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As filed with the Securities and Exchange Commission on April 18, 2005
Registration No. 333-                    
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
CAPELLA EDUCATION COMPANY
(Exact name of Registrant as specified in its charter)
         
Minnesota   8221   41-1717955
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
 
225 South 6th Street, 9th Floor
Minneapolis, Minnesota 55402
(888) 227-3552
(Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)
Stephen G. Shank
Chairman and Chief Executive Officer
Capella Education Company
225 South 6th Street, 9th Floor
Minneapolis, Minnesota 55402
(888) 227-3552
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
Copies to:
     
David B. Miller, Esq.
Michael K. Coddington, Esq.
Faegre & Benson LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402
Telephone: (612) 766-7000
Facsimile: (612) 766-1600
  George A. Stephanakis, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
 
      Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.
      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:      o
      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:      o
      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:      o
      If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box:      o
CALCULATION OF REGISTRATION FEE
             
             
             
      Proposed Maximum      
Title of Each Class of     Aggregate Offering     Amount of
Securities to be Registered     Price(1)     Registration Fee
             
Common Stock, $0.10 par value per Share
    $86,250,000     $10,152
             
             
(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of 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 Commission, acting pursuant to said Section 8(a), may determine.
 
 


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The information in this prospectus is not complete and may be changed. We 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 APRIL 18, 2005
                            Shares
(CAPELLA UNIVERSITY LOGO)
Capella Education Company
Common Stock
 
        Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $           per share and $           per share. We intend to apply to list our common stock on The Nasdaq National Market under the symbol “CAPU.”
      We are selling           shares of common stock and the selling shareholders are selling           shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders.
      The underwriters have an option to purchase a maximum of           additional shares from us to cover over-allotments of shares.
      Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.
                                 
        Underwriting       Proceeds to
    Price to   Discounts and   Proceeds to   Selling
    Public   Commissions   Capella   Shareholders
                 
Per Share
    $       $       $       $  
Total
    $       $       $       $  
      Delivery of the shares of common stock will be made on or about                     , 2005.
      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
  Banc of America Securities LLC
  Piper Jaffray
The date of this prospectus is                     , 2005.


 
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    F-1  
  Articles of Incorporation
  Restated Bylaws
  3rd Amended/Restated Co-Sale and Board Representation Agreement
  Registration Rights Agreement
  Amendment No. 1 to The Registration Rights Agreement
  Amendment No. 2 to The Registration Rights Agreement
  Amendment No. 3 to The Registration Rights Agreement
  2nd Amended/Restated Investor Rights Agreement
  Warrant
  Amendment to Warrant
  Amendment to Warrant
  Amendment to Warrant
  Warrant
  Amendment to Warrant
  Amendment to Warrant
  Exchange Agreement
  Class G Convertible Preferred Stock Purchase Agreement
  Class F Convertible Preferred Stock Purchase Agreement
  Class E Convertible Preferred Stock Purchase Agreement
  1999 Stock Option Plan
  Form of Non-Statutory Stock Option Agreement
  Form of Non-Statutory Stock Option Agreement
  Form of Incentive Stock Option Agreement
  Learning Ventures International, Inc. 1993 Stock Option Plan
  Form of Option Agreement
  Confidentiality, Non-Competition and Inventions Agreement
  Confidentiality, Non-Competition and Inventions Agreement
  Form of Confidentiality, Non-Competition and Inventions Agreement
  Offer Letter
  Offer Letter
  Offer Letter
  Offer Letter
  Form of Nondisclosure Agreement
  Office Lease
  Short Term Office Space Lease
  Memorandum of Lease
  Office Lease
  Subsidiaries
  Consent of Independent Registered Public Accounting Firm
  Powers of Attorney
 
      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.
Dealer Prospectus Delivery Obligation
      Until                     , 2005, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

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PROSPECTUS SUMMARY
      This summary highlights information contained elsewhere in this prospectus. This summary sets forth the material terms of the offering, but does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, especially the risks of investing in our common stock discussed under “Risk Factors.” Unless the context otherwise requires, the terms “we,” “us,” “our” and “Capella” refer to Capella Education Company and its wholly owned subsidiary, Capella University. Unless otherwise indicated, industry data is derived from publicly available sources, which we have not independently verified. Certain figures in this prospectus may not total due to rounding adjustments.
Overview
      We are an exclusively online post-secondary education services company. Through our wholly owned subsidiary, Capella University, we offer a variety of doctoral, master’s and bachelor’s programs in the following disciplines:     business, organization and management; education; psychology; human services; and information technology. Our academic offerings combine rigorous curricula with the convenience and flexibility of an online learning format. As of December 31, 2004, we offered more than 675 online courses and 13 academic programs with 68 specializations to more than 12,000 learners. Measured by enrollment, we are one of the largest exclusively online universities in the United States.
      The majority of our learners are working adults seeking a degree to advance their careers, often with their current employer. The convenience and flexibility of our online learning environment allow learners to combine academic studies with their personal and professional responsibilities. Our courses are focused on helping working adult learners develop specific competencies that they can employ in their workplace. Our research shows that the quality of our academic offerings appeals to adults who value life-long learning. For this reason, we refer to our customers as learners, rather than students.
      We are committed to providing our learners with a high quality educational experience. We offer a broad array of rigorous curricula that incorporates the application of theory into a format specifically designed for online learning. Our faculty members bring significant academic credentials as well as teaching or practitioner experience in their particular disciplines. We offer our learners extensive support services such as academic advising and career counseling that are tailored to meet their specific needs in a flexible manner. Additionally, we employ a structured approach to academic oversight that provides leadership and continuity across our educational offerings and includes internal and external program reviews.
      Our end-of-period enrollments and our revenues have grown at compound annual growth rates of approximately 54% and 65%, respectively, from 2000 through 2004. In 2004, our end-of-period enrollment and revenues grew by approximately 32% and 44%, respectively, as compared to 2003. To date, our growth has resulted from a combination of: increased demand for our programs; expansion of our program and degree offerings; establishment of relationships with large corporate employers, the U.S. Armed Forces and other colleges and universities; and a growing acceptance of online education. We seek to achieve growth in a manner that assures continued improvement in educational quality and learner success while maintaining compliance with regulatory standards.
Industry
      The U.S. market for post-secondary education is a large, growing market. Based on estimates by the U.S. Department of Education, National Center for Education Statistics, or NCES, revenue for post-secondary degree-granting educational institutions exceeded $260 billion in the 2000 – 2001 academic year. According to the NCES, post-secondary students enrolled as of the Fall of 2001 were 15.9 million and are expected to grow to 17.4 million by 2009. We believe the forecasted growth in post-secondary enrollment is a result of a number of factors, including the expected increase in annual high school graduates from 2.9 million in 2001 to 3.3 million by 2009 (based on estimates by the NCES), the significant and measurable personal income premium that is attributable to post-secondary education and an increase in demand by employers for professional and skilled workers. According to the U.S. Department of

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Commerce, Bureau of the Census, as of March 2002, over 65% of adults (persons 25 years of age or older) did not possess a post-secondary degree. Of the 15.9 million post-secondary students enrolled as of the Fall of 2001, the NCES estimated that 6.0 million were adults, representing 38% of total enrollment. We expect that adults will continue to represent a large, growing segment of the post-secondary education market as they seek additional education to secure better jobs, or to remain competitive or advance in their current careers.
      According to Eduventures, an education consulting and research firm, the revenue growth rate in fully-online education exceeded the revenue growth rate in the for-profit segment of the post-secondary market from 2001 to 2003. We believe that higher growth in demand for fully-online education is largely attributable to the flexibility and convenience that it offers to both working adults and traditional students. Additionally, in March 2004, Eduventures projected that the number of students enrolled in fully-online programs at Title IV eligible, degree-granting institutions would be approximately 915,000 as of December 31, 2004, and would grow to approximately 1,600,000 by December 31, 2007. Eduventures also projected that annual revenues generated from students enrolled in fully-online programs at Title IV eligible, degree-granting institutions would be $5.1 billion in 2004 and would increase to $10.4 billion in 2007.
Our Competitive Strengths
      We believe we have the following competitive strengths:
      Commitment to Academic Quality. We are committed to providing each of our learners with a high quality academic experience. Our commitment to academic quality is a tenet of our culture and is reflected in our curricula, faculty, learner support services and academic oversight process.
      Exclusive Focus on Online Education. As opposed to converting a traditional, classroom-based educational offering to an online format, our academic programs have been designed solely for online delivery. Our curriculum design offers flexibility and promotes a high level of interaction, our faculty are specifically trained to deliver online education, and our learner support infrastructure was developed to meet the needs of online learners.
      Academic Programs and Specializations Designed for Working Adults. We currently offer 13 academic programs with 68 specializations specifically designed to appeal to and meet the educational objectives of working adults. Our curricula and pedagogy are designed to enable learners to apply relevant theories in their workplace.
      Extensive Learner Support Services. We provide extensive learner support services via teams assigned to serve as each learner’s primary point of contact. Our support services include: academic services, such as advising, writing and research services; administrative services, such as online class registration and transcript requests; library services, which are provided through an agreement with the Sheridan Libraries at Johns Hopkins University; and career counseling services.
      Experienced Management Team with Significant Business and Academic Expertise. Our management team possesses extensive experience in both business and academic management. We utilize cross-functional teams to ensure that our business objectives are met without sacrificing academic quality.
Our Operating Strategy
      We intend to pursue the following operating strategies:
      Invest in Strengthening the Capella Brand. We will continue to enhance our brand recognition as a quality, exclusively online university for working adults. Using sophisticated marketing strategies, we will continue to invest through a variety of advertising media to strengthen our brand recognition among working adults.

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      Continue to Focus on Learner Success. Our commitment to helping our learners reach their educational and professional goals guides the development of our curricula, the recruitment and training of our faculty and staff, and the design of our support services. We believe our focus on learner success will continue to enhance learner satisfaction, leading to higher levels of learner engagement, retention and referrals.
      Increase Marketing Investment and Enhance Recruiting Effectiveness. We have invested substantial resources in performing detailed market research that enables us to identify potential learners best suited for our educational experience. Using this research, we will target our marketing and recruiting expenditures toward segments of the market that are more likely to result in enrolling learners that are likely to complete their programs. We intend to increase our marketing expenditures and to continue to enhance the training we provide to our recruitment personnel.
      Further Develop and Expand Our Program and Degree Offerings. We will continue to develop our existing program offerings while selectively adding new programs and specializations in disciplines that we believe offer significant market potential and in which we believe we can deliver a high quality learning experience. In particular, we intend to emphasize growth in our master’s and bachelor’s degree offerings, and to focus on targeted specializations for which we believe there is significant demand. Examples include, our recently launched master’s specializations in education targeted at K-12 teachers, bachelor’s degree in business and bachelor’s degree in information technology.
      Establish Additional Strategic Relationships. We currently have strategic relationships with approximately 80 corporations, the U.S. Armed Forces and over 230 community colleges and other universities, through which we recruit learners. We intend to increase enrollment from our existing relationships and to increase the number of these relationships.
Our Executive Offices
      Our principal executive offices are located at 225 South 6th Street, 9th Floor, Minneapolis, Minnesota 55402, and our telephone number is (888) 227-3552. Our website is located at www.capellaeducationcompany.com. The information on our website does not constitute part of, and is not incorporated into, this prospectus.

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The Offering
Common stock offered by us                      shares (or                      shares, if the underwriters exercise the over-allotment option in full)
 
Common stock offered by the selling shareholders                      shares
 
Total offering                      shares
 
Common stock to be outstanding after the offering                      shares
 
Proposed Nasdaq National Market symbol CAPU
 
Use of proceeds We estimate that the net proceeds to us from this offering will be approximately $           million, or approximately $           million if the underwriters exercise their over-allotment option in full. We intend to use the net proceeds of this offering for working capital and general corporate purposes, which may include expanding our marketing and recruiting efforts, capital expenditures, developing new courses and programs and potential acquisitions.
 
We will not receive any of the proceeds from the sale of shares of our common stock by the selling shareholders.
 
Dividend Policy Following the consummation of the offering, we do not expect to pay any dividends on our common stock for the foreseeable future.
 
Risk Factors You should carefully read and consider the information set forth under the heading titled “Risk Factors” and all other information set forth in this prospectus before deciding to invest in shares of our common stock.
      The number of shares of common stock shown to be outstanding after the offering is based on the number of shares of common stock outstanding as of                     , 2005. This number does not include:
  •                       shares of common stock reserved for future issuance upon the exercise of stock options outstanding as of                     , 2005 under our stock option plans, at a weighted average exercise price of $           per share; and
 
  •                       shares of common stock reserved for future issuance under our stock option plans, of which options to purchase                      shares of common stock are proposed to be issued in connection with this offering at an exercise price equal to the price of shares sold in this offering.
Except as otherwise indicated, all information in this prospectus:
  •  gives effect to a                     -for-one stock split of our common stock, which will occur prior to the closing of the offering;
 
  •  assumes no exercise by the underwriters of their option to purchase up to                     additional shares from us to cover over-allotments of shares;
 
  •  assumes all outstanding shares of our preferred stock have been converted into shares of common stock in connection with this offering; and
 
  •  assumes no outstanding options have been exercised since                     , 2005.

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Summary Financial and Other Data
      The following table sets forth our summary consolidated financial and operating data as of the dates and for the periods indicated. The summary consolidated statement of operations data for each of the years in the three-year period ended December 31, 2004, and the summary consolidated balance sheet data as of December 31, 2003 and 2004, have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2002, have been derived from our audited consolidated balance sheet as of December 31, 2002, which is not included in this prospectus.
      The following table also sets forth summary unaudited consolidated pro forma balance sheet data, which give effect to the transactions described in footnote (d) of the following table. The unaudited consolidated pro forma balance sheet data are presented for informational purposes only and do not purport to represent what our financial position actually would have been had the transactions so described occurred on the dates indicated or to project our financial position as of any future date.
      You should read the following summary financial and other data in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes included elsewhere in this prospectus.
                             
    Year Ended December 31,
     
    2002   2003   2004
             
    (In thousands, except per share and
    enrollment data)
Statement of Operations Data:
                       
Revenues
  $ 49,556     $ 81,785     $ 117,689  
Costs and expenses:
                       
 
Instructional costs and services
    27,247       42,402       57,512  
 
Selling and promotional
    15,559       21,161       33,989  
 
General and administrative
    12,744       14,152       16,323  
                   
   
Total costs and expenses
    55,550       77,715       107,824  
                   
Operating income (loss)
    (5,994 )     4,070       9,865  
Other income, net
    327       427       724  
                   
Income (loss) before income taxes
    (5,667 )     4,497       10,589  
Income tax expense (benefit)
          104       (8,196 )
                   
Net income (loss)
  $ (5,667 )   $ 4,393     $ 18,785  
                   
Net income (loss) per common share:
                       
 
Basic
  $ (3.70 )   $ 2.63     $ 9.34  
 
Diluted
  $ (3.70 )   $ 0.39     $ 1.62  
Weighted average number of common shares outstanding:
                       
 
Basic
    1,532       1,669       2,011  
 
Diluted
    1,532       11,154       11,595  
Other Data:
                       
Depreciation and amortization (a)
  $ 3,108     $ 4,177     $ 5,454  
Net cash provided by operating activities
  $ 177     $ 16,028     $ 17,494  
Capital expenditures
  $ 3,859     $ 4,348     $ 8,986  
EBITDA (b)
  $ (2,886 )   $ 8,247     $ 15,319  
Enrollment (c)
    6,380       9,115       12,013  

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        Pro Forma
    As of December 31,   As of
        December 31,
    2002   2003   2004   2004 (d)
                 
    (In thousands)
Consolidated Balance Sheet Data:
                               
Cash, cash equivalents and short-term investments
  $ 22,060     $ 41,190     $ 49,980          
Working capital (e)
    15,340       27,516       37,935          
Total assets
    35,380       55,402       80,026          
Total redeemable preferred stock
    50,401       57,646       57,646          
Shareholders’ equity (deficit)
    (26,250 )     (20,416 )     (5 )        
 
(a) Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Amortization includes amounts related to purchased software, capitalized website development costs and internally developed software.
 
(b) EBITDA consists of net income (loss) minus other income, net, plus income tax expense (benefit) and plus depreciation and amortization. Other income, net consists primarily of interest income earned on short-term investments, net of any interest expense for capital leases. We believe that the presentation of EBITDA will enhance investors’, securities analysts’ and other interested parties’ understanding of our operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our business. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax payments.
  The following table provides a reconciliation of net income (loss) to EBITDA:
                         
    Year Ended December 31,
     
    2002   2003   2004
             
    (In thousands)
Net income (loss)
  $ (5,667 )   $ 4,393     $ 18,785  
Other income, net
    (327 )     (427 )     (724 )
Income tax expense (benefit)
          104       (8,196 )
Depreciation and amortization
    3,108       4,177       5,454  
                   
EBITDA
  $ (2,886 )   $ 8,247     $ 15,319  
                   
(c) Enrollment reflects the total number of learners registered in a course as of the last day of classes for such periods.
 
(d) The consolidated pro forma balance sheet data for the year ended December 31, 2004, give effect to the conversion of all outstanding preferred stock into shares of common stock in connection with this offering, the sale of                      shares of common stock by us in this offering and our receipt of the estimated net proceeds of that sale, after deducting underwriting discounts and estimated offering expenses.
 
(e) Working capital is calculated by subtracting total current liabilities from total current assets.

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RISK FACTORS
      Investing in our common stock involves risks. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks described below are those which we believe are the material risks we face. Any of the risk factors described below could significantly and adversely affect our business, prospects, financial condition and results of operations. As a result, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to The Extensive Regulation of Our Business
If we fail to comply with the extensive regulatory requirements for our business, we could face significant restrictions on our operations and monetary penalties, including loss of access to federal loans and grants for our learners on which we are substantially dependent.
      In 2004, we derived approximately 69% of our revenues (calculated on a cash basis) from federal student financial aid programs, referred to in this prospectus as Title IV programs, administered by the Department of Education. To participate in Title IV programs, a school must receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting agency recognized by the Secretary of the U.S. Department of Education and be certified as an eligible institution by the Department of Education. As a result, we are subject to extensive regulation by the state education agencies, our accrediting agency and the Department of Education. These regulatory requirements cover the vast majority of our operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures, marketing, recruiting, financial operations and financial condition. These regulatory requirements can also affect our ability to acquire or open additional schools, to add new or expand existing educational programs and to change our corporate structure and ownership. The state education agencies, our accrediting agency and the Department of Education periodically revise their requirements and modify their interpretations of existing requirements.
      If we fail to comply with any of these regulatory requirements, our regulatory agencies could impose monetary penalties, place limitations on our operations, terminate our ability to grant degrees and certificates, revoke our accreditation and/or terminate our eligibility to receive Title IV program funds, each of which could adversely affect our financial condition and results of operations. In addition, should we fail to properly comply with the regulatory requirements set forth in the following risk factors, and as a result be charged, sanctioned, subjected to loss of a federal, state or agency approval or authorization, or otherwise be penalized in some way, our reputation could be damaged and such damage could have a negative impact on our stock price. We cannot predict with certainty how all of these regulatory requirements will be applied or whether we will be able to comply with all of the requirements in the future. We have described some of the most significant regulatory risks that apply to us in the following paragraphs.
If we cease to participate in the Department of Education’s “Distance Education Demonstration Program” without Congress first amending or repealing the “50% Rules,” our learners could lose the ability to participate in Title IV programs.
      The Higher Education Act of 1965, as amended (the Higher Education Act) generally excludes from Title IV program participation institutions at which (1) more than 50% of the institution’s courses are offered via correspondence, which includes online courses, or (2) 50% or more of the institution’s students are enrolled in correspondence courses, including online courses. Under a less restrictive limitation applied to predominantly degree-granting institutions (like Capella University), an institution at which 50% or more of the institution’s students are enrolled in courses delivered via telecommunications (including online courses) can nonetheless be eligible for Title IV program participation provided that no more than 49% of its courses are offered online or through distance delivery methods. As an exclusively online university, the so called “50% Rules,” enacted in 1992, would otherwise preclude us from participating in

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Title IV programs. However, in 1998, Congress authorized the Department of Education to establish and administer the Distance Education Demonstration Program, or the “Demonstration Program,” to assess the viability of providing Title IV program funds to institutions that offered online educational programs. We were accepted as one of the first participants in the program, and we remain a participant today. As part of our participation in the Demonstration Program, the Department of Education has waived the application of the 50% Rules to Capella University. Our participation in the Demonstration Program, and the participation of all other institutions currently admitted to the Demonstration Program, will expire on June 30, 2006. The Department of Education may terminate our participation in the Demonstration Program at any time, for cause, including for failure to submit required reports in a timely manner. Reauthorization legislation pending before Congress would repeal the 50% Rules as applied to online institutions and extend the Demonstration Program, but there is no assurance that Congress will enact such legislation or that our participation in the Demonstration Program will extend beyond June 30, 2006. So long as the 50% Rules remain in effect, if for any reason we cease to participate in the Demonstration Program, our learners would no longer be able to participate in Title IV programs and receive Title IV program funds, and this would have a material adverse effect on our enrollments, revenues and results of operations.
Congress may change the law or reduce funding for Title IV programs, which could reduce our learner population, revenues or profit margin.
      Congress reauthorizes the Higher Education Act and other laws governing Title IV programs approximately every five to eight years. The last reauthorization of the Higher Education Act was completed in 1998, which extended authorization through September 30, 2004. Because reauthorization had not yet been completed in a timely manner, in 2004 Congress extended the current provisions of the Higher Education Act through September 30, 2005. Additionally, Congress determines the funding level for each Title IV program on an annual basis through the budget and appropriations process. Congress is currently considering taking measures to reduce the federal budget deficit and, as a result, may reduce funding for Title IV programs. Congress is currently just beginning the reauthorization process for the Higher Education Act, and there is no assurance that such reauthorization will happen in a timely manner, or that Congress will not enact changes that decrease Title IV program funds available to students, including students who attend our institution. A failure by Congress to reauthorize or otherwise extend the provisions of the Higher Education Act, or any action by Congress that significantly reduces funding for Title IV programs or the ability of our school or learners to participate in these programs, would require us to arrange for non-federal sources of financial aid and would materially decrease our enrollment. Such a decrease in enrollment would have a material adverse effect on our revenues and results of operations. Congressional action may also require us to modify our practices in ways that could result in increased administrative costs and decreased profit margin.
If we fail to maintain our institutional accreditation, we would lose our ability to participate in Title IV programs.
      Capella University is institutionally accredited by The Higher Learning Commission, which is part of the North Central Association of Colleges and Schools (“The Higher Learning Commission”), one of six regional accrediting agencies recognized by the Secretary of the Department of Education as a reliable indicator of educational quality. Accreditation by a recognized accrediting agency is required for an institution to become and remain eligible to participate in Title IV programs. In 2007, we will have to seek to have our accreditation reaffirmed with The Higher Learning Commission and The Higher Learning Commission may impose restrictions on our accreditation or may not renew our accreditation. In order to remain accredited we must continuously meet certain criteria and standards relating to, among other things, performance, governance, institutional integrity, educational quality, faculty, administrative capability, resources and financial stability. Failure to meet any of these criteria or standards could result in the loss of accreditation at the discretion of The Higher Learning Commission. The loss of accreditation would, among other things, render our learners and us ineligible to participate in Title IV programs and would have a material adverse effect on our enrollments, revenues and results of operations.

