------   -----  ---------  -------
BALANCE,
September 30,
1998 (Unaudited).       --    $ --        --    $ --         --   $   --      --      $--        --    $ --   7,144,806  $71,448
                    =======   =====   =======   =====   ========  =======     ===     ====   =======   =====  =========  =======
<CAPTION>
                    Total
                   Amount
                   -------
<S>                <C>
BALANCE, December
31, 1994.........  $ 7,524
 Issuance of
 stock...........       78
 Dividends paid..      --
 Dividends on
 preferred stock
 for the year....      --
 Preferred stock
 and warrant
 accretion.......      --
 Net income......      --
                   -------
BALANCE, December
31, 1995.........    7,602
 Issuance of
 stock...........       77
 Dividends paid..      --
 Dividends on
 preferred stock
 for the year....      --
 Preferred stock
 and warrant
 accretion.......      --
 Net income......      --
                   -------
BALANCE, December
31, 1996.........    7,679
 Issuance of
 warrants........      --
 Exercise of
 warrants........        9
 Dividends paid..      --
 Dividends on
 preferred stock
 for the period..      --
 Preferred stock
 and warrant
 accretion.......      --
 Net loss........      --
                   -------
BALANCE, December
31, 1997.........    7,688
 Preferred stock
 and warrant
 accretion.......      --
 Dividends paid..      --
 Options granted.      --
 Conversion of
 stock...........   30,805
 Sales of common
 stock...........   32,775
 Options
 exercised.......      180
 Foreign currency
 translation.....      --
 Net income......      --
                   -------
BALANCE,
September 30,
1998 (Unaudited).  $71,448
                   =======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-8
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (Continued)
 
<TABLE>
<CAPTION>
                          Warrants
                         ----------                Foreign
                          Class E    Additional   Currency                     Total
                           Common      Paid-in   Translation Accumulated   Stockholders'
                           Stock       Capital   Adjustment    Deficit      Investment
                         ----------  ----------- ----------- ------------  -------------
<S>                      <C>         <C>         <C>         <C>           <C>
BALANCE, December 31,
 1994................... $      --   $       --   $     --   $ (1,989,477)  $(1,981,953)
  Issuance of stock.....        --        29,904        --            --         29,982
  Dividends paid........        --           --         --       (206,800)     (206,800)
  Dividends on preferred
   stock for the Year...        --           --         --       (570,277)     (570,277)
  Preferred stock and
   warrant accretion....        --           --         --        (95,822)      (95,822)
  Net income............        --           --         --         68,543        68,543
                         ----------  -----------  ---------  ------------   -----------
BALANCE, December 31,
 1995...................        --        29,904        --     (2,793,833)   (2,756,327)
  Issuance of stock.....        --        29,905        --            --         29,982
  Dividends paid........        --           --         --       (495,400)     (495,400)
  Dividends on preferred
   stock for the Year...        --           --         --       (632,417)     (632,417)
  Preferred stock and
   warrant accretion....        --           --         --       (229,975)     (229,975)
  Net income............        --           --         --      1,494,666     1,494,666
                         ----------  -----------  ---------  ------------   -----------
BALANCE, December 31,
 1996...................        --        59,809        --     (2,656,959)   (2,589,471)
  Issuance of warrants..  4,788,563          --         --            --      4,788,563
  Exercise of warrants..    (11,136)      11,127        --            --            --
  Dividends paid........        --           --         --       (495,400)     (495,400)
  Dividends on preferred
   stock for the Period.        --           --         --     (1,663,137)   (1,663,137)
  Preferred stock and
   warrant accretion....        --           --         --     (6,268,478)   (6,268,478)
  Net loss..............        --           --         --       (879,608)     (879,608)
  Foreign currency
   translation..........        --           --    (296,602)          --       (296,602)
                         ----------  -----------  ---------  ------------   -----------
BALANCE, December 31,
 1997...................  4,777,427       70,936   (296,602)  (11,963,582)   (7,404,133)
  Preferred stock and
   warrant accretion....        --           --         --     (2,152,834)   (2,152,834)
  Dividends paid........        --           --         --       (274,208)     (274,208)
  Options granted.......        --     1,960,614        --            --      1,960,614
  Conversion of stock... (4,777,427)  47,286,372        --            --     42,539,750
  Sale of common stock..        --    45,586,425        --            --     45,619,200
  Options exercised.....        --       179,682        --            --        179,862
  Foreign currency
   translation..........        --           --    (526,685)          --       (526,685)
  Net income............        --           --         --         34,856        34,856
                         ----------  -----------  ---------  ------------   -----------
BALANCE, September 30,
 1998 (Unaudited)....... $      --   $95,084,029  $(823,287) $(14,355,768)  $79,976,422
                         ==========  ===========  =========  ============   ===========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-9
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                        December 31, 1995, 1996 and 1997
 
1. DESCRIPTION OF THE COMPANY
 
   Career Education Corporation ("CEC", collectively with its subsidiaries "we"
or "our") was incorporated in January 1994, for the purpose of acquiring
operations of various for-profit postsecondary schools. We manage and operate
educational institutions acquired through our wholly-owned subsidiaries, Al
Collins Graphic Design School, Ltd. ("Collins"), Brooks College, Ltd.
("Brooks"), Allentown Business School, Ltd. ("Allentown"), Brown Institute,
Ltd. ("Brown"), Western Culinary Institute, Inc. ("Western"), School of
Computer Technology, Inc. ("SCT"), The Katharine Gibbs Schools, Inc. ("Gibbs"),
IAMD, Limited and Subsidiaries ("IAMD") and International Academy of Design
(Canada) Ltd. and Subsidiary ("IAD").
 
   Our Collins campus is located in Tempe, Arizona, and offers associate and
bachelor degrees in visual communications and a certificate in desktop
publishing. Our Brooks campus, located in Long Beach, California, offers
associate degrees in fashion design, fashion merchandising, interior design and
visual communications. Our Allentown campus is located in Allentown,
Pennsylvania, and offers associate degrees in business administration,
accounting, marketing, secretarial, fashion merchandising and medical-related
fields, and offers diplomas in business operations, PC/LAN, office assistant
and medical-related fields. Our Brown campus is located in Mendota Heights,
Minnesota, and offers certificates and/or associate degrees in visual
communications, business administration, information systems management,
computer programming, electronics technology and radio/television broadcasting.
Our Western campus, located in Portland, Oregon, offers diplomas in culinary
arts. SCT is headquartered in Pittsburgh, Pennsylvania and has campuses in
Pittsburgh, Pennsylvania and Fairmont, West Virginia and offers associate
degrees and diplomas in computer technology, laser technology and specialized
culinary arts. Gibbs has campuses located in various cities throughout New
York, New Jersey, and New England and offers associate degrees in secretarial
arts, business administration and PC TEC. IAMD has campuses located in Chicago,
Illinois and Tampa, Florida. IAD has campuses located in Toronto, Canada and
Montreal, Canada. Both IAMD and IAD offer associate and bachelor degrees in
various fields of merchandising management, fashion design, interior design and
computer graphics.
 
2. INITIAL PUBLIC OFFERING
 
   On February 4, 1998, we sold 3,277,500 shares of our common stock at $16.00
per share pursuant to an initial public offering ("IPO"). The net proceeds from
the offering of $45.6 million were used to repay borrowings under the Credit
Agreement (Note 5) totaling $41.5 million and amounts owed to former owners of
acquired businesses of $4.1 million (Note 5) which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all
series of preferred stock and accumulated dividends were converted into
2,423,485 shares of common stock and warrants (except for redeemable warrants
exercisable into 32,947 shares of Class E common stock) to purchase 624,320
shares of common stock were exercised. Subsequent to December 31, 1997 and
prior to the consummation of the IPO, we also authorized one class of preferred
stock and one class of common stock, increased the number of authorized shares
of common stock to 50,000,000 and completed a 9.376-for-1 stock split. The
effect of the split has been retroactively reflected for all periods presented
in the accompanying consolidated financial statements.
 
3. SIGNIFICANT ACCOUNTING POLICIES
 
   The financial statements for the nine months ended September 30, 1998 are
unaudited and have been prepared on the same basis as the audited financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information set forth herein.
Operating results for the nine months ended
 
                                      F-10
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
September 30 1998 is not necessarily indicative of results that may be expected
for the fiscal year ended December 31, 1998. Our principal accounting policies
are as follows:
 
 
 a. Principles of Consolidation
 
   The consolidated financial statements include the accounts of CEC and our
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation. The results of operations
of all acquired businesses have been consolidated for all periods subsequent to
the date of acquisition.
 
 b. Concentration of Credit Risk
 
   We extend unsecured credit for tuition to a significant portion of the
students who are in attendance at the campuses operated by our subsidiaries. A
substantial portion of credit extended to students is repaid through the
students' participation in various federally funded financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). The following table presents the amounts and percentages of the
Company's U.S. institutions' cash receipts collected from Title IV Programs for
the years ended December 31, 1995, 1996 and 1997 (such amounts were determined
based upon each U.S. institution's cash receipts for the twelve-month period
ended December 31, pursuant to the regulations of the United States Department
of Education ("DOE") at 34 C.F.R. (S) 600.5):
 
<TABLE>
<CAPTION>
                                             For the Years Ended December 31,
                                            -----------------------------------
                                               1995        1996        1997
                                            ----------- ----------- -----------
      <S>                                   <C>         <C>         <C>
      Total Title IV funding............... $17,885,111 $26,931,030 $54,963,232
      Total cash receipts.................. $26,380,681 $38,036,509 $85,046,951
      Total Title IV funding as a
       percentage of total cash receipts...         68%         71%         65%
</TABLE>
 
   We generally complete and approve the financial aid packet of each student
who qualifies for financial aid prior to the student's beginning class in an
effort to enhance the collectibility of our unsecured credit. Transfers of
funds from the financial aid programs are made in accordance with DOE
requirements. Changes in DOE funding of Title IV Programs could impact our
ability to attract students.
 
 c. Marketing and Advertising Costs
 
   Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$2,715,000, $3,494,000 and $10,640,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
 
 d. Inventories
 
   Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
 
 e. Property and Equipment
 
   Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets. Leasehold improvements and assets recorded under capital leases
are amortized on a straight-line basis over their estimated useful lives or
lease terms,
 
                                      F-11
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
whichever is shorter. Maintenance, repairs and minor renewals and betterments
are expensed; major improvements are capitalized. The estimated cost basis and
useful lives of property and equipment at December 31, 1996 and 1997, are as
follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                      December 31,
                                                     ---------------
                                                      1996    1997      Life
                                                     ------- ------- ----------
      <S>                                            <C>     <C>     <C>
      Buildings..................................... $   350 $ 1,190   31 years
      Classroom equipment, courseware and other
       instructional materials......................  17,905  38,882 3-15 years
      Furniture, fixtures and equipment.............   2,926   8,888 3-10 years
      Leasehold improvements........................   1,296   3,841  1-7 years
      Vehicles......................................      40      17    5 years
                                                     ------- -------
                                                      22,517  52,818
      Less--Accumulated depreciation and
       amortization.................................   2,957   7,263
                                                     ------- -------
                                                     $19,560 $45,555
                                                     ======= =======
</TABLE>
 
   The gross cost of assets recorded under capital leases included above
amounts to $39,000 and $2,075,000 at December 31, 1996 and 1997, respectively.
 
 f. Intangible Assets
 
   Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
4. Goodwill and student contracts are being amortized on a straight-line basis
over their estimated useful lives. Covenants not-to-compete entered into before
1997 are being amortized on a straight-line basis over their useful lives.
Those entered into after 1996 are being amortized on an accelerated method over
their estimated useful lives. At December 31, 1996 and 1997, the cost basis and
useful lives of intangible assets consist of the following (dollars in
thousands):
 
<TABLE>
<CAPTION>
                                                         December 31,
                                                        -------------- Estimated
                                                         1996   1997     Lives
                                                        ------ ------- ---------
      <S>                                               <C>    <C>     <C>
      Goodwill......................................... $3,470 $24,358  40 years
      Covenants not-to-compete.........................    500  13,250 3-5 years
      Student contracts................................  1,107     --     1 year
                                                        ------ -------
                                                         5,077  37,608
      Less--Accumulated amortization...................  1,670   4,029
                                                        ------ -------
                                                        $3,407 $33,579
                                                        ====== =======
</TABLE>
 
   On an ongoing basis, we review intangible assets and other long-lived assets
for impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. To date, no such events or changes in circumstances
have occurred. If such events or changes in circumstances occur, we will
recognize an impairment loss if the undiscounted future cash flows expected to
be generated by the asset (or acquired business) are less than the carrying
value of the related asset. The impairment loss would adjust the asset to its
fair value.
 
 g. Revenue Recognition
 
   Revenue is derived primarily from courses taught at our schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Dormitory and cafeteria revenues charged to
 
                                      F-12
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
students are recognized on a straight-line basis over the length of the
students' program. Other dormitory and cafeteria revenues are recognized as
earned. Textbook sales and other revenues are recognized as services are
performed. If a student withdraws, future revenue is reduced by the amount of
the refund due to the student. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Deferred tuition revenue
represents the portion of payments received but not earned and is reflected as
a current liability in the accompanying consolidated balance sheets as such
amount is expected to be earned within the next year.
 
 h. Management's Use of Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
 
 i. Income Taxes
 
   We file a consolidated federal income tax return and provide for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
 
 j. Fair Value of Financial Instruments
 
   The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of our
debt obligations reasonably approximates their fair value as the stated
interest rate approximates current market interest rates of debt with similar
terms.
 
 k. Accretion to Redemption Value of Preferred Stock and Warrants
 
   Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants, which is being accreted over the earliest period redemption can
occur using the effective interest method. The redemption values are based on
the estimated fair market values of the classes of stock and consider the
amounts we have received for the sale of equity instruments, prices paid for
acquired businesses and our operations.
 
 l. Income (Loss) Per Share Attributable to Common Stockholders
 
   In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations to basic earnings per share and diluted earnings
per share. The calculations primarily differ by excluding dilutive common stock
equivalents and convertible securities (such as stock options, warrants, and
convertible preferred stock) using the treasury method, when computing basic
earnings per share. We adopted SFAS No. 128 in December 1997 and have
retroactively restated all periods presented. The weighted average number of
common shares used in determining basic and diluted
 
                                      F-13
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
income (loss) per share attributable to common stockholders for the years ended
December 31, 1995, 1996 and 1997 is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  For the Years
                                                                 Ended December
                                                                       31,
                                                                 ---------------
                                                                 1995 1996  1997
                                                                 ---- ----- ----
      <S>                                                        <C>  <C>   <C>
      Common shares outstanding (basic)......................... 755    761 768
      Common stock equivalents.................................. --     269 --
                                                                 ---  ----- ---
      Diluted................................................... 755  1,030 768
                                                                 ===  ===== ===
</TABLE>
 
   For the years ending December 31, 1995 and 1997, antidilutive options and
warrants excluded from diluted weighted average number of common shares
outstanding were 112,906 and 568,332, respectively.
 
   Supplemental pro forma diluted income (loss) before extraordinary item and
net loss per share attributable to common stockholders, had the debt retirement
in connection with the consummation of the IPO occurred at the beginning of the
year, would have been $(2.59) and $(2.73), respectively, for the year ended
December 31, 1997. This earnings per share data is computed based upon the pro
forma loss before extraordinary item and after the extraordinary item
attributable to common stockholders adjusted for the reduction in interest
expense resulting from the application of net proceeds from the IPO to reduce
our indebtedness and pro forma weighted average number of shares of common
stock outstanding which reflect our assumed sale of approximately 2,314,688
shares of common stock in the IPO resulting in net proceeds sufficient to pay
indebtedness as described in Note 2 (after considering certain cash on hand) in
1997.
 
 m. Pro Forma Diluted Loss per Share Attributable to Common Stockholders
 
   Pro forma diluted loss before extraordinary item and net loss per share
attributable to common stockholders is based on the weighted average number of
shares of common stock and common stock equivalents outstanding after giving
retroactive adjustments for (i) the stock split described in Notes 2 and 6 for
all periods presented, (ii) shares of redeemable preferred stock converted into
shares of common stock (determined by dividing the liquidation value, including
paid-in-kind dividends, by the initial public offering price of $16.00 per
share), (iii) the exercise of warrants to purchase shares of common stock, (iv)
the conversion of all existing classes of common stock into a single new class
of common stock and (v) common stock equivalents (if dilutive). Common stock
equivalents represent stock options and warrants using the treasury stock
method for all periods presented.
 
   Supplemental pro forma diluted loss before extraordinary item and net loss
per share attributable to common stockholders, had the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year and after considering the conversion of preferred stock and exercise of
warrants, would have been $(1.49) and $(1.57), respectively, for the year ended
December 31, 1997.
 
 n. Stock-Based Compensation
 
   Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), was issued in October, 1995 by the
Financial Accounting Standards Board. SFAS No. 123 provides an alternative
method of accounting for stock-based compensation arrangements, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25").
 
                                      F-14
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
The Financial Accounting Standards Board encourages entities to adopt the fair-
value based method but does not require adoption of this method. We will
continue our current accounting policy and have adopted the disclosure-only
provisions of SFAS No. 123 for options and warrants issued to employees and
directors. Expense associated with stock options and warrants issued to non-
employees/non-directors is recorded in accordance with SFAS No. 123.
 
 o. Accounting Pronouncements to Be Adopted During 1998
 
  Comprehensive Income
 
   In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for the reporting of comprehensive income. This pronouncement requires that all
items recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
financial statement presentation required under SFAS No. 130 is effective for
all fiscal years beginning after December 15, 1997. We will adopt SFAS No. 130
in 1998. As of December 31, 1997, the impact of adopting this pronouncement has
not been determined; however, we will be affected by it because we maintain a
subsidiary which has operations in Canada.
 
  Segment Reporting
 
   In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS No.
131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available that we
evaluate regularly in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the basis
that is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The disclosures required by SFAS No. 131 are
effective for all fiscal years beginning after December 15, 1997. We will adopt
SFAS No. 131 in 1998. We believe that the adoption of SFAS No. 131 will not
have a material impact on our future results.
 
 p. Foreign Currency Translation
 
   We acquired IAD, an entity with operations in Canada, on June 30, 1997. At
December 31, 1997, revenues and expenses related to these operations have been
translated at average exchange rates in effect at the time the underlying
transactions occurred. Transaction gains or losses are included in income.
Assets and liabilities of this subsidiary have been translated at the year-end
exchange rate, with gains and losses resulting from such translation being
included in stockholders' investment at December 31, 1997.
 
4. BUSINESS ACQUISITIONS
 
Western
 
   On October 21, 1996, we acquired certain assets and assumed certain
liabilities of Western Culinary Institute, a wholly owned subsidiary of
Phillips College, Inc. This acquisition was accounted for as a purchase and,
accordingly, the purchased assets and assumed liabilities have been recorded at
their estimated fair market
 
                                      F-15
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
values at the date of the acquisition. The purchase price, as adjusted, of
approximately $7,477,000 exceeded the fair market value of net assets acquired,
resulting in goodwill of approximately $646,000. In connection with the
purchase, the former owner of the school entered into a four-year covenant not-
to-compete agreement with us for a total price of $400,000.
 
   At closing, we paid $7,000,000 to the former owner with funds obtained
through bank financing, assumed a $150,000 obligation and deposited $1,250,000
into escrow. At December 31, 1996, we estimated that the former owner owed us
approximately $523,000 as a result of purchase price adjustments and have
reflected such amount as due from former owners of acquired businesses in the
accompanying December 31, 1996 consolidated balance sheet. This amount was
collected in January 1997.
 
SCT
 
   On February 28, 1997, through SCT Acquisition, Ltd., we acquired 100% of the
outstanding shares of capital stock of School of Computer Technology, Inc. This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The purchase price, as adjusted,
of approximately $4,944,000 exceeded the estimated fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,111,000. In connection with the purchase, we entered into a three-year
covenant not-to-compete agreement with each of the former owners of the school
for a total price of $1,750,000.
 
   At closing, we paid $400,000 to the former owners, deposited $5,000,000 into
escrow, and assumed a $1,800,000 note payable due to the former owners. Funds
paid were raised through the issuance of $2,000,000 of Series D preferred stock
and warrants and $3,400,000 of bank borrowings. The note, secured by letters of
credit, bears interest payable quarterly at 7% per annum and is due February
28, 2001.
 
Gibbs
 
   On May 31, 1997, we acquired 100% of the outstanding shares of capital stock
of The Katharine Gibbs Schools, Inc. The Katharine Gibbs Schools, Inc. has
seven wholly-owned subsidiaries, each of which owns and operates separate
campuses. This acquisition was accounted for as a purchase and, accordingly,
the acquired assets and assumed liabilities have been recorded at their
estimated fair market values at the date of the acquisition. The estimated fair
market values of certain assets are based upon preliminary appraisal reports.
The purchase price, as adjusted, of approximately $19,029,000 exceeded the fair
market value of net assets acquired and liabilities assumed, resulting in
goodwill of approximately $8,434,000. In connection with the purchase, we also
entered into a covenant not-to-compete agreement with the former owner of the
schools in exchange for $7,000,000. The covenant not-to-compete restricts the
former owners' ability to own or operate certain types of for-profit
postsecondary schools for five years.
 
   At closing, we paid $5,400,000 to the former owner and deposited $18,850,000
into escrow with borrowings of $12,500,000 from a new bank financing
arrangement and $15,000,000 which was raised through the issuance of Series D
preferred stock.
 
IAMD
 
   On June 30, 1997, through IAMD, Acquisition I, Ltd. we acquired 100% of the
outstanding shares of capital stock of IAMD for $3,000,000. Subsequent to the
purchase, IAMD Acquisition I, Ltd. merged with and into IAMD and assumed its
name. The purchase price may be increased by up to $5,000,000 based upon the
 
                                      F-16
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
amount by which revenue of the acquired operations for the 12 month period
ended June 30, 1998 exceeds $8,000,000, as provided for in an earn-out
provision in the purchase agreement. IAMD generated revenue of $7,493,000 for
the year ended June 30, 1997 (see Note 16 for subsequent event). This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The estimated fair market values
of certain assets are based upon preliminary appraisal reports. The purchase
price, subject to certain modifications, exceeded the fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,695,000.
 
   In connection with the purchase, we also entered into covenant not-to-
compete agreements with the former owners of the school in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability to
own or operate certain types of for-profit postsecondary schools for four
years.
 
   On June 30, 1997, we paid $100,000 to the former owners, issued $1,500,000
in notes payable to the former owners and issued letters of credit totaling
$3,400,000 to secure amounts owed to the former owners to consummate these
transactions. The funds to consummate these transactions were obtained through
the issuance of Series D preferred stock and warrants and bank borrowings. The
notes, secured by letters of credit, bear interest payable quarterly at 7% per
annum, and were paid upon the consummation of the IPO (Note 2).
 
IAD
 
   On June 30, 1997, we purchased 100% of the capital stock of IAD for
$6,500,000. This acquisition was accounted for as a purchase and, accordingly,
the acquired assets and assumed liabilities have been recorded at their
estimated fair market values at the date of the acquisition. The estimated fair
market values of certain assets are based upon preliminary appraisal reports.
The purchase price, subject to certain modifications, exceeded the fair market
value of net assets acquired and liabilities assumed, resulting in goodwill of
approximately $5,648,000.
 
   In connection with the purchase, we entered into covenant not-to-compete
agreements with the former owners of the school in exchange for $2,000,000. The
covenant not-to-compete restricts the former owners' ability to own or operate
certain types of postsecondary vocational schools for four years.
 
   On June 30, 1997, we paid $3,820,000 to the former owners, deposited
$2,120,000 into escrow, and issued $2,550,000 in notes payable to the former
owners to consummate these transactions. The funds to consummate these
transactions were obtained through the issuance of Series D preferred stock and
warrants and bank borrowings. The notes are secured by letters of credit, bear
interest payable quarterly at 7% per annum, and were paid upon consummation of
the IPO (Note 2).
 
Pro Forma Results of Operations
 
   The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the years ended December 31, 1995, 1996 and 1997,
assume that the business acquisitions subsequent to January 1, 1996 described
above occurred at the beginning of the year preceding the year of the
acquisition. The
 
                                      F-17
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
pro forma results below are based on historical results of operations, include
adjustments for depreciation, amortization, interest and taxes and do not
necessarily reflect actual results that would have occurred.
 
<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                            December 31
                                                      -------------------------
                                                       1995    1996      1997
                                                      ------- -------  --------
                                                            (Unaudited)
<S>                                                   <C>     <C>      <C>
Net revenue.........................................  $32,175 $87,476  $106,467
Income (loss) before extraordinary item.............    1,137  (5,051)   (3,506)
Net income (loss)...................................    1,137  (5,051)   (3,924)
Income (loss) before extraordinary item attributable
 to common stockholders.............................      264  (6,409)  (11,933)
Net income (loss) attributable to common
 stockholders.......................................      264  (6,409)  (12,351)
                                                      ======= =======  ========
Basic income (loss) per share attributable to common
 stockholders--
  Income (loss) before extraordinary item...........  $  0.35 $ (8.42) $ (15.53)
                                                      ======= =======  ========
  Net income (loss).................................  $  0.35 $ (8.42) $ (16.08)
                                                      ======= =======  ========
Diluted income (loss) per share attributable to
 common stockholders--
  Income (loss) before extraordinary item...........  $  0.30 $ (8.42) $ (15.53)
                                                      ======= =======  ========
  Net income (loss).................................  $  0.30 $ (8.42) $ (16.08)
                                                      ======= =======  ========
</TABLE>
 
 
5. DEBT
 
   Our long-term debt at December 31, 1996 and 1997, consists of the following:
 
<TABLE>
<CAPTION>
                                                                   December 31
                                                                 ---------------
                                                                  1996    1997
                                                                 ------- -------
                                                                 (in thousands)
<S>                                                              <C>     <C>
Borrowings under Credit Agreement with a syndicate of banks as
 discussed below--
  Revolving loans..............................................  $   --  $39,985
  Term loans...................................................      --   13,500
Revolving credit notes with a bank, as discussed below, net of
 debt discount of $57,000......................................    8,182     --
Bank term loan, as discussed below.............................    8,250     --
Notes payable to former owners of SCT, secured by bank letters
 of credit, bearing annual interest of 7%, interest only
 payable quarterly, principal due February 28, 2001............      --    1,800
Notes payable to former owners of IAMD, secured by bank letters
 of credit, bearing annual interest of 7%, interest only
 payable quarterly, repaid in connection with the consummation
 of the IPO....................................................      --    1,500
Amounts due to former owners of IAMD, currently payable, non-
 interest-bearing, secured by bank letters of credit...........      --    3,400
Notes payable to former owners of IAD, secured by bank letters
 of credit, bearing annual interest of 7%, interest only
 payable quarterly, repaid in connection with the consummation
 of the IPO....................................................      --    2,550
Equipment under capital leases, secured by related equipment,
 discounted at a weighted average interest rate of 9.58%.......       27   1,279
Other..........................................................      --       21
                                                                 ------- -------
                                                                  16,459  64,035
Less--Current portion..........................................    2,676   3,888
                                                                 ------- -------
                                                                 $13,783 $60,147
                                                                 ======= =======
</TABLE>
 
                                      F-18
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
 
   On May 30, 1997, we entered into a new credit agreement (the "Credit
Agreement") with a bank and prepaid approximately $21,187,000 of outstanding
revolving credit notes, term loans and other obligations under our previous
credit agreement. On September 25, 1997, the Credit Agreement was amended and
syndicated. We can borrow, under the amended Credit Agreement, up to an
aggregate of $80,000,000 on a consolidated basis, including $65,000,000 under a
revolving credit facility ("Revolving Loans") and $15,000,000 through a term
loan facility ("Term Loan"), and can obtain up to $30,000,000 in outstanding
letters of credit. Outstanding letters of credit reduce the revolving credit
facility availability under the amended Credit Agreement. The amended Credit
Agreement matures on May 30, 2002; however, availability under the revolving
credit facility is reduced by $10,000,000 on May 30, 2001. The Term Loan is
payable in equal quarterly installments of $750,000. Borrowings under the
amended Credit Agreement bear interest, payable quarterly, at the Base Rate
(defined as the greater of the bank's prime rate plus 0.75%, 9.25% at December
31, 1997, or the Federal Funds Rate plus 0.50%, 7.00% at December 31, 1997) or
at LIBOR plus 2% (7.84% at December 31, 1997), at our election. Interest rates
are subject to change based upon our funded debt levels relative to
consolidated earnings before interest, taxes, depreciation and amortization on
a pro forma basis for the last four fiscal quarters. We are also required to
pay annual commitment fees of 0.375% on unused availability (Note 16).
 
   At December 31, 1997, we had outstanding, $39,985,000 in revolving credit
borrowings, a $13,500,000 term loan and outstanding letters of credit totaling
approximately $25,005,000 (to meet certain Department of Education financial
responsibility requirements and to guarantee certain purchase price payments)
under the Credit Agreement. At December 31, 1997, borrowings totaling
$17,485,000 were at the bank's prime rate plus 0.75%, and borrowings totaling
$36,000,000 were at LIBOR plus 2%.
 
   During 1995, we entered into a credit agreement (the "Agreement") with a
bank. The Agreement permitted us to borrow, on a consolidated basis, $8,000,000
under a revolving credit note and $12,000,000 through a term loan. In
connection with the Agreement, we also issued warrants to purchase 20,618
shares of Class D common stock and recorded a debt discount of $79,977 for the
value of the warrants. The debt discount is amortized over the five year
maturity of the related debt. On May 30, 1997, in connection with entering into
the Credit Agreement and prepaying all amounts outstanding under the Agreement,
we expensed the remaining unamortized debt discount totaling $51,000,
prepayment penalty fees totaling $294,000 and the remaining unamortized
deferred financing costs totaling $306,000. The loss on the early
extinguishment of debt of $651,000, net of related tax benefit of $233,000, has
been reflected as an extraordinary item in the accompanying consolidated
statement of operations for the year ended December 31, 1997.
 
   At December 31, 1996, we had $8,239,057 outstanding under revolving credit
notes and had issued various letters of credit totaling approximately $270,000
(to meet certain Department of Education financial responsibility requirements
under the Agreement). Amounts outstanding under the revolving credit notes bear
interest either at the bank's prime rate plus 1.25% (9.50% at December 31,
1996), or LIBOR plus 3.5% (8.875% at December 31, 1996), and are reduced
annually over a five-year period with the balance due in July, 2000. Interest
is payable monthly. At December 31, 1996, $5,239,057 in borrowings were at the
bank's prime rate plus 1.25%, and $3,000,000 in borrowings were at LIBOR plus
3.5% rate. The term loan is payable in 35 equal monthly installments beginning
a year from the origination date of the term loan, October 21, 1996, with any
unpaid balance due in full in July, 2000. Amounts outstanding bear monthly
interest either at the bank's prime rate plus 1.25%, or LIBOR plus 3.5%. At
December 31, 1996, we had $8,250,000 outstanding under the term loan.
 
   CEC and our subsidiaries have collectively guaranteed repayment of amounts
outstanding under the Credit Agreement. In addition, we have pledged the stock
of our subsidiaries as collateral for repayment of the debt. We may voluntarily
make principal prepayments. Mandatory principal prepayments are required if we
generate
 
                                      F-19
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
excess cash flows, as defined, sell certain assets, or upon the occurrence of
certain other events. Under the Credit Agreement we are limited in our ability
to take certain actions, including paying dividends, as defined, selling or
disposing of certain assets or subsidiaries, making annual rental payments in
excess of $14,000,000, and issuing subordinated debt in excess of $5,000,000,
among other things. We are required to maintain certain financial ratios,
including a quarterly fixed coverage ratio of at least 1.25:1, a quarterly
interest coverage ratio of at least 3:1, certain levels of consolidated
tangible net worth, consolidated net worth, and funded debt to consolidated
earnings before interest, taxes, depreciation, and amortization, on a pro forma
basis for the last four fiscal quarters, of 3.75:1 through June 30, 1998, among
others. At December 31, 1997, we were either in compliance with or had obtained
a waiver for the covenants of the Credit Agreement, as amended.
 
   We intend to refinance amounts owed to former owners of acquired businesses
as noted above through availability under our Credit Agreement and, therefore,
such amounts have been classified as long-term.
 