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If Capella University does not maintain its authorization in Minnesota, it may not operate or participate in Title IV programs.
      A school that grants degrees, diplomas or certificates must be authorized by the relevant education agency of the state in which it is located. Capella University is deemed to be located in the State of Minnesota and is authorized by the Minnesota Higher Education Services Office. State authorization is also required for our learners to be eligible to receive funding under Title IV programs. Loss of state authorization by Capella University from the Minnesota Higher Education Services Office would terminate our ability to legally provide educational services as well as our eligibility to participate in Title IV programs.
Our regulatory environment and our reputation may be negatively influenced by the actions of other for-profit institutions.
      We are one of a number of for-profit institutions serving the post-secondary education market. In recent years, regulatory investigations and civil litigation have been commenced against several companies that own large numbers of for-profit educational institutions. These investigations and lawsuits have attracted media coverage and have been the subject of a Congressional hearing. Although the media, regulatory and Congressional focus has been primarily upon the allegations made against these specific companies, broader allegations against the overall for-profit school sector may negatively impact public perceptions of other for-profit educational institutions, including Capella University. Adverse media coverage regarding other companies in the for-profit school sector or regarding us directly could damage our reputation, could result in lower enrollments, revenues and operating profit, and could have a negative impact on our stock price. Such allegations could also result in increased scrutiny and regulation by the Department of Education or Congress on all for-profit institutions, including us.
We are subject to sanctions if we fail to correctly calculate and timely return Title IV program funds for learners who withdraw before completing their educational program.
      A school participating in Title IV programs must correctly calculate the amount of unearned Title IV program funds that has been disbursed to learners who withdraw from their educational programs before completion and must return those unearned funds in a timely manner, generally within 30 days of the date the school determines that the learner has withdrawn. Under Department of Education regulations, late returns of Title IV program funds for 5% or more of students sampled on the institution’s annual compliance audit constitutes material non-compliance. If unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the Department of Education or otherwise be sanctioned by the Department of Education, which could increase our cost of regulatory compliance and adversely affect our results of operations.
A failure to demonstrate “financial responsibility” may result in the loss of eligibility by Capella University to participate in Title IV programs or require the posting of a letter of credit in order to maintain eligibility to participate in Title IV programs.
      To participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the Department of Education, or post a letter of credit in favor of the Department of Education and possibly accept other conditions on its participation in Title IV programs. The Department of Education may also apply such measures of financial responsibility to the operating company and ownership entities of an eligible institution and, if such measures are not satisfied by the operating company or ownership entities, require the institution to post a letter of credit in favor of the Department of Education and possibly accept other conditions on its participation in Title IV programs. Any obligation to post a letter of credit could increase our costs of regulatory compliance. If Capella University is unable to secure a letter of credit, it would lose its eligibility to participate in Title IV programs. In addition to the obligation to post a letter of credit, an institution that is determined by the Department of Education not to be financially responsible can be transferred from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment.

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Limitations on, or termination of, Capella University’s participation in Title IV programs as a result of its failure to demonstrate financial responsibility would limit Capella University’s learners’ access to Title IV program funds, which could significantly reduce our enrollments and revenues and materially and adversely affect our results of operations.
A failure to demonstrate “administrative capability” may result in the loss of Capella University’s eligibility to participate in Title IV programs.
      Department of Education regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. These criteria require, among other things, that the institution:
  •  comply with all applicable Title IV program regulations;
 
  •  have capable and sufficient personnel to administer the federal student financial aid programs;
 
  •  have acceptable methods of defining and measuring the satisfactory academic progress of its student;
 
  •  not have cohort default debt rates above specified levels;
 
  •  have various procedures in place for safeguarding federal funds;
 
  •  not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
 
  •  provide financial aid counseling to its students;
 
  •  refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
 
  •  submit in a timely manner all reports and financial statements required by the regulations; and
 
  •  not otherwise appear to lack administrative capability.
      If an institution fails to satisfy any of these criteria or comply with any other Department of Education regulations, the Department of Education may:
  •  require the repayment of Title IV funds;
 
  •  transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment;
 
  •  place the institution on provisional certification status; or
 
  •  commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
      If we are found not to have satisfied the Department of Education’s “administrative capability” requirements we could be limited in our access to, or lose, Title IV program funding, which would significantly reduce our enrollment and revenues and materially and adversely affect our results of operations.
We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities.
      A school participating in Title IV programs may not provide any commission, bonus or other incentive payment to any person involved in student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds based on success in enrolling students or securing financial aid. If we violate this law, we could be fined or otherwise sanctioned by the Department of

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Education. Any such fines or sanctions could harm our reputation, impose significant costs on us, and have a material adverse effect on our results of operations.
Our failure to comply with regulations of various states could result in actions taken by those states that would have a material adverse effect on our enrollments, revenues and results of operations.
      Various states impose regulatory requirements on educational institutions operating within their boundaries. Several states have sought to assert jurisdiction over online educational institutions that have no physical location or other presence in the state but offer educational services to students who reside in the state, or that advertise to or recruit prospective students in the state. State regulatory requirements for online education are inconsistent between states and not well developed in many jurisdictions. As such, these requirements change frequently and, in some instances, are not clear or are left to the discretion of state employees or agents. Our changing business and the constantly changing regulatory environment require us to continually evaluate our state regulatory compliance activities. In the event we are found not to be in compliance, and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit learners from that state and may have to cease providing service to learners in that state.
      Capella University is subject to extensive regulations by the states in which it is authorized or licensed. In addition to Minnesota, Capella University is authorized or licensed in 13 states because we have determined that our activities in these states constitute a presence requiring licensure by the respective state educational agencies. State laws typically establish standards for instruction, qualifications of faculty, administrative procedures, marketing, recruiting, financial operations, and other operational matters. State laws and regulations may limit our ability to offer educational programs and award degrees. Some states may also prescribe financial regulations that are different from those of the Department of Education. Capella University is required to post surety bonds in several states. If we fail to comply with state licensing requirements, we may be subject to the loss of state licensure. Although we believe that the only state authorization or licensure that is necessary for Capella University to participate in Title IV programs is our authorization from the Minnesota Higher Education Services Office, loss of authorization or licensure in other states could prohibit us from recruiting or enrolling students in those states, reduce significantly our enrollments and revenues and have a material adverse effect on our results of operations.
The inability of our graduates to obtain licensure in their chosen professional fields of study could reduce our enrollments and revenues, and potentially lead to litigation that could be costly to us.
      Certain of our graduates seek professional licensure in their chosen fields following graduation. Their success in obtaining licensure depends on several factors, including the individual merits of the learner, but also may depend on whether the institution and the program were approved by the state or by a professional association, whether the program from which the learner graduated meets all state requirements and whether the institution is accredited. Certain states have refused to license students who fail to meet specific types of accreditation, residency or other state requirements. In the past, certain states have refused to license learners from particular Capella University programs due to the fact that the program did not meet one or more of the state’s specific licensure requirements, and we have had to respond to claims brought against us as a result of such refusal. In the event that one or more states refuse to recognize our learners for professional licensure in the future based on factors relating to our institution or programs, the potential growth of our programs would be negatively impacted and we could be exposed to litigation. Each of these outcomes could increase our costs in order to defend against or settle any litigation brought against us and could have a material adverse effect on our results of operations.
If regulators do not approve or delay their approval of transactions involving a change of control of our company, our ability to participate in Title IV programs may be impaired.
      If we or Capella University experience a change of control under the standards of applicable state education agencies, The Higher Learning Commission or the Department of Education, we must seek the approval of each relevant regulatory agency. Transactions or events that constitute a change of control

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include significant acquisitions or dispositions of an institution’s common stock and significant changes in the composition of an institution’s board of directors. Some of these transactions or events may be beyond our control. We are seeking, but have not yet received, confirmation from the Department of Education, the applicable state educational agencies that authorize or license Capella University, and The Higher Learning Commission, that this offering will not constitute a change of control under their respective standards. Our failure to obtain, or a delay in receiving, approval of any change of control from the Department of Education, The Higher Learning Commission or the Minnesota Higher Education Services Office could impair our ability to participate in Title IV programs. Our failure to obtain, or a delay in receiving, approval of any change of control from any other state in which we are currently licensed could require us to suspend our activities in that state. The potential adverse effects of a change of control with respect to participation in Title IV programs could influence future decisions by us and our stockholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for your shares of our common stock and could have an adverse effect on the market price of your shares.
Government and regulatory agencies and third parties may conduct compliance reviews, bring claims or initiate litigation against us.
      Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of non-compliance and lawsuits by government agencies, regulatory agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations, loss of Title IV funding, injunctions or other penalties. Even if we adequately address issues raised by an agency review or successfully defend a lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those reviews or defend against those lawsuits or claims. Moreover, in the future we may be subject to lawsuits filed by private individuals on behalf of the federal government under the False Claims Act. Claims and lawsuits brought against us may damage our reputation, even if such claims and lawsuits are without merit.
We may lose eligibility to participate in Title IV programs if the percentage of our revenue derived from those programs is too high, which would significantly reduce our learner population.
      A for-profit institution loses its eligibility to participate in Title IV programs if, on a cash accounting basis, it derives more than 90% of its revenue from those programs in any fiscal year. In 2004, under the regulatory formula prescribed by the Department of Education, we derived approximately 69% of our revenues (calculated on a cash basis) from Title IV programs. If we lose our eligibility to participate in Title IV programs because more than 90% of our revenues are derived from Title IV program funds in any year, our learners would no longer be eligible to receive Title IV program funds under various government-sponsored financial aid programs, which would significantly reduce our enrollments and revenues and have a material adverse effect on our results of operations.
We may lose eligibility to participate in Title IV programs if our student loan default rates are too high, which would significantly reduce our learner population.
      An educational institution may lose its eligibility to participate in some or all Title IV programs if, for three consecutive federal fiscal years, 25% or more of its students who were required to begin repaying their student loans in the relevant fiscal year default on their payment by the end of the next federal fiscal year. In addition, an institution may lose its eligibility to participate in some or all Title IV programs if its default rate exceeds 40% in the most recent federal fiscal year for which default rates have been calculated by the Department of Education. Capella University’s default rates on FFEL program loans for the 2000, 2001 and 2002 federal fiscal years, the three most recent years for which final information is available, were 0%, 0.5% and 2.8%, respectively. If Capella University loses eligibility to participate in Title IV programs because of high student loan default rates, our learners would no longer be eligible to receive Title IV program funds under various government-sponsored financial aid programs, which would

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significantly reduce our enrollments and revenues and have a material adverse effect on our results of operations.
Risks Related to Our Business
At present we derive a significant portion of our revenues and all our operating profit from our doctoral programs.
      Our origins are as an online university primarily for doctoral learners. Despite the expansion of our program offerings to include both master’s and bachelor’s degrees, our doctoral learner community remains an important part of the success of our business model. At December 31, 2004, learners seeking doctoral, master’s and bachelor’s degrees represented 47%, 38% and 15%, respectively, of our enrollment. Due to the relative size, maturity and economics of our doctoral programs, for the year ended December 31, 2004, doctoral learners accounted for the majority of our revenues and all of our operating profit. In contrast, our bachelor’s and master’s programs were not profitable in 2004. If we were to experience any learner, regulatory, reputational, instructional or other event that adversely affected our doctoral offerings, our results of operations could be significantly and adversely affected.
We may not be able to manage future growth effectively, and we expect our growth rates to decline over time.
      We have experienced a period of significant growth since our inception. The growth and expansion of our operations may place a significant strain on our resources, increase demands on our management information and reporting systems and financial management controls, and limit our ability to attract and retain qualified faculty, enrollment and other personnel. If we are unable to manage our growth effectively while maintaining appropriate internal controls, we may experience operating inefficiencies that would likely increase our costs more than we had planned and could adversely affect our profitability and results of operations. We expect that the growth rate we have experienced in enrollment will decrease and our future growth will occur at slower rates.
Our success depends in part on our ability to update and expand the content of existing programs and develop new programs on a timely basis and in a cost-effective manner.
      The updates and expansions of our existing programs and the development of new programs may not be accepted by existing or prospective learners or employers. If we cannot respond to changes in market requirements, our business may be adversely affected. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as learners require or as quickly as our competitors introduce competing programs. To offer a new academic program, we may be required to obtain appropriate federal, state and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for federal student financial aid programs, the new academic program may need to be certified by the Department of Education. If we are unable to respond adequately to changes in market requirements due to financial constraints or other factors, our ability to attract and retain learners could be impaired and our financial results could suffer.
      In addition to the bachelor’s degree completion, master’s and doctoral degree programs that we offered previously, in 2004, we introduced our first four-year bachelor’s degree programs in business administration and information technology and our first master’s in education specializations in K-12 teaching. Establishing new academic programs or modifying existing programs requires us to make investments in management and capital expenditures, incur marketing expenses and reallocate other resources. We have limited experience with the courses in these areas and may need to modify our systems and strategy or enter into arrangements with other educational institutions to provide these programs effectively and profitably. If we are unable to increase the number of learners in our bachelor’s and certain of our master’s programs or offer these programs in a cost-effective manner, or are otherwise

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unable to manage effectively the operations of newly established academic programs, our results of operations and financial condition could be adversely affected.
Our financial performance depends on our ability to continue to develop awareness among, and attract and retain, working adult learners.
      Building awareness of the programs we offer among working adult learners is critical to our ability to attract prospective learners. It is also critical to our success that we convert these prospective learners to enrolled learners at rates that compare favorably to those of our competitors and that these enrolled learners remain active in our programs. Some of the factors that could prevent us from successfully enrolling and retaining learners in our programs include:
  •  the emergence of more successful competitors;
 
  •  factors related to our marketing, including the costs of Internet advertising and broad-based branding campaigns;
 
  •  performance problems with our online systems;
 
  •  learner dissatisfaction with our services and programs;
 
  •  adverse publicity regarding us, our competitors or online or for-profit education generally;
 
  •  a decline in the acceptance of online education; and
 
  •  a decrease in the perceived or actual economic benefits that learners derive from our programs.
If we are unable to continue to develop awareness of the programs we offer, and to enroll and retain learners, our enrollments would suffer and our ability to increase revenues or maintain profitability would be significantly impaired.
Strong competition in the post-secondary education market, especially in the online education market, could decrease our market share and put downward pressure on our tuition rates.
      Post-secondary education is highly competitive. We compete with traditional public and private two-year and four-year colleges as well as other for-profit schools. Traditional colleges and universities may offer programs similar to ours at lower tuition levels as a result of government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to for-profit institutions. In addition, some of our competitors in both the public and private sectors, such as the University of Phoenix, have substantially greater name recognition and financial and other resources than we have, which may enable them to compete more effectively for potential learners and decrease our market share. Some of our competitors also have more favorable cost structures. We further expect new competitors to enter the online education market.
      We may not be able to compete successfully against current or future competitors and may face competitive pressures that could adversely affect our business or results of operations. For example, we may be required to reduce our tuition or increase spending in response to competition in order to retain or attract learners or pursue new market opportunities. As a result, our profitability may significantly decrease.
We rely on exclusive proprietary rights and intellectual property that may not be adequately protected under current laws and we encounter disputes from time to time relating to our use of intellectual property of third parties.
      Our success depends in part on our ability to protect our proprietary rights. We rely on a combination of copyrights, trademarks, service marks, trade secrets, domain names and agreements to protect our proprietary rights. We rely on service mark and trademark protection in the United States and select foreign jurisdictions to protect our rights to the marks “CAPELLA,” “CAPELLA EDUCATION COMPANY,” and “CAPELLA UNIVERSITY,” as well as distinctive logos and other marks associated

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with our services. We rely on agreements under which we obtain rights to use course content developed by faculty members and other third party content experts. We cannot assure you that these measures will be adequate, that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights in the United States or select jurisdictions, or that third parties will not infringe upon or violate our proprietary rights. Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our curricula, online resource material and other content. Our management’s attention may be diverted and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation.
      We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. In certain instances, we may not have obtained sufficient rights in the content of a course. Third parties may raise a claim against us alleging an infringement or violation of the intellectual property of that third party. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. Our general liability and cyber liability insurance may not cover potential claims of this type adequately or at all, and we may be required to alter the content of our classes or pay monetary damages, which may be significant.
We may incur liability for the unauthorized duplication or distribution of class materials posted online for class discussions.
      In some instances, our faculty members or our learners may post various articles or other third-party content on class discussion boards. We may incur liability for the unauthorized duplication or distribution of this material posted online for class discussions. Third parties may raise claims against us for the unauthorized duplication of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. Our general liability insurance may not cover potential claims of this type adequately or at all, and we may be required to alter the content of our courses or pay monetary damages.
A reclassification of our adjunct faculty by authorities may have a material adverse effect on our results of operations.
      Adjunct faculty comprised approximately 85% of our faculty population as of December 31, 2004. We classify our adjunct faculty as independent contractors, as opposed to employees. Because we classify our adjunct faculty as independent contractors, we do not withhold federal or state income or other employment related taxes, make federal or state unemployment tax or Federal Insurance Contributions Act, or FICA, payments or provide workers’ compensation insurance with respect to our adjunct faculty. The determination of whether adjunct faculty members are properly classified as independent contractors or as employees is based upon the facts and circumstances of our relationship with our adjunct faculty members. Federal or state authorities may challenge our classification as incorrect and assert that our adjunct faculty members must be classified as employees. In the event that we were to reclassify our adjunct faculty as employees, we would be required to withhold the appropriate taxes, pay unemployment tax and FICA and pay for workers’ compensation insurance and additional payroll processing costs. If we had reclassified our adjunct faculty members as employees for 2004, we estimate our additional tax, workers’ compensation insurance and payroll processing payments would have been approximately $1.1 million for 2004. The amount of additional tax and insurance payments would increase in the future as the total amount we pay to adjunct faculty increases. In addition to these known costs, we could be subject to retroactive taxes and penalties, which may be significant, by federal and state authorities which could adversely affect our financial condition and results of operations.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
      Our success to date has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers, who generally have significant experience with our company and

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within the education industry. Our chairman and chief executive officer, Stephen Shank, is 61 years old and has been our chief executive officer since he founded Capella in 1991. Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the nature of our business, we face significant competition in attracting and retaining personnel who possess the skill sets we seek. In addition, key personnel may leave us and subsequently compete against us. We do not carry any life insurance on our key personnel for our benefit. 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 impair our ability to successfully manage our business, which could in turn materially and adversely affect our results of operations.
Failure on our part to maintain and expand our existing relationships with the U.S. Armed Forces could adversely affect our learner population and revenues.
      We have relationships with several branches of the U.S. Armed Forces that we believe assist us in recruiting and retaining learners. In order to be eligible to recruit potential learners from these branches pursuant to these relationships, we must comply with the applicable requirements of, and maintain good relations with, each branch. We also offer tuition discounts to all members of the U.S. Armed Forces and their immediate family members. For the quarter ended March 31, 2005, approximately 19% of our learners received a U.S. Armed Forces discount. If our relationship with any branch of the U.S. Armed Forces from which we recruit learners terminates or deteriorates significantly, our efforts to recruit learners from that branch will be impaired. This impairment could reduce the number of learners from the U.S. Armed Forces that enroll at Capella University, which could have a material adverse effect on our enrollments, revenues and results of operations.
Our expenses may cause us to incur operating losses if we are unsuccessful in achieving growth.
      Our expenses are based, in significant part, on our estimates of future revenues and are largely fixed in the short term. As a result, we may be unable to adjust our spending in a timely manner if our revenues fall short of our expectations. Accordingly, any significant shortfall in revenues in relation to our expectations would have an immediate and material adverse effect on our profitability. In addition, as our business grows, we anticipate increasing our operating expenses to expand our program offerings, marketing and administrative organizations. Any such expansion could cause material losses to the extent we do not generate additional revenues sufficient to cover those expenses.
We receive library services through an agreement with Johns Hopkins University and cannot guarantee the continued availability of those services.
      Our library services and resources are provided by the Sheridan Libraries at Johns Hopkins University under an agreement between Johns Hopkins University and us. Our current agreement with Johns Hopkins University expires on December 31, 2006. In the event that our agreement with Johns Hopkins University is not renewed or terminates for any reason, we will be required to seek a relationship with another library services provider to provide the resources and services of the Capella University Library. Such a relationship may not be available to us. In the event we are unable to enter into an agreement with another library services provider, we could lose our accreditation, and in turn, our ability to participate in Title IV programs. Loss of accreditation or inability to participate in Title IV programs would have a material adverse effect on our enrollments, revenues and results of operations.
A change in U.S. GAAP accounting standards for employee stock options is expected to have a significant adverse effect on the reporting of our results of operations.
      In December 2004, the Financial Accounting Standards Board (FASB) issued revised Statement of Financial Accounting Standards (SFAS) No. 123 (revised), Share-Based Payment (SFAS 123R). SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments, focusing primarily on accounting for transactions in

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which an entity obtains employee services in share-based payment transactions. SFAS 123R requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions) and to recognize the cost over the period during which an employee is required to provide service in exchange for the award. The Securities and Exchange Commission amended the compliance date on April 14, 2005 to require public companies to adopt this standard as of the beginning of the first annual period that begins after June 15, 2005. We are therefore required to implement this standard on January 1, 2006. We currently account for share-based payments to our employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, we expect that we will record substantial non-cash compensation expenses as a result of the application of SFAS 123R, which is expected to have a significant adverse effect on our results of operations.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
      In reviewing our results of operations, you should not focus on quarter-to-quarter comparisons. Our results in any quarter may not indicate the results we may achieve in any subsequent quarter or for the full year. Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in enrollment. Learner population varies as a result of new enrollments, graduations and learner attrition. While our revenues and number of enrolled learners have grown in each sequential quarter over the past three years, the number of enrolled learners has been proportionally greatest in the fourth quarter of each respective year. A significant portion of our general and administrative expenses do not vary proportionately with fluctuations in revenues. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of new program introductions, the timing of seminars and events and increased enrollments of learners. These fluctuations may result in volatility or have an adverse effect on the market price of our common stock.
Capacity constraints, system disruptions and vulnerability from security risks to our online computer networks could impact our ability to generate revenue and damage the reputation of Capella University, limiting our ability to attract and retain learners.
      The performance and reliability of our technology infrastructure is critical to our reputation and ability to attract and retain learners. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of our courseroom platform, damaging our ability to generate revenue. Our technology infrastructure could be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters, terrorist activities and telecommunications failures. We rely on third parties to provide software for our courseroom platform, accounting, administrative and other functions. We have transferred a majority of our learners to a new courseroom platform. We plan to migrate this new courseroom platform to a new server system. In addition, we plan to replace our individual administrative software applications with a comprehensive enterprise resource planning system. Over the past two years, we experienced intermittent failures of our courseroom platform that prevented learners from accessing their courses. We may experience additional interruptions or failures in our computer systems as a result of these migrations and replacements. Any interruption to our technology infrastructure could have a material adverse effect on our ability to attract and retain learners and could require us to incur additional expenses to correct or mitigate the interruption.
      Our computer networks may also be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. We engage with multiple security assessment providers on a periodic basis to review and assess our security. We utilize this information to audit ourselves ensure that we are continually monitoring the security of our technology infrastructure.