  At December 31, 1997, future annual principal payments of long-term debt are
as follows (in thousands):
 
<TABLE>
             <S>                               <C>
             1998............................. $ 3,888
             1999.............................   3,300
             2000.............................   3,070
             2001.............................   8,869
             2002.............................  44,908
                                               -------
                                               $64,035
                                               =======
</TABLE>
 
6. STOCKHOLDERS' INVESTMENT
 
   In connection with the consummation of the IPO on February 4, 1998, we
amended and restated our certificate of incorporation to authorize a total of
50,000,000 shares of common stock ("Common Stock") and authorize 1,000,000
shares of preferred stock and converted all classes of common stock described
below into one class of Common Stock, with a par value of $0.01, at a rate of
9.376 shares of Common Stock for every share of existing common stock. The
shares of common stock disclosed in these financial statements and notes hereto
retroactively reflect this split.
 
Common Stock
 
   Class A and Class B common stock maintain voting rights while Class C, D and
E common stock is nonvoting. Class B common stock is convertible into shares of
Class A common stock at any time at the discretion of the holder at a ratio of
1:1. Class C common stock is convertible into shares of either Class A common
stock or Class B common stock at any time at the discretion of the holder at a
ratio of 1:1. Class D common stock is convertible into shares of Class A common
stock, subject to certain restrictions. Class E common stock may only be
converted into shares of Class A common stock upon the occurrence of certain
events.
 
   In July 1995, we increased the number of authorized shares of common stock
and completed a 100-for-1 stock split. The par value of the additional shares
arising from these splits has been reclassified from additional paid in capital
or accumulated deficit (as appropriate) to common stock. The stock splits have
been retroactively reflected in the accompanying consolidated financial
statements. All references to per share amounts in this report have been
restated to reflect the stock splits.
 
   In 1996, we entered into a stock subscription agreement with an employee,
whereby the employee may purchase up to $100,000 of common and preferred stock.
A receivable and the common and preferred stock to be issued under the
agreement have been recorded at December 31, 1996. This receivable was paid in
February 1997.
 
                                      F-20
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
 
Preferred Stock
 
   In connection with the IPO consummated on February 4, 1998, all classes of
redeemable preferred stock described in Note 7 were converted into 2,423,485
shares of common stock by dividing the liquidation value on that date
(including all accrued paid-in-kind dividends) of preferred stock by $16.00,
the initial public offering price of the common stock. We also authorized
1,000,000 shares of Preferred Stock with a par value of $0.01 per share.
 
7. Redeemable Preferred Stock
 
   Subsequent to year-end, all shares of redeemable preferred stock described
below were converted into Common Stock in connection with the IPO, as discussed
in Notes 2 and 6.
 
Series A
 
   Series A preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends as defined).
Dividends are paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series A preferred
stock. The mandatory redemption value of the Series A preferred stock has been
increased to reflect these dividends.
 
Series B
 
   Series B preferred stock has a stated value of $1,000 per share, and its
holders are not entitled to any dividends on any outstanding shares. We may
call the Series B preferred stock at any time and we are required to redeem
them at their liquidation value ($1,000 per share) on August 31, 2003. At
December 31, 1997, there were no shares of Series B preferred stock issued or
outstanding.
 
Series C
 
   Series C preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share ($1,000 per share plus undeclared dividends as
defined). Dividends are payable in equal quarterly installments on each March
31, June 30, September 30 and December 31. To the extent dividends are declared
and not paid, they are added to the liquidation value. The Company has paid all
dividends through December 31, 1997 on Series C preferred stock.
 
   In July 1995, we issued shares of Series C preferred stocks and redeemable
warrants described in Note 8. The proceeds, totaling $5,000,000, have been
allocated to preferred stock and warrants based upon their relative market
values after considering issuance costs.
 
   In July 1996, we increased the number of authorized shares of Series C
preferred stock and completed a 10-for-1 stock split. The stock split has been
retroactively reflected in the accompanying financial statements.
 
Series D
 
   Series D preferred stock has a stated value of $1,000 per share, and its
holders are entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends, as defined).
Dividends are paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series D preferred
stock. The mandatory redemption value of the Series D preferred stock has been
increased to reflect these dividends.
 
                                      F-21
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
 
   On February 28, 1997, we entered into a securities purchase agreement with
existing common and preferred stockholders to raise funds for acquisitions. The
securities purchase agreement gives the stockholders the right to purchase up
to 7,500 shares of Series D preferred stock for $1,000 per share and receive
warrants, currently exercisable, for the purchase of 83,671 shares of Class E
common stock at an exercise price of $.01 per share.
 
   Under the February 28, 1997, securities purchase agreement, we issued 2,000
shares of Series D preferred stock and warrants to purchase 22,315 shares of
Class E common stock to existing stockholders in connection with the
acquisition of SCT. On May 30, 1997, we issued the remaining 5,500 shares of
Series D preferred stock and warrants to purchase 61,357 shares of Class E
common stock to existing stockholders. The proceeds (totaling $7,500,000) were
used for the acquisition of SCT and Gibbs and have been allocated to preferred
stock and warrants based upon their relative market values after considering
issuance costs.
 
   On May 30, 1997, we also entered into another securities purchase agreement
with existing common and preferred stockholders to raise funds for additional
acquisitions. The securities purchase agreement gives them the right to
purchase up to an additional 15,000 shares of Series D preferred stock for
$1,000 per share and receive warrants, currently exercisable, for the purchase
of 339,280 shares of Class E common stock at an exercise price of $.01 per
share.
 
   Under the May 30, 1997, securities purchase agreement, we issued 15,000
shares of Series D preferred stock and warrants to purchase 339,280 shares of
Class E common stock to existing stockholders in connection with the
acquisitions of Gibbs, IAMD and IAD. The proceeds, totaling $15,000,000, have
been allocated to preferred stock and warrants based upon their relative market
values after considering issuance costs.
 
8. REDEEMABLE WARRANTS
 
   In connection with the issuance of Series C preferred stock during 1995, we
issued warrants exercisable into 237,072 shares of Class D common stock. These
warrants, which are exercisable at any time, have an exercise price of $.01 per
share and expire in July 2005. The number of warrants is subject to adjustment
upon the occurrence of certain events. In any event, the total number of shares
the warrant may be exercised into may not be reduced by more than 92,766
shares. Based upon the results of operations through December 31, 1997, the
total number of shares of Class D common stock into which these warrants are
exercisable was adjusted to be 202,297. Subsequent to year-end, these warrants
were exercised in connection with the IPO (Note 2). We are accreting the
difference between the value of the warrants at the date of issuance and the
IPO date using the effective interest method.
 
   In connection with the credit agreement we entered into during 1995 (Note
5), we issued warrants exercisable into 20,618 shares of Class D common stock.
The warrants, which are exercisable at any time, have an exercise price of $.01
per share and expire in July 2005. The number of warrants is subject to
adjustment under certain circumstances. Based upon the terms and provisions of
the credit and warrant agreements, we assigned a value (based upon the relative
fair market value of the debt and warrants) of $79,997 to these warrants. The
fair market value of the warrants was determined with reference to the exercise
price of the warrants, the fair market value of our common stock at the date
the warrants were issued (considering its recent sale of stock to third
parties) and the period the warrants can be exercised. In connection with the
sales of Series D preferred stock through the various securities purchase
agreements, the outstanding warrants to purchase 20,618 shares of Class D
common stock were exchanged for warrants (with similar put and call features)
to purchase 20,618 shares of Class E common stock and also increased to include
additional warrants to purchase 12,329 shares of Class E common stock. The
value of these additional warrants, totaling
 
                                      F-22
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
approximately $180,000 (based upon a Black-Scholes option pricing model with
assumptions as described in Note 9) was recorded as interest expense in 1997.
 
   On January 22, 1998, the holder of warrants to purchase 32,947 shares of
Common Stock notified us that it was exercising its right to cause us to
repurchase the warrants. We determined that the appropriate purchase price for
the warrants was approximately $525,000 and offered to pay such amount to the
holder of the warrants. This offer has not yet been accepted (See Note 16 for
subsequent event). To the extent that we are required to purchase the warrants
for an amount in excess of $525,000, such excess amount would be reflected as
additional accretion to the redemption value of these warrants when calculating
our earnings per share attributable to the common stockholders. The difference
between the value of the warrants at the date of issuance and their currently
estimated value is being accreted using the effective interest method.
 
9. STOCK OPTIONS AND WARRANTS
 
Stock Options
 
   During 1994, certain stockholders were granted options to purchase up to a
total of approximately 13.5% of the outstanding shares of our common stock.
These options, which have an exercise price of $.10 per share, are earned and
become exercisable based upon certain financial returns earned and realized in
a cash payment by certain stockholders and are subject to other conditions. In
July 1995, the option agreements were amended to reduce the total number of
shares of common stock for which the options could be exercised to 11.5% of the
outstanding shares, and a supplemental option agreement was entered into
entitling one of these stockholders to purchase 20,618 shares of common stock
at $0.01 per share. The supplemental option vests over a five year period.
Under the supplemental option agreement, additional options to purchase a total
of 8,579 shares of common stock at an exercise price of $0.01 per share were
issued in 1997. These options vest over the same period as the initial
supplemental option. At December 31, 1996, and 1997, 8,251 and 17,514 of the
supplemental options, respectively, had vested.
 
   On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon
completion of the IPO. Under these amended agreements, in addition to the
options issued under the supplemental option agreement, the stockholders may
purchase an aggregate of 122,615 shares of our common stock at any time after
the IPO closing, but prior to January 1, 2004. The options (other than the
supplemental options) fully vested upon the IPO closing. We recorded
compensation expense of approximately $2.0 million in February 1998 related to
these agreements.
 
   During 1995, we adopted the 1995 Stock Option Plan. Under this plan we can
grant up to 160,568 options exercisable into shares of Class E common stock to
certain members of management. The options vest and become exercisable in five
equal annual installments commencing with the first anniversary of the grant,
and expire 10 years from the date of grant, or earlier under certain
circumstances. Options issued under the 1995 Stock Option Plan to purchase
92,101 shares of common stock were fully vested upon the consummation of the
IPO.
 
                                      F-23
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                       December 31, 1995, 1996 and 1997
 
 
   Stock option activity under our 1995 Stock Option Plan for the years ended
December 31, 1995, 1996 and 1997, was as follows:
 
<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                                        Exercise
                                                  Shares   Price Range   Price
                                                  -------  ------------ --------
  <S>                                             <C>      <C>          <C>
  Outstanding as of January 1, 1995..............     --   $        --   $ --
    Granted......................................  63,672          3.88   3.88
    Cancelled....................................  (9,338)         3.88   3.88
                                                  -------
  Outstanding as of December 31, 1995............  54,334          3.88   3.88
    Granted......................................  30,922          3.88   3.88
                                                  -------
  Outstanding as of December 31, 1996............  85,256          3.88   3.88
    Granted......................................  68,782   13.85-14.71  14.59
    Cancelled....................................  (2,672)         3.88   3.88
                                                  -------
  Outstanding as of December 31, 1997............ 151,366  $ 3.88-14.71  $8.75
                                                  =======  ============  =====
  Stock options exercisable at
    December 31, 1996............................  10,332         $3.88  $3.88
                                                  =======  ============  =====
    December 31, 1997............................  26,853         $3.88  $3.88
                                                  =======  ============  =====
</TABLE>
 
   The following table summarizes information about all stock options
outstanding as of December 31, 1997:
 
<TABLE>
<CAPTION>
                                        Options Outstanding                      Options Exercisable
                         ------------------------------------------------- --------------------------------
                              Number                          Weighted          Number
                            Outstanding       Weighted        Average         Exercisable       Weighted
                               as of          Average        Remaining            at            Average
Exercise Price Ranges    December 31, 1997 Exercise Price Contractual Life December 31, 1997 Exercise Price
---------------------    ----------------- -------------- ---------------- ----------------- --------------
<S>                      <C>               <C>            <C>              <C>               <C>
$0.01-$0.10.............       29,197          $ 0.01           6.1             17,514           $0.01
$3.88...................       82,584            3.88           8.0             26,853            3.88
$13.85-$14.71...........       68,782           14.59           9.5                --              --
                              -------                                           ------
$0.01-$14.71............      180,563          $ 7.33           8.2             44,367           $2.35
                              =======          ======           ===             ======           =====
</TABLE>
 
   For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model assuming, among other things, no dividend yield,
a range of risk-free interest rates of 5.7% to 6.8%, no volatility and an
expected life of 10 years. The weighted average fair value of the options
granted during the years ended December 31, 1996 and 1997, was approximately
$1.80 and $2.58, respectively.
 
   On January 29, 1998, we issued options to employees for the purchase of
207,100 shares of Common Stock at an exercise price of $16.00 per share.
 
Warrants
 
   During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, we issued warrants
exercisable into a total of 422,951 shares of Class E common stock. These
warrants, which are exercisable at any time, have an exercise price of $.01
per share and expire in July 2005. The holders of these warrants exercised
them in connection with the consummation of the IPO (Note 2).
 
 
                                     F-24
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
   A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1995, 1996 and 1997, is as follows:
 
<TABLE>
<CAPTION>
                                                      Shares Under Warrant
                                                   -----------------------------
                                                      Class D        Class E
                                                   Common Stock   Common Stock
                                                   -------------- --------------
                                                   Shares   Price Shares   Price
                                                   -------  ----- -------  -----
   <S>                                             <C>      <C>   <C>      <C>
   Outstanding as of January 1, 1995..............     --   $ --      --   $ --
     Issued....................................... 257,690   0.01     --     --
                                                   -------  ----- -------  -----
   Outstanding as of December 31, 1995............ 257,690   0.01     --     --
     Issued.......................................     --     --      --     --
                                                   -------  ----- -------  -----
   Outstanding as of December 31, 1996............ 257,690   0.01     --     --
     Issued.......................................     --     --  435,281   0.01
     Cancelled.................................... (34,776)  0.01     --     --
     Exercised....................................     --     --     (928)  0.01
     Exchanged.................................... (20,618)  0.01  20,618   0.01
                                                   -------  ----- -------  -----
   Outstanding as of December 31, 1997............ 202,296   0.01 454,971   0.01
                                                   =======  ===== =======  =====
   Warrants exercisable at December 31, 1996...... 257,690  $0.01     --   $ --
                                                   =======  ===== =======  =====
   Warrants exercisable at December 31, 1997...... 202,296  $0.01 454,971  $0.01
                                                   =======  ===== =======  =====
</TABLE>
 
   The fair value of each warrant is estimated on the date of grant based on
the Black-Scholes option pricing model assuming among other things, no dividend
yield, a risk-free interest rate of 6.59%, an expected volatility of 0.70 and
expected life of 8-10 years.
 
   The weighted average fair value of warrants to purchase Class D common stock
issued during the year ended December 31, 1995, was approximately $3.88. As of
December 31, 1997, the remaining contractual life of these warrants was
approximately 7.6 years. The weighted average fair value of warrants to
purchase Class E common stock issued for the year ended December 31, 1997 was
approximately $14.67. As of December 31, 1997, the remaining contractual life
of these warrants was approximately 7.6 years.
 
Pro Forma Results
 
   Had we accounted for our stock options in accordance with FASB No. 123, pro
forma income (loss) before extraordinary item and net income (loss), and pro
forma income (loss) before extraordinary item and net income (loss)
attributable to common stockholders would have been as follows (in thousands,
except per share data):
 
<TABLE>
<CAPTION>
                                                            December 31
                                                       -----------------------
                                                        1995    1996    1997
                                                       ------  ------- -------
      <S>                                              <C>     <C>     <C>
      Pro forma income (loss) before extraordinary
       item........................................... $   64  $ 1,475 $  (505)
      Pro forma net income (loss).....................     64    1,475    (923)
      Pro forma income (loss) before extraordinary
       item attributable to common stockholders.......   (809)     117  (8,932)
      Pro forma net income (loss) attributable to
       common stockholders............................   (809)     117  (9,350)
                                                       ======  ======= =======
      Pro forma diluted income (loss) before
       extraordinary item per share attributable to
       common stockholders............................ $(1.07) $  0.11 $(11.63)
                                                       ======  ======= =======
      Pro forma diluted net income (loss) per share
       attributable to common stockholders............ $(1.07) $  0.11 $(12.17)
                                                       ======  ======= =======
</TABLE>
 
                                      F-25
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
 
   Pro forma basic amounts per share attributable to common stockholders are
the same as diluted disclosed above except in 1996, where basic income before
extraordinary item and net income attributable to common stockholders was
$0.15.
 
   The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted. At December 31, 1997, the
unamortized compensation expense under FASB No. 123 to be recognized for
options that vested upon the IPO was approximately $192,000.
 
10. INCOME TAXES
 
   The provision (benefit) for income taxes for the years ended December 31,
1995, 1996 and 1997, consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                           For the Year Ended
                                                              December 31
                                                           -------------------
                                                           1995  1996   1997
                                                           ----- ----  -------
      <S>                                                  <C>   <C>   <C>
      Current--
        Federal........................................... $ --  $150  $   685
        State and local...................................    24  260       (3)
        Foreign...........................................   --   --       --
                                                           ----- ----  -------
          Total current...................................    24  410      682
                                                           ----- ----  -------
      Deferred--
        Federal...........................................   --  (172)    (578)
        State and local...................................   --   (30)     (76)
        Foreign...........................................   --   --      (359)
                                                           ----- ----  -------
          Total deferred..................................   --  (202)  (1,013)
                                                           ----- ----  -------
      Total provision (benefit) for income taxes.......... $  24 $208  $  (331)
                                                           ===== ====  =======
</TABLE>
 
   A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1995, 1996 and 1997,
is as follows:
 
<TABLE>
<CAPTION>
                                  Year Ended
                                  December 31
                               ---------------------
                               1995    1996    1997
                               -----   -----   -----
      <S>                      <C>     <C>     <C>
      Statutory U.S. Federal
       income tax rate........  34.0 %  34.0 % (34.0)%
      Foreign taxes...........   --  %   --  %  (8.7)%
      State income taxes, net
       of Federal benefit.....  17.0 %  10.0 %  (6.6)%
      Permanent differences
       and other.............. (11.2)%   4.8 %   7.6 %
      Valuation allowance..... (14.0)% (36.6)%   --  %
                               -----   -----   -----
      Effective income tax
       rate...................  25.8 %  12.2 % (41.7)%
                               =====   =====   =====
</TABLE>
 
 
                                      F-26
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
   Components of deferred income tax assets and liabilities consist of the
following at December 31, 1996 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                   December 31
                                                                   -----------
                                                                   1996  1997
                                                                   ---- ------
<S>                                                                <C>  <C>
Deferred income tax assets:
  Tax net operating loss carryforwards............................ $281 $  891
  Allowance for doubtful accounts.................................  182    285
  Amortization on covenants not to compete........................  --     926
  Other...........................................................   49    121
                                                                   ---- ------
    Total deferred income tax assets..............................  512  2,223
                                                                   ---- ------
Deferred income tax liabilities:
  Depreciation and amortization...................................   86  3,032
  Other...........................................................   37    --
                                                                   ---- ------
    Total deferred income tax liabilities.........................  123  3,032
  Valuation allowance.............................................  --     --
                                                                   ---- ------
    Net deferred income tax (liability) asset..................... $389 $ (809)
                                                                   ==== ======
</TABLE>
 
   We have generated a tax net operating loss carryforward and also purchased
certain tax net operating loss carryforwards in connection with our business
acquisitions. At December 31, 1997, such tax net operating loss carryforwards
totaled $2,123,000 and begin to expire in 2010. We have not recorded a
valuation allowance because we believe that deferred income tax assets will be
realized in the future.
 
11. COMMITMENTS AND CONTINGENCIES
 
Litigation
 
   We are subject to occasional lawsuits, investigations and claims arising out
of the normal conduct of our business. In certain cases, claims against
acquired businesses relating to events which occurred during the periods we did
not own them are indemnified by the former owners. Management does not believe
the outcome of any pending claims will have a material adverse impact on our
financial position or results of operations.
 
Leases
 
   We rent most of our school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through March 2009. The
facility leases require us to make monthly payments covering rent, taxes,
insurance and maintenance costs. Rent expense, exclusive of taxes, insurance
and maintenance of the facilities and equipment for the years ended December
31, 1995, 1996 and 1997 was approximately $1,589,000, $2,649,000, $8,049,000,
respectively.
 
 
                                      F-27
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
   Future minimum lease payments under these leases as of December 31, 1997,
are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                      Capital Operating
                                                      Leases   Leases    Total
                                                      ------- --------- -------
      <S>                                             <C>     <C>       <C>
      1998........................................... $1,018   $11,678  $12,696
      1999...........................................    345    10,650   10,995
      2000...........................................     68     9,627    9,695
      2001...........................................     20     8,069    8,089
      2002...........................................      5     5,751    5,756
      2003 and thereafter............................    --     20,248   20,248
                                                      ------   -------  -------
                                                       1,456   $66,023  $67,479
                                                               =======  =======
      Less--Portion representing interest at a
       weighted average rate of 9.58%................    177
                                                      ------
      Principal payments.............................  1,279
      Less--Current portion..........................    868
                                                      ------
                                                      $  411
                                                      ======
</TABLE>
 
12. REGULATORY
 
   CEC and our U.S. schools are subject to extensive regulation by federal and
state governmental agencies and accrediting bodies. In particular, the Higher
Education Act of 1965, as amended (the "HEA"), and the regulations promulgated
thereunder by the DOE subject our U.S. schools to significant regulatory
scrutiny on the basis of numerous standards that schools must satisfy in order
to participate in the various federal student financial assistance programs
under Title IV Programs. Under the HEA and its implementing regulations,
certain financial responsibility and other regulatory standards must be
complied with in order to qualify to participate in the Title IV Programs.
Under such standards, each institution must, among other things, (i) have an
acid test ratio (defined as the ratio of cash, cash equivalents, and current
accounts receivable to current liabilities) of at least 1:1 at the end of each
fiscal year, (ii) have a positive tangible net worth at the end of each fiscal
year, (iii) not have a cumulative net operating loss during its two most recent
fiscal years that results in a decline of more than 10% of the institution's
tangible net worth at the beginning of that two-year period, (iv) collect 85%
or less of its education revenues from Title IV Program funds in any fiscal
year, and (v) not have cohort default rates on federally funded or federally
guaranteed student loans of 25% or greater for three consecutive federal fiscal
years. The DOE may measure the financial responsibility standards on a school-
by-school basis or on a corporate consolidated basis. Any regulatory violation
could be the basis for the initiation of a suspension, limitation or
termination proceeding against us or any of our U.S. institutions. To minimize
risks associated with noncompliance with DOE requirements, we conduct periodic
financial and compliance reviews of our subsidiaries.
 
   An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate in
the Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting surety
either in an amount equal to 50% (or greater, as the DOE may require) of the
total Title IV Program funds received by students enrolled at such institution
during the prior year or in an amount equal to 10% (or greater, as the DOE may
require) of such prior year's funds if the institution also agrees to transfer
to the reimbursement system of payment for its Title IV Program funds. The DOE
has interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE.
 
 
                                      F-28
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
   In November 1997, the DOE published new regulations regarding financial
responsibility to take effect on July 1, 1998. The regulations provide a
transition year alternative which will permit institutions to have their
financial responsibility for the 1998 fiscal year measured on the basis of
either the new regulations or the current regulations, whichever are more
favorable. Under the new regulations, the DOE will calculate three financial
ratios for an institution, each of which will be scored separately and which
will then be combined to determine the institution's financial responsibility.
If an institution's composite score is below the minimum requirement for
unconditional approval but above a designated threshold level, such institution
may take advantage of an alternative that allows it to continue to participate
in the Title IV Programs for up to three years under additional monitoring and
reporting procedures. If an institution's composite score falls below this
threshold level or is between the minimum for unconditional approval and the
threshold for more than three consecutive years, the institution will be
required to post a letter of credit in favor of the DOE. We do not believe that
these new regulations will have a material effect on our compliance with the
DOE's financial responsibility standards.
 
   The process of reauthorizing the HEA by the U.S. Congress, which takes place
approximately every five years, has begun and is expected to be completed by
1998. It is not possible to predict the outcome of the reauthorization process.
Although there is no present indication that the Congress will decline to
reauthorize the Title IV Programs, there can be no assurance that government
funding for the Title IV Programs will continue to be available or maintained
at current levels, nor can there be assurance that current requirements for
student and institutional participation in the Title IV Programs will be
unchanged. Thus, the reauthorization process could result in revisions to the
HEA that increase the compliance burden on our institutions. A reduction in
funding levels for federal student financial assistance programs could impact
our ability to attract students.
 
   In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agencies of the state in
which such campus is located. Each of our U.S. campuses is licensed or
authorized by the relevant agencies of the state in which such campus is
located. In addition, in order to participate in the Title IV Programs, an
institution must be accredited by an accrediting agency recognized by the DOE.
Each of our U.S. campuses is accredited by an accrediting agency recognized by
the DOE.
 
   With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution undergoes a change of ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously committed
Title IV Program funds to its students until it has applied for and received
from the DOE recertification under our ownership.
 
   In reviewing our acquisitions since September 1996, it has been the DOE's
practice to measure financial responsibility on the basis of the financial
statements of both our institutions and CEC on a consolidated basis. In its
review of our 1996 annual financial statements and interim 1997 balance sheets,
as filed with the DOE in connection with our applications for DOE certification
of institutions acquired subsequent to September 1996 to allow such
institutions to participate in the Title IV Programs, the DOE has questioned
our accounting for certain direct marketing costs and the valuation of
courseware and other instructional materials of our recently acquired
institutions. The audited financial statements included herein have been
restated to expense as incurred all direct marketing and advertising costs
which had previously been deferred.
 
   As a result of the DOE's concerns regarding our accounting for direct
marketing costs and courseware and instructional materials, the DOE has offered
us the alternative of posting an irrevocable letter of credit in favor of the
Secretary of Education with respect to each institution we acquired since
September 1996 in a sum
 
                                      F-29
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
sufficient to secure the DOE's interest in the Title IV Program funds
administered by the applicable institution. While we continue to disagree with
the position taken by the DOE, in order to obtain certification of the
institutions to resume participation in the Title IV Programs in a timely
fashion, and thus, to avoid any material interruption in Title IV Program
funding for the acquired institutions, we posted, and currently had
outstanding, a letter of credit in the amount of $1.9 million, which expires on
September 30, 1998, with respect to Western; a letter of credit in the amount
of $12.0 million, which expires on October 31, 1998, with respect to Gibbs; a
letter of credit in the amount of $1.2 million, which expires on October 31,
1998, with respect to SCT; and a letter of credit in the amount of $5.3
million, which expires on October 31, 1998, with respect to IAMD (See Note 16
for subsequent event).
 
   The original letters of credit for Western and SCT represented 50% of each
institution's Title IV Program funding in the prior award year. Subsequently,
the DOE increased the level of surety for SCT to, and established the level of
surety of Gibbs and IAMD at, 75% of the Title IV Program funds that students
enrolled at each such institution received in the previous award year. The DOE
also has stated that, prior to a determination that we satisfy the standards of
financial responsibility, the DOE will not consider applications to resume
Title IV Program participation on behalf of any institutions that we may
acquire in the future or applications that seek approval of any action that
would expand the Title IV Program participation of any of our U.S. institutions
which are already certified for such participation.
 
   Beginning in October 1997, the DOE has imposed a condition that, through
September 30, 1998, SCT, Gibbs and IAMD may not disburse Title IV Program funds
in excess of the total Title IV Program funds that students enrolled at each
institution received in the most recent award year for which data are available
to the DOE (See Note 16 for subsequent event). The DOE has calculated this
amount to be $1.6 million in the case of SCT, $16.0 million in the case of
Gibbs and $7.0 million in the case of IAMD. In subsequent discussions, the DOE
has agreed to consider potential increases in the Title IV Program funding
available to students at the affected institutions, if we so request and with
the understanding that we would secure any such increase in Title IV Program
funding by increasing the applicable letter of credit in an amount commensurate
with the additional Title IV Program funding utilized by such students. SCT
currently participates in the FDL Program, the Gibbs schools are eligible to
participate in the FDL Program, and the IAMD schools are applying for such
eligibility.
 
   We have determined that the Title IV funding disbursed to students enrolled
at each of SCT, Gibbs and IAMD is approaching the funding limitation imposed by
the DOE for each such school. We believe we can stay within such limitation at
Gibbs and IAMD for at least the next calendar quarter by utilizing Federal
Direct Loans at such schools. Based on current trends, we believe SCT could
reach its Title IV funding limitation in the second quarter of 1998, but, if
that occurs, we believe we can provide alternative sources of financial aid to
students at SCT. We have initiated discussions with the DOE to consider an
increase in the Title IV funding limitation for SCT, Gibbs and IAMD, at least
until the DOE can conclude its next financial review of us, based on our
ability to expand the letters of credit that it has posted on behalf of each
such school. If IAMD cannot begin participation in the FDL program early in the
next quarter, it could significantly reduce our ability to provide financial
assistance to additional students at IAMD which in turn could reduce our
ability to enroll such additional students. If we were unable to increase
aggregate enrollment at SCT, Gibbs and IAMD and unable for an extended period
to file applications with the DOE for other newly acquired U.S. institutions to
seek Title IV Program participation, it could have a material adverse effect on
our business, results of operations and financial condition and on its ability
to generate sufficient liquidity to continue to fund growth in its operations
and purchase other institutions.
 
                                      F-30
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
 
   In accordance with applicable law, the DOE will be required to rescind the
letters of credit and related requirements if CEC and our U.S. institutions
demonstrate that they satisfy the standards of financial responsibility, using
accounting treatments that are acceptable to the DOE. We changed our accounting
to eliminate deferred marketing costs from our financial statements and, during
discussions with the DOE, provided additional information regarding the
valuation of courseware and instructional materials at one of the recently
acquired institutions where such valuation was questioned by the DOE. The DOE
agreed that in the conduct of its next review of the financial responsibility
of CEC and our U.S. institutions, the DOE will consider financial information
reflecting the results of the IPO, as well as the 1997 audited financial
statements of each entity. Accordingly, we intend to seek the DOE's review of
CEC and our U.S. institutions' audited 1997 financial statements and our
audited post-IPO balance sheet on a expedited basis in April 1998 (See Note 16
for subsequent event).
 
   At December 31, 1997, we believe, based on our audited 1997 financial
statements, that we satisfy each of the DOE's standards of financial
responsibility, except for the tangible net worth ratio. However, we believe
that based upon the DOE's review of our audited 1997 financial statements and
our audited post-IPO balance sheet, we will also satisfy the tangible net worth
ratio. Certain of our institutions acquired during 1997 (IAMD and four of the
Gibbs schools) will show an operating loss for the portion of 1997 fiscal year
that they were owned and operated by us. In the event that the DOE considers a
part-year operating loss material, and if the DOE does not measure the
financial responsibility of such institutions on the basis of the financial
position of CEC, the DOE may require us to post letters of credit on behalf of
such institutions, but management does not believe there would be any basis for
the DOE to impose a further Title IV funding limitation on such institutions.
Such letters of credit, which would be calculated on an institution-specific
basis, would be in amounts substantially less than the letters of credit we
currently have outstanding. To the extent the outstanding letters of credit are
reduced or eliminated based upon the DOE's review, we will have additional
availability under the Credit Agreement. After considering the IPO proceeds and
use thereof, we had unused availability under its Credit Agreement of
approximately $55.1 million which provides it with liquidity to increase the
letters of credit should the DOE so require.
 
   In Canada, there are several government programs which provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.
 
13. RELATED-PARTY TRANSACTIONS
 
   We maintain short-term employment and consulting agreements with certain
stockholders. Total expenses under these agreements were approximately
$292,000, $298,000 and $367,000, for the years ended December 31, 1995, 1996
and 1997, respectively.
 
   In July 1995, we entered into an agreement with a stockholder whereby the
stockholder provides certain consulting services for us. Total expenses under
this agreement were $31,000, $75,000, and $75,000 for the years ended December
31, 1995, 1996 and 1997. The agreement was terminated upon the consummation of
the IPO.
 
   We have also entered into a stock subscription agreement with an employee,
as discussed in Note 6.
 