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Our current success and future growth depend on the continued increased acceptance of the Internet and the corresponding growth in users seeking educational services on the Internet.
      Our business relies on the Internet for its success. A number of factors could inhibit the growth and acceptance of the Internet and adversely affect our profitability, including:
  •  inadequate Internet infrastructure;
 
  •  security and privacy concerns; and
 
  •  the unavailability of cost-effective Internet service and other technological factors.
If Internet use decreases, or if the number of Internet users seeking educational services on the Internet does not increase, our business may not grow as planned.
We operate in a highly competitive market with rapid technological change, and we may not have the resources needed to compete successfully.
      Online education is a highly competitive market that is characterized by rapid changes in our learners’ technological requirements and expectations and evolving market standards. Competitors vary in size and organization from traditional colleges and universities to for-profit schools, corporate universities and software companies providing online education and training software. Each of these competitors may develop programs or other technology that is superior to the programs and technology we use. We may not have the resources necessary to acquire or compete with technologies being developed by our competitors, which may render our online delivery format less competitive or obsolete.
Government regulations relating to the Internet could increase our cost of doing business, affect our ability to grow or otherwise have a material adverse effect on our business.
      The increasing popularity and use of the Internet and other online services has led and may lead to the adoption of new laws and regulatory practices in the United States or foreign countries and to new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues such as online privacy, copyrights, trademarks and service marks, sales taxes, fair business practices and the requirement that online education institutions qualify to do business as foreign corporations or be licensed in one or more jurisdictions where they have no physical location or other presence. New laws, regulations or interpretations related to doing business over the Internet could increase our costs and materially and adversely affect our enrollments, revenues and results of operations.
An increase in interest rates could adversely affect our ability to attract and retain learners.
      Approximately 69% of our revenues (calculated on a cash basis) for the year ended December 31, 2004, were derived from Title IV programs, which involve subsidized student borrowing. Additionally, many of our learners finance their education through private, unsubsidized borrowing. Interest rates have reached relatively low levels in recent years, creating a favorable borrowing environment for learners. However, interest rates are currently increasing. Much of the financing our learners receive is tied to floating interest rates. In addition, in the event Congress decreases the amount available for federal student aid, our learners may have to pay higher, unsubsidized interest rates. Therefore, any future increase in interest rates will result in a corresponding increase in educational costs to our existing and prospective learners, which could result in a significant reduction in our learner population and revenues. Higher interest rates could also contribute to higher default rates with respect to our learners’ repayment of their education loans. Higher default rates may in turn adversely impact our eligibility to participate in some or all Title IV programs, which could result in a significant reduction in our learner population and our profitability.

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Risks Related to the Offering
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
      Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The market price of our common stock could fluctuate significantly for various reasons, which include:
  •  our quarterly or annual earnings or those of other companies in our industry;
 
  •  the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission, or SEC;
 
  •  changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of other companies in our industry;
 
  •  changes in our number of enrolled learners;
 
  •  new laws or regulations or new interpretations of laws or regulations applicable to our business;
 
  •  seasonal variations in our learner population;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;
 
  •  litigation involving our company or investigations by regulators into the operations of our company or our competitors; and
 
  •  sales of common stock by our directors, executive officers and significant shareholders.
      In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of these companies. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our stock price.
If our share price is volatile, we may be the target of securities litigation, which is costly and time-consuming to defend.
      In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s and board’s attention could be diverted from the operation of our business, causing our business to suffer.
There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.
      There has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on The Nasdaq National Market or otherwise, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

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Future sales of our common stock in the public market could lower our stock price.
      We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock to finance future acquisitions. After the completion of this offering, we will have                     outstanding shares of common stock. This number includes                      shares that we are selling in this offering, which may be resold immediately in the public market.                      shares of our common stock, or           % of our total outstanding shares, are restricted from immediate resale under the federal securities laws and the lock-up agreements between certain of our current shareholders and the underwriters described in the section entitled “Underwriting,” but may be sold into the market in the near future. These shares will become available for sale at various times following the expiration of the lock-up agreements which, without the prior consent of Credit Suisse First Boston LLC, is 180 days (subject to an extension of no more than 34 days as a result of an earnings release by us) after the date of this prospectus, subject to volume limitations and manner-of-sale requirements under Rule 144 of the Securities Act of 1933. However, CSFB may release all or a portion of these shares subject to lock-up agreements at any time without notice. The period immediately following expiration of the lock-up agreements may experience relatively higher levels of selling activity.
      After this offering, several of our existing shareholders owning                      shares of our common stock, are expected to be parties to a registration rights agreement with us. Under that agreement, these shareholders will have the right, after the expiration of the lock-up period, to require us to effect the registration of their shares. In addition, if we propose to register, or are required to register following the exercise of a “demand” registration right as described in the previous sentence, any of our shares of common stock under the Securities Act, all the shareholders who are parties to the registration rights agreement will be entitled to include their shares of common stock in that registration. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
Our executive officers, directors and principal existing shareholders will continue to own a large percentage of our voting stock after this offering, which may allow them to control substantially all matters requiring shareholder approval.
      Stephen G. Shank, our chief executive officer and chairman of our board of directors, will hold approximately                     of the outstanding common stock after the offering. Additionally, our other directors, executive officers and principal existing shareholders will beneficially own approximately      % of our common stock upon the completion of this offering. Accordingly, if some or all of these shareholders decided to act in concert, they could control us through their ability to determine the outcome of the election of our directors, to amend our articles of incorporation and bylaws and to take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The ownership positions of these shareholders may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors.
Our articles of incorporation, bylaws, Minnesota law and regulations of state and federal education agencies may discourage takeovers and business combinations that our shareholders might consider in their best interests.
      Anti-takeover provisions of our articles of incorporation, bylaws and Minnesota law and regulations of state and federal education agencies could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then-current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our board of directors, without further shareholder approval, may issue shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of your shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our board

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of directors that could have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act, or MBCA, regarding “business combinations,” which can deter attempted takeovers in certain situations. The approval requirements of the Department of Education, our regional accrediting agency and state education agencies for a change in control transaction could also delay, deter or prevent a transaction that would result in a change in control. We may, in the future, consider adopting additional anti-takeover measures. The authority of our board to issue undesignated preferred or other capital stock and the anti-takeover provisions of the MBCA, as well as other current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the company not approved by our board of directors.
Being a public company will increase our expenses and administrative workload.
      As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain provisions of the Sarbanes-Oxley Act of 2002, related SEC regulations and requirements of The Nasdaq National Market with which we are not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will increase our costs and expenses. We will need to:
  •  create or expand the roles and duties of our board of directors, our board committees and management;
 
  •  establish an internal audit function;
 
  •  institute a more comprehensive compliance function;
 
  •  design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
 
  •  prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;
 
  •  establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
 
  •  involve and retain to a greater degree outside counsel and accountants in the above activities; and
 
  •  enhance our investor relations function.
      In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.
We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.
      We are in the process of evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal control over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to comply with Section 404 by no later than December 31, 2006. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and

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Public Company Accounting Oversight Board rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a significant deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or The Nasdaq National Market, and if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets, and our stock price may be adversely affected.
We will have broad discretion in applying the net proceeds of the offering and may not use those proceeds in ways that will enhance the market value of our common stock.
      We have significant flexibility in applying the net proceeds we will receive in this offering. As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the net proceeds from this offering favorably.
You will suffer immediate and substantial dilution.
      The initial public offering price per share is substantially higher than the pro forma net tangible book value per share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the tangible book value of our assets after subtracting our liabilities. At an assumed initial public offering price of $          , you will incur immediate and substantial dilution in the amount of $           per share. We also have outstanding stock options to purchase shares of our common stock at a weighted average exercise price of $           per share. To the extent these options are exercised, there will be further dilution.

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FORWARD-LOOKING STATEMENTS
      This prospectus contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
      Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
  •  our failure to comply with the extensive regulatory framework applicable to our industry, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting agency requirements;
 
  •  risks associated with changes in applicable federal and state laws and regulations and accrediting agency policies;
 
  •  our ability to manage future growth effectively;
 
  •  the pace of growth of our enrollment;
 
  •  our ability to convert prospective learners to enrolled learners and to retain active learners;
 
  •  our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;
 
  •  industry competition;
 
  •  failure on our part to maintain and expand existing commercial relationships with the U.S. Armed Forces and various corporations and develop new commercial relationships;
 
  •  general and economic conditions; and
 
  •  other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Regulatory Environment.”
      Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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USE OF PROCEEDS
      The net proceeds from the sale of                      shares of our common stock offered by us in this offering will be approximately $           million, based on an estimated initial public offering price of $           per share, which is the mid-point of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of the shares to be sold by the selling shareholders.
      The primary purposes of the offering are to create a public market for our common stock, obtain additional equity capital and facilitate future access to public markets. We have not made any specific plans with respect to the use of the net proceeds of this offering. We expect to use the net proceeds of this offering for working capital and general corporate purposes, which may include expanding our marketing and recruiting efforts, capital expenditures, developing new courses and programs and acquisitions complementary to our business. We have no current plans, arrangements or commitments for, and are not currently engaged in any negotiations with respect to, any such acquisition. Management will have broad discretion in the allocation of the net proceeds of this offering. Depending upon future events, we may determine at a later time to use the net proceeds for different purposes. Pending their use, we intend to invest the net proceeds in investment-grade, interest-bearing securities.
DIVIDEND POLICY
      We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, to fund the operation and expansion of our business and do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. The payment of any dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors deemed relevant by our board. As a result, you will need to sell your shares of common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

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CAPITALIZATION
      The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of December 31, 2004:
  •  on an actual basis;
 
  •  on a pro forma basis, giving effect to (i) our sale of                      shares of our common stock in this offering (at an assumed initial public offering price of $                     per share); and (ii) the conversion of all outstanding shares of our Class A, Class B and Class D convertible preferred stock and our Class E and Class G redeemable convertible preferred stock into                      shares of our common stock, which is expected to occur concurrently with the consummation of the offering in accordance with the provisions of each class of preferred stock’s respective certificate of designation.
      You should read this table together with the “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements included elsewhere in this prospectus.
                     
    As of
    December 31, 2004
     
    Actual   Pro Forma
         
    (In thousands,
    except share and
    per share amounts)
Cash, cash equivalents and short-term investments
  $ 49,980          
             
Debt:
               
 
Line of credit (a)
             
 
Capital lease obligations, including current portion of $314
    322          
             
   
Total debt
    322          
             
Redeemable preferred stock:
               
 
Class E Redeemable Convertible Preferred Stock: $0.01 par value; 2,596,491 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma
    34,985          
 
Class G Redeemable Convertible Preferred Stock: $0.01 par value; 2,184,540 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma
    22,661          
             
   
Total redeemable preferred stock
    57,646          
             
Shareholders’ equity (deficit):
               
 
Class A Convertible Preferred Stock: $1.00 par value; 3,000,000 shares authorized, 2,810,000 shares issued and outstanding, actual; none authorized, issued and outstanding, pro forma
    2,810          
 
Class B Convertible Preferred Stock: $2.50 par value; 1,180,000 shares authorized, 460,000 shares issued and outstanding, actual; none authorized, issued and outstanding, pro forma
    1,150          
 
Class D Convertible Preferred Stock: $4.50 par value; 1,022,222 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma
    4,600          
 
Undesignated preferred stock: none authorized, issued and outstanding, actual;            shares authorized, none issued and outstanding, pro forma
             
 
Common stock: $0.10 par value; 10,000,000 shares authorized, 2,074,427 shares issued and outstanding, actual;            shares authorized,            shares issued and outstanding, pro forma (b)
    208          

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    As of
    December 31, 2004
     
    Actual   Pro Forma
         
    (In thousands,
    except share and
    per share amounts)
 
Additional paid-in capital
    5,166          
 
Accumulated deficit
    (13,939 )        
             
   
Total shareholders’ equity (deficit)
    (5 )        
             
Total capitalization
  $ 57,963          
             
 
(a)  At December 31, 2004, we had available funds under our revolving line of credit in the amount of $10.0 million. There have been no borrowings to date under our revolving line of credit.
 
(b)  Excludes:
  •               shares of common stock reserved for future issuance upon the exercise of stock options outstanding as of                     , 2005 under our stock option plans, at a weighted average exercise price of $           per share;
 
  •               shares of common stock reserved for future issuance upon the vesting of common stock outstanding under our stock purchase plan; and
 
  •               shares of common stock reserved for future issuance under our stock option plans, of which options to purchase                      shares of common stock are proposed to be issued in connection with this offering at an exercise price equal to the price of shares sold in this offering.
      For further information regarding our stock and stock option plans, see “Description of Capital Stock” and “Management – Existing Stock and Stock Option Plans.”

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DILUTION
      If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after the offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing shareholders for the presently outstanding stock.
      Our net tangible book value (deficit) as of December 31, 2004, was $(5,000). Net tangible book value (deficit) per share of common stock is equal to the total book value of the tangible assets less total liabilities and total redeemable preferred stock, divided by the number of shares of common stock outstanding as of December 31, 2004. Pro forma net tangible book value per share of common stock represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all outstanding classes of preferred stock into common stock upon the completion of this offering. As of December 31, 2004, our pro forma net tangible book value would have been approximately $          million, or $           per share of common stock.
      Pro forma as adjusted net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all preferred stock into common stock upon the completion of this offering, our sale of            shares of common stock in this offering at an assumed initial public offering price of $           per share of common stock (the mid-point of the range set forth on the cover of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. As of December 31, 2004, our pro forma as adjusted net tangible book value would have been approximately $          million, or $           per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $           per share of common stock to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $           per share of common stock to investors purchasing common stock in this offering. The following table illustrates this per share dilution:
           
Assumed initial public offering price per share of common stock
  $    
 
Pro forma net tangible book value per share of common stock as of December 31, 2004
  $    
 
Increase per share of common stock attributable to new investors
       
Pro forma as adjusted net tangible book value per share of common stock after this offering
       
Dilution per share of common stock to new investors
  $    
      The following table sets forth, as of December 31, 2004, on the pro forma as adjusted basis described above, the differences between existing stockholders and the new investors with respect to the total number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $           per share of common stock.
                                           
    Shares Purchased   Total Consideration    
            Average Price
    Number   Percent   Amount   Percent   Per Share
                     
    (In thousands)   (In thousands)    
Existing shareholders
                                       
New investors
                                       
 
Total
                                       
      Sales by the selling shareholders in this offering will cause the number of shares held by existing shareholders to be reduced to                     , or           % of the total number of shares of our common stock outstanding after this offering, and will increase the total number of shares held by new investors to                     , or           % of the total number of shares of our common stock outstanding after this offering. If the underwriters’ over-allotment option is exercised in full, the number of shares held by existing

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shareholders after this offering would be                     , or           %, and the number of shares held by new investors would increase to                     , or           %, of the total number of shares of our common stock outstanding after this offering.
      The discussion and table assume that no stock options were exercised after December 31, 2004. As of the consummation of this offering, we expect to have options outstanding to purchase a total of                      shares of common stock at a weighted average exercise price of approximately $                     per share of common stock. To the extent that these options are exercised, there will be further dilution to new investors. See “Description of Capital Stock.”

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SELECTED CONSOLIDATED FINANCIAL DATA
      The following table sets forth our selected consolidated financial and operating data as of the dates and for the periods indicated. You should read this data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for each of the years in the three-year period ended December 31, 2004, and the consolidated balance sheet data as of December 31, 2003 and 2004, have been derived from our audited consolidated financial statements which are included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2000 and 2001, and consolidated balance sheet data as of December 31, 2000, 2001 and 2002, have been derived from our audited consolidated financial statements not included in this prospectus. Historical results are not necessarily indicative of the results of operations to be expected for future periods.
      The following table also sets forth summary unaudited consolidated pro forma balance sheet data as of December 31, 2004, which give effect to the transactions described in footnote (d) of the following table. The unaudited consolidated pro forma balance sheet data are presented for informational purposes only and do not purport to represent what our financial position actually would have been had the transactions so described occurred on the dates indicated or to project our financial position as of any future date.
                                             
    Year Ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (In thousands, except per share and enrollment data)
Statement of Operations Data:
                                       
Revenues
  $ 15,896     $ 29,806     $ 49,556     $ 81,785     $ 117,689  
Costs and expenses:
                                       
 
Instructional costs and services
    12,394       20,486       27,247       42,402       57,512  
 
Selling and promotional
    8,190       13,627       15,559       21,161       33,989  
 
General and administrative
    7,345       9,387       12,744       14,152       16,323  
                               
   
Total costs and expenses
    27,929       43,500       55,550       77,715       107,824  
                               
Operating income (loss)
    (12,033 )     (13,694 )     (5,994 )     4,070       9,865  
Other income, net
    1,332       731       327       427       724  
                               
Income (loss) before income taxes
    (10,701 )     (12,963 )     (5,667 )     4,497       10,589  
Income tax expense (benefit)
                      104       (8,196 )
                               
Net income (loss)
  $ (10,701 )   $ (12,963 )   $ (5,667 )   $ 4,393     $ 18,785  
                               
Net income (loss) per common share:
                                       
 
Basic
  $ (7.61 )   $ (8.71 )   $ (3.70 )   $ 2.63     $ 9.34  
 
Diluted
  $ (7.61 )   $ (8.71 )   $ (3.70 )   $ 0.39     $ 1.62  
Weighted average number of common shares outstanding:
                                       
 
Basic
    1,406       1,489       1,532       1,669       2,011  
 
Diluted
    1,406       1,489       1,532       11,154       11,595  

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    Year Ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (In thousands, except per share and enrollment data)
Other Data:
                                       
Depreciation and amortization (a)
  $ 985     $ 2,044     $ 3,108     $ 4,177     $ 5,454  
Net cash provided by (used in) operating activities
  $ (7,895 )   $ (9,249 )   $ 177     $ 16,028     $ 17,494  
Capital expenditures
  $ 4,477     $ 5,283     $ 3,859     $ 4,348     $ 8,986  
EBITDA (b)
  $ (11,048 )   $ (11,650 )   $ (2,886 )   $ 8,247     $ 15,319  
Enrollment (c)
    2,111       3,757       6,380       9,115       12,013  
                                                 
        Pro Forma
    As of December 31,   As of
        December 31,
    2000   2001   2002   2003   2004   2004 (d)
                         
    (In thousands)    
Consolidated Balance Sheet Data:
                                               
Cash, cash equivalents and short-term investments
  $ 25,368     $ 10,655     $ 22,060     $ 41,190     $ 49,980          
Working capital (e)
    22,268       6,203       15,340       27,516       37,935          
Total assets
    32,763       23,882       35,380       55,402       80,026          
Total redeemable preferred stock
    35,150       34,985       50,401       57,646       57,646          
Shareholders’ equity (deficit)
    (8,318 )     (20,999 )     (26,250 )     (20,416 )     (5 )        
 
(a)  Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Amortization includes amounts related to purchased software, capitalized website development costs and internally developed software.
 
(b)  EBITDA consists of net income (loss) minus other income, net, plus income tax expense (benefit) and plus depreciation and amortization. Other income, net consists primarily of interest income earned on short-term investments, net of any interest expense for capital leases. We believe that the presentation of EBITDA will enhance investors’, securities analysts’ and other interested parties’ understanding of our operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our business. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax payments.
  The following table provides a reconciliation of net income (loss) to EBITDA:
                                         
    Year Ended December 31,
     
    2000   2001   2002   2003   2004
                     
    (In thousands)
Net income (loss)
  $ (10,701 )   $ (12,963 )   $ (5,667 )   $ 4,393     $ 18,785  
Other income, net
    (1,332 )     (731 )     (327 )     (427 )     (724 )
Income tax expense (benefit)
                      104       (8,196 )
Depreciation and amortization
    985       2,044       3,108       4,177       5,454  
                               
EBITDA
  $ (11,048 )   $ (11,650 )   $ (2,886 )   $ 8,247     $ 15,319  
                               

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(c)  Enrollment reflects the total number of learners registered in a course as of the last day of classes for such periods.
 
(d)  The consolidated pro forma balance sheet data for the year ended December 31, 2004, give effect to the conversion of all outstanding preferred stock into shares of common stock in connection with this offering, the sale of                      shares of common stock by us in this offering and our receipt of the estimated net proceeds of that sale, after deducting underwriting discounts and estimated offering expenses.
 
(e)  Working capital is calculated by subtracting total current liabilities from total current assets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
      You should read the following discussion together with the financial statements and the related notes included elsewhere in the prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this prospectus. You should read “Risk Factors” and “Forward-Looking Statements.”
Overview
Background
      We are an exclusively online post-secondary education services company. Our wholly owned subsidiary, Capella University, is a regionally accredited university that offers a variety of undergraduate and graduate degree programs primarily targeted to working adults. As of December 31, 2004, we offered more than 675 courses and 13 degree programs with 68 specializations at the graduate and undergraduate levels to more than 12,000 learners.
      We were founded in 1991, and in 1993, we established our wholly owned university subsidiary, The Graduate School of America, to offer doctoral and master’s degrees through distance learning programs in management, education, human services and interdisciplinary studies. In 1995, we launched our online format for delivery of our doctoral and master’s degree programs. In 1997, our university subsidiary received accreditation from the North Central Association of Colleges and Schools (later renamed The Higher Learning Commission of the North Central Association). In 1998, we began the expansion of our original portfolio of academic programs by introducing doctoral and master’s degrees in psychology and a master of business administration degree. In 1999, to expand the reach of our brand in anticipation of moving into the bachelor’s degree market, we changed our name to Capella Education Company and the name of our university to Capella University. In 2000, we introduced our bachelor’s degree completion program in information technology, which provided instruction for the last two years of a four-year bachelor’s degree. In 2004, we believe we expanded our addressable market through the introduction of our four-year bachelor’s degree programs in business administration and information technology as well as the introduction of three master’s level specializations in education targeted at K-12 teachers.
Our key financial results metrics
      Revenues. Revenues consist principally of tuition, application and graduation fees, and commissions we earn from bookstore and publication sales. During each of 2002, 2003 and 2004, tuition represented approximately 99% of our revenues. Factors affecting our revenues include: (i) the number of enrollments; (ii) the number of courses per learner; (iii) our degree and program mix; (iv) the number of programs and specializations we offer; and (v) annual tuition adjustments.
      Enrollments for a particular time period are defined as the number of learners registered in a course on the last day of classes within that period. We offer monthly start options for newly enrolled learners. Learners who start their program in the second or third month of a quarter transition to a quarterly schedule beginning in their second quarter. Enrollments are a function of the number of continuing learners at the beginning of each period and new enrollments during the period, which are offset by graduations, withdrawals and inactive learners during the period. Inactive learners for a particular period include learners who are not registered in a class, and, therefore, are not generating revenues for that period, but who have not withdrawn from Capella University. We believe that our enrollments are influenced by the attractiveness of our program offerings, the effectiveness of our marketing and recruiting efforts, the quality of our instructors, the number of programs and specializations we offer, the availability

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of federal and other funding, the length of our educational programs, the seasonality of our enrollments and general economic conditions.
      Our enrollments by degree level for the periods ended December 31, 2002, 2003 and 2004, were as follows:
                           
    For the periods ended
    December 31,
     
    2002   2003   2004
             
Doctoral
    3,187       4,251       5,611  
Master’s
    2,603       3,695       4,543  
Bachelor’s
    590       1,169       1,859  
                   
 
Total
    6,380       9,115       12,013  
                   
      Our tuition rates vary by type and length of the programs and the degree level, such as doctoral, master’s or bachelor’s. For all master’s and bachelor’s programs and for selected doctoral programs, tuition is determined by the number of courses taken by each learner. For the 2004 – 2005 academic year (the academic year that began in July 2004), prices per course generally range from $1,350 to $1,825. The price of the course depends on the number of credit hours, the degree level of the program and the discipline. For the 2004 – 2005 academic year, the majority of doctoral programs are priced at a fixed quarterly amount of $3,750 per learner, regardless of the number of courses in which the learner is registered. Based on these prices, we estimate that full tuition is approximately $49,000 for a four-year bachelor’s program, ranges from approximately $16,000 to $26,000 for a master’s program, and ranges from approximately $48,000 to $67,000 for a doctoral program. These amounts and ranges assume no reductions for transfer credits. Many of our learners reduce their total program costs at Capella University by transferring credits earned at other institutions.
      Tuition increases ranged from 3% to 7% in the 2004 – 2005 academic year as compared to the prior academic year. Tuition increases have not historically been, and may not in the future be, consistent across our programs and specializations due to market conditions or changes in operating costs that have an impact on price adjustments of individual programs or specializations.
      A large portion of our learners rely on funds received under various government-sponsored student financial aid programs, predominantly Title IV programs, to pay a substantial portion of their tuition and other education-related expenses. In the years ended December 31, 2002, 2003 and 2004, approximately 51%, 61% and 69%, respectively, of our revenues were attributable to funds derived from Title IV programs. In addition to Title IV funding, our learners receive financial aid from other governmental sources or finance their education through private financing institutions or with their own funds.
      Other income, net. Other income, net consists primarily of interest income earned on short-term investments net of any interest expense for capital leases.
      Costs and expenses. We categorize our costs and expenses as (i) instructional costs and services expenses, (ii) selling and promotional expenses, and (iii) general and administrative expenses.
      Instructional costs and services expenses are items of expense directly attributable to the educational services we provide our learners. This expense category includes salaries and benefits of full-time faculty, administrators and academic advisors and costs associated with adjunct faculty. Instructional pay for adjunct faculty varies across programs and is primarily dependent on the number of learners taught. Instructional costs and services expenses also include costs of educational supplies, costs associated with admissions and other university services, and an allocation of facility costs, depreciation and amortization and information technology costs that are attributable to providing educational services to our learners.
      Selling and promotional expenses include salaries and benefits of personnel engaged in recruitment and promotion, as well as costs associated with advertising and the production of marketing materials. Selling and promotional expenses also include an allocation of facility costs, depreciation and amortization,