14. EMPLOYEE BENEFIT PLAN
 
   We maintain a contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code that provides
retirement benefits for our eligible employees. This plan requires
 
                                      F-31
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                        December 31, 1995, 1996 and 1997
 
matching contributions to eligible employees. Our matching contributions were
$89,000, $279,000, and $400,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
 
15. PRO FORMA DATA (UNAUDITED)
 
   The unaudited pro forma consolidated balance sheet information gives effect
to the transactions discussed in Note 2 as if they had occurred on December 31,
1997 and therefore would have resulted in the repayment of outstanding
indebtedness totaling $44,035,000 which existed at that time.
 
16. SUBSEQUENT EVENTS
 
   On February 4, 1998, we approved the 1998 Non-Employee Directors' Stock
Option Plan. The plan provides for us to grant options to purchase shares of
common stock to directors. Each person who is a non-employee director on the
effective date shall become a participant and shall be granted an option to
purchase 8,000 shares of common stock. On an annual basis, as long as such
director continues to serve as a director, such director shall receive an
option to purchase 3,000 shares of common stock. Each person who is
subsequently elected as a director shall become a participant and shall, on his
date of election, be granted an option to purchase 8,000 shares of common
stock. Each participant shall receive additional grants in subsequent years.
Each option becomes exercisable in three equal annual installments and expires
ten years from the date of grant. We have reserved 200,000 shares of common
stock for issuance under the plan.
 
   On February 4, 1998, we approved the 1998 Employee Incentive Compensation
Plan. The plan provides for us to grant stock options, stock appreciation
rights, restricted stock, deferred stock and other awards (including stock
bonus and performance awards) which are exercisable into shares of common stock
to our directors, officers, employees and consultants. The plan shall be
administered by a committee of the board of directors which shall have the
authority to determine the persons to receive awards, the type of awards to be
issued, the number of shares of common stock to be covered by each award, and
the terms and conditions. We will fix the period of each stock option and the
term of the stock appreciation right, provided that no stock option or
appreciation right shall be exercisable more than ten years after the date of
grant. Stock options may be either incentive stock options or nonqualified
stock options. We have reserved 600,000 shares of common stock for distribution
pursuant to awards issued under the plan.
 
   On February 4, 1998, we approved the 1998 Employee Stock Purchase Plan,
which is effective April 1, 1998. The plan provides for the issuance of up to
500,000 shares of common stock to be purchased by our eligible employees
through periodic offerings. Our employees may purchase common stock through
payroll deductions (not to exceed $20,000 per person within any calendar year)
at 85% of the fair market value.
 
   On March 13, 1998, we purchased 100% of the outstanding shares of capital
stock of Southern California School of Culinary Arts for $1,000,000. The
acquisition will be accounted for as a purchase and based upon preliminary
estimates, the purchase price in excess of the fair value of assets acquired
and liabilities assumed is anticipated to be approximately $850,000. In
connection with the acquisition, we entered into covenant not-to-compete
agreements with the former owners of the school for a total price of $150,000.
 
   On May 13, 1998, we entered into an agreement with the holder of redeemable
warrants to purchase 32,947 shares of common stock who had previously notified
us that it was exercising its right requiring us to repurchase the warrants.
The agreement permitted the warrant holder to exercise the warrants (a right
previously given up when they exercised their right to put the warrants to CEC)
in exchange for not requiring us to repurchase the warrants as provided under
the warrant holders put right. The warrant holder did exercise the warrants.
 
                                      F-32
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
 
                        December 31, 1995, 1996 and 1997
 
 
   On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale Culinary Institute, Inc. for approximately $9.9 million. The
acquisition is accounted for as a purchase and the purchase price in excess of
the fair value of assets acquired and liabilities assumed is approximately $8.4
million.
 
   In connection with the DOE's recent reviews of our compliance with the
standards of financial responsibility, it has considered both ours and our
institutions' financial statements as of and for the year then ended December
31, 1997 and balance sheets as of February 28, 1998. Based on such reviews, the
DOE reduced the letters of credit we have been required to file with the DOE to
maintain our institutions' participation in the Title IV Programs such that we
are required to post and maintain and have posted and maintain irrevocable
letters of credit of $3.4 million for IAMD, $8.9 million for Gibbs and $2.0
million for Western. The DOE also has removed its prior condition that limited
the amount of Title IV funds that SCT, IAMD and Gibbs could disburse to their
students.
 
   During 1998, we recorded approximately $4.7 million in additional goodwill
related to the acquisition of IAMD, based upon the contingent earn-out
provision of the purchase agreement.
 
   In October 1998, we refinanced our Credit Agreement. Under the new Credit
Agreement, we can borrow up to $60 million under a revolving line of credit,
such amount reduced by outstanding letters of credit. We can obtain up to $35
million in letters of credit. All other terms of the Credit Agreement remained
substantially the same, except that the new Credit Agreement expires on October
26, 2003.
 
   On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
United States and Canada in connection with our culinary education programs. We
are developing a curriculum with Le Cordon Bleu for use at our culinary schools
and the agreement will not take effect until this curriculum is approved by
both of us. Upon approval of the curriculum, we will pay $1 million in common
stock to Le Cordon Bleu. An additional payment of $1 million in common stock is
due one year later. We will pay Le Cordon Bleu royalties based on tuition
collected from students enrolled in Le Cordon Bleu programs at our schools. The
agreement expires on December 31, 2008 but can be renewed for two successive
terms of five years each.
 
   On January 4, 1999, we acquired 100% of the outstanding shares of capital
stock of the Harrington Institute of Interior Design, Inc. for $2.9 million,
subject to adjustment. The acquisition will be accounted for as a purchase,
with the excess of the purchase price over the net assets acquired being
recorded as goodwill.
 
                                      F-33
<PAGE>
 
17. COMPREHENSIVE INCOME (Unaudited)
 
   On January 1, 1998, we adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires
companies to report all changes in equity during a period, expect those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income, which
encompasses net income and foreign currency translation adjustments, is as
follows:
 
<TABLE>
<CAPTION>
                                                            Accumulated Other
                                                           Comprehensive Income
                                                             (Loss)--Foreign
                                             Comprehensive Currency Translation
                                                 Loss           Adjustment
                                             ------------- --------------------
                                                       (in thousands)
<S>                                          <C>           <C>
Balance December 31, 1996...................                      $ --
  Net Income for the year ended December 31,
   1997.....................................    $  (880)            --
  Other Comprehensive Income (Loss)--Foreign
   currency translation adjustment..........       (297)           (297)
                                                -------           -----
  Comprehensive loss for the year ended
   December 31, 1997........................    $(1,177)          $(297)
                                                -------           -----
Balance December 31, 1997...................        --            $(297)
  Net income for the nine months ended
   September 30, 1998.......................    $    35             --
  Other Comprehensive Income (Loss)--Foreign
   currency translation adjustment..........       (526)           (526)
                                                -------           -----
  Comprehensive loss for the nine months
   ended September 30, 1998.................    $  (491)
                                                =======
Balance, September 30, 1998.................                      $(823)
                                                                  =====
</TABLE>
 
   The accumulated other comprehensive income (loss) balance as of January 1,
1997 has been restated in connection with our adoption of SFAS No. 130.
 
                                      F-34
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of
Career Education Corporation
Hoffman Estates, Illinois
 
   We have audited the accompanying consolidated balance sheets of The
Katharine Gibbs Schools, Inc. and subsidiaries (a wholly-owned subsidiary of
PRIMEDIA Inc., formerly K-III Communications Corporation) (the "Company") as of
December 31, 1995 and 1996, and the related statements of consolidated
operations, shareholder's deficiency, and consolidated cash flows for the years
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 audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1996, and the results of their operations and their cash flows, and
for the years then ended in conformity with generally accepted accounting
principles.
 
DELOITTE & TOUCHE LLP
 
New York, New York
October 27, 1997
 
                                      F-35
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1995 and 1996
                  (Dollars In Thousands, Except Share Amounts)
 
<TABLE>
<CAPTION>
                                                              1995      1996
                                                             -------  --------
<S>                                                          <C>      <C>
                           ASSETS
CURRENT ASSETS:
  Cash...................................................... $ 5,507  $  6,296
  Receivables:
    Students, net of allowance for doubtful accounts of
     approximately $520 and $433 at December 31, 1995 and
     1996, respectively.....................................   1,464     1,067
    Other...................................................     456       630
  Prepaid expenses and other current assets.................     599       103
                                                             -------  --------
      Total current assets..................................   8,026     8,096
                                                             -------  --------
PROPERTY AND EQUIPMENT, Net.................................   3,995     4,082
                                                             -------  --------
OTHER ASSETS:
  Intangible assets, net....................................  21,364    20,285
  Investment in Perkins loan program, net...................      50        29
  Other non-current assets..................................     217       292
                                                             -------  --------
      Total other assets....................................  21,631    20,606
                                                             -------  --------
TOTAL ASSETS................................................ $33,652  $ 32,784
                                                             =======  ========
          LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
  Accounts payable.......................................... $ 1,605  $  1,201
  Accrued expenses..........................................   2,117     2,312
  Advance student payments..................................   1,999     2,395
  Deferred tuition revenue..................................   1,727     1,072
  Other current liabilities.................................   1,173       791
  Current maturities of capital lease obligations...........      96        29
                                                             -------  --------
      Total current liabilities.............................   8,717     7,800
                                                             -------  --------
NON-CURRENT LIABILITIES:
  Capital lease obligations, less current maturities........      39        89
  Payable to PRIMEDIA Inc. .................................  26,679    26,851
  Other non-current liabilities.............................     653       805
                                                             -------  --------
      Total non-current liabilities.........................  27,371    27,745
                                                             -------  --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIENCY:
  Common stock, $.01 par value; 1,000 shares authorized,
   1,000 shares issued and outstanding......................     --        --
  Accumulated deficit.......................................  (2,436)   (2,761)
                                                             -------  --------
      Total shareholder's deficiency........................  (2,436)   (2,761)
                                                             -------  --------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.............. $33,652  $ 32,784
                                                             =======  ========
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                      F-36
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED OPERATIONS
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
<TABLE>
<CAPTION>
                                                               1995     1996
                                                              -------  -------
<S>                                                           <C>      <C>
REVENUES:
  Tuition and registration fees, net......................... $22,343  $25,831
  Other, net.................................................   2,507    2,932
                                                              -------  -------
    Total revenues...........................................  24,850   28,763
                                                              -------  -------
OPERATING COSTS AND EXPENSES:
  Instruction................................................   5,945    6,427
  Selling, general and administrative........................  16,937   18,991
  Depreciation and amortization..............................   2,400    2,235
  Management fees charged by PRIMEDIA Inc....................     354      397
                                                              -------  -------
    Total operating costs and expenses.......................  25,636   28,050
                                                              -------  -------
INCOME (LOSS) FROM OPERATIONS................................    (786)     713
INTEREST EXPENSE.............................................   1,394    1,038
                                                              -------  -------
NET LOSS..................................................... $(2,180) $  (325)
                                                              =======  =======
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                      F-37
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                     STATEMENTS OF SHAREHOLDER'S DEFICIENCY
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
<TABLE>
<CAPTION>
                                                       Common Stock
                                                       ------------- Accumulated
                                                       Shares Amount   Deficit
                                                       ------ ------ -----------
<S>                                                    <C>    <C>    <C>
Balance at January 1, 1995............................ 1,000  $ --     $  (256)
  Net loss............................................   --     --      (2,180)
                                                       -----  -----    -------
Balance at December 31, 1995.......................... 1,000    --      (2,436)
  Net loss............................................   --     --        (325)
                                                       -----  -----    -------
Balance at December 31, 1996.......................... 1,000  $ --     $(2,761)
                                                       =====  =====    =======
</TABLE>
 
 
 
                See notes to consolidated financial statements.
 
                                      F-38
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
<TABLE>
<CAPTION>
                                                               1995     1996
                                                              -------  -------
<S>                                                           <C>      <C>
OPERATING ACTIVITIES:
 Net loss.................................................... $(2,180) $  (325)
 Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Depreciation and amortization..............................   2,400    2,235
  Changes in operating assets and liabilities:
   (Increase) decrease in:
    Accounts receivable--students............................     463      397
    Accounts receivable--other...............................    (195)    (174)
    Prepaid expenses and other current assets................    (121)     496
    Other non-current assets.................................     (29)     (75)
   Increase (decrease) in:
    Accounts payable and accrued expenses....................   1,087     (209)
    Advance student payments and other current liabilities...  (1,158)      14
    Deferred tuition revenue.................................     639     (655)
    Other non-current liabilities............................     199      152
                                                              -------  -------
       Net cash provided by operating activities.............   1,105    1,856
                                                              -------  -------
INVESTING ACTIVITIES:
 Purchases of property and equipment.........................  (1,025)  (1,157)
 Investment in Perkins loan program, net.....................       9       21
                                                              -------  -------
       Net cash used in investing activities.................  (1,016)  (1,136)
                                                              -------  -------
FINANCING ACTIVITIES:
 Principal payments under capital lease obligations..........     (85)    (103)
 Increase in payable to PRIMEDIA Inc.........................   1,666      172
                                                              -------  -------
       Net cash provided by financing activities.............   1,581       69
                                                              -------  -------
NET INCREASE IN CASH.........................................   1,670      789
CASH, BEGINNING OF PERIOD....................................   3,837    5,507
                                                              -------  -------
CASH, END OF PERIOD.......................................... $ 5,507  $ 6,296
                                                              =======  =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Interest paid............................................... $    26  $    16
                                                              =======  =======
NON-CASH INVESTING AND FINANCING ACTIVITIES--
 Equipment acquired under capital lease obligations.......... $    57  $    86
                                                              =======  =======
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                      F-39
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
1. DESCRIPTION OF THE BUSINESS AND GENERAL
 
   The Katharine Gibbs Schools, Inc. (which together with its subsidiaries is
herein referred to as the "Company") is headquartered in New York, New York,
and has wholly-owned subsidiary campuses in New York, New York; Melville, New
York; Boston, Massachusetts; Montclair, New Jersey; Piscataway, New Jersey;
Norwalk, Connecticut; and Providence, Rhode Island. The schools are private
post-secondary vocational schools which are engaged in the instruction of
business career education programs leading towards degrees or certificates of
completion in secretarial arts, business administration, hospitality
management, and hotel and restaurant management.
 
   On March 7, 1994, the operating assets and liabilities of the Company were
acquired from Phillips Colleges, Inc. by The Katharine Gibbs Schools, Inc.
(formerly K-III KG Holdings Corporation), a wholly-owned subsidiary of PRIMEDIA
Inc. (formerly K-III Communications Corporation) (the ultimate parent company,
"PRIMEDIA").
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
   Principles of Consolidation--The consolidated financial statements include
the accounts of The Katharine Gibbs Schools, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
 
   Concentration of Credit Risk--The Company extends unsecured credit for
tuition to a significant portion of the students who are in attendance at the
schools. A substantial portion of credit extended to students is repaid through
the student's participation in Federally funded financial aid programs. The
Company generally completes and approves the financial aid packet of each
student who qualifies for financial aid prior to the student's beginning of
class in an effort to enhance the collectibility of its unsecured credit.
Transfers of funds from the financial aid programs to the Company are made in
accordance with the United States Department of Education (the "DOE")
requirements.
 
   The Company participates in various Federal student financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). Approximately 62% and 63% of the Company's net revenue was
collected from funds distributed under these programs for 1995 and 1996,
respectively.
 
   Investment in Perkins Loan Program, Net--The Company participates in the
Perkins Loan program in order to provide continuing long-term, low interest
loans to qualifying students in need of financial assistance. Perkins loans are
available on the basis of student financial need and are subject to the
availability of Perkins loan funds at the institution. There is a 25%
institutional matching requirement for Perkins loans. The Company carries its
investment at cost, net of an allowance of $19 at December 31, 1995 and 1996.
 
   Marketing and Advertising Costs--Marketing and advertising costs are
expensed as incurred. Marketing and advertising costs included in selling,
general and administrative expenses were $4,282 and $5,687 for 1995 and 1996,
respectively.
 
   Property and Equipment, Net--Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recognized utilizing the straight-line method over their useful lives.
Leasehold improvements are amortized over their useful lives or lease term,
whichever is shorter.
 