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and information technology costs that are attributable to the marketing of Capella University and recruitment of new learners. Our selling and promotional expenses are generally affected by the cost of advertising media, the efficiency of our selling efforts, salaries and benefits for our sales personnel and the number of advertising initiatives for new and existing academic programs.
      General and administrative expenses include salaries and benefits of employees engaged in management, finance, human resources, compliance and other corporate functions, together with an allocation of facility costs, depreciation and amortization and information technology costs attributable to such functions. General and administrative expenses also include bad debt expense and any charges associated with asset impairments.
Factors affecting comparability
      We set forth below selected factors that we believe have had, or are expected to have, a significant effect on the comparability of recent or future results of operations:
      Introduction of new programs and specializations. At December 31, 2002, learners seeking doctoral degrees represented approximately 50% of our enrollment, while learners seeking master’s and bachelor’s degrees represented approximately 41% and 9%, respectively. The higher concentration of learners in doctoral programs reflects our early emphasis on these programs. In 2004, we believe we expanded our addressable market through the introduction of our four-year bachelor’s degree programs in business administration and information technology as well as the introduction of three master’s level specializations in education targeted at K-12 teachers. These additions are consistent with our continuing migration from a concentration of doctoral enrollment to an enrollment that includes more master’s and bachelor’s learners. At December 31, 2004, learners seeking doctoral, master’s and bachelor’s degrees represented 47%, 38% and 15%, respectively, of our enrollment. We expect to introduce additional master’s and bachelor’s programs and specializations in the future.
      We make significant investments in program and specialization development, support infrastructure and marketing and selling when introducing new programs and specializations. Relative to our doctoral programs, our master’s and bachelor’s programs have tended to have lower revenue per learner and higher selling and promotional, learner recruitment and support costs. In the year ended December 31, 2004, doctoral programs accounted for a majority of our revenues and all of our operating profit. In contrast, our bachelor’s and master’s programs were not profitable in 2004. During the period of new program introduction and development, the rate of growth of revenues and income from operations has been, and may be, adversely affected in part due to these factors. Our strategy is to operate these newer programs at profit levels approaching those of our doctoral program. As our newer programs develop, we anticipate increases in enrollment, higher revenue per learner, more cost-effective delivery of instructional and support services and more efficient selling and promotional processes.
      Income tax benefits resulting from reversal of valuation allowance. In the period from our inception through 2002, we incurred significant operating losses that resulted in a net operating loss carryforward for tax purposes and net deferred tax assets. Until 2004, we provided a 100% valuation allowance for all net deferred tax assets. Because we achieved three years of cumulative taxable income in 2004 and we expect to be profitable in future years, we have concluded that it is more likely than not that substantially all of our net deferred tax assets will be realized. As a result, in accordance with SFAS No. 109, Accounting for Income Taxes , all of the valuation allowance applied to net deferred tax assets was reversed during the year ended December 31, 2004. Reversal of the valuation allowance resulted in a non-cash income tax benefit totaling $12.9 million, which accounted for 68% of our net income of $18.8 million in the year ended December 31, 2004. We expect that our effective tax rate for 2005 will be in the range of 39% to 41%.
      Stock option expense. In December 2004, the FASB issued to SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). The Securities and Exchange Commission amended the compliance date on April 14, 2005, to require public companies to adopt the standard as of the beginning of the first annual period that begins after June 15, 2005. We are therefore required to implement this standard on

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January 1, 2006. SFAS 123R eliminates the ability to account for share-based compensation transactions using the footnote disclosure-only provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees , and instead requires that such transactions be recognized and reflected in our financial statements using a fair-value-based method. Companies are required to recognize an expense for compensation costs related to share-based payment arrangements including stock options and employee stock purchase plans. Under SFAS 123R, the amount of compensation expense recognized will vary depending on numerous factors, including the option valuation methodology adopted, the number and vesting period of option grants, the publicly traded stock price of the underlying option security and the volatility of that stock price. The cumulative effect of adoption, if any, would be measured and recognized in the period of adoption. We are evaluating SFAS 123R, the factors referred to above and the resulting impact of adoption of SFAS 123R. We expect that we will record in our statement of operations substantial noncash compensation expense in 2006 and thereafter. In accordance with SFAS No. 123, we provide in Note 2 to our consolidated financial statements, included elsewhere in this prospectus, an estimate of the effect, on a pro forma basis, of recognizing as compensation expense option grants on a fair value basis using the Black-Scholes option valuation model and other assumptions. However, had we adopted SFAS 123R using the Black-Scholes option valuation model in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per common share in Note 2 to our consolidated financial statements. Estimates of option values using the Black-Scholes method and these other assumptions may not be indicative of results from valuation methodologies and assumptions ultimately adopted by us for purposes of SFAS 123R. The adoption of SFAS 123R is not expected to have a significant adverse effect on our cash flows, but is expected to have a significant adverse effect on our results of operations.
      Public company expense. Upon consummation of our initial public offering, we will become a public company, and our shares of common stock will be publicly traded on The Nasdaq National Market. As a result, we will need to comply with new laws, regulations and requirements that we did not need to comply with as a private company, including certain provisions of the Sarbanes-Oxley Act of 2002, related SEC regulations and the requirements of The Nasdaq National Market. Compliance with the requirements of being a public company will require us to increase our general and administrative expenses in order to pay our employees, legal counsel and accountants to assist us in, among other things, instituting and monitoring a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, being a public company will make it more expensive for us to obtain director and officer liability insurance. We estimate that incremental annual public company costs will be between $1.5 million and $2.5 million. During 2004, we incurred approximately $0.5 million of such general and administrative expenses in anticipation of our becoming a public company in 2005.
      401(k) company contributions. In April 2005, we instituted, for the first time, a program under which we match employee contributions to our 401(k) program up to a specified level. We estimate that this program will result in additional expenses in 2005 of between $0.5 million and $1.0 million.
Critical Accounting Policies and Use of Estimates
      The discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, stock-based compensation expense and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form

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the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
      We believe that the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements:
      Revenue recognition. Tuition revenue represented approximately 99% of our revenues recognized for each of the years ended December 31, 2002, 2003 and 2004. Course tuition revenue is deferred and recognized as revenue ratably over the period of instruction, which is generally from one and a half to three months. Seminar tuition revenue is recognized over the length of the seminar, which ranges from two days to two weeks. Deferred revenue in any period represents the excess of tuition and fees received as compared to tuition and fees recognized in revenue on the consolidated statement of operations and is reflected as a current liability on our consolidated balance sheet.
      Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of our learners to make required payments. We determine the allowance for doubtful accounts amount based on an analysis of the aging of the accounts receivable and historical write-off experience.
      In establishing our credit practices, we seek to strike an appropriate balance between prudent learner credit policies and learner retention. Accordingly, we periodically review and alter learner credit policies to achieve that objective by restricting or expanding the availability of credit we extend. Changes to credit practices may impact enrollments, revenues, accounts receivables, our allowance for doubtful accounts and bad debt expense. For example, in the second quarter of 2005, we arranged to offer learners new, third-party private loan programs. The third party loans were not available at the beginning of classes and, as a result, we permitted some learners, who previously may have been placed on inactive, non-revenue-generating status, to remain enrolled and in their classes. Because a majority of these learners received federal financial aid and were eligible for the third party private loan programs, we were able to effect this change with a relatively small increase in our accounts receivable during this enrollment period. If changes in credit practices result in higher receivable balances, if the financial condition of our learners deteriorates resulting in an impairment of their ability to pay, or if we underestimate the allowances required, additions to our allowance for doubtful accounts may be necessary, which will result in increased general and administrative expenses in the period such determination is made.
      As of December 31, 2002, 2003 and 2004, the allowance for doubtful accounts was approximately $1.2 million, $0.7 million and $1.1 million, respectively. During 2002, 2003 and 2004, we recognized bad debt expense of $3.0 million, $0.6 million and $1.4 million, respectively. The lower bad debt expense as a percentage of revenue in 2003 and 2004 as compared to 2002 resulted from a tightening of our credit policies during 2002.
      Impairment of long-lived assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure the recoverability of an asset by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. During the years ended December 31, 2002, 2003 and 2004, we recorded impairment charges of $0.2 million, $0.4 million and $1.0 million, respectively. The impairment charge recorded in 2004 consisted primarily of the write-off of previously capitalized software development costs for software projects that were abandoned due to our decision to implement an enterprise resource planning system. Capitalized software costs represent our long-lived assets that are most subject to the risk of impairment from changes in our business strategy and ongoing technological developments. We recorded capitalized software costs with a net book value of $5.8 million as of December 31, 2004. Our impairment loss calculation is subject to uncertainties because management

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must use judgment to forecast estimated fair values and to determine the useful lives of the assets. If actual results are not consistent with our assumptions and estimates regarding these factors, we may be exposed to losses that could be material. Changes in strategy or market conditions, or significant technological developments, could significantly impact these judgments and require adjustments to recorded asset balances.
      Stock-based compensation. We account for stock-based employee compensation arrangements in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations, and comply with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. We currently are not required to record stock-based compensation charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the grant date. Because no market for our common stock existed prior to this offering, our board of directors determined the fair value of our common stock based upon several factors, including our operating performance, forecasted future operating results, the terms of preferred stock issued by us, including the liquidation value and other preferences of our preferred shareholders, recent sales of our stock by investors, recent transactions involving our investors and our expected valuation in an initial public offering.
      For purposes of pro forma disclosures, the estimated fair value of the option is expensed over the option’s vesting period. The compensation expense determined under the fair-value-based method does not include assumed tax benefits related to non-qualified stock options until the fourth quarter of 2004, which is the first period in which we have not fully reserved for our net deferred tax assets with a valuation allowance.
      If we had estimated the fair value of the options on the date of grant using a Black-Scholes option valuation model and then amortized this estimated fair value over the vesting period of the options, our net income (loss) would have been adversely affected, as shown in the table below:
                           
    Year Ended December 31,
     
    2002   2003   2004
             
    (In thousands, except per share
    information)
Net income (loss) as reported
  $ (5,667 )   $ 4,393     $ 18,785  
Deferred compensation expense included in net income (loss) as reported
    39       37       4  
Compensation expense determined under the fair-value-based method
    (1,623 )     (1,779 )     (2,383 )
                   
Pro forma net income (loss)
  $ (7,251 )   $ 2,651     $ 16,406  
                   
Net income (loss) per common share:
                       
 
Basic — as reported
  $ (3.70 )   $ 2.63     $ 9.34  
 
Basic — pro forma
  $ (4.76 )   $ 1.59     $ 8.16  
 
Diluted — as reported
  $ (3.70 )   $ 0.39     $ 1.62  
 
Diluted — pro forma
  $ (4.76 )   $ 0.24     $ 1.43  
      As our stock has not been publicly traded, the pro forma compensation expense determined under the fair-value-based method is based on a stock price volatility assumption that reflects the average of our peer group of public post-secondary education companies. Our calculation of pro forma compensation expense also reflects estimates of forfeitures which are adjusted in subsequent periods as actual forfeitures differ from the original estimates.
      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and

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because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a single measure of the fair value of our employee stock options.
      Effective for annual periods beginning after June 15, 2005, public companies are required to implement SFAS 123R, an amendment to SFAS No. 123. We are required to implement this standard on January 1, 2006. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally instead requires that such transactions be recognized and recorded using a fair-value-based method. SFAS 123R will continue to require significant management judgment and assumptions concerning such factors as the option methodology adopted and the volatility of the underlying stock price. We are currently evaluating SFAS No. 123R, these factors and the resulting impact of adoption of SFAS 123R. For more information concerning the adoption of SFAS 123R and the possible effects on our results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Comparability – Stock Option Expense; – Recent Accounting Pronouncements” and Note 2 to our consolidated financial statements.
      Accounting for income taxes. We account for income taxes as prescribed by SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes the use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the related financial amounts, using currently enacted tax laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to examination by tax authorities in the ordinary course of business. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the impact on our deferred taxes and income tax liabilities and the adequacy of our provision for income taxes. Changes in income tax legislation, statutory income tax rates, or future taxable income levels, among other things, could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
      At December 31, 2004, a significant portion of our net deferred tax assets consisted of net operating loss carryforwards approximating $22.1 million that are available to offset future taxable income. The net operating loss carryforwards expire at various dates through 2022. During 2004, we experienced an ownership change as defined under Section 382 of the Internal Revenue Code. As a result, the utilization of the net operating loss carryforwards will be subject to an annual limitation imposed by Section 382. While based on our estimates we do not believe the limitation will adversely impact our ability to utilize the net operating loss carryforwards before they expire, changes in future taxable income levels could significantly impact our ability to realize the entire benefit of this deferred tax asset.
      Prior to 2004, we had provided a valuation allowance for all net deferred tax assets. Because we achieved three years of cumulative taxable income in 2004 and expect to be profitable in future years, we concluded that it is more likely than not that all of our net deferred tax assets will be realized. As a result, in accordance with SFAS No. 109, the valuation allowance applied to such net deferred tax assets of $12.9 million at December 31, 2003, was reversed during the year ended December 31, 2004. We will require approximately $22.0 million of future taxable income to realize the $8.6 million of net deferred tax assets that existed as of December 31, 2004.

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Results of Operations
      The following table sets forth statements of operations data as a percentage of revenues for each of the periods indicated:
                             
    Year Ended December 31,
     
    2002   2003   2004
             
Revenues
    100.0 %     100.0 %     100.0 %
Costs and expenses:
                       
 
Instructional costs and services
    55.0       51.8       48.9  
 
Selling and promotional
    31.4       25.9       28.9  
 
General and administrative
    25.7       17.3       13.9  
                   
   
Total costs and expenses
    112.1       95.0       91.7  
                   
Operating income (loss)
    (12.1 )     5.0       8.3  
Other income, net
    0.7       0.5       0.6  
                   
Income (loss) before income taxes
    (11.4 )     5.5       8.9  
Income tax expense (benefit)
    0.0       0.1       (7.0 )
                   
Net income (loss)
    (11.4 )%     5.4 %     15.9 %
                   
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
      Revenues. Our revenues for the year ended December 31, 2004, were $117.7 million, representing an increase of $35.9 million, or 43.9%, as compared to revenues of $81.8 million for the year ended December 31, 2003. This increase was primarily due to an increase in enrollments as well as increases in tuition in 2004 as compared to 2003, partially offset by a larger proportion of bachelor’s learners, who generated less revenue per learner than our doctoral learners. Tuition increases ranged from 3% to 7% and were implemented during July 2004.
      Instructional costs and services expenses. Our instructional costs and services expenses for the year ended December 31, 2004, were $57.5 million, representing an increase of $15.1 million, or 35.6%, as compared to instructional costs and services expenses of $42.4 million for the year ended December 31, 2003. This increase was primarily due to increases in instructional pay due to the increase in enrollments. Our instructional costs and services expenses as a percentage of revenues decreased by 2.9 percentage points to 48.9% for the year ended December 31, 2004, as compared to 51.8% for the year ended December 31, 2003. This improvement in 2004 was driven by our tuition increases, the centralization of academic services, and slower growth of information technology and depreciation and amortization expenses relative to revenue growth.
      Selling and promotional expenses. Our selling and promotional expenses for the year ended December 31, 2004, were $34.0 million, representing an increase of $12.8 million, or 60.6%, as compared to selling and promotional expenses of $21.2 million for the year ended December 31, 2003. This increase was primarily attributable to an increase in recruitment personnel, an increase in marketing and advertising expenses to attract more learners to our existing programs, and an increase in the cost of online advertising. This increase in selling and promotional expenses was also attributable to an increase in marketing and advertising expenses and enrollment expenses to support the introduction of our four-year bachelor’s degree program in January 2004, and to develop and launch our new brand strategy during 2004. Our selling and promotional expenses as a percentage of revenues increased by 3.0 percentage points to 28.9% for the year ended December 31, 2004, from 25.9% for the year ended December 31, 2003, as a result of the same factors described above.
      General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2004, were $16.3 million, representing an increase of $2.1 million, or 15.3%, as compared to

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general and administrative expenses of $14.2 million for the year ended December 31, 2003. This increase was primarily attributable to an increase in administrative costs resulting from investments to further develop our corporate infrastructure, an increase in internally developed software impairment charges, and an increase in bad debt expense. In 2004, we made further investments in corporate infrastructure through additions of personnel and systems to accommodate current and expected future growth. A $0.7 million increase in asset impairment charge was the result of our decision to abandon some internally developed software projects in light of a decision to implement a new enterprise resource planning system that will be phased in starting in 2006. A $0.8 million increase in bad debt expense was primarily due to an increase in revenues and an increase in our write off experience. Our general and administrative expenses as a percentage of revenues decreased by 3.4 percentage points to 13.9% for the year ended December 31, 2004, from 17.3% for the year ended December 31, 2003, as a significant portion of our general and administrative expenses do not vary with fluctuations in revenues.
      Other income, net. Other income, net increased by $0.3 million, or 69.6%, to $0.7 million for the year ended December 31, 2004, from $0.4 million for the year ended December 31, 2003. The increase was principally due to higher average cash and short-term investment balances throughout 2004, which was partially offset by lower interest rates.
      Income tax expense (benefit). We recognized a net tax benefit for the year ended December 31, 2004, of $8.2 million. The tax benefit recorded in 2004 included a tax benefit for the complete reversal of our valuation allowance on our net deferred tax assets of $12.9 million, offset by tax expense of $4.3 million on 2004 pretax earnings and $0.4 million relating to a change in our estimate of the income tax rates applied to our net deferred tax assets. During 2003, we had $0.1 million of income tax expense related to alternative minimum tax liabilities. No additional tax expense was recorded in 2003 as we were able to utilize net operating loss carryforwards that were fully reserved for in prior periods. We expect that our effective tax rate for 2005 will be in the range of 39% to 41%.
      Net income. Net income was $18.8 million for the year ended December 31, 2004, compared to net income of $4.4 million for the year ended December 31, 2003, an increase of $14.4 million, because of the factors discussed above.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
      Revenues. Our revenues for the year ended December 31, 2003, were $81.8 million, representing an increase of $32.2 million, or 65.0%, as compared to revenues of $49.6 million for the year ended December 31, 2002. This increase was primarily due to an increase in enrollments and in tuition rates in 2003 compared to 2002. We implemented an average tuition increase of approximately 5% in July 2003 for almost all our courses. These increases were partially offset by a slight decline in the number of courses taken per learner due to the introduction of our FirstCourse initiative, which encourages learners to only take one course in their first quarter with us.
      Instructional costs and services expenses. Our instructional costs and services expenses for the year ended December 31, 2003, were $42.4 million, representing an increase of $15.2 million, or 55.6%, as compared to instructional costs and services expenses of $27.2 million for the year ended December 31, 2002. This increase was primarily due to increases in instructional pay due to the increase in enrollments in 2003 compared to 2002, investments in the development of the bachelor’s programs that were subsequently launched in January 2004, investments to build infrastructure needed to support corporate alliance programs, and an increase in academic advising to support growth in our doctoral program. Our instructional costs and services expenses as a percentage of revenues decreased by 3.2 percentage points to 51.8% for the year ended December 31, 2003, as compared to 55.0% for the year ended December 31, 2002. This improvement in 2003 was driven by tuition increases, the centralization of academic services, and slower growth of information technology and depreciation and amortization expenses relative to revenue growth.
      Selling and promotional expenses. Our selling and promotional expenses for the year ended December 31, 2003, were $21.2 million, representing an increase of $5.6 million, or 36.0%, as compared to

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selling and promotional expenses of $15.6 million for the year ended December 31, 2002. This increase was primarily attributable to increased recruitment personnel, increased marketing and advertising expenses to attract more learners to our programs and an incremental increase in advertising expenses and enrollment expenses to support the introduction of our four-year bachelor’s programs in January 2004. Selling and promotional expenses as a percentage of revenues decreased by 5.5 percentage points to 25.9% for the year ended December 31, 2003, as compared to 31.4% in the year ended December 31, 2002, primarily driven by improved efficiency of advertising and recruitment functions and tuition increases.
      General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2003, were $14.2 million, representing an increase of $1.4 million, or 11.1%, as compared to general and administrative expenses of $12.7 million for the year ended December 31, 2002. This increase is primarily attributable to further investments in our corporate infrastructure consisting primarily of personnel and management to accommodate current and expected growth and additional compensation expense. This increase was partially offset by a decrease in bad debt expense, primarily attributable to a tightening of our credit policies during 2002. Our general and administrative expenses as a percentage of revenues decreased by 8.4 percentage points to 17.3% of revenues for the year ended December 31, 2003, from 25.7% for the year ended December 31, 2002, due to the fact that a significant portion of our general and administrative expenses does not vary with fluctuations in revenues and reduced bad debt expense.
      Other income, net. Other income, net increased $0.1 million, or 30.5%, to $0.4 million for the year ended December 31, 2003, from $0.3 million for the year ended December 31, 2002. The increase was principally due to a higher average cash and short-term investment balances throughout 2003, partially offset by lower interest rates.
      Income tax expense (benefit). We were able to utilize existing net operating loss carryforwards to offset all taxable income in 2003. As these net operating loss carryforwards were fully reserved for in prior periods, no income tax expense was recognized in 2003, except for $0.1 million of alternative minimum tax liabilities, which were paid during 2003.
      Net income (loss). Net income was $4.4 million for the year ended December 31, 2003, as compared to a net loss of $5.7 million for the year ended December 31, 2002, an increase of $10.1 million, because of the factors discussed above.
Quarterly Results and Seasonality
      The following table sets forth certain unaudited financial and operating data in each quarter during the years ended December 31, 2003 and 2004. The unaudited information reflects all adjustments, which include only normal and recurring adjustments, necessary to present fairly the information shown.
                                   