                                      F-40
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
Improvements are capitalized while maintenance and repairs are expensed as
incurred. The estimated useful lives and cost basis of property and equipment
at December 31, 1995 and 1996, are as follows:
 
<TABLE>
<CAPTION>
                                                   1995   1996       Life
                                                  ------ ------ ---------------
      <S>                                         <C>    <C>    <C>
      Building................................... $  608 $  633      31.5 years
      Furniture, fixtures and equipment..........  4,040  5,194    5 to 7 years
      Leasehold improvements.....................    844    908 1.5 to 11 years
                                                  ------ ------
      Total at cost..............................  5,492  6,735
      Less accumulated depreciation and
       amortization..............................  1,497  2,653
                                                  ------ ------
                                                  $3,995 $4,082
                                                  ====== ======
</TABLE>
 
   The cost of equipment acquired under capital leases was $256 and $143 at
December 31, 1995 and 1996, respectively. Accumulated amortization of equipment
acquired under capital leases was $138 and $18 at December 31, 1995 and 1996,
respectively.
 
   Intangible Assets--Intangible assets include the excess of purchase price
over net assets acquired resulting from the business acquisition described in
Note 1. Intangible assets are being amortized on a straight-line basis over
their estimated useful life. At December 31, 1995 and 1996, the cost basis and
useful lives of intangible assets consist of the following:
 
<TABLE>
<CAPTION>
                                                       1995    1996     Life
                                                      ------- ------- --------
      <S>                                             <C>     <C>     <C>
      Excess of purchase price over net assets
       acquired...................................... $ 9,464 $ 9,464 40 years
      Trademarks.....................................   6,569   6,569 40 years
      Non-compete agreement..........................   1,000   1,000  2 years
      Curriculum.....................................   7,038   7,038 12 years
                                                      ------- -------
                                                       24,071  24,071
      Less accumulated amortization..................   2,707   3,786
                                                      ------- -------
                                                      $21,364 $20,285
                                                      ======= =======
</TABLE>
 
   The recoverability of the carrying values of the excess of the purchase
price over the net assets acquired and other intangible assets is evaluated
quarterly to determine if an impairment in value has occurred. An impairment in
value will be considered to have occurred when it is determined that the
undiscounted future operating cash flows generated by the acquired business is
not sufficient to recover the carrying values of such intangible assets. If it
has been determined that an impairment in value has occurred, the excess of the
purchase price over the net assets acquired and other intangible assets would
be written down to an amount which will be equivalent to the present value of
the future operating cash flows to be generated by the acquired business.
 
   Revenue Recognition--Revenue is derived primarily from courses taught at the
schools. Tuition revenue is recognized ratably over the length of the
applicable course. Textbook sales and other revenues are recognized as services
are performed. If a student withdraws, future revenue would be reduced by the
amount of refund due to the student. Refunds are calculated in accordance with
Federal, state and accrediting agency standards.
 
   Deferred Rent Obligations--Certain of the schools' facility leases include
rental concessions, as defined in the various lease agreements. The Company
recognizes rent expense on a straight-line basis over the terms of the various
leases, ranging from 7 to 11 years. Rent expense recognized differs from the
actual cash payments required to be made under these lease agreements.
 
                                      F-41
<PAGE>
 
              THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                For the Years Ended December 31, 1995 and 1996
                            (Dollars In Thousands)
 
 
   Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from these
estimates. In 1996, the Company recorded an adjustment to reduce certain
liabilities established in prior periods, which decreased net loss by
approximately $341.
 
   Fair Value of Financial Instruments--The fair value of financial
instruments approximates carrying value.
 
3. INCOME TAXES
 
   The results of operations of the Company are included in the consolidated
Federal income tax return of PRIMEDIA. The income tax provision has been
computed as if the Company filed a separate return. At December 31, 1996, the
Company, on a stand-alone basis, had aggregate net operating loss
carryforwards of approximately $4,200 for Federal and state income taxes. As a
result of the disposition of the Company on May 31, 1997, as discussed in Note
8, PRIMEDIA will retain all net operating losses up to the date of
disposition. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts for income tax purposes.
 
   The components of the deferred income tax assets consist of the following
at December 31, 1995 and 1996:
 
<TABLE>
<CAPTION>
                                                                   1995   1996
                                                                  ------ ------
<S>                                                               <C>    <C>
Allowance for doubtful accounts receivable....................... $  212 $  195
Book depreciation over tax depreciation..........................      6    136
Deferred rent obligations........................................    292    352
Intangible assets................................................    190     99
Operating loss carryforwards.....................................  1,200  1,675
Other............................................................    493    250
                                                                  ------ ------
  Total deferred tax assets......................................  2,393  2,707
Less valuation allowance.........................................  2,393  2,707
                                                                  ------ ------
Total............................................................ $  --  $  --
                                                                  ====== ======
</TABLE>
 
4. CAPITAL LEASE OBLIGATIONS
 
   The Company leases certain equipment under capital leases. The Company
incurred interest expense related to these capital leases of $26 and $16 for
1995 and 1996, respectively.
 
                                     F-42
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
 
   The future minimum payments on the obligations under capital leases as of
December 31, 1996, are as follows:
 
<TABLE>
      <S>                                                                  <C>
      1997................................................................ $ 37
      1998................................................................   37
      1999................................................................   37
      2000................................................................   31
      2001................................................................    5
                                                                           ----
                                                                            147
      Less portion applicable to interest at rates ranging from 5.18
       percent to 10.38 percent...........................................   29
                                                                           ----
      Principal obligations under capital leases..........................  118
      Less current portion................................................   29
                                                                           ----
                                                                           $ 89
                                                                           ====
</TABLE>
 
5. COMMITMENTS AND CONTINGENCIES
 
   Operating Leases--The Company rents seven of its eight administrative and
classroom facilities and certain equipment under noncancellable operating
leases. The facility leases require the Company to make monthly payments
covering rent, taxes, insurance and maintenance costs and expire at various
times through 2007. Rent expense under operating leases exclusive of taxes,
insurance and maintenance of the facilities and equipment for 1995 and 1996,
was approximately $3,418 and $4,098, respectively.
 
   Future minimum lease payments under these noncancellable operating leases as
of December 31, 1996, are approximately as follows:
 
<TABLE>
             <S>                               <C>
             1997............................. $ 3,646
             1998.............................   3,590
             1999.............................   3,611
             2000.............................   3,690
             2001.............................   3,295
             2002 and thereafter..............   7,441
                                               -------
                                               $25,273
                                               =======
</TABLE>
 
   Litigation--The Company is subject to occasional lawsuits, investigations
and claims arising out of the normal conduct of its business. Management does
not believe the outcome of any of these legal actions and claims will have a
material adverse impact on the Company's consolidated financial statements.
 
   Regulatory--Each of the Company's schools has Federal financial assistance
programs which are subject to ongoing program reviews by the DOE, Title IV
program audits by external auditors and state program audits by state agencies.
Any regulatory violation could be the basis for the initiation of a suspension,
limitation or termination proceeding against the Company. To minimize risks
associated with noncompliance, the Company conducts periodic reviews of its
schools' financial conditions. Changes in DOE funding of Federal student
financial aid programs could impact the Company's ability to attract students.
 
                                      F-43
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
 
                 For the Years Ended December 31, 1995 and 1996
                             (Dollars In Thousands)
 
 
   Each of the Company's schools is also required to meet certain financial and
other standards in order to qualify to participate in Title IV programs. These
include maintaining an acid test ratio (defined as cash, cash equivalents and
current accounts receivable to current liabilities) of at least 1:1, having a
positive tangible net worth at the end of each fiscal year, collecting less
than 85% of its education revenues from Title IV funds on an annual basis, not
having cumulative net operating losses during its two most recent fiscal years
that result in a decline of more than 10% of the individual school's tangible
net worth at the beginning of that two-year period, and not having cohort
default rates on Federal student loans that equal or exceed 25% for three
consecutive federal fiscal years, amongst others. At December 31, 1996, each of
the Company's schools was in compliance with such requirements.
 
6. TRANSACTIONS WITH PARENT COMPANY
 
   The payable to PRIMEDIA includes a note payable to PRIMEDIA of $13,865 and
$11,413 as of December 31, 1995 and 1996, respectively. Interest accrues on the
note payable at PRIMEDIA's weighted average borrowing rate. Interest expense of
$1,368 and $1,022 on the note payable to PRIMEDIA has been recorded for 1995
and 1996, respectively. The note payable to PRIMEDIA is payable on demand,
however, PRIMEDIA has no intention of demanding payment in the next twelve
months. The Company pays PRIMEDIA management fees for costs and expenses
incurred by PRIMEDIA on behalf of the Company for certain services, including
treasury, consulting, insurance, tax, financing and other services.
 
7. EMPLOYEE BENEFIT PLANS
 
   The Company participates in a PRIMEDIA contributory profit sharing plan,
established pursuant to the provisions of Section 401(k) of the Internal
Revenue Code, that provides retirement benefits for eligible employees of the
Company. This plan requires matching contributions to eligible employees. The
Company's matching contributions were $12, and $23 for 1995 and 1996,
respectively.
 
8. SUBSEQUENT EVENTS
 
   On May 31, 1997, PRIMEDIA sold 100% of the outstanding shares of capital
stock of the Company to Career Education Corporation ("CEC") for approximately
$20,000. The sales price is subject to certain adjustments. In connection with
the sale, PRIMEDIA also entered into a covenant not-to-compete agreement with
CEC for proceeds totaling $7,000. The covenant not-to-compete restricts
PRIMEDIA's ability to own or operate certain types of post-secondary vocational
schools for a period of five years.
 
                                      F-44
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
 
                        June 30, 1996, and May 31, 1997
                       (Unaudited, dollars in thousands)
 
<TABLE>
<CAPTION>
                                                               June
                                                                30,    May 31,
                                                               1996     1997
                                                              -------  -------
<S>                                                           <C>      <C>
                           ASSETS
CURRENT ASSETS:
  Cash....................................................... $ 5,992  $ 1,157
  Accounts receivable, net of allowance for doubtful accounts
   of approximately $668 and $607 at June 30, 1996, and May
   31, 1997, respectively....................................   1,495    2,987
  Prepaid expenses and other current assets..................     617       75
                                                              -------  -------
    Total current assets.....................................   8,104    4,219
                                                              -------  -------
PROPERTY AND EQUIPMENT, net..................................   4,082    3,901
                                                              -------  -------
OTHER ASSETS:
  Intangibles, net...........................................  20,751   19,830
  Other noncurrent assets....................................     259       60
                                                              -------  -------
    Total other assets.......................................  21,010   19,890
                                                              -------  -------
TOTAL ASSETS................................................. $33,196  $28,010
                                                              =======  =======
          LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
  Current maturities of capital lease obligations............ $    68  $    83
  Accounts payable...........................................     934      282
  Accrued expenses...........................................   2,354    1,782
  Deferred tuition revenue...................................   2,558    3,772
                                                              -------  -------
    Total current liabilities................................   5,914    5,919
                                                              -------  -------
NON-CURRENT LIABILITIES, net of current portion..............     767    1,069
                                                              -------  -------
PAYABLE TO PRIMEDIA Inc......................................  29,754   23,170
                                                              -------  -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIENCY:
  Common stock, $0.01 par value; 1,000 shares authorized,
   issued and outstanding at June 30, 1996, and May 31, 1997.     --       --
  Accumulated deficit........................................  (3,239)  (2,148)
                                                              -------  -------
    Total shareholder's deficiency...........................  (3,239)  (2,148)
                                                              -------  -------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY............... $33,196  $28,010
                                                              =======  =======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-45
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                  For the Six Months Ended June 30, 1996, and
                     For the Five Months Ended May 31, 1997
                       (Unaudited, dollars in thousands)
 
<TABLE>
<CAPTION>
                             June 30, 1996 May 31, 1997
                             ------------- ------------
<S>                          <C>           <C>
REVENUE:
  Tuition and registration
   fees, net................    $12,179      $11,606
  Other, net................      1,316        1,222
                                -------      -------
    Total net revenue.......     13,495       12,828
                                -------      -------
OPERATING COSTS AND
 EXPENSES:
  Instruction...............      3,247        3,029
  Selling, general and
   administrative...........      9,261        8,028
  Depreciation and
   amortization.............      1,199          901
  Management fees charged by
   PRIMEDIA, Inc............         82           15
                                -------      -------
    Total operating
     expenses...............     13,789       11,973
                                -------      -------
    Income (loss) from
     operations.............       (294)         855
                                -------      -------
INTEREST EXPENSE............        509          242
                                -------      -------
    Income (loss) before
     provision for income
     taxes..................       (803)         613
PROVISION FOR INCOME TAXES..        --           --
                                -------      -------
NET INCOME (LOSS)...........    $  (803)     $   613
                                =======      =======
</TABLE>
 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-46
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                  For the Six Months Ended June 30, 1996, and
                     For the Five Months Ended May 31, 1997
                       (Unaudited, dollars in thousands)
 
<TABLE>
<CAPTION>
                                                             June 30,  May 31,
                                                               1996     1997
                                                             --------  -------
<S>                                                          <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $(1,436)  $(1,057)
                                                             --------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment, net..................     (542)    (134)
                                                             --------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in Payable to PRIMEDIA, Inc...........    2,464   (3,948)
                                                             --------  -------
NET INCREASE (DECREASE) IN CASH.............................      486   (5,139)
CASH, beginning of period...................................    5,506    6,296
                                                             --------  -------
CASH, end of period......................................... $  5,992  $ 1,157
                                                             ========  =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
  Capital leases entered into for the purchase of equipment. $     34  $   158
                                                             ========  =======
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-47
<PAGE>
 
               THE KATHARINE GIBBS SCHOOLS, INC. AND SUBSIDIARIES
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                        June 30, 1996, and May 31, 1997
 
1. BASIS OF PRESENTATION
 
   The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of financial position and the
results of operations and cash flows have been included, and the disclosures
made are adequate to prevent the information presented from being misleading.
Operating results for the six months ended June 30, 1996, and the five months
ended May 31, 1997, are not necessarily indicative of the results that may be
expected for the fiscal years ended December 31, 1996 and 1997. These financial
statements should be read in conjunction with, and have been prepared in
conformity with the accounting principles reflected in the financial statements
and related notes of The Katharine Gibbs Schools, Inc. and Subsidiaries (the
"Company") as of and for the year ended December 31, 1996.
 
2. SUBSEQUENT EVENTS
 
   On May 31, 1997, PRIMEDIA, Inc. (formerly K-III Communications Corporation)
("PRIMEDIA"), the sole shareholder of the Company, sold 100% of the outstanding
shares of capital stock of the Company to Career Education Corporation ("CEC")
for approximately $20,000,000. The sales price is subject to certain
adjustments. In connection with the sale, PRIMEDIA also entered into a covenant
not-to-compete agreement with CEC for proceeds totaling $7,000,000. The
covenant not-to-compete restricts PRIMEDIA's ability to own or operate certain
types of postsecondary vocational schools for five years.
 