    First   Second   Third   Fourth
    Quarter   Quarter   Quarter   Quarter
                 
    (In thousands, except per share and
    enrollment data)
2003
                               
Revenues
  $ 17,936     $ 19,593     $ 20,747     $ 23,509  
Operating income (loss)
    1,432       2,554       (375 )     459  
Net income (loss)
    1,525       2,659       (273 )     482  
Net income (loss) per common share:
                               
 
Basic
  $ 0.99     $ 1.68     $ (0.16 )   $ 0.27  
 
Diluted
  $ 0.14     $ 0.24     $ (0.16 )   $ 0.04  
Enrollment
    6,795       7,367       7,923       9,115  

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    First   Second   Third   Fourth
    Quarter   Quarter   Quarter   Quarter
                 
    (In thousands, except per share and
    enrollment data)
2004
                               
Revenues
  $ 26,488     $ 28,321     $ 28,040     $ 34,840  
Operating income
    1,383       1,773       2,147       4,562  
Net income
    1,466       1,892       2,310       13,117  
Net income per common share:
                               
 
Basic
  $ 0.77     $ 0.95     $ 1.12     $ 6.31  
 
Diluted
  $ 0.13     $ 0.16     $ 0.20     $ 1.11  
Enrollment
    9,919       10,370       11,086       12,013  
      Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in enrollment. Learner population varies as a result of new enrollments, graduations and learner attrition. While the number of enrollments has grown in each sequential quarter over these periods, the sequential quarterly increase in enrollments has been the greatest in the fourth quarter of each respective year, which corresponds with a traditional Fall school start. The larger relative increases in enrollments in the fourth quarter have resulted in larger sequential increases in revenue during the fourth quarter than in other quarters. A significant portion of our general and administrative expenses do not vary proportionately with fluctuations in revenues, resulting in larger relative increases in operating income in the fourth quarter relative to increases between other quarters. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns.
      In addition to our recurring seasonal patterns described above, our quarterly revenue may be impacted by the timing of our seminar tuition revenue resulting from week-long gatherings of our doctoral learners for in-depth, face-to-face instruction. We typically have three to six seminars per year. For example, revenue declined slightly from the second quarter of 2004 as compared to the third quarter of 2004 because two seminars totaling $2.7 million in revenue occurred in the second quarter of 2004 and no seminars occurred in the third quarter of 2004. Our quarterly operating results may fluctuate in the future based on the timing and number of our seminars.
      Our fourth quarter results in each of 2003 and 2004 were affected particularly by impairment charges and income tax expense (benefit). During the fourth quarter of 2003 and 2004, we recorded impairment charges of $0.4 and $1.0 million, respectively, related to previously capitalized software development costs for software projects that were abandoned. The fourth quarter of 2003 included tax expense of $0.1 million related to alternative minimum taxes, while the first three quarters in 2003 and in 2004 included zero tax expense primarily because we utilized net operating loss carryforwards that were fully reserved for in prior periods. Additionally, in the fourth quarter of 2004, in accordance with SFAS No. 109, the remaining valuation allowance applied to net deferred tax assets of $10.6 million was reversed, resulting in a corresponding favorable impact on net income.
Liquidity and Capital Resources
Liquidity
      We financed our operating activities and capital expenditures during the year ended December 31, 2004, through cash provided by operating activities. During the years ended December 31, 2002 and 2003, we financed our operating activities and capital expenditures through a combination of cash provided by operating activities and sales of equity to private investors. Our cash, cash equivalents and short-term investments were $41.2 million and $50.0 million at 2003 and 2004, respectively.
      In August 2004, we entered into an unsecured $10.0 million line of credit with Wells Fargo Bank. The line of credit has an expiration date of June 30, 2005. There have been no borrowings to date under

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this line of credit. Any borrowings would bear interest at a rate of either LIBOR plus 2.5% or the bank’s prime rate, at our discretion on the borrowing date.
      A majority of our revenues are derived from Title IV programs. Federal regulations dictate the timing of disbursements under Title IV programs. Learners must apply for new loans and grants each academic year, which starts July 1. Loan funds are generally provided by lenders in multiple disbursements for each academic year. The disbursements are usually received by the start of the second week of the term, except that borrowers in the first year of their bachelor’s program are subject to a 30-day delivery delay on the first disbursement. Certain types of grants and other funding are not subject to a 30-day delay and are delivered after enrollment has been verified. These factors, together with the timing of our learners beginning their programs, affect our operating cash flow.
      Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash, cash equivalents and short-term investments, will provide adequate funds for ongoing operations and planned capital expenditures for at least the 12 months immediately following the consummation of this offering.
Operating Activities
      Net cash provided by operating activities during the year ended December 31, 2004, was $17.5 million, an increase of $1.5 million, or 9.1%, from $16.0 million during the year ended December 31, 2003. The increase was primarily due to a $14.4 million increase in net income, a $3.3 million increase in non-cash related expenses for the provision for bad debts, depreciation and amortization, asset impairments, and equity related expense, and a $2.1 million increase in deferred revenue, partially offset by a $8.4 million increase in deferred tax assets primarily as a result of the non-cash reversal of the valuation allowance, a $5.6 million increase in accounts receivable and prepaid expenses and a $4.4 million decrease in accounts payable and accrued liabilities due to the timing of vendor payments.
      Net cash provided by operating activities during the year ended December 31, 2003, was $16.0 million, an increase of approximately $15.9 million, from $0.2 million during the year ended December 31, 2002. This increase was primarily due to a $10.1 million increase in net income in the 2003 period, a $1.9 million increase in accounts payable and a $5.3 million increase in accrued liabilities related to an increase in accrued salaries and related benefits, partially offset by a $1.8 million decrease in accounts receivable.
Investing Activities
      Our cash used in investing activities is primarily related to the purchase of property and equipment and short-term investment activity. Net cash used in investing activities was $15.8 million, $26.7 million and $13.6 million for the years ended December 31, 2002, 2003 and 2004, respectively. Short-term investment activity consists of purchases and sales of auction rate securities. Net purchases of these securities were $12.0 million, $22.4 million and $4.7 million during the year ended December 31, 2002, 2003 and 2004, respectively. Our capital expenditures primarily result from the expansion of our existing corporate facilities, classroom technology and other systems and equipment that support our program offerings and our learner management and reporting system. Capital expenditures were $3.9 million, $4.3 million and $9.0 million for the year ended December 31, 2002, 2003 and 2004, respectively. The increase in 2004 was due to the investment in a new courseroom learning platform and furniture and fixtures in our new corporate headquarters. Capital expenditures are expected to continue to increase in the next several years as we invest in integrating most of our business systems with an enterprise resource planning system. We expect that once implemented, this integration of our systems and processes will reduce some of our instructional costs and services, selling and promotional and general and administrative expenses. We expect that our capital expenditures in 2005 will be approximately $13 million to $15 million. We expect to be able to fund these capital expenditures with cash generated from operations.
      We lease all of our facilities. We expect to make future payments on existing leases from cash generated from operations.

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Financing Activities
      Net cash provided by financing activities was $15.1 million, $7.4 million and $0.3 million, for the years ended December 31, 2002, 2003 and 2004, respectively. The financing activities during these periods were primarily related to private placements of our stock in 2002 and 2003 and stock option exercises in 2004.
      In February 2002, we entered into an agreement with investors pursuant to which we issued and sold 1,425,457 shares of our Class F redeemable convertible preferred stock, or Class F preferred stock, at a price per share of $11.71. We received proceeds, less offering costs of $1.3 million, totaling $15.4 million from this sale. In January 2003, we entered into another agreement with the purchasers of the Class F preferred stock as well as new investors, pursuant to which we issued and sold 2,184,540 shares of our Class G redeemable convertible preferred stock, or Class G preferred stock, at a price per share of $11.12. Of the 2,184,540 shares of Class G preferred stock issued, 1,501,088 shares were issued in exchange for all of the outstanding shares of Class F preferred stock. We received no proceeds from this exchange. As consideration for the remaining 683,452 shares of Class G preferred stock sold, we received proceeds, less offering costs of $0.4 million, totaling $7.2 million.
      We received proceeds from the exercise of stock options of $0.04 million, $0.8 million and $0.9 million in 2002, 2003 and 2004, respectively.
Contractual Obligations
      The following table sets forth, as of December 31, 2004, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms due in each of the periods presented:
                                         
    Payments Due by Period
     
        Less than       More than
    Total   1 Year   1-3 Years   3-5 Years   5 Years
                     
    (In thousands)
Capital leases
  $ 333     $ 325     $ 8     $     $  
Operating leases (a)
    12,065       1,617       4,247       4,337       1,864  
Adjunct faculty obligations (b)
    6,414       6,414                    
                               
Total contractual obligations
  $ 18,812     $ 8,356     $ 4,255     $ 4,337     $ 1,864  
                               
 
(a) Minimum lease commitments for our headquarters and miscellaneous office equipment.
 
(b) Consists of payment obligations to adjunct faculty as of December 31, 2004, based on existing contractual agreements with them.
Impact of Inflation
      We believe that inflation has not had a material impact on our results of operations for any of the years in the three year period ended December 31, 2004. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.
Quantitative and Qualitative Disclosures About Risk
Market Risk
      We have no derivative financial instruments or derivative commodity instruments. We believe that the risk related to short-term investments is limited due to the adherence to our investment policy that requires investments to have a minimum Standard & Poor’s rating of A (or equivalent), and limits investments in any one issuer to the greater of 10% of the short-term portfolio at the time of purchase or $2,500,000. All of our investments as of December 31, 2003 and 2004, consisted of cash, cash equivalents, and short-term investments rated AA or higher, further limiting our credit and market risk related to investments.

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Interest Rate Risk
      We manage interest rate risk by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. Consequently, the fair value of our cash and cash equivalents would not be significantly impacted by either a 100 basis point increase or decrease in interest rates. However, a 100 basis point change in interest rates for 2004 would have changed our interest income from cash equivalents and short-term investments by approximately $0.5 million based on the average amount of our cash, cash equivalents and short-term investments during the year ended December 31, 2004.
Recent Accounting Pronouncements
      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments and specifies that some financing arrangements with characteristics of both liabilities and equity must be classified as liabilities. Among the requirements of SFAS No. 150 is that all “mandatorily redeemable” securities be classified as liabilities. SFAS No. 150 was effective for us beginning in 2004. None of our current classes of redeemable preferred stock is considered “mandatorily redeemable” as defined by SFAS No. 150 because these securities are also convertible into common stock and therefore are not required to be classified as liabilities. Our adoption of SFAS No. 150 did not have a material effect on our financial condition or results of operations.
      In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (SFAS 123R). We are required to adopt SFAS 123R on January 1, 2006. The cumulative effect of adoption, if any, would be measured and recognized in the period of adoption. SFAS 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally would require instead that such transactions be accounted for using a fair-value-based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements, including stock options and employee stock purchase plans. We currently account for share-based payments to our employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R’s fair-value-based method will have a significant adverse impact on our results of operations, although it will have no impact on our overall cash position. We are currently evaluating option valuation methodologies and assumptions. The impact of adoption of SFAS 123R cannot be predicted with more specificity at this time because it will depend on the option methodology adopted, the assumptions utilized and the levels of share-based payments granted in the future. However, had we adopted SFAS 123R using the Black-Scholes option valuation model in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per share of common stock in Note 2 to our consolidated financial statements included elsewhere in this prospectus.

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BUSINESS
Overview
      We are an exclusively online post-secondary education services company. Through our wholly owned subsidiary, Capella University, we offer a variety of doctoral, master’s and bachelor’s programs in the following disciplines:     business, organization and management; education; psychology; human services; and information technology. Our academic offerings combine rigorous curricula with the convenience and flexibility of an online learning format. We design our offerings to help working adult learners develop specific competencies that they can employ in their workplace. We believe that the rigor, relevance and convenience of our programs provide a quality educational experience for our learners. As of December 31, 2004, we offered more than 675 online courses and 13 academic programs with 68 specializations to more than 12,000 learners. Measured by enrollment, we are one of the largest exclusively online universities in the United States.
      Our end-of-period enrollments and our revenues have grown at compound annual growth rates of approximately 54% and 65%, respectively, from 2000 through 2004. In 2004, our end-of-period enrollment and revenues grew by approximately 32% and 44%, respectively, as compared to 2003. To date, our growth has resulted from a combination of: increased demand for our programs; expansion of our program and degree offerings; establishment of relationships with large corporate employers, the U.S. Armed Forces and other colleges and universities; and a growing acceptance of online education. We seek to achieve growth in a manner that assures continued improvement in educational quality and learner success while maintaining compliance with regulatory standards.
Our History
      We were founded in 1991 as a Minnesota corporation. In 1993, we established our wholly owned university subsidiary, The Graduate School of America, to offer doctoral and master’s degrees through distance learning programs in management, education, human services and interdisciplinary studies. In 1995, we launched our online format for delivery of our doctoral and master’s degree programs over the Internet. In 1997, our university subsidiary received accreditation from the North Central Association of Colleges and Schools (later renamed The Higher Learning Commission of the North Central Association). In 1998, we began the expansion of our original portfolio of academic programs by introducing doctoral and master’s degrees in psychology and a master of business administration degree. In 1999, to expand the reach of our brand in anticipation of moving into the bachelor’s degree market, we changed our name to Capella Education Company and the name of our university to Capella University. In 2000, we introduced our bachelor’s degree completion program in information technology, which provided instruction for the last two years of a four-year bachelor’s degree. In 2004, we believe we expanded our addressable market through the introduction of our four-year bachelor’s degree programs in business administration and information technology as well as the introduction of three master’s level specializations in education targeted at K-12 teachers.
Industry
      The U.S. market for post-secondary education is a large, growing market. Based on estimates by the U.S. Department of Education, National Center for Education Statistics, or NCES, revenue for post-secondary degree-granting educational institutions exceeded $260 billion in the 2000 – 2001 academic year. According to the NCES, post-secondary students enrolled as of the Fall of 2001 were 15.9 million and are expected to grow to 17.4 million by 2009. We believe the forecasted growth in post-secondary enrollment is a result of a number of factors, including the expected increase in annual high school graduates from 2.9 million in 2001 to 3.3 million by 2009 (based on estimates by the NCES), the significant and measurable personal income premium that is attributable to post-secondary education and an increase in demand by employers for professional and skilled workers.

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      According to the U.S. Department of Commerce, Bureau of the Census, as of March 2002, over 65% of adults (persons 25 years of age or older) did not possess a post-secondary degree. Of the 15.9 million post-secondary students enrolled as of the Fall of 2001, the NCES estimated that 6.0 million were adults, representing 38% of total enrollment. We expect that adults will continue to represent a large, growing segment of the post-secondary education market as they seek additional education to secure better jobs, or to remain competitive or advance in their current careers.
      According to Eduventures, an education consulting and research firm, many traditional, non-profit post-secondary education providers have been unable to meet the increasing demand for post-secondary education as a result of, among other factors, a lack of funding and physical constraints on their ability to admit additional students. Alternatively, many for-profit institutions have been designed to meet this growing demand and are becoming an increasingly popular alternative for working adults. We believe that the focus of for-profit institutions on education related to specific labor markets and on strong customer service has made them an increasingly popular alternative for working adults seeking additional education.
      According to Eduventures, the revenue growth rate in fully-online education exceeded the revenue growth rate in the for-profit segment of the post-secondary market from 2001 to 2003. We believe that the higher growth in demand for fully-online education is largely attributable to the flexibility and convenience that it offers to both working adults and traditional students. Additionally, in March 2004, Eduventures projected that the number of students enrolled in fully-online programs at Title IV eligible, degree-granting institutions would be approximately 915,000 as of December 31, 2004, and would grow to approximately 1,600,000 by December 31, 2007. Eduventures also projected that annual revenues generated from students enrolled in fully-online programs at Title IV eligible, degree-granting institutions would be $5.1 billion in 2004 and would increase to $10.4 billion in 2007.
Our Competitive Strengths
      We believe we have the following competitive strengths:
      Commitment to Academic Quality. We are committed to providing each of our learners with a high quality academic experience. Our commitment to academic quality is a tenet of our culture, and we believe that quality is an important consideration to learners as they evaluate institutions at which to pursue their education. Having originated as an institution exclusively focused on graduate degree education, we have historically promoted a rigorous educational experience. We have continued to apply this approach as we have expanded our graduate and undergraduate programs. Today, our commitment to academic quality is reflected in our curricula, faculty, learner support services and academic oversight process. The impact of this commitment is evident in the satisfaction of our learners both during their educational experience and following graduation.
      Exclusive Focus on Online Education. As opposed to converting a traditional, classroom-based educational offering to an online format, our academic programs have been designed solely for online delivery. Our curriculum design offers flexibility while promoting a high level of interaction with other learners and faculty members. Our faculty are specifically trained to deliver online education, and our learner support infrastructure was developed to meet the needs of online learners. As a result of our exclusive focus on online education, we believe we have developed educational programs that meet the needs of our learners in a convenient and effective manner.
      Academic Programs and Specializations Designed for Working Adults. We currently offer 13 academic programs with 68 specializations, each specifically designed to appeal to and meet the educational objectives of working adults. The diversity of our program portfolio allows us to target a significant portion of the adult learner population and provide offerings in several of the highest demand areas of study, such as business and education. Our specializations are designed to attract learners by providing depth within a program that is typically unavailable in an unspecialized program and by addressing specific competencies that learners can apply in their current workplace.

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      Extensive Learner Support Services. We provide extensive learner support services, both online and telephonically, via teams assigned to serve as each learner’s primary point of contact. Our support services include: academic services, such as advising, writing and research services; administrative services, such as online class registration and transcript requests; library services, which are provided through an agreement with the Sheridan Libraries at Johns Hopkins University; and career counseling services. We believe our commitment to providing high quality, responsive and convenient learner support services promotes learner persistence, encourages course and degree completion and contributes to our high learner satisfaction.
      Experienced Management Team with Significant Business and Academic Expertise. Our management team possesses extensive experience in both business and academic management as well as public company experience, in many cases with organizations of much larger scale and operational diversity than our organization. Our management team is led by Stephen Shank, our Chairman and Chief Executive Officer, who founded our company in 1991, and who possesses over 12 years of experience serving as the chief executive officer of a public company. Dr. Michael Offerman, who has 24 years of academic management experience, serves as President and Chief Executive Officer of Capella University and oversees all of our academic activities. We integrate our management through cross-functional teams to ensure that business objectives are met without sacrificing academic quality.
Our Operating Strategy
      We intend to pursue the following operating strategies:
      Invest in Strengthening the Capella Brand. We will continue to enhance our brand recognition as a quality, exclusively online university for working adults. We seek to appeal to prospective learners who aspire to obtain a rigorous post-secondary education, but for whom a traditional, classroom-based educational experience is impractical. Using sophisticated marketing strategies, we will continue to invest through a variety of advertising media, including the Internet, radio, print and direct mail, to strengthen our brand recognition among working adults. We believe increased brand recognition will contribute to continued enrollment growth in our existing and future program offerings.
      Continue to Focus on Learner Success. We are committed to helping our learners reach their educational and professional goals. This commitment guides the development of our curricula, the recruitment and training of our faculty and staff, and the design of our support services. For example, we offer FirstCourse, a required twelve-week orientation to our approach to online education, to assess each new learner’s academic readiness, which enables us to supplement or refine the course of study for each learner to address each learner’s needs. We will continue to look for opportunities to improve our learners’ educational experience and increase the likelihood of learners successfully completing degree programs. We believe our focus on learner success complements our brand strategy and will continue to enhance learner satisfaction, leading to higher levels of engagement, retention and referrals.
      Increase Marketing Investment and Enhance Recruiting Effectiveness. We have invested substantial resources in performing detailed market research that enables us to more effectively segment our target market and identify potential learners best suited for our educational experience. As a result, we believe we are capable of directing our marketing and recruiting expenditures towards segments of the market that are more likely to result in enrolling learners that are likely to complete their programs, and we intend to increase expenditures targeted at these segments. We also intend to continue to enhance the process by which we recruit potential applicants by providing intensive training to our recruiting personnel to ensure that each individual is capable of explaining our offerings to potential applicants as well as addressing their questions and concerns.
      Further Develop and Expand Our Program and Degree Offerings. We believe that substantial growth potential exists within each of the five disciplines that comprise our existing portfolio of academic programs and degree offerings. We will continue to develop our existing program offerings while selectively adding new programs and specializations in disciplines that we believe offer significant market potential and in which we believe we can deliver a high quality learning experience. In particular, we intend to emphasize growth in our master’s and bachelor’s degree offerings, and to focus on targeted specializations

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for which we believe there is significant demand. Examples include, our recently launched master’s specializations in education targeted at K-12 teachers, bachelor’s degree in business and bachelor’s degree in information technology.
      Establish Additional Strategic Relationships. Both corporate and government employers often provide incentives to their employees, such as tuition reimbursement and potential advancement opportunities, to encourage them to pursue additional education. We currently have strategic relationships with approximately 80 corporations and the U.S. Armed Forces. Typically, we provide for discounted tuition under these arrangements in exchange for promotional and endorsement efforts by employers. Additionally, we have alliances with over 230 community colleges and other universities, through which we facilitate the transfer of learners and their credits to Capella University for completion of their degrees or pursuit of additional education. We intend to increase enrollment from our existing relationships and to increase the number of these relationships.
Capella University
      Capella University is a post-secondary educational institution accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools, one of six regional institutional accrediting associations in the United States, and is authorized to grant degrees by the State of Minnesota.
Our Approach to Quality
      Some of the critical elements of our university that we believe promote a high level of academic quality include:
  •  Curricula. We believe the academic rigor of our curricula is commensurate with that of many traditional colleges and universities. The particular competencies targeted in our academic programs are identified and validated through a variety of internal and external sources and reviews. Individual courses are structured to provide learners with an understanding of relevant theories and to teach learners how to apply these theories. We believe this approach of applied instruction helps our learners apply their education in their workplace and also helps them integrate workplace issues or projects into their academic studies.
 
  •  Faculty. We select our faculty based on their academic achievement and teaching and practitioner experience. Our faculty members tend to be scholars as well as practitioners, and they bring relevant, practical experience from their professional careers into the courses they teach. Approximately 77% of our faculty members hold a doctoral degree in their respective fields. We invest in the professional development of our faculty members through training in online teaching techniques as well as events and discussions designed to foster sharing of best practices.
 
  •  Learner Support. We establish teams comprised of both academic and administrative personnel that are assigned to serve as the primary support contact point for each of our learners throughout the duration of their studies. All of our support services, including academic, administrative, library and career counseling services are also accessible online, allowing users to access these services at a time and in a manner that is convenient to them.
 
  •  Academic Oversight. Our academic management organization is structured to provide leadership and continuity across our academic offerings. In addition to regular reviews by accrediting bodies, our academic management team oversees periodic examinations of our curricula by internal and external reviewers. Internal reviews are performed by our assessment and institutional research team to assess academic content, delivery method and learning outcomes for each program. External reviews are performed by individuals with professional certifications in their fields to provide additional evaluation and verification of program quality and workplace applicability.
 
  •  Accreditation. In addition to being accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools, we also pursue specialized accreditation, where appropriate, such as our accreditation from the Council for the Accreditation of Counseling and

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  Related Educational Programs (CACREP) for our mental health counseling specialization within our master’s in human services program. Our commitment to maintaining regional and specialized accreditation reflects our goal to provide our learners with an academic experience commensurate with that of traditional post-secondary educational institutions.

      In addition to these traditional components of academic quality, our approach to teaching and the online format of our programs offers several features that enrich the learning experience:
  •  Low student to faculty ratio. Our courses average between 15 and 20 learners, providing each learner the opportunity to interact directly with our faculty and to receive individualized feedback and attention. We believe this adds to the academic quality of our programs by ensuring that each learner is encouraged to participate actively, thus enabling the instructor to better evaluate the learner’s understanding of course material.
 
  •  Diverse learner population. Our online format allows us to focus on adult learners as well as to attract a diverse population of learners with a variety of professional backgrounds and life experiences. Additionally, our courses are designed to encourage our learners to incorporate workplace issues or projects into their studies, providing relevant context to many of the academic theories covered by our curricula.
 
  •  Increased time for learning. While many campus-based students are required to spend time commuting, parking, or otherwise navigating a large campus, our online learning format enables our learners to focus their time on course assignments and discussions.