3. USE OF ESTIMATES
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
 
                                      F-48
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Shareholders of
Scottsdale Culinary Institute, Inc.:
 
   We have audited the accompanying balance sheets of SCOTTSDALE CULINARY
INSTITUTE, INC. (a Delaware corporation) as of December 31, 1996 and 1997, and
the related statements of operations and retained earnings and cash flows for
the years 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 audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits 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 Scottsdale Culinary
Institute, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
 
Arthur Andersen LLP
 
Chicago, Illinois
September 25, 1998 (except
with respect to the matter
discussed in Note 7, as to
which the date is December
17, 1998)
 
                                      F-49
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                                 BALANCE SHEETS
 
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                                             December 31
                                                             -----------   June 30
                                                             1996  1997     1998
                                                             ----- ----- -----------
                           ASSETS                                        (Unaudited)
<S>                                                          <C>   <C>   <C>
CURRENT ASSETS:
  Cash and cash equivalents................................. $ 359 $ 288   $  766
  Receivables, net of allowance for doubtful accounts of $5.   264   388      375
  Inventories and other current assets......................    62    63       64
                                                             ----- -----   ------
      Total current assets..................................   685   739    1,205
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
 amortization...............................................   270   201      187
OTHER ASSETS................................................    14    15       15
                                                             ----- -----   ------
TOTAL ASSETS................................................ $ 969 $ 955   $1,407
                                                             ===== =====   ======
<CAPTION>
            LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                          <C>   <C>   <C>
CURRENT LIABILITIES:
  Accounts payable, accrued expenses and other current
   liabilities.............................................. $ 251 $ 199   $  163
  Deferred tuition revenue..................................   355   338      299
                                                             ----- -----   ------
      Total current liabilities.............................   606   537      462
LONG-TERM DEBT, net of current portion......................    31    17       15
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
  Common stock, no par value; 1,000,000 shares authorized;
   51,000 shares issued and outstanding at December 31,
   1997, December 31, 1996 and June 30, 1998................    51    51       51
  Additional paid-in capital................................   145   145      145
  Retained earnings.........................................   136   205      734
                                                             ----- -----   ------
      Total shareholders' equity............................   332   401      930
                                                             ----- -----   ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 969 $ 955   $1,407
                                                             ===== =====   ======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-50
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
 
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                        For the Years     For the Six Months
                                      Ended December 31      Ended June 30
                                      ------------------  --------------------
                                        1996      1997      1997       1998
                                      --------  --------  ---------  ---------
                                                              (Unaudited)
<S>                                   <C>       <C>       <C>        <C>
REVENUE:
  Tuition and registration fees, net. $  3,823  $  4,428  $   2,272  $   2,469
  Other, net.........................      408       415        221        232
                                      --------  --------  ---------  ---------
      Total net revenue..............    4,231     4,843      2,493      2,701
OPERATING EXPENSES:
  Educational services and
   facilities........................    2,445     2,565      1,323      1,168
  General and administrative.........    1,097     1,292        565        575
  Depreciation and amortization......      107        94         46         38
  Rent paid to related party.........      --         62        --         162
                                      --------  --------  ---------  ---------
      Total operating expenses.......    3,649     4,013      1,934      1,943
                                      --------  --------  ---------  ---------
      Income from operations.........      582       830        559        758
OTHER INCOME, net....................       33        62          5         11
                                      --------  --------  ---------  ---------
NET INCOME...........................      615       892        564        769
Retained earnings, beginning of
 period..............................      250       136        136        205
Distributions to shareholders........     (729)     (823)      (206)      (240)
                                      --------  --------  ---------  ---------
RETAINED EARNINGS, END OF PERIOD..... $    136  $    205  $     494  $     734
                                      ========  ========  =========  =========
</TABLE>
 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-51
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                            STATEMENTS OF CASH FLOWS
 
                             (Dollars in thousands)
 
<TABLE>
<CAPTION>
                                                                  For the Six
                                           For the Years Ended      Months
                                               December 31       Ended June 30
                                           --------------------  --------------
                                             1996       1997      1997    1998
                                           ---------  ---------  ------  ------
                                                                  (Unaudited)
<S>                                        <C>        <C>        <C>     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.............................  $     615  $     892  $  564  $  769
  Adjustments to reconcile net income to
   net cash provided by operating
   activities--
    Depreciation and amortization........        107         94      46      38
    Loss on disposal of asset............          1          3       1     --
    Changes in operating assets and
     liabilities--
      Receivables, net...................        (21)      (124)    (69)     13
      Inventories and other current
       assets............................          7         (1)     (2)     (1)
      Accounts payable, accrued expenses
       and other current liabilities.....         95        (44)    (29)    (36)
      Deferred tuition revenue...........       (286)       (17)     62     (39)
                                           ---------  ---------  ------  ------
        Net cash provided by operating
         activities......................        518        803     573     744
                                           ---------  ---------  ------  ------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment.....       (134)       (28)    (3)     (24)
  Other assets...........................          2         (1)      1     --
                                           ---------  ---------  ------  ------
        Net cash used in investing
         activities......................       (132)       (29)    (2)     (24)
                                           ---------  ---------  ------  ------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Distributions to shareholders..........       (729)      (823)   (206)   (240)
  Repayments of long-term debt...........        (14)       (22)    (10)    (2)
  Proceeds from issuance of long-term
   debt..................................         31        --      --      --
                                           ---------  ---------  ------  ------
        Net cash used in financing
         activities......................       (712)      (845)   (216)   (242)
                                           ---------  ---------  ------  ------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS.............................       (326)       (71)    355     478
CASH AND CASH EQUIVALENTS, beginning of
 period..................................        685        359     359     288
                                           ---------  ---------  ------  ------
CASH AND CASH EQUIVALENTS, end of period.        359        288     714     766
                                           =========  =========  ======  ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
  Cash paid during the period for
   interest..............................          2          2     --       16
                                           =========  =========  ======  ======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-52
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
   (Information for the Six Months Ended June 30, 1997 and 1998 is Unaudited)
 
1. DESCRIPTION OF THE BUSINESS
 
   Scottsdale Culinary Institute, Inc. (the "Company" or the "School") was
incorporated in June 1986 for the purpose of operating a school to provide
professional culinary education. The School, located in Scottsdale, Arizona,
provides professional culinary education leading to an Associate of
Occupational Studies degree in Culinary Arts and Sciences and Restaurant
Management. The School also operates a restaurant open to the public.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
   The financial statements and related notes thereto for the six months ended
June 30, 1997 and 1998 are unaudited and have been prepared on the same basis
as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
information set forth herein. Operating results for the six months ended June
30, 1998 are not necessarily indicative of results that may be expected for the
fiscal year ending December 31, 1998. The principal accounting policies of the
Company are as follows:
 
 Concentration of Credit Risk
 
   The Company extends unsecured credit for tuition to a significant portion of
the students who are in attendance at the School. A substantial portion of
credit extended to students is repaid through the students' participation in
federally funded financial aid programs under Title IV of the Higher Education
Act of 1965, as amended ("Title IV Programs"). Approximately 58%, 55%, 57% and
55% of the Company's net revenue was collected from Title IV Program funds for
the years ended December 31, 1996 and 1997 and for the six months ended June
30, 1997 and 1998, respectively. The Company generally completes and approves
the financial aid packet of each student who qualifies for financial aid prior
to the student's beginning class in an effort to enhance the collectibility of
its unsecured credit. Transfers of funds from the financial aid programs to the
Company are made in accordance with DOE requirements. Changes in DOE funding of
federal student financial aid programs could impact the Company's ability to
attract students.
 
 Cash and Cash Equivalents
 
   Cash and cash equivalents consists of cash in banks and money market funds.
 
 Restricted Cash
 
   Cash received from the U. S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and the
cash is transferred to an operating account. There is no restricted cash
included in the cash and cash equivalents balance at December 31, 1996,
December 31, 1997 and June 30, 1998.
 
 Inventories
 
   Inventories consisting principally of food and beverage, program materials,
books and supplies are stated at the lower of cost, determined on a first-in,
first-out basis or market.
 
                                      F-53
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Property and Equipment
 
   Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the related assets useful
lives. Leasehold improvements and assets recorded under capital leases are
amortized on a straight-line basis over the shorter of the estimated useful
life of the asset or the lease term. The cost basis and estimated useful lives
of property and equipment at December 31, 1996, December 31, 1997 and June 30,
1998, are as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                  December 31
                                                  ----------- June 30
               Asset Description                  1996  1997   1998      Life
               -----------------                  ----- ----- ------- ----------
<S>                                               <C>   <C>   <C>     <C>
Classroom equipment and other instructional
 materials......................................  $ 492 $ 469  $478   5-10 years
Leasehold improvements..........................    266   265   280   3-10 years
                                                  ----- -----  ----
                                                    758   734   758
Less--Accumulated depreciation and amortization.    488   533   571
                                                  ----- -----  ----
                                                  $ 270 $ 201  $187
                                                  ===== =====  ====
</TABLE>
 
   The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable. To date,
no such events or changes in circumstances have occurred. If such events or
changes in circumstances occur, the Company will recognize an impairment loss
if the undiscounted future cash flows expected to be generated by the asset (or
acquired business) are less than the carrying value of the related asset. The
impairment loss would adjust the asset to its fair value.
 
 Revenue Recognition
 
   Revenue is derived primarily from courses taught at the School. Tuition
revenue is recognized on a straight-line basis during the period of instruction
provided by the School. Other revenues consist of restaurant revenues and are
recognized as services are performed. If a student withdraws, future revenue is
reduced by the amount of refund due to the student. Refunds are calculated in
accordance with federal, state and accrediting agency standards. Deferred
tuition revenue represents the portion of tuition payments received but not
earned and is reflected as a current liability on the balance sheet as such
amount is expected to be earned within the next year.
 
 Marketing and Advertising Costs
 
   Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
approximately $221,000, $191,000, $93,000 and $113,000 for the years ended
December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998,
respectively.
 
 Income Taxes
 
   The Company has elected to be treated as an S Corporation under the
provisions of Subchapter S of the Internal Revenue Code. Accordingly, the
shareholders of the Company are responsible for the federal taxes arising from
its operations. Therefore, no provision or liability for federal income taxes
has been included in these financial statements.
 
 Use of Estimates
 
   The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
 
                                      F-54
<PAGE>
 
                      SCOTTSDALE CULINARY INSTITUTE, INC.
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
3. LINE OF CREDIT
 
   At December 31, 1996 and December 31, 1997, the Company had available a line
of credit providing for borrowings of up to $200,000, bearing interest at the
bank's reference rate plus 1.5%. The line of credit contains certain financial
covenants and is guaranteed by the shareholders. The line of credit was not
utilized at December 31, 1996 and December 31, 1997, and expired in April 1998.
 
4. COMMITMENTS AND CONTINGENCIES
 
 Regulatory
 
   The Company has federal financial assistance programs that are subject to
ongoing program reviews by the DOE and Title IV program audits by external
auditors. Based upon the results of such audits and reviews, the Company may
have to repay funds previously granted to its students through loans and
grants, and pay interest, fines and/or penalties. Management believes such
amounts would be minimal and does not expect them to have a material effect on
the results of operations of the Company.
 
   The Company is also required to meet certain financial and other standards
in order to qualify to participate in Title IV programs. These include
maintaining an acid test ratio (defined as cash, cash equivalents, and current
accounts receivable to current liabilities) of at least 1:1, having a positive
tangible net worth at the end of each fiscal year, to collect less than 85% of
its education revenues from Title IV funds on an annual basis, not to have
cumulative net operating losses during the most recent fiscal years that result
in a decline of more than 10% of the Company's tangible net worth at the
beginning of that two-year period, and a student default rate on their federal
loans of not more than 25% for any three-year consecutive period, amongst
others.
 
 Leases
 
   The Company leases equipment under capital leases expiring at various dates
through 2002. In addition, the Company leases its school facility and certain
equipment under noncancellable operating leases expiring at various dates
through 2008. Rent expense, exclusive of taxes, insurance and maintenance of
the facility and equipment for the years ended December 31, 1996 and 1997 and
the six months ended June 30, 1997 and 1998 was approximately $369,000,
$436,000, $220,000 and $191,000, respectively.
 
   Future minimum lease payments under these capital and operating leases as of
June 30, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                   Capital Operating
                                                   Leases    Leases     Total
                                                   ------- ---------- ----------
      <S>                                          <C>     <C>        <C>
      Remainder of 1998........................... $ 3,153 $  166,742 $  169,895
      1999........................................   6,304    320,307    326,611
      2000........................................   6,304    318,792    325,096
      2001........................................   6,304    318,792    325,096
      2002........................................   3,341    318,792    322,133
      2003........................................     --     318,066    318,066
      2004 and thereafter.........................     --   1,205,750  1,205,750
                                                   ------- ---------- ----------
                                                    25,406 $2,967,241 $2,992,647
                                                           ========== ==========
      Less--portion attributable to interest......   6,904
                                                   -------
      Principal payments..........................  18,502
      Less--Current portion.......................   3,527
                                                   -------
                                                   $14,975
                                                   =======
</TABLE>
 
 
                                      F-55
<PAGE>
 
 Litigation
 
   The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. At June 30, 1998, the
Company is not a party to any material legal action.
 
5. RELATED-PARTY TRANSACTIONS
 
   Effective October 15, 1997, the Company leases its office and school space
from an affiliated company operated by the Company's shareholders. Total rent
expense under this agreement was approximately $62,000 and $162,000 for the
year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. In addition, the Company loaned the affiliated company $6,500.
This amount is included in receivables at December 31, 1997.
 
   As of June 30, 1998, the Company has guaranteed a $750,000 bank loan of an
affiliated company. The Company's equipment serves as collateral for the loan.
 
6. EMPLOYEE BENEFIT PLAN
 
   The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code that
provides retirement benefits for eligible employees of the Company. This plan
requires matching contributions to eligible employees. The Company's matching
contributions were approximately $9,600, $12,500, $0 and $9,300 for the years
ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and
1998, respectively.
 
7. SUBSEQUENT EVENT
 
   On July 31, 1998, SCI Acquisition, Ltd., a wholly owned subsidiary of Career
Education Corporation ("CEC"), purchased certain assets and assumed certain
liabilities of the Company for a sales price of approximately $9,900,000.
Subsequent to the purchase, SCI Acquisition, Ltd. changed its name to
Scottsdale Culinary Institute, Ltd.
 
                                      F-56
<PAGE>
 
                              [INSIDE BACK COVER]
 
                           Map of North America with
                           Logos of the Company and its
                           Schools superimposed on the map
                           indicating the location of
                           each campus.
 
                           Below the map are the logos,
                           full names and addresses of
                           each of the schools
                           and their campuses.
<PAGE>
 
 
 
 
 
<PAGE>
 
                                    PART II
 
                   INFORMATION NOT REQUIRED IN THE PROSPECTUS
 
Item 13. Other Exepnses of Issuance and Distribution
 
   Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of our common stock
pursuant to the prospectus contained in this Registration Statement. The
Registrant will pay all of these expenses.
 
<TABLE>
<CAPTION>
                                                                     Approximate
                                                                       Amount
                                                                     -----------
      <S>                                                            <C>
      Securities and Exchange Commission registration fee...........   $17,374
      NASD filing fee...............................................     6,750
      Accountants' fees and expenses................................      *
      Blue Sky fees and expenses....................................      *
      Legal fees and expenses.......................................      *
      Transfer Agent and Registrar fees and expenses................      *
      Printing and engraving........................................      *
      Miscellaneous expenses........................................      *
                                                                       -------
          Total.....................................................   $  *
                                                                       =======
</TABLE>
--------
*  To be provided by amendment
 
   All expenses other than the Securities and Exchange Commission registration
fee and NASD filing fee are estimated.
 
Item 14. Indemnification of Directors and Officers
 
   Article XII of the Registrant's Amended and Restated Certificate of
Incorporation provides that the Registrant shall indemnify its directors to the
full extent permitted by the General Corporation Law of the State of Delaware
and may indemnify its officers and employees to such extent, except that the
Registrant shall not be obligated to indemnify any such person (i) with respect
to proceedings, claims or actions initiated or brought voluntarily by any such
person and not by way of defense, or (ii) for any amounts paid in settlement of
an action indemnified against by the Registrant without the prior written
consent of the Registrant. The Registrant has entered into indemnity agreements
with each of its directors. These agreements may require the Registrant, among
other things, to indemnify such directors against certain liabilities that may
arise by reason of their status or service as directors, to advance expenses to
them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled
to indemnification and to obtain directors' liability insurance if available on
reasonable terms.
 
   In addition, Article XII of the Registrant's Amended and Restated
Certificate of Incorporation provides that a director of the Registrant shall
not be personally liable to the Registrant or its stockholders for monetary
damages for breach of his or her fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
willful or negligent conduct in paying dividends or repurchasing stock out of
other than lawfully available funds or (iv) for any transaction from which the
director derives an improper personal benefit.
 
   Reference is made to Section 145 of the General Corporation Law of the State
of Delaware which provides for indemnification of directors and officers in
certain circumstances.
 
   The Registrant has purchased a directors' and officers' liability insurance
policy.
 
                                      II-1
<PAGE>
 
   Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Registrant, its directors, certain
of its officers and persons who control the Registrant within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.
 
Item 15. Recent Sales of Unregistered Securities
 
   Prior to the consummation of our initial public offering in February 1998,
the Registrant's outstanding capital stock consisted of (i) four classes of
common stock: Class A Voting Common Stock, $.01 par value (the "Class A Common
Stock"); Class B Voting Common Stock, $.01 par value (the "Class B Common
Stock"); Class C Non-voting Common Stock, $.01 par value (the "Class C Common
Stock"); and Class E Non-voting Common Stock, $.01 par value (the "Class E
Common Stock") (the Class A Common Stock, Class B Common Stock, Class C Common
Stock and Class E Common Stock are collectively referred to as the "Existing
Common Stock"); and (ii) three classes of preferred stock: preferred stock,
Series A, $.01 par value (the "Series A Preferred Stock"); preferred stock,
Series C, $.01 par value (the "Series C Preferred Stock"); and Series D
Preferred Stock, $.01 par value (the "Series D Preferred Stock") (the Series A
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are
collectively referred to as the "Existing Preferred Stock").
 
   The following information reflects a 100-for-one split of the Registrant's
common stock effected as of July 31, 1995 and a 10-for-one split of our Series
C Preferred Stock effected as of July 26, 1996. It does not reflect the
following transactions effected immediately prior to the consummation of the
initial public offering: (i) the Amended and Restated Certificate of
Incorporation of the Registrant was amended to provide, among other things, for
(a) only two classes of capital stock, consisting of our common stock and
preferred stock, $.01 par value, (b) the conversion of all shares of Existing
Common Stock into Common Stock at the rate of 9.376 shares of Common Stock for
every share of Existing Common Stock, and (c) the conversion (the "Preferred
Stock Conversion") of all Existing Preferred Stock (including all accrued paid-
in-kind dividends thereon) into common stock at a rate determined by dividing
the liquidation value of the Existing Preferred Stock (including the
liquidation value of the accrued paid-in-kind dividends) by the initial public
offering price of our common stock in the initial public offering (converting
into 2,423,481 shares of common stock); and then (ii) all outstanding warrants
to purchase Class D Non-Voting Common Stock, $.01 par value (the "Class D
Common Stock"), and Class E Common Stock were exercised for an aggregate of
624,062 shares of common stock.
 
   On February 28, 1997, pursuant to a Securities Purchase Agreement dated as
of February 28, 1997 (the "February 1997 Agreement"), the Registrant issued (i)
1,391 shares of Series D Preferred Stock and warrants to purchase 1,655 shares
of Class E Common Stock to Heller in exchange for total consideration of
$1,391,000, (ii) 468 shares of Series D Preferred Stock and warrants to
purchase 558 shares of Class E Common Stock to Electra in exchange for total
consideration of $468,000, (iii) 84 shares of Series D Preferred Stock and
warrants to purchase 99 shares of Series E Common Stock to Dowdell in exchange
for total consideration of $84,000, (iv) 16 shares of Series D Preferred Stock
and warrants to purchase 19 shares of Class E Common Stock to Larson in
exchange for total consideration of $16,000, (v) 15 shares of Series D
Preferred Stock and warrants to purchase 18 shares of Class E Common Stock to
Klettke in exchange for total consideration of $15,000 and (vi) 26 shares of
Series D Preferred Stock and warrants to purchase 31 shares of Class E Common
Stock to Laub in exchange for total consideration of $26,000.
 
   On May 30, 1997, pursuant to the February 1997 Agreement, the Registrant
issued (i) 3,995 shares of Series D Preferred Stock and warrants to purchase
4,754 shares of Class E Common Stock to Heller in exchange for total
consideration of $3,995,000, (ii) 1,348 shares of Series D Preferred Stock and
warrants to purchase 1,603 shares of Class E Common Stock to Electra in
exchange for total consideration of $1,348,000, (iii) 44 shares of Series D
Preferred Stock and warrants to purchase 52 shares of Class E Common Stock to
Larson in exchange for total consideration of $44,000, (iv) 42 shares of Series
D Preferred Stock and warrants to purchase 50 shares of Class E Common Stock to
Klettke in exchange for total consideration of $42,000 and (v) 71 shares of
Series D Preferred Stock and warrants to purchase 85 shares of Class E Common
Stock to Laub in exchange for total consideration of $71,000.
 
                                      II-2
<PAGE>
 
   On May 30, 1997, pursuant to a Securities Purchase Agreement dated as of May
30, 1997 (the "May 1997 Agreement"), the Registrant issued (i) 11,127 shares of
Series D Preferred Stock and warrants to purchase 26,842 shares of Class E
Common Stock to Heller in exchange for total consideration of $11,127,000,
(ii) 2,376 shares of Series D Preferred Stock and warrants to purchase 5,732
shares of Class E Common Stock to Electra in exchange for total consideration
of $2,376,000 and (iii) 122 shares of Series D Preferred Stock and warrants to
purchase 295 shares of Class E Common Stock to Klettke in exchange for total
consideration of $122,000.
 
   On June 30, 1997, pursuant to the May 1997 Agreement, the Registrant issued
1,375 shares of Series D Preferred Stock and warrants to purchase 3,317 shares
of Class E Common Stock to Electra in exchange for total consideration
of $1,375,000.
 
   No underwriters were involved in any of the transactions described above.
All of the securities issued in the foregoing transactions were issued by the
Registrant in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Regulation D promulgated
thereunder.
 
Item 16. Exhibits and Financial Statement Schedules
 
   (a) Exhibits.
 
<TABLE>
     <C>       <S>
      1*       Form of Underwriting Agreement.
      2.1**    Asset Purchase Agreement dated as of September 30, 1996, among
               the Registrant, WCI Acquisition, Ltd., Phillips Educational
               Group of Portland, Inc., and Phillips Colleges, Inc.
      2.2**    Stock Sale Agreement dated as of April 7, 1997, between K-III
               Prime Corporation, Inc. and the Registrant.
      2.3**    Stock Purchase Agreement dated as of June 30, 1997, among IAMD
               Acquisition I, Ltd. and Clem Stein, Jr., Marion Stein, Leonard
               Rutstein, Barbara Ann Scott King, Thomas V. King, William W.
               Wirtz and David Powell.
      2.4**    Share Purchase Agreement dated as of June 30, 1997, among the
               Registrant and Clem Stein, Jr., Leonard Rutstein, Barbara Ann
               Scott King and Lawrence N. Gross.
      2.5***   Asset Purchase Agreement dated as of July 1, 1998 by and among
               Scottsdale Institute, Inc., an Arizona corporation, The Frank G.
               and Elizabeth S. Leite Revocable Trust dated April 14, 1992,
               Frank G. Leite and Elizabeth S. Leite, and SCI Acquisition I,
               Ltd., a Delaware Corporation.
      3.1+     Amended and Restated Certificate of Incorporation of the
               Registrant.
      3.2+     Amended and Restated By-laws of the Registrant.
      4.1**    Specimen stock certificate representing common stock.
      4.3      Credit Agreement dated as of October 26, 1998 among the
               Registrant, as borrower, the Co-Borrowers named therein, the
               lenders named therein, LaSalle National Bank, as administrative
               agent and The Bank of Nova Scotia as foreign currency agent.
      5*       Opinion of Katten Muchin & Zavis as to the legality of the
               securities being registered (including consent).
     10.1**    Career Education Corporation 1995 Stock Option Plan, as amended.
     10.2**    Form of Option Agreement under the Registrant's 1995 Stock
               Option Plan.
     10.3**    Career Education Corporation 1997 Employee Incentive
               Compensation Plan.
     10.4**    Form of Option Agreement under the Registrant's 1997 Employee
               Incentive Compensation Plan.
</TABLE>
 
 
                                      II-3
<PAGE>
 
<TABLE>
     <C>       <S>
     10.5**    Career Education Corporation 1997 Non-Employee Directors' Stock
               Option Plan.
     10.6**    Form of Option Agreement under the Registrant's 1997 Non-
               Employee Directors' Stock Option Plan.
     10.7**    Career Education Corporation 1998 Employee Stock Option Plan.
     10.8**    Amended and Restated Option Agreement dated July 31, 1995,
               between the Registrant and John M. Larson.
     10.9**    Supplemental Option Agreement dated July 31, 1995, between the
               Registrant and John M. Larson.
     10.10**   Amended and Restated Option Agreement dated July 31, 1995,
               between the Registrant and Robert E. Dowdell.
     10.11**   Employment and Non-Competition Agreement as of October 9, 1997
               between the Registrant and John M. Larson.
     10.12**   Form of Indemnification Agreement for Directors and Executive
               Officers.
     10.13**   Career Education Corporation Amended and Restated Stockholders'
               Agreement dated as of July 31, 1995, as amended on February 28,
               1997 and May 30, 1997.
     10.14**   Registration Rights Agreements dated as of July 31, 1995,
               between the Registrant, Electra Investment Trust P.L.C. and
               Electra Associates, Inc.
     10.15**   Securities Purchase Agreement dated as of July 31, 1995 among
               the Registrant, Electra Investment Trust P.L.C. and Electra
               Associates, Inc. (the "Electra 1995 Agreement").
     10.16**   Securities Purchase Agreement dated as of February 28, 1997,
               among the Registrant, Heller Equity Capital Corporation, Electra
               Investment Trust P.L.C., Robert E. Dowdell, John M. Larson,
               Wallace O. Laub and Constance L. Laub and William A. Klettke
               (the "February 1997 Agreement").
     10.17**   Securities Purchase Agreement dated as of May 30, 1997 among the
               Registrant, Heller Equity Capital Corporation, Electra
               Investment Trust P.L.C. and William A. Klettke (the "May 1997
               Agreement").
     10.18**   Form of Management Fee Agreement between the Registrant and each
               of its subsidiaries.
     10.19**   Form of Tax Sharing Agreement between the Registrant and each of
               its subsidiaries.
     10.20+    Registration Rights Agreement between the Registrant Heller
               Equity Capital Corporation dated as of February 3, 1998.
     10.21+    Agreement between the Registrant and Heller Equity Capital
               Corporation, regarding designation of directors of the
               Registrant.
     10.22++   Stock Purchase Agreement dated as of November 25, 1998 by and
               between the Registrant, and Robert C. Marks and the Robert C.
               Marks Trust dated October 9, 1997.
     11+++     Statement regarding computation of per share earnings.
     21.1      Subsidiaries of the Registrant.
     23.1      Consent of Arthur Andersen LLP with respect to financial
               statements of the Registrant.
     23.2      Consent of Arthur Andersen LLP with respect to financial
               statements of Scottsdale Culinary Institute, Inc.
     23.3      Consent of Deloitte & Touche LLP with respect to financial
               statements of The Katharine Gibbs Schools, Inc.
</TABLE>
 
 
                                      II-4
<PAGE>
 
<TABLE>
     <C>       <S>
     23.6*     Consent of Katten Muchin & Zavis (contained in its opinion to be
               filed as Exhibit 5 hereto).
     24        Power of Attorney (included on signature page hereto).
     27+++     Financial Data Schedule.
</TABLE>
--------
*  To be filed by amendment.
** Incorporated by reference to the Exhibit of the same number to our
   Registration Statement No. 333-37601 on Form S-1, effective as of January
   28, 1998.
*** Incorporated by reference to our Report on Form 8-K dated August 14, 1998.
+  Incorporated by reference to the Exhibit of the same number to our Annual
   Report on Form 10-K for the year ended December 31, 1997.
++ Incorporated by reference to our Report on Form 8-K dated January 15, 1999.
+++ Incorporated by reference to the Exhibit of the same number to each of our
    Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
    June 30 and September 30, 1998.
 
   (b) Financial Statement Schedules.
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
      <S>                                                                   <C>
      Schedule II--Valuation and Qualifying Accounts....................... S-1
</TABLE>
 
Item 17. Undertakings
 
   The Registrant hereby undertakes:
 
     (1) To provide to the underwriters at the closing specified in the
  underwriting agreement, certificates in such denominations and registered
  in such names as required by the underwriters to permit prompt delivery to
  each purchaser.
 
     (2) Insofar as indemnification for liabilities arising under the
  Securities Act may be permitted to directors, officers and controlling
  persons of the Registrant pursuant to the foregoing provisions, or
  otherwise, the Registrant has been advised that, in the opinion of the
  Securities and Exchange Commission, such indemnification is against public
  policy as expressed in the Securities Act and is, therefore, unenforceable.
  In the event that a claim for indemnification against such liabilities
  (other than the payment by the Registrant of expenses incurred or paid by a
  director, officer or controlling person of the Registrant in the successful
  defense of any action, suit or proceeding) is asserted by such director,
  officer or controlling person in connection with the securities being
  registered, the Registrant will, unless in the opinion of its counsel the
  matter has been settled by controlling precedent, submit to a court of
  appropriate jurisdiction the question whether such indemnification by it is
  against public policy as expressed in the Securities Act and will be
  governed by the final adjudication of such issue.
 
     (3) For purposes of determining any liability under the Securities Act,
  (i) the information omitted from the form of prospectus filed as part of
  this Registration Statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective and (ii)
  each post-effective amendment that contains a form of prospectus shall be
  deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
                                      II-5
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, and State of
Illinois on the 18th day of January, 1999.
 
                                          Career Education Corporation
 
                                                    /s/ John M. Larson
                                          By: _________________________________
                                                       John M. Larson
                                               President and Chief Executive
                                                          Officer
 
   Each person whose signature appears below hereby constitutes and appoints
John M. Larson and William A. Klettke, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, to sign on his
behalf, individually and in each capacity stated below, all amendments and
post-effective amendments to this Registration Statement on Form S-1 (including
any registration statement filed pursuant to Rule 462(b) under the Securities
Act of 1933, and all amendments thereto) and to file the same, with all
exhibits thereto and any other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as each might or
could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue
thereof.
 
   Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January 18, 1999.
 
<TABLE>
<CAPTION>
                 Signature                                     Title
                 ---------                                     -----
<S>                                         <C>
           /s/ John M. Larson               President, Chief Executive Officer
___________________________________________   (Principal Executive Officer) and a
              John M. Larson                  Director
 
         /s/ William A. Klettke             Senior Vice President and Chief Financial
___________________________________________   Officer (Principal Financial and
            William A. Klettke                Accounting Officer)
 
          /s/ Robert E. Dowdell             Director
___________________________________________
             Robert E. Dowdell
 
           /s/ Thomas B. Lally              Director
___________________________________________
              Thomas B. Lally
 
           /s/ Wallace O. Laub              Director
___________________________________________
              Wallace O. Laub
 
           /s/ Keith K. Ogata               Director
___________________________________________
              Keith K. Ogata
 
          /s/ Patrick K. Pesch              Director
___________________________________________
             Patrick K. Pesch
</TABLE>
 
                                      II-6
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                          FINANCIAL STATEMENT SCHEDULE
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders of Career Education Corporation:
 
     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Career Education Corporation and
Subsidiaries and issued our unqualified opinion thereon dated February 13,
1998, except with respect to the matters discussed in the fourth, fifth, sixth,
seventh, eighth, ninth, tenth and eleventh paragraphs of Note 16, as to which
the dates are March 13, 1998, May 13, 1998, July 31, 1998, September 8, 1998,
October 5, 1998, October 26, 1998, October 29, 1998 and January 4, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Valuation and Qualifying Account Schedule is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
 
ARTHUR ANDERSEN LLP
 
Chicago, Illinois
February 13, 1998
 
                                      S-1
<PAGE>
 
                 CAREER EDUCATION CORPORATION AND SUBSIDIARIES
 
                          FINANCIAL STATEMENT SCHEDULE
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                         Balance at Charges to Increase Due             Balance at
                         Beginning  Operating       to        Amounts     End of
                         of Period   Expenses  Acquisitions Written-off   Period
                         ---------- ---------- ------------ ----------- ----------
                                              (in thousands)
<S>                      <C>        <C>        <C>          <C>         <C>
Student receivable
 allowance activity for
 the year ended
 December 31, 1995.....    $  533     $  479      $  158      $  (912)    $  258
Student receivable
 allowance activity for
 the year ended
 December 31, 1996.....       258        760          30         (593)       455
Student receivable
 allowance activity for
 the year ended
 December 31, 1997.....       455      1,400       1,040       (1,379)     1,516
Student receivable
 allowance activity for
 the nine months ended
 September 30, 1998
 (unaudited)...........     1,516      2,267          17          --       3,800
</TABLE>
 
                                      S-2