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Curricula
      Our program offerings cover five disciplines:     business, organization and management; education; psychology; human services; and information technology. Within these disciplines, we offer 13 academic programs with 68 specializations as follows:
     
 
Programs     Specializations
 
Business, Organization and Management    
Doctor of Philosophy in   • Business General
Organization and Management   • Human Resource Management
    • Information Technology Management
    • Leadership
 
Master of Business   • Finance
Administration   • General Business Administration
    • Marketing
 
Master of Science in   • Business General
Organization and Management   • Human Resource Management
    • Information Technology Management
    • Leadership
 
Bachelor of Science in   • Business Administration
Business Administration   • Finance
    • Human Resource Management
    • Management and Leadership
    • Marketing
 
 
Education    
Doctor of Philosophy in   • Instructional Design for
Education     Online Learning
    • Leadership for Higher Education
    • Leadership in Educational Administration
    • Post-Secondary and Adult Education
    • Professional Studies in Education
    • Training and Performance Improvement
 
Master of Science in   • Enrollment Management
Education   • Instructional Design for Online Learning
    • K-12 Advanced Classroom Instruction
    • K-12 Curriculum and Instruction
    • K-12 Leadership in Educational Administration
    • K-12 Reading and Literacy
    • Leadership for Higher Education
    • Post-Secondary and Adult Education
    • Professional Studies in Education
    • Training and Performance Improvement
     
 
Programs     Specializations
 
Psychology    
Doctor of Philosophy in   • Educational Psychology
Psychology   • Industrial/Organizational Psychology
    • General Psychology
 
Doctor of Psychology   • Clinical Psychology
    • Counseling Psychology
 
Master of Science in   • Clinical Psychology
Psychology   • Counseling Psychology
    • Educational Psychology
    • General Psychology
    • Industrial/Organizational Psychology
    • School Psychology
    • Sport Psychology
 
 
Human Services    
Doctor of Philosophy in   • Counseling Studies
Human Services   • Criminal Justice
    • General Human Services
    • Health Care Administration
    • Management of Non-Profit Agencies
    • Social and Community Services
 
Master of Science in Human   • Counseling Studies
Services   • Criminal Justice
    • General Human Services
    • Health Care Administration
    • Management of Non-Profit Agencies
    • Marital, Couple, and Family Counseling/Therapy
    • Mental Health Counseling
    • Social and Community Services
 
 
Information Technology    
Master of Science in   • General Information
Information Technology     Technology
    • Information Security
    • Network Architecture and Design
    • Project Management and Leadership
    • System Design and Programming
 
Bachelor of Science in   • Graphics and Multimedia
Information Technology   • General Information Technology
    • Network Technology
    • Project Management
    • Web Application Development
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      Courses are offered on a quarterly academic schedule, which generally coincides with the calendar quarters. We offer new learners the flexibility to begin our introductory FirstCourse on the first day of classes in any month. Learners then enroll in subsequent courses on a regular quarterly course schedule. Depending on the program, learners generally enroll in one to two courses per quarter. Each course has a designated start date, and the majority of our courses last for twelve weeks.
      To meet course requirements, learners typically need to access the online courseroom two to five times each week. However, there is no set class schedule, so learners can attend each class as it fits their weekly schedule. Learners are required to respond to questions posed by the instructor, as well as comments made by other learners. This provides for an interactive experience in which each learner is both encouraged and required to be actively engaged. Our online format provides a digital record of learner interactions for the course instructor to assess learners’ level of engagement and demonstration of required competencies.
      The only exception to our exclusively online format is for doctoral and certain master’s degree candidates pursuing professional licenses who participate in periodic in-residence colloquia (or seminars), supervised practicum and internships as a complement to their courses. The colloquia typically last one week and are required, on average, once per year for learners in applicable programs, while the supervised practicum and internships vary in length based on the program in which the learner is enrolled.
      We design our curricula by first defining competencies that each learner needs to develop at the course and program level. We consult with subject matter experts and professional associations in the relevant field of study to ensure that we are addressing the appropriate competencies. Our internal instructional designers then work with the subject matter experts to develop our online courses. Each learner is required to demonstrate the defined competencies through integrated projects at the completion of the applicable program. In select cases, we also work with faculty from other post-secondary educational institutions to develop our curricula. For example, we have entered into an agreement with Augsburg College under which faculty members of Augsburg College provide us with assistance in developing general education courses for the first two years of our bachelor’s programs.
      Each program is regularly subjected to program reviews by accrediting bodies, state regulatory authorities and external experts to assure relevance and attainment of specified outcomes.
Faculty
      We seek to hire faculty who have teaching or practitioner experience in their particular discipline and who possess appropriate academic credentials. Approximately 77% of our faculty members have a doctoral degree from a regionally accredited institution. We provide significant training to new faculty members, including a seven-week online development program focused on effective online teaching methods and our online platform, prior to offering them a teaching assignment. In addition, we provide professional development and training for all faculty members on an ongoing basis. In order to evaluate the performance of our faculty members, we periodically monitor courseroom activity and conduct end of course evaluations to gather learner input on faculty effectiveness.
      Our faculty consists of full-time academic administrators, faculty chairs and core faculty as well as adjunct faculty. Our full-time academic administrators’ primary responsibilities are to monitor the quality and relevance of our curricula, to recruit and manage teaching faculty and to ensure that we maintain standards of accreditation. Our full-time faculty chairs supervise the faculty in their respective specializations. Our full-time core faculty teach courses in their assigned specializations and serve as mentors to, and on dissertation committees for, our doctoral learners. Our adjunct faculty typically teach one to three courses per quarter in their specializations. Of our 739 faculty members as of December 31, 2004, 110 were full-time employees and the remainder were adjunct faculty.
      In select cases, we have agreements with other post-secondary educational institutions to provide faculty for certain courses. For example, we have entered into an agreement with Augsburg College under which faculty members of Augsburg College teach general education courses in our bachelor’s programs.

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General education course credits comprise approximately 32% of the total credits required for our bachelor’s programs.
Learner Support Services
      The learner support services we provide include:
  •  Academic Services. We provide learners with a variety of services designed to support their academic studies. These services include new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and other online tutoring. We also provide appropriate educational accommodations to learners with documented disabilities through our disability support services team.
 
  •  Administrative Services. We provide learners with the ability to access a variety of administrative services both telephonically and via the Internet. For example, learners can register for classes, apply for financial aid, pay their tuition and access their transcripts online. We believe this online accessibility provides the convenience and self-service capabilities that our learners value.
 
  •  Library Services. We provide learners with complete online access to the Capella University Library. Our library, provided through a contractual relationship with the Sheridan Libraries at Johns Hopkins University, supplies learners with full-text articles, electronic books, reference assistants and hard copy materials via inter-library loans.
 
  •  Career Counseling Services. Our staff of professional career counselors use a variety of tools, including individualized phone, email and face-to-face communications, online newsletters, online seminars and conference calls to provide career planning services to learners and alumni. Our counselors also assist our recruitment staff with prospective learners’, selection of the Capella University program and specialization that best suits their professional aspirations.
      In the 2004 National Survey of Student Engagement, a nationwide survey of bachelor’s students, our learners reported significantly higher levels of satisfaction than levels typically reported by students at the other approximately 470 four-year colleges and universities participating in the survey. We believe our commitment to providing responsive, convenient and helpful learner support contributes to our high learner satisfaction. We intend to continue to monitor learner satisfaction and to evaluate and refine our learner support services as appropriate to meet learner needs.
Admissions
      Capella University’s admission process is designed to offer access to prospective learners who seek the benefits of a post-secondary education while providing realistic feedback to prospects regarding their ability to successfully complete their chosen program. For admitted learners, our screening process extends into FirstCourse, a required twelve-week orientation to our approach to online education that is designed to assess the new learner’s academic readiness, which enables us to supplement or refine the course of study for learners to address their specific needs.
      Learners enrolling in our bachelor’s programs must have a high school diploma or a GED and meet a minimum grade point average requirement, which varies depending on the amount of prior college credits they have earned. Learners enrolling in our graduate programs must have the requisite academic degree from an accredited institution and a minimum grade point average. In addition to our standard admission requirements, we require applicants to some of our graduate counseling programs to interview with, and be approved by, one or more faculty members.
Marketing and Learner Recruitment
      We engage in a range of marketing activities to build the Capella brand, raise levels of awareness with prospective learners and generate inquiries about enrollment. These marketing activities include Internet, radio, print and direct mail advertising campaigns, participation in seminars and trade shows, and

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development of marketing channels through our corporate, U.S. Armed Forces and educational relationships. We believe that online advertising currently generates our largest volume of prospective learners.
      Marketing. We have invested substantial resources in segmenting our potential learner population and developing a detailed understanding of the traits and characteristics that are most representative of learners who are best suited for our programs. We have also developed a structured framework for positioning our brand to prospective learners. As a result of these investments, we believe that we are well positioned to direct marketing expenditures towards segments of the population that, on average, are more likely to be interested in and benefit from our offerings.
      Strategic Relationships. Our corporate, U.S. Armed Forces and educational relationships are developed and managed by our channel development teams. Our channel development teams work with representatives in the various organizations to help them understand the quality, impact and value that our programs can provide, both for the employees in their organization as well as for the organization itself.
  •  Corporate Relationships. We developed our corporate alliance program to offer education opportunities to the broad employee base of large companies. Pursuant to these arrangements, our participants make information about Capella University available to their employees. In return, we provide a tuition discount to our participants’ employees and their immediate family members. Our corporate relationships are generally terminable upon two to three months prior notice and are non-exclusive. Through formal and informal arrangements of this nature, we presently have learners from approximately 80 corporations.
 
  •  U.S. Armed Forces Relationships. We have entered into arrangements with various service branches of the U.S. Armed Forces pursuant to which we have agreed to accept credits from certain military educational programs for learners who meet our transfer requirements. We also offer a discount on tuition for all members of the U.S. Armed Forces and their immediate family members. For the quarter ended March 31, 2005, approximately 19% of our learners received a U.S. Armed Forces discount.
 
  •  Educational Relationships. We developed our educational alliance program to transfer graduates of community colleges into our programs. Pursuant to the arrangements between us and approximately 230 community colleges, we provide a tuition discount and an application fee waiver for community college students, alumni, faculty, administrators and staff in exchange for marketing opportunities within each community college. Our educational alliance programs are generally terminable by us or the applicable community college on one or two months prior notice.
      Learner Recruitment. Once a prospective learner has indicated an interest in attending Capella University, our lead management system directs an enrollment director from our enrollment services team to follow up with the prospective learner, usually within 24 hours. The enrollment director is the primary contact for the prospective learner and the director’s goal is to help that individual understand our programs and assess whether there is a good match between our offerings and their interests and goals. The enrollment director also works with prospective learners to guide them through the financial aid and enrollment processes.
Enrollment
      We offer twelve different program start dates to new learners, occurring approximately once per month. As of the last day of classes in 2004, our enrollment was 12,013 learners, of which approximately 61% were female and approximately 33% were minorities. Our learner population is geographically distributed throughout the United States.

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      The following is a summary of our learners by degree level as of the last day of classes in 2004:
                 
    Enrollment
     
    Number    
Degree Level   of Learners   % of Total
         
Doctoral
    5,611       46.7 %
Master’s
    4,543       37.8  
Bachelor’s
    1,859       15.5  
             
Total
    12,013       100.0 %
             
Tuition and Fees
      Our tuition rates vary by type and length of the programs and the degree level, such as doctoral, master’s or bachelor’s. For all master’s and bachelor’s programs and for selected doctoral programs, tuition is determined by the number of courses taken by each learner. For the 2004 – 2005 academic year (the academic year that began in July 2004), prices per course generally range from $1,350 to $1,825. The price of the course depends on the number of credit hours, the degree level of the program and the discipline. For the 2004 – 2005 academic year, the majority of doctoral programs are priced at a fixed quarterly amount of $3,750 per learner, regardless of the number of courses in which the learner is registered. Based on these prices, we estimate that full tuition is approximately $49,000 for a four-year bachelor’s program, ranges from approximately $16,000 to $26,000 for a master’s program, and ranges from approximately $48,000 to $67,000 for a doctoral program. These amounts and ranges assume no reductions for transfer credits. Many of our learners reduce their total program costs at Capella University by transferring credits earned at other institutions.
      Tuition increases ranged from 3% to 7% in the 2004 – 2005 academic year as compared to the prior academic year. Tuition increases have not historically been, and may not in the future be, consistent across our programs and specializations due to market conditions or changes in operating costs that have an impact on price adjustments of individual programs or specializations.
      A large portion of our learners rely on funds received under various government-sponsored student financial aid programs, predominantly Title IV programs, to pay a substantial portion of their tuition and other education-related expenses. In the years ended December 31, 2002, 2003 and 2004, approximately 51%, 61% and 69%, respectively, of our revenues (calculated on a cash basis) were attributable to funds derived from Title IV programs. In addition to Title IV funding, our learners receive financial aid from other governmental sources or finance their education through private financing institutions or with their own funds.
Technology
      Capella University provides learners and faculty members a secure web-based portal through which they can access courses and support services.
      Online courseroom. Our online courseroom provides the instructional content of the course, along with tools to facilitate course discussions, assessments, grading and submission of assignments. We are in the process of upgrading our courseroom platform to WebCT Vista to provide additional features and functionality, including more robust discussion, testing and grading capabilities. We expect to complete this upgrade by the end of 2005.
      Learner and faculty support. We rely on a combination of packaged and custom software to provide support services to our learners and faculty, including learner participation monitoring, course registration, transcript requests and financial aid applications. In addition, we offer our learners and faculty members online access to our library, which is provided through our web-based portal, under a contractual relationship with the Sheridan Libraries at Johns Hopkins University.

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      Internal administration. We use several commercial software packages to perform internal administrative and operational functions. Our student information system manages learner academic data and accounts receivable information, and our document management system stores and sorts learner applications, academic records and marketing data. We also employ customer relationship management software to organize and process prospective learner information.
      Infrastructure. Our servers are located in a third party hosting facility and at our corporate headquarters. All of our servers are linked and we have redundant data backup. We currently use Microsoft-based software on HP server equipment. We plan to migrate our courseroom and learner and faculty support service applications to Sun Microsystems servers.
Employees and Adjunct Faculty
      As of December 31, 2004, we had a total of 739 faculty members, consisting of 110 full-time faculty and 629 part-time, adjunct faculty. Our adjunct faculty are engaged through independent contractor agreements.
      We engage our adjunct faculty on a course-by-course basis. Adjunct faculty are compensated a fixed amount per learner (which varies depending on course load and learner related activities), and a stipend to cover a portion of their preparation costs. In addition to teaching assignments, adjunct faculty may be asked to serve on learner committees, such as comprehensive examination and dissertation committee, or assist with course development. We have the right to cancel any teaching assignment due to low enrollment or to cancel sections to create proper class sizes. If a teaching assignment is canceled, we do not compensate the adjunct faculty member for the assignment. Our independent contractor agreements with adjunct faculty typically have a one-year term, but we are not required to engage them to teach any certain number of courses and have the right to terminate their services upon written notice at any time.
      As of December 31, 2004, we also employed 633 non-faculty staff in university services, academic advising and academic support, enrollment services, university administration, financial aid, information technology, human resources, corporate accounting and other administrative functions. None of our employees is a party to any collective bargaining or similar agreement with us. We consider our relationships with our employees to be good.
Competition
      The post-secondary education market is highly fragmented and competitive, with no private or public institution enjoying a significant market share. We compete primarily with public and private degree-granting regionally accredited colleges and universities. Many of these colleges and universities enroll working adults in addition to traditional 18 to 24 year-old students. In addition, many of those colleges and universities offer a variety of distance education initiatives.
      We believe that the competitive factors in the post-secondary education market include the following:
  •  relevant, practical and accredited program offerings;
 
  •  reputation of the college or university and marketability of the degree;
 
  •  convenient, flexible and dependable access to programs and classes;
 
  •  qualified and experienced faculty;
 
  •  relative marketing and selling effectiveness;
 
  •  level of learner support;
 
  •  cost of the program; and
 
  •  the time necessary to earn a degree.

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Property
      Our corporate headquarters occupies approximately 150,000 square feet in Minneapolis, Minnesota, under a lease which expires in 2010. Renewal terms under this lease allow for us to extend the current lease for up to two additional five-year terms. We also lease approximately 91,500 square feet in a second facility in Minneapolis that houses our enrollment services and learner services functions. That lease expires in November 2005. We believe our existing facilities are adequate for current requirements and that additional space can be obtained on commercially reasonable terms to meet future requirements.
Intellectual Property
      Intellectual property is important to our business. We rely on a combination of copyrights, trademarks, service marks, trade secrets, domain names and agreements with third parties to protect our proprietary rights. In many instances, our course content is produced for us by faculty and other content experts under work-for-hire agreements pursuant to which we own the course content in return for a fixed development fee. In certain limited cases, we license course content from a third party on a royalty fee basis.
      We have trademark or service mark registrations and pending applications in the U.S. and select foreign jurisdictions for the words “CAPELLA,” “CAPELLA EDUCATION COMPANY,” and “CAPELLA UNIVERSITY” and distinctive logos, along with various other trademarks and service marks related to our specific offerings.
      We also own domain name rights to “www.capella.edu” and “www.capellauniversity.edu”, as well as other words and phrases important to our business.
Legal Proceedings
      From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not at this time a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.

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REGULATORY ENVIRONMENT
      Learners attending Capella University finance their education through a combination of individual resources, private loans, corporate reimbursement programs and federal financial aid programs. Capella University participates in the federal student financial aid programs authorized under Title IV. For the year ended December 31, 2004, approximately 69% of our revenues (calculated on a cash basis) were derived from Title IV programs. In connection with a learner’s receipt of federal financial aid, we are subject to extensive regulation by the Department of Education, state education agencies and our accrediting agency, The Higher Learning Commission. In particular, the Title IV programs, and the regulations issued thereunder by the Department of Education, subject us to significant regulatory scrutiny in the form of numerous standards that we must satisfy in order to participate in the federal student financial aid programs. To participate in Title IV programs, a school must be:
  •  authorized to offer its programs of instruction by the applicable state educating agencies in the states in which it is physically located (in our case, Minnesota);
 
  •  accredited by an accrediting agency recognized by the Secretary of the Department of Education; and
 
  •  certified as an eligible institution by the Department of Education.
      Our business activities are planned and implemented to achieve compliance with the rules and regulations of the state, regional and federal agencies that regulate our activities. We have established regulatory compliance and management systems and processes under the oversight of our chief financial officer and our general counsel that are designed to meet the requirements of this regulatory environment.
Accreditation
      Capella University has been institutionally accredited since 1997 by The Higher Learning Commission, a regional accrediting agency recognized by the Secretary of the Department of Education. Accreditation is a non-governmental system for recognizing educational institutions and their programs for student performance, governance, integrity, educational quality, faculty, physical resources, administrative capability and resources, and financial stability. In the United States, this recognition comes primarily through private voluntary associations that accredit institutions and programs of higher education. To be recognized by the Secretary of the Department of Education, accrediting agencies must adopt specific standards for their review of educational institutions. These associations, or accrediting agencies, establish criteria for accreditation, conduct peer-review evaluations of institutions and professional programs for accreditation and publicly designate those institutions that meet their criteria. Accredited schools are subject to periodic review by accrediting agencies to determine whether such schools maintain the performance, integrity and quality required for accreditation.
      The Higher Learning Commission is the same accrediting agency that accredits such universities as Northwestern University, the University of Chicago, the University of Minnesota and other degree-granting public and private colleges and universities in its region (namely, the States of Arkansas, Arizona, Colorado, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, Oklahoma, New Mexico, South Dakota, Wisconsin, West Virginia and Wyoming).
      Accreditation by The Higher Learning Commission is important to us. Colleges and universities depend, in part, on accreditation in evaluating transfers of credit and applications to graduate schools. Employers rely on the accredited status of institutions when evaluating a candidate’s credentials, and students and corporate and government sponsors under tuition reimbursement programs look to accreditation for assurance that an institution maintains quality educational standards. Moreover, institutional accreditation by an accrediting agency recognized by the Secretary of the Department of Education is necessary for eligibility to participate in the Title IV programs.

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State Education Licensure
      We are authorized to offer our programs by the Minnesota Higher Education Services Office, the regulatory agency governing the State of Minnesota, where Capella University is located. We are required by the Higher Education Act to maintain authorization from the Minnesota Higher Education Services Office in order to participate in Title IV programs.
      The increasing popularity and use of the Internet and other online services for the delivery of education has led and may lead to the adoption of new laws and regulatory practices in the United States or foreign countries and new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues such as the requirement that online education institutions be licensed in one or more jurisdictions where they have no physical location or other presence. For instance, in some states, we are required to seek licensure or authorization because our recruiters meet with prospective students in the state. In other cases, the state educational agency has required licensure or authorization because we enroll students who reside in the state. New laws, regulations or interpretations related to doing business over the Internet could increase our cost of doing business and affect our ability to recruit students in particular states, which could, in turn, negatively affect enrollments and revenues and have a material adverse effect on our business.
      In addition to Minnesota, Capella University is licensed, authorized to operate or to offer degree programs in the following states: Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Illinois, Kentucky, Ohio, Virginia, Washington, West Virginia and Wisconsin. We are licensed in these states because we have determined that our activities in each state constitute a presence requiring licensure by the state educational agency. Because we enroll students from each of the 50 states, as well as the District of Columbia, and because we may undertake activities in other states that constitute a presence subjecting us to the jurisdiction of the respective state educational agency, we may, from time to time, need to seek authorization or licensure in additional states.
      We are subject to extensive regulations by the states in which we are authorized or licensed to operate. State laws typically establish standards for instruction, qualifications of faculty, administrative procedures, marketing, recruiting, financial operations and other operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees. Some states may also prescribe financial regulations that are different from those of the Department of Education. We are required to post surety bonds in several states. If we fail to comply with state licensing requirements, we may lose our state licensure or authorizations. Although we believe that the only state authorization or licensure necessary for us to participate in the Title IV programs is our authorization from the Minnesota Higher Education Services Office, loss of authorization or licensure in other states could prohibit our ability to recruit or enroll students in those states. Failure to comply with the requirements of the Minnesota Higher Education Services Office could result in Capella University losing its authorization from the Minnesota Higher Education Services Office, its eligibility to participate in Title IV programs or its ability to offer certain programs, any of which may force us to cease operations.
State Professional Licensure
      Many states have specific requirements that an individual must satisfy in order to be licensed as a professional in specified fields in that particular state. Students often seek to obtain professional licensure in their chosen fields following graduation. Their success in obtaining licensure typically depends on several factors, including the individual merits of the graduate, as well as the following, among other factors:
  •  whether the institution and the program were approved by the state in which the graduate seeks licensure, or by a professional association;
 
  •  whether the program from which the student graduated meets all state requirements for professional licensure; and
 
  •  whether the institution is accredited.

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Due to varying requirements for professional licensure in each state, Capella University’s catalog informs learners of the risks associated with obtaining professional licensure and more specifically that (1) Capella University makes no representation or guarantees that completion of any educational program ensures that the learner will be able to obtain individual professional licensure or certification, and (2) that learners are solely responsible for determining and complying with state, local, or professional licensure and certification requirements.
Nature of Federal, State and Private Financial Support for Post-Secondary Education
      The federal government provides a substantial part of its support for post-secondary education through Title IV programs, 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. Aid under Title IV programs is primarily awarded on the basis of financial need, generally defined 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 satisfactory academic progress and must also progress in a timely manner toward completion of their program of study. In addition, each school must ensure that Title IV program funds are properly accounted for and disbursed in the correct amounts to eligible learners.
      Capella University learners receive loans and grants to fund their education under the following Title IV programs: (1) the Federal Family Education Loan, or FFEL, program and (2) the Federal Pell Grant, or Pell, program. In 2004, approximately 69% of our revenues (calculated on a cash basis) were derived from tuition financed under Title IV programs.
        1)  FFEL. Under the FFEL program, banks and other lending institutions make loans to learners. If a learner 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. In 2004, we derived approximately 68% of our revenues (calculated on a cash basis) from the FFEL program.
 
        2)  Pell. Under the Pell program, the Department of Education makes grants to students who demonstrate financial need. In 2004, we derived approximately 1% of our revenues (calculated on a cash basis) from the Pell program.
      In addition to the programs stated above, eligible learners at Capella University may participate in several other financial aid programs or receive support from other governmental and private sources. Certain learners are eligible to receive funds from educational assistance programs administered by the U.S. Department of Veterans Affairs through the Minnesota Department of Veterans Affairs. In certain circumstances, we may assist learners in accessing alternative loan programs available to Capella University’s learners. Alternative loans are intended to cover the difference between what the learner receives from all financial aid sources and the full cost of the learner’s education. Learners can apply to a number of different lenders for this funding at current market interest rates. Finally, many Capella University learners finance their own education or receive full or partial tuition reimbursement from their employers.
Regulation of Federal Student Financial Aid Programs
      To be eligible to participate in Title IV programs, an institution must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education. An institution must, among other things, be licensed or authorized to offer its educational programs by the state within which it is physically located (in our case, Minnesota) and maintain institutional accreditation by a recognized accrediting agency. Capella University is currently certified to participate in Title IV programs through December 31, 2008, provided that the Demonstration Program is continued to that date or that the 50% Rules are repealed.
      The substantial amount of federal funds disbursed through Title IV programs, the large number of students and institutions participating in these programs and instances of fraud and abuse by certain for-profit institutions have caused Congress to require the Department of Education to exercise considerable

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regulatory oversight over for-profit institutions of higher learning. Accrediting agencies and state education agencies also have responsibilities for overseeing compliance of institutions with Title IV program requirements. As a result, our institution is subject to extensive oversight and review. Because the Department of Education periodically revises its regulations and changes its interpretations of existing laws and regulations, we cannot predict with certainty how the Title IV program requirements will be applied in all circumstances.
      Significant factors relating to Title IV programs that could adversely affect us include the following:
      Congressional Action. Congress reauthorizes the Higher Education Act approximately every five to eight years. Congress most recently reauthorized the Higher Education Act in 1998, with authorization extended through September 30, 2004. Because reauthorization had not yet been completed in a timely manner, in 2004, Congress extended the current provisions of the Higher Education Act through September 30, 2005. Congress has begun review of the Higher Education Act for purposes of reauthorization and is currently expected to complete reauthorization in 2005 or 2006. We believe that this reauthorization will likely result in numerous changes to the Higher Education Act. At this time, we cannot predict with certainty what changes Congress will make. An elimination of certain Title IV programs, material changes in the requirements for participation in such programs, or the substitution of materially different programs could reduce the ability of certain learners to finance their education. If reauthorization is not completed by September 30, 2005, Congress is expected to enact legislation to extend the Title IV programs as currently authorized under the Higher Education Act for up to one additional year.
      In addition, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations process. Congress is currently considering taking measures to reduce the federal budget deficit and, as a result, may decrease funding for Title IV programs. A reduction in federal funding levels of such programs could reduce the ability of certain learners to finance their education. These changes, in turn, could lead to lower enrollments at Capella University or require Capella University to increase its reliance upon alternative sources of learner financial aid. Given the significant percentage of Capella University’s revenues that are derived indirectly from Title IV programs, the loss of or a significant reduction in Title IV program funds available to Capella University’s learners could reduce our enrollment and revenue and possibly have a material adverse effect on our business. In addition, the regulations applicable to Capella University have been subject to frequent revisions, many of which have increased the level of scrutiny to which for-profit post-secondary educational institutions are subjected and have raised applicable standards. If Capella University were not to continue to comply with such regulations, such non-compliance might impair its ability to participate in Title IV programs, offer programs or continue to operate. Certain of the regulations applicable to Capella University are described below.
      Distance Learning and the “50% Rules.” Capella University offers all of its existing degree and certificate programs via Internet-based telecommunications from Capella’s headquarters in Minneapolis, Minnesota. Capella University is approved by the Minnesota Higher Education Services Offices to operate and to offer degrees in Minnesota, the state in which Capella University’s administrative offices and facilities are located.
      The Higher Education Act generally excludes from Title IV programs institutions at which (1) more than 50% of the institution’s courses are offered via distance delivery methods, which includes online courses, or (2) 50% or more of the institution’s students are enrolled in courses delivered via correspondence methods, including online courses. Institutions whose eligible programs are predominantly (at least 50%) degree programs are subject to different and less restrictive limitations for distance education than institutions that predominantly offer short-term certificate programs. Under this less restrictive limitation for predominantly degree-granting institutions, an institution at which 50% or more of the institution’s students are enrolled in courses delivered via telecommunications (including online courses) can nonetheless be eligible for Title IV program participation provided that no more than 49% of its courses are offered online or through distance delivery methods. Because 100% of Capella University’s

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courses are online courses and 100% of its students are enrolled in online courses, the 50% Rules would, absent the Demonstration Program, preclude Capella University and its learners from participating in Title IV programs.
      As part of the 1998 amendments to the Higher Education Act, the Department of Education was authorized to waive the 50% Rules in certain cases as part of the Demonstration Program. The Demonstration Program is a program authorized by Congress and administered by the Department of Education to assess the viability of online educational offerings. Under the Demonstration Program, institutions may seek waivers of certain regulatory provisions that inhibit the offering of distance education programs, including the 50% Rules. Participation in the Demonstration Program includes regular submissions of data to the Department of Education. Capella University was selected for participation in the Demonstration Program in 1999, which allows Capella University to participate in the Title IV programs. The Department of Education may terminate our participation in the Demonstration Program at any time, for cause, including for failure to submit required reports in a timely manner. Before terminating our participation for cause, the Department of Education would provide us with an opportunity to demonstrate that such termination is not warranted. As of the date of this prospectus, there are 23 institutions, or consortia of institutions, participating in the Demonstration Program, and the Department of Education is prohibited by Congress from selecting more than 35 institutions or consortia of institutions for participation in the Demonstration Program. Capella University’s participation in the Demonstration Program, and the waiver of the 50% Rules that applies to us, will cease on June 30, 2006, unless extended. Our participation has twice been extended for additional one-year periods by the Department of Education. Legislation is currently pending as part of the Higher Education Act reauthorization that, if passed, would eliminate the 50% Rules as they apply to online institutions and would extend the Demonstration Program. If Congress does not eliminate the 50% Rules by June 30, 2006, and if the Department of Education does not extend our participation in the Demonstration Program beyond June 30, 2006, we will cease to be eligible to participate in the Title IV programs and our learners will be unable to receive Title IV funds.
      Administrative Capability. Department of Education regulations specify extensive criteria by which an institution must establish that it has the requisite “administrative capability” to participate in Title IV programs. Failure to satisfy any of the standards may lead the Department of Education to find the institution ineligible to participate in Title IV programs or to place the institution on provisional certification as a condition of its participation. To meet the administrative capability standards, an institution must, among other things:
  •  comply with all applicable Title IV program regulations;
 
  •  have capable and sufficient personnel to administer the federal student financial aid programs;
 
  •  have acceptable methods of defining and measuring the satisfactory academic progress of its student;
 
  •  not have cohort default debt rates above specified levels;
 
  •  have various procedures in place for safeguarding federal funds;
 
  •  not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
 
  •  provide financial aid counseling to its students;
 
  •  refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
 
  •  submit in a timely manner all reports and financial statements required by the regulations; and
 
  •  not otherwise appear to lack administrative capability.

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      If an institution fails to satisfy any of these criteria or any other Department of Education regulation, the Department of Education may:
  •  require the repayment of Title IV funds;
 
  •  transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment;
 
  •  place the institution on provisional certification status; or
 
  •  commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
      If we are found not to have satisfied the Department of Education’s “administrative capability” requirements, we could lose, or be limited in our access to, Title IV program funding.
      Financial Responsibility. The Higher Education Act and Department of Education regulations establish extensive standards of financial responsibility that institutions such as Capella University must satisfy in order to participate in Title IV programs. These standards generally require that an institution provide the resources necessary to comply with Title IV program requirements and meet all of its financial obligations, including required refunds and any repayments to the Department of Education for liabilities incurred in programs administered by the Department of Education.
      The Department of Education evaluates institutions on an annual basis for compliance with specified financial responsibility standards utilizing a complex formula that uses line items from the institution’s audited financial statements. The standards focus on three financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial viability and ability to borrow); (2) primary reserve ratio (which measures the institution’s ability to support current operations from expendable resources); and (3) net income ratio (which measures the institution’s ability to operate at a profit or within its means). An institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed financially responsible without the need for further federal oversight. We have applied the financial responsibility standards to our audited financial statements as of and for the year ended December 31, 2004, and calculated a composite score of 3.0, which is the maximum score attainable. We therefore believe that we meet the Department of Education’s financial responsibility standards. If the Department of Education were to determine that we did not meet the financial responsibility standards due to a failure to meet the composite score or other factors, we could establish financial responsibility on an alternative basis by, among other things:
  •  posting a letter of credit in an amount equal to at least 50% of the total Title IV program funds received by the institution during the institution’s most recently completed fiscal year;
 
  •  posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV program funds received by us, accepting provisional certification, complying with additional Department of Education monitoring requirements and agreeing to receive Title IV program funds under an arrangement other than the Department of Education’s standard advance funding arrangement; or
 
  •  complying with additional Department of Education monitoring requirements and agreeing to receive Title IV program funds under an arrangement other than the Department of Education’s standard advance funding arrangement such as the “reimbursement” system of payment or cash monitoring.
      Failure to meet the Department of Education’s “financial responsibility” requirements, either because we do not meet the Department of Education’s minimum composite score to establish financial responsibility or are unable to establish financial responsibility on an alternative basis, would cause us to lose access to Title IV program funding.
      Title IV Return of Funds. Under the Department of Education’s return of funds regulations, an institution must first determine the amount of Title IV program funds that the student “earned.” If the student withdraws during the first 60% of any period of enrollment or payment period, the amount of Title IV program funds that the student earned is equal to a pro rata portion of the funds for which the

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learner would otherwise be eligible. If the student withdraws after the 60% threshold, then the student has earned 100% of the Title IV program funds. The institution must return to the appropriate Title IV programs, in a specified order, the lesser of (i) the unearned Title IV program funds and (ii) the institutional charges incurred by the student for the period multiplied by the percentage of unearned Title IV program funds. An institution must return the funds no later than 30 days after the date of the institution’s determination that a student withdrew. If such payments are not timely made, an institution may be subject to adverse action, including being required to submit a letter of credit equal to 25% of the refunds the institution should have made in its most recently completed year. Under Department of Education regulations, late returns of Title IV program funds for 5% or more of students sampled in the institution’s annual compliance audit constitutes material non-compliance. We believe that Capella University’s return of funds policy and practice is consistent, and materially complies, with the current Title IV return of funds regulations.
      The “90/10 Rule.” A requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” applies only to “proprietary institutions of higher education,” which includes Capella University. Under this rule, an institution loses its eligibility to participate in the Title IV programs, if, on a cash accounting basis, it derives more than 90% of its revenues for any fiscal year from Title IV program funds. Any institution that violates the 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 90%, and it is unable to apply to regain its eligibility until the next fiscal year. For the year ended December 31, 2004, we derived approximately 69% of our revenues (calculated on a cash basis) from Title IV program funds.
      Student Loan Defaults. Under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all of the Title IV programs if defaults on the repayment of federally guaranteed student loans by its students exceed certain levels. For each federal fiscal year, a rate of student defaults (known as a “cohort default rate”) is calculated for each institution with 30 or more borrowers entering repayment in a given federal fiscal year by determining the rate at which borrowers who become subject to their repayment obligation in that federal fiscal year default by the end of the following federal fiscal year. For such institutions, the Department of Education calculates a single cohort default rate for each federal fiscal year that includes in the cohort all current or former student borrowers at the institution who entered repayment on any FFEL program loan during that year.
      If the Department of Education notifies an institution that its cohort default rates for each of the three most recent federal fiscal years, are 25% or greater, the institution’s participation in the FFEL program and Pell program ends 30 days after the notification, unless the institution appeals in a timely manner that determination on specified grounds and according to specified procedures. In addition, an institution’s participation in the FFEL program ends 30 days after notification that its most recent cohort default rate is greater than 40%, unless the institution timely appeals that determination on specified grounds and according to specified procedures. An institution whose participation ends under these provisions may not participate in the relevant programs for the remainder of the fiscal year in which the institution receives the notification, as well as for the next two fiscal years.
      If an institution’s cohort default rate equals or exceeds 25% in any single year, the institution may be placed on provisional certification status. Provisional certification does not limit an institution’s access to Title IV program funds; however, an institution with provisional status is subject to closer review by the Department of Education and may be subject to summary adverse action if it violates Title IV program requirements. Capella University’s cohort default rates on FFEL program loans for the 2000, 2001 and 2002 federal fiscal years, the three most recent years for which final information is available, were 0%, 0.5% and 2.8%, respectively. The average cohort default rates for four-year degree-granting proprietary institutions nationally were 8.0%, 7.4% and 7.3% in fiscal years 2000, 2001 and 2002, respectively.
      Incentive Compensation Rules. As a part of an institution’s program participation agreement with the Department of Education and in accordance with the Higher Education Act, the institution may not provide any commission, bonus or other incentive payment to any person or entity engaged in any student recruitment, admissions or financial aid awarding activity based directly or indirectly on success in securing

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enrollments or financial aid. Certain Department of Education regulations clarify the incentive payment rule. The regulations set forth 12 “safe harbors,” which describe payments or arrangements that do not violate the incentive payment rule. Failure to comply with the incentive compensation rules could result in loss of eligibility to participate in federal student financial aid programs or financial penalties. Although there can be no assurance that the Department of Education would not find deficiencies in Capella University’s present or former employee compensation and third-party contractual arrangements, we believe that our employee compensation and third-party contractual arrangements comply with the incentive compensation provisions of the Higher Education Act and Department of Education regulations thereunder.
      Compliance Reviews. We are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department of Education, its Office of Inspector General, state licensing agencies, agencies that guarantee FFEL loans, the Department of Veterans Affairs and accrediting agencies. The Higher Education Act and Department of Education regulations also require an institution to submit annually a compliance audit of its administration of the Title IV programs conducted by an independent certified public accountant in accordance with Government Auditing Standards and applicable audit guides of the Department of Education’s Office of Inspector General. In addition, to enable the Secretary of Education to make a determination of financial responsibility, an institution must submit annually audited financial statements prepared in accordance with Department of Education regulations.
      Potential Effect of Regulatory Violations. If Capella University fails to comply with the regulatory standards governing Title IV programs, the Department of Education could impose one or more sanctions, including transferring Capella University to the reimbursement or cash monitoring system of payment, seeking to require repayment of certain Title IV program funds, requiring Capella University to post a letter of credit in favor of the Department of Education as a condition for continued Title IV certification, taking emergency action against Capella University, referring the matter for criminal prosecution or initiating proceedings to impose a fine or to limit, condition, suspend or terminate the participation of Capella University in Title IV programs. In addition, the agencies that guarantee FFEL loans for Capella University learners could initiate proceedings to limit, suspend or terminate Capella University’s eligibility to provide guaranteed student loans in the event of certain regulatory violations. Although there are no such pending proceedings or sanctions currently in force, and we do not believe any such sanctions or proceedings are presently contemplated, if such sanctions or proceedings were imposed against us and resulted in a substantial curtailment, or termination, of Capella University’s participation in Title IV programs, our enrollments, revenues and results of operations would be materially and adversely affected.
      If Capella University lost its eligibility to participate in Title IV programs, or if the amount of available federal student financial aid were reduced, we would seek to arrange or provide alternative sources of revenue or financial aid for learners. Although we believe that one or more private organizations would be willing to provide financial assistance to learners attending Capella University, there is no assurance that this would be the case, and the interest rate and other terms of such financial aid might not be as favorable as those for Title IV program funds. We may be required to guarantee all or part of such alternative assistance or might incur other additional costs in connection with securing alternative sources of financial aid. Accordingly, the loss of eligibility of Capella University to participate in Title IV programs, or a reduction in the amount of available federal student financial aid, would be expected to have a material adverse effect on our results of operations even if we could arrange or provide alternative sources of revenue or student financial aid.
      Capella University also may be subject, from time to time, to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by other government agencies and third parties, such as present or former learners or employees and other members of the public.
      Restrictions on Adding Educational Programs. State requirements and accrediting agency standards may, in certain instances, limit our ability to establish additional programs. Many states require approval before institutions can add new programs under specified conditions. The Higher Learning Commission, the Minnesota Higher Education Services Office, and other state educational regulatory agencies that

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license or authorize us and our programs, require institutions to notify them in advance of implementing new programs, and upon notification may undertake a review of the institution’s licensure, authorization or accreditation.
      Generally, if an institution eligible to participate in Title IV programs adds an educational program after it has been designated as an eligible institution, the institution must apply to the Department of Education to have the additional program designated as eligible. However, a degree-granting institution is not obligated to obtain the Department of Education’s approval of additional programs that lead to an associate, bachelor’s, professional or graduate degree at the same degree level(s) previously approved by the Department of Education. Similarly, an institution is not required to obtain advance approval for new programs that both prepare learners for gainful employment in the same or related recognized occupation as an educational program that has previously been designated as an eligible program at that institution and meet certain minimum-length requirements. However, the Department of Education, as a condition of certification to participate in Title IV programs, can require prior approval of such programs or otherwise restrict the number of programs an institution may add. In the event that an institution that is required to obtain the Department of Education’s express approval for the addition of a new program fails to do so, and erroneously determines that the new educational program is eligible for Title IV program funds, the institution may be liable for repayment of Title IV program funds received by the institution or learners in connection with that program.
      Eligibility and Certification Procedures. Each institution must apply to the Department of Education for continued certification to participate in Title IV programs at least every six years, or when it undergoes a change of control, and an institution may come under the Department of Education’s review when it expands its activities in certain ways, such as opening an additional location or, in certain cases, when it modifies academic credentials that 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. In addition, the Department of Education may more closely review an institution that is provisionally certified if it applies for approval to open a new location, add an educational program, acquire another school or make any other significant change.
      During the period of provisional certification, the institution must comply with any additional conditions included in its program participation agreement. If the Department of Education determines that a provisionally certified institution is unable to meet its responsibilities under its program participation agreement, it may seek to revoke the institution’s certification to participate in Title IV programs with fewer due process protections for the institution than if it were fully certified. Students attending provisionally certified institutions remain eligible to receive Title IV program funds.
      School Acquisitions. When a company, partnership or any other entity or individual acquires a school that is eligible to participate in Title IV programs, that school undergoes a change of ownership resulting in a change of control as defined by the Department of Education. Upon such a change of control, a school’s eligibility to participate in Title IV programs is generally suspended until it has applied for recertification by the Department of Education as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. The Department of Education may temporarily and provisionally certify an institution seeking approval of a change of ownership under certain circumstances while the Department of Education reviews the institution’s application. The time required for the Department of Education to act on such an application may vary substantially. The Department of Education’s recertification of an institution following a change of control will be on a provisional basis.
      Change in Ownership Resulting in a Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The Department of Education, most state education agencies and our accrediting agency all have standards pertaining to the change of control of schools, but these standards are not uniform. Department of Education regulations describe some

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transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution’s parent corporation. For a company that is privately held, but not closely held, which is our status prior to the consummation of this offering, Department of Education regulations provide that a change of ownership resulting in a change of control occurs if any person either acquires or ceases to hold at least 25% of the company’s total outstanding voting stock and that person gains or loses actual control of the corporation. With respect to a publicly traded corporation, which will be our status after the consummation of this offering, Department of Education regulations provide that a change of control occurs in one of two ways: (i) if there is an event that would obligate the corporation to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing a change of control or (ii) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. These standards are subject to interpretation by the Department of Education. A significant purchase or disposition of our voting stock could be determined by the Department of Education to be a change of control under this standard. Many states include the sale of a controlling interest of common stock in the definition of a change of control requiring approval. A change of control under the definition of one of these agencies would require us to seek approval of the change in ownership and control in order to maintain its accreditation, state authorization or licensure. The requirements to obtain such approval from the states and our accrediting commission vary widely. In some cases, approval of the change of ownership and control cannot be obtained until after the transaction has occurred.
      When a change of ownership resulting in a change of control occurs at a for-profit institution, the Department of Education applies a different set of financial tests to determine the financial responsibility of the institution in conjunction with its review and approval of the change of ownership. The institution is required to submit a same-day audited balance sheet reflecting the financial condition of the institution immediately following the change in ownership. The institution’s same day-balance sheet must demonstrate an acid test ratio of at least 1:1, which is calculated by adding cash and cash equivalents to current accounts receivable and dividing the sum by total current liabilities (and excluding all unsecured or uncollateralized related party receivables). In addition, the same-day balance sheet must demonstrate positive tangible net worth. If the institution does not satisfy these requirements, the Department of Education may condition its approval of the change of ownership on the institution’s agreeing to letters of credit, provisional certification, and/or additional monitoring requirements, as described in the above section on Financial Responsibility.
      We intend to submit a description of the offering to the Department of Education, the Higher Learning Commission and each of the state education agencies which currently licenses or authorizes us to offer degree programs, asking each agency to confirm our understanding that the offering will not be a change of control under its respective standards. If the offering were considered to be a change of control by the Department of Education, the Department of Education would not review or approve the offering until after it has occurred. Some state educational agencies also would not act to review or approve the offering on an advance basis. In addition, if the offering were viewed as a change of ownership by the Department of Education, any approval granted by the Department of Education would be subject to provisional certification. Our failure to obtain any required approval of the offering from the Department of Education, the Higher Learning Commission, or the Minnesota Higher Education Services Office, could result in the loss of our continued eligibility to participate in the Title IV programs and materially and adversely affect our enrollments, revenues and results of operations.
      A change of control also could occur as a result of future transactions in which Capella Education Company or Capella University are involved. Some corporate reorganizations and some changes in the board of directors are examples of such transactions. Moreover, once we become a publicly traded company, the potential adverse effects of a change of control could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for your shares of common stock and could have an adverse effect on the market price of your shares.

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MANAGEMENT
      Set forth below is certain information concerning our executive officers and directors:
             
Name   Age   Position
         
Stephen G. Shank
    61     Chairman and Chief Executive Officer
(Mr. Shank also serves as Chancellor of Capella University)
Michael J. Offerman
    57     Senior Vice President
(Mr. Offerman also serves as President, Chief Executive Officer, and as a director of Capella University)
Lois M. Martin
    42     Senior Vice President and Chief Financial Officer
Paul A. Schroeder
    45     Senior Vice President, Business Management (Mr. Schroeder also serves as a director of Capella University)
Elizabeth A. Nordin
    49     Vice President of Operations
Heidi K. Thom
    41     Senior Vice President of Marketing
Scott M. Henkel
    50     Vice President and Chief Information Officer
Gregory W. Thom
    48     Vice President, General Counsel, and Secretary
Elizabeth M. Rausch
    52     Vice President, Human Resources
Tony J. Christianson
    52     Director
Gordon A. Holmes
    36     Director
S. Joshua Lewis
    42     Director
Jody G. Miller
    47     Director
James A. Mitchell
    63     Director
David W. Smith
    60     Director
Jeffrey W. Taylor
    51     Director
Darrell R. Tukua
    51     Director
Jon Q. Reynolds, Jr. 
    37     Director
      Stephen G. Shank founded our company in 1991 and has been serving as our Chairman and Chief Executive Officer since then. Mr. Shank also has been serving as Chancellor of Capella University since 2001, and as emeritus (non-voting) director of Capella University since 2003. Mr. Shank served as a member of the board of directors of Capella University from 1993 through 2003. From 1979 to 1991, Mr. Shank was Chairman and Chief Executive Officer of Tonka Corporation, an NYSE-listed manufacturer of toys and games. Mr. Shank is a member of the board of directors of Tennant Company, an NYSE-listed manufacturer of cleaning equipment. Mr. Shank earned a B.A. from the University of Iowa, an M.A. from the Fletcher School, a joint program of Tufts and Harvard Universities, and a J.D. from Harvard Law School.
      Dr. Michael J. Offerman joined our company in 2001 and has been serving as our Senior Vice President since then. Dr. Offerman also has been serving as President, Chief Executive Officer and director of Capella University since 2001. From 1994 to 2001, Dr. Offerman served as Dean of the Division of Continuing Education at the University of Wisconsin-Extension, the University of Wisconsin’s institution dedicated to the development and delivery of continuing education and online programs. Dr. Offerman also has served on a number of national boards, including the American Council on Education, the University Continuing Education Association, and the National Technology Advisory Board. Dr. Offerman earned a B.A. from the University of Iowa, an M.S. from the University of Wisconsin-Milwaukee and an Ed.D. from Northern Illinois University.

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      Lois M. Martin joined our company in 2004 and has been serving as our Senior Vice President and Chief Financial Officer since then. From 2002 to 2004, Ms. Martin served at World Data Products as Executive Vice President and Chief Financial Officer, and in a number of executive positions, including Senior Vice President and Chief Financial Officer, at Deluxe Corporation from 1993 to 2001. Ms. Martin is a member the board of directors of ADC, Inc., a publicly held global supplier of network infrastructure. She was also a member of the boards of directors of Ensodex Corporation, a provider of enterprise integration products and services, in 2002, and eFunds Corporation, an NYSE-listed company offering integrated information, payment and technology solutions, in 2000. From 1996 to 2001, Ms. Martin also served as Secretary/ Treasurer for the Deluxe Corporation Foundation and the W.R. Hotchkiss Foundation, a provider of education and other grant funding to non-profit organizations. Ms. Martin began her career at Coopers and Lybrand (now PricewaterhouseCoopers LLP), where she earned her C.P.A. designation. Ms. Martin earned a B.A. from Augustana College.
      Paul A. Schroeder has been serving as Senior Vice President, Business Management of our company since 2004 and as a director of Capella University since 2003. From 2001 to 2003, Mr. Schroeder served as our Senior Vice President and Chief Financial Officer. From 1997 to 2001, Mr. Schroeder held various executive management positions, including Senior Vice President, General Manager and Chief Financial Officer, with Datacard Group, a privately held company providing hardware and software solutions to the financial card and government ID markets. From 1984 to 1997, Mr. Schroeder held a variety of financial management positions at NCR Corporation, an NYSE-listed technology systems and services company. Mr. Schroeder earned a B.A. from Haverford College and an M.B.A. from Northwestern University. He also completed additional graduate work at the University of Illinois.
      Elizabeth A. Nordin joined our company in 2004 and has been serving as Vice President of Operations of our company since then. From 2001 to 2004, Ms. Nordin served as Senior Vice President of Information Technology at Pearson, plc, a media company, Vice President and Chief Information Officer of Pearson Education, a business unit within Pearson, plc, and Vice President and Chief Information Officer at NCS Pearson, Inc., a subsidiary of Pearson Education. Prior to that, Ms. Nordin worked for 15 years in various senior information technology positions at Liberty Enterprises, a check printing and services company, and Honeywell, a manufacturing and service organization. Ms. Nordin earned a B.A. from Augsburg College.
      Heidi K. Thom has been serving as Senior Vice President of Marketing of our company since July 2004. From 2003 to July 2004, Ms. Thom served as our Vice President of Marketing. From 2000 to 2003, Ms. Thom served as Vice President of Business Development and Marketing Services at Land O’Lakes Inc., a national food and agricultural cooperative. From 1998 to 2000, Ms. Thom served as Category Vice President of Frozen Foods at The Pillsbury Company, a food manufacturing company. Ms. Thom earned a B.S. from Moorhead State University and an M.B.A. from the University of Minnesota’s Carlson School of Management.
      Scott M. Henkel joined our company in 2004 and has been serving as our Vice President and Chief Information Officer since then. From 1994 to 2003, Mr. Henkel served as Chief Information Officer and Vice President of Software Engineering at Datacard Group. Mr. Henkel earned a B.A. from Metropolitan State University and an M.B.A. in finance from the College of St. Thomas.
      Gregory W. Thom joined our company in 2003 and has been serving as Vice President, General Counsel, and Secretary since then. From 2002 to 2003, Mr. Thom served as Vice President, Global Sales and Distribution at Datacard Group. From 2001 to 2003, Mr. Thom served as Vice President, Government Solutions at Datacard Group. From 2000 to 2001, Mr. Thom served as Vice President, General Counsel and Secretary at Datacard Group. From 1991 to 1994, Mr. Thom was an attorney with Dorsey & Whitney LLP, a Minneapolis-based law firm. Mr. Thom earned a B.A. from Bethel College, an M.B.A. from the University of Connecticut and a J.D. from William Mitchell College of Law.
      Elizabeth M. Rausch joined our company in 1999 and has been serving as our Vice President, Human Resources since then. From 1985 to 1999, Ms. Rausch served as Director and Manager of Human

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Resources at Marigold Foods, Inc., a regional food and dairy processing organization. Ms. Rausch earned a B.A. from the University of Minnesota and a M.S. degree from Mankato State University.
      Tony J. Christianson has served as a director of our company since 1993. Mr. Christianson co-founded the Cherry Tree Companies, an investment management and investment banking firm, in 1980, and has been serving as its Managing General Partner since then. Mr. Christianson is a member of the boards of directors of three public companies: Fair Isaac Corporation, a financial services company; Peoples Educational Holdings, an educational publisher; and Transport Corp. of America, a long haul trucking company. He earned a B.A. from St. John’s University and an M.B.A. from the Harvard School of Business.
      Gordon A. Holmes has served as a director of our company since 2000. Since 2001, Mr. Holmes has been a general partner of several limited partnerships affiliated with Forstmann Little & Co., an investment firm. From 1998 to 2001, Mr. Holmes was an associate at Forstmann Little & Co. Mr. Holmes also serves as a member of the board of directors of Citadel Broadcasting Corporation, an NYSE-listed radio broadcasting company. Mr. Holmes earned a B.C.L. degree from University College, Dublin and an M.B.A. from Stanford University Graduate School of Business.
      S. Joshua Lewis has served as a director of our company since 2000. Since 2001, Mr. Lewis has been a managing partner of Salmon River Capital, a private equity/venture capital firm. He is also a special partner of Insight Venture Partners, a private equity/venture capital firm, and a special limited partner of Stonewater Capital, a public equity investment firm. During 2000, he was a general partner of Forstmann Little & Co. From 1997 to 1999, Mr. Lewis was a managing director of Warburg Pincus, a private equity/venture capital firm. Mr. Lewis earned an A.B. from Princeton University and a D.Phil. from Oxford University.
      Jody G. Miller has served as a director of our company since 2003. She joined Maveron, LLC, a Seattle-based venture capital firm, in 2000, and has served as a Venture Partner since that time. From 1995 to 1999, Ms. Miller held various positions at Americast, a digital video and interactive services partnership, including as Acting President and Chief Operating Officer, Executive Vice President, Senior Vice President for Operations and consultant. From 1993 to 1995, Ms. Miller served in the White House as Special Assistant to the President with the Clinton Administration. Ms. Miller is a member of the board of directors of the National Campaign to Prevent Teenage Pregnancy, a not-for-profit program devoted to reducing teen pregnancy, and will begin serving as a member of the board of directors of TRW Automotive Holdings Corp., an NYSE-listed global supplier of automotive components, in May 2005. From 2000 to 2004, Ms. Miller also served as member of the board of directors of Exide Technologies, an NYSE-listed battery manufacturing company. Ms. Miller earned a B.A. from the University of Michigan and a J.D. from the University of Virginia.
      James A. Mitchell has served as a director of our company since 1999. From 1993 to 1999, when he retired, Mr. Mitchell served as Executive Vice President of Marketing and Products of American Express Company, a diversified global financial services company. From 1984 to 1993, he served as Chairman, President and CEO of IDS Life, a life insurance company and a wholly owned subsidiary of American Express. From 1982 to 1984, he served as President of the reinsurance division at CIGNA Corp., an insurance company. Mr. Mitchell is Executive Fellow — Leadership at the Center for Ethical Business Cultures, a non-profit organization assisting business leaders in creating ethical and profitable cultures, and serves as a member of the board of directors of Great Plains Energy Incorporated, an NYSE-listed diversified public utility holding company. He earned a B.A. from Princeton University.
      David W. Smith has served as a director of our company since 1998. From 2000 to 2003, when he retired, Mr. Smith was the Chief Executive Officer of NCS Pearson, Inc. Mr. Smith is a member of the boards of directors of Plato Learning, Inc. and Scientific Learning Corporation, both of which are Nasdaq-listed companies. Mr. Smith earned a B.A. and an M.A. from Southern Illinois University, as well as an M.B.A. from the University of Iowa.

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      Jeffrey W. Taylor has served as a director of our company since 2002. Since 2003, Mr. Taylor has been the President of Pearson, Inc., the U.S. holding company of Pearson plc. From 2000 to 2001, Mr. Taylor served as Vice President of Government Relations for Pearson, Inc. From 1994 to 2000, he served as Vice President and Chief Financial Officer of National Computer Systems, an education testing and software company. Mr. Taylor earned a B.A. in Accounting from Indiana State University.
      Darrell R. Tukua has served as a director of our company since 2004. From 1988 to 2003, when he retired, Mr. Tukua was a partner with KPMG LLP, a public accounting firm he joined in 1976. Mr. Tukua is a member of the audit and budget committee of The MMIC Group, an insurance company, where he is also a board observer. In addition, in 2004 Mr. Tukua was elected an advisory board member of Gate City Bank, a retail and commercial bank, and in 2005 he became a member of the board of directors and audit and compensation committees of Gate City Bank. Mr. Tukua earned a B.S. in Accounting from the University of South Dakota.
      Jon Q. Reynolds, Jr. has served as a director of our company since 2005. Since 1999, Mr. Reynolds has been a general partner at Technology Crossover Ventures, a venture capital firm he joined in 1997. Mr. Reynolds earned an A.B. degree in geography from Dartmouth College and an M.B.A. from Columbia Business School.
      Our board currently has three board observers: Tom Lister, an affiliate of our shareholders, Forstmann Little & Co. Equity Partnership-VI, L.P., Forstmann Little & Co. Equity Partnership-VII, L.P. and Forstmann Little & Co. Subordinated Debt and Equity Buyout Partnership-VIII, L.P., which we refer to as the Forstmann Little entities in this prospectus; Frederick M. Wynn, Jr., an affiliate of our shareholders, Putnam OTC and Emerging Growth Fund and TH Lee, Putnam Investment Trust-TH Lee, Putnam Emerging Opportunities Portfolio, which we refer to as the Putnam entities in this prospectus; and Jeffrey Horing, an affiliate of Insight-Salmon River LLC. None of Messrs. Lister, Wynn or Horing will have a contractual right to serve as a board observer upon the completion of this offering. Pursuant to a written action by our board of directors, Mr. Horing’s board observation right will terminate automatically upon the completion of this offering. Pursuant to the Class F preferred stock purchase agreement, Mr. Wynn’s board observation right will also terminate automatically upon the completion of this offering. We expect that Mr. Lister’s board observation right will also terminate upon the completion of this offering. See “—Board Observation Rights; Inspection Rights” for a discussion of this agreement.
Board of Directors
      Our board of directors currently consists of ten members, with each director serving a one-year term. At each annual meeting, our shareholders elect our full board of directors. Directors may be removed at any time with or without cause by the affirmative vote of the holders of a majority of the voting power then entitled to vote.
Board Representation Agreement
      We entered into a third amended and restated co-sale and board representation agreement on January 22, 2003, with certain of our shareholders, which we refer to as the board representation agreement in this prospectus. Under the board representation agreement and giving effect to any rights that have been transferred under the agreement, each of the following persons, or groups of persons, currently has the right to designate one person for election to our board:
        (1) Insight-Salmon River LLC, which has designated Mr. Lewis;
 
        (2) Cherry Tree Ventures IV, which has designated Mr. Christianson;
 
        (3) Forstmann Little & Co. Equity Partnership-VI, L.P., which has designated Mr. Holmes;
 
        (4) Stephen Shank (so long as he is our Chief Executive Officer or the beneficial owner of not less than 5% of our outstanding capital stock), who has designated himself;

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        (5) The holders of 66 2 / 3 % of our outstanding shares of Class G preferred stock, who at the date of this prospectus have not designated a director; and
 
        (6) The directors designated under (1) to (5) above, by majority vote; these directors have designated Mr. Taylor.
      We and the shareholder parties have agreed to take all steps necessary to cause the nomination and election to our board of each person designated in accordance with the board representation agreement. The right to designate a director may be transferred by a shareholder party to a transferee so long as the shareholder party transfers at least 50% of the capital stock held by such shareholder as of January 22, 2003, to the transferee and the transferee assumes the shareholder party’s obligations under the agreement in writing.
      Under the board representation agreement, Joshua Lewis, Elizabeth Rausch, Michael Offerman, Paul Schroeder, David Smith, Russell Gullotti, Stephen J. Weiss, Piper Jaffray as custodian for Joseph Gaylord IRA and Stephen J. Weiss IRA, and The S. Joshua and Teresa D. Lewis Issue Trust also agreed to vote their shares of Class G preferred stock in the manner directed by Stephen Shank, our chairman and chief executive officer.
      After the Offering. Except for the director designation right of Forstmann Little & Co. Equity Partnership-IV L.P., all director designation rights specified above will terminate upon the completion of this offering. The director designation right of Forstmann Little & Co. Equity Partnership-IV L.P. will terminate when the Forstmann Little entities collectively own less than 5% of our outstanding capital stock. The voting agreement contained in the board representation agreement specified above will also terminate upon the completion of this offering.
Board Observation Rights; Inspection Rights
      Class G Preferred Stock Purchase Agreement. We entered into a Class G preferred stock purchase agreement on January 15, 2003. Pursuant to the agreement, Maveron Equity Partners 2000, L.P., Maveron Equity Partners 2000-B, L.P., and MEP 2000 Associates LLC, which we refer to as the Maveron entities in this prospectus, are entitled to designate one representative to observe board and board committee meetings. Under the agreement, the Maveron entities also have the right to consult with and advise our management on significant business issues. The Maveron entities have not appointed an observer to our board.
      After the Offering. Pursuant to the terms of the Class G preferred stock purchase agreement, the board observation and consultation rights of the Maveron entities under the agreement terminate upon the completion of this offering.
      Class F Preferred Stock Purchase Agreement. We entered into a Class F preferred stock purchase agreement on January 31, 2002, as amended by an exchange agreement on January 22, 2003. Pursuant to the agreement, so long as an investor party holds more than 337,230 shares of Class G preferred stock, or shares of common stock acquired upon conversion of the Class G convertible preferred stock, such investor will have the right to designate one representative to observe board and board committee meetings. Currently, the Putnam entities, as a group, and the Forstmann Little entities, as a group, are each entitled to designate one representative to observe board and board committee meetings. The Putnam entities do not have a board observation right if any of the Putnam entities has a board representation right pursuant to a separate agreement. The Forstmann Little entities do not have a board observation right if any of the Forstmann Little entities has a board representation right pursuant to a separate agreement. The Putnam entities currently have a board observation right, and have appointed Frederick M. Wynn, Jr. as their designated board observer. Currently, the board observation right of the Forstmann Little entities does not apply because Forstmann Little & Co. Equity Partnership — VI, L.P. has a board representation right under the board representation agreement. Under the agreement, the Putnam entities and the Forstmann Little entities also have the right to consult and advise management on our significant business issues.
      After the Offering. Pursuant to the terms of the Class F preferred stock purchase agreement, the board observation and consultation rights of the Putnam entities under the agreement will terminate upon

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the completion of this offering. Currently, the board observation right of the Forstmann Little entities do not apply because Forstmann Little & Co. Equity Partnership — VI, L.P. has a board representation right under the board representation agreement. If, however, the Forstmann Little entities collectively own less than 5% of our outstanding capital stock, then the board representation right under the board representation agreement will terminate and the board observation right under the Class F preferred stock purchase agreement will be operative. See “— Board Representation Agreement” for a more detailed discussion of the board representation agreement.
      Class E Preferred Stock Purchase Agreement. We entered into a Class E preferred stock purchase agreement on April 20, 2000. Pursuant to the agreement, so long as Forstmann Little & Co. Equity Partnership-VI, L.P. holds any shares of Class E preferred stock, or shares of common stock acquired upon conversion of the Class E preferred stock, it will be entitled to designate one representative to observe our board and board committee meetings and to advise our management on significant business issues. The observation right will not apply if Forstmann Little & Co. Equity Partnership-VI, L.P. already has a board representation right pursuant to a separate agreement. Currently, the board observation right of Forstmann Little & Co. Equity Partnership-VI, L.P. does not apply because it has a board representation right under the board representation agreement.
      After the Offering. Currently, the board observation right of Forstmann Little & Co. Equity Partnership-VI, L.P. does not apply because it has a board representation right under the board representation agreement. If, however, the Forstmann Little entities collectively own less than 5% of our outstanding capital stock, then the board representation right under the board representation agreement will terminate and the board observation right under the Class E preferred stock purchase agreement will be operative. See “— Board Representation Agreement” for a more detailed discussion of the board representation agreement.
      Investor Rights Agreement. We entered into an investor rights agreement on April 20, 2000, as amended and restated on each of February 21, 2002 and January 22, 2003, with Forstmann Little & Co. Equity Partnership-VI, L.P., Maveron Equity Partners 2000, LP, TH Lee, Putnam Investment Trust, and TCV V, L.P. as investor parties to the agreement. Pursuant to the agreement, so long as an investor party holds 337,230 or more shares of Class G preferred stock, or shares of common stock acquired upon conversion of the Class G preferred stock (or in the case of Forstmann Little & Co. Equity Partnership-VI, L.P., so long as it owns 5% or more of our outstanding capital stock), it will have the right to visit and inspect any of our properties. Each of the investor parties named above currently has the right to visit and inspect any of our properties. The inspection right extends to our books and records and allows the eligible shareholders to discuss our affairs, finances, and accounts with our officers, lawyers, and accountants.
      After the Offering. The investor parties to the investor rights agreement will still have inspection rights after the completion of this offering.
Committees of Our Board of Directors
      Our board of directors directs the management of our business and affairs, as provided by Minnesota law, and conducts its business through meetings of the board of directors and four standing committees: the audit committee; the compensation committee; the governance committee; and the executive committee. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues. The composition of the board committees will comply, when required, with the applicable rules of The Nasdaq National Market and applicable law. Our board of directors has adopted a written charter for each of the audit committee, the compensation committee, the governance committee and the executive committee. These charters will be available on our website following the completion of the offering.
      Audit Committee. Our audit committee consists of Messrs. Tukua (Chair), Christianson, Holmes and Taylor. Our audit committee is directly responsible for, among other things, the appointment, compensation, retention and oversight of our independent registered public accounting firm. The oversight includes reviewing the plans and results of the audit engagement with the firm, approving any additional professional services provided by the firm and reviewing the independence of the firm. The committee also

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reviews the adequacy and effectiveness of the accounting and financial reporting controls with the firm and relevant financial management, and discusses any significant matters regarding internal control over financial reporting that come to its attention during the completion of the audit. We believe that each member of our audit committee (except for Mr. Christianson) is “independent,” as defined under and required by the rules of The Nasdaq National Market and the federal securities law.
      Compensation Committee. Our compensation committee consists of Messrs. Mitchell (Chair), Lewis, Smith and Holmes. Our compensation committee is responsible for, among other things, recommending the compensation level of our Chief Executive Officer to the executive committee, determining the compensation levels and compensation types (including base salary, stock options, perquisites and severance) of the other members of our senior executive team and administering our stock option plans and other compensation programs. The compensation committee also recommends compensation levels for board members and approves new hire offer packages for our senior executive management. We believe that each member of our compensation committee is “independent,” as defined under and required by the rules of The Nasdaq National Market.
      Governance Committee. Our governance committee consists of Messrs. Smith (Chair), Shank, Reynolds and Miller. Our governance committee is responsible for, among other things, assisting the board of directors in selecting new directors and committee members, evaluating the overall effectiveness of the board of directors, and reviewing developments in corporate governance compliance. We believe that each member of our governance committee (except for Mr. Shank) is “independent,” as defined under and required by the rules of The Nasdaq National Market. Concurrently with the completion of this offering, we anticipate that Mr. Shank will resign as a member of the governance committee.
      Executive Committee. Our executive committee consists of Messrs. Smith (Lead Director and Chair), Christianson, Holmes, Lewis, Mitchell, Taylor, Tukua and Reynolds and Ms. Miller. Our executive committee is responsible for, among other things, evaluating and determining the compensation of our Chief Executive Officer, setting the agenda for meetings of our board of directors, establishing procedures for our shareholders to communicate with our board of directors and reviewing and approving our management succession plan. We believe that each member of our executive committee is “independent,” as defined under and required by the rules of The Nasdaq National Market.
Compensation of Directors
      During 2004, the directors who were our employees or who had represented an entity that had a financial interest in us did not receive any compensation. The directors who were not our employees and who did not represent an entity that had a financial interest in us (except for Mr. Darrell R. Tukua) received an option to purchase 2,500 shares of our common stock under the Capella Education Company 1999 Stock Option Plan. Mr. Tukua received an option to purchase 10,000 shares of our common stock upon joining our board in 2004. Mr. David W. Smith received an additional option to purchase 500 shares of our common stock in 2004 for serving as our lead director. All directors who were not our employees and who did not represent an entity that had a financial interest in us were reimbursed for all reasonable expenses incurred to attend board and board committee meetings.
      After consummation of this offering, we intend to pay our non-employee directors an annual cash retainer of $30,000 as fees related to their board and board committee services. Committee Chairs will be paid an additional annual cash retainer of $5,000. New non-employee directors will receive an option to purchase 10,000 shares of our common stock. Each non-employee director also will receive an annual stock option grant valued at $30,000. We will reimburse all directors for reasonable expenses incurred to attend our board or board committee meetings.
Compensation Committee Interlocks and Insider Participation
      During 2004, Messrs. Holmes, Lewis, Mitchell and Smith served as the members of our compensation committee. No executive officer serves, or in the past has served, as a member of the board of directors or compensation committee of any entity that has any of its executive officers serving as a member of our board of directors or compensation committee.

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Executive Compensation
Summary Compensation Table
      The table below sets forth summary information concerning the compensation awarded during fiscal 2004 to our Chief Executive Officer and our four most highly compensated executive officers, other than our Chief Executive Officer. The individuals listed below are referred to in this prospectus as our “named executive officers.”
                                           
                Long Term    
        Compensation Awards    
    Annual Compensation        
        Securities Underlying   All Other
Name and Principal Position   Year   Salary   Bonus   Options (#)   Compensation (a)
                     
Stephen G. Shank
    2004     $ 375,740     $ 173,435       25,616     $ 6,150  
  Chairman and Chief Executive Officer                                        
Michael J. Offerman (b)
    2004     $ 250,470     $ 77,143       15,211     $ 6,150  
  Senior Vice President                                        
Paul A. Schroeder
    2004     $ 250,464     $ 77,022       15,211     $ 6,150  
  Senior Vice President, Business Management                                        
Heidi K. Thom
    2004     $ 235,756     $ 72,192       25,000     $ 6,150  
  Senior Vice President of Marketing                                        
Scott M. Henkel
    2004     $ 177,885     $ 49,715       35,000     $ 5,227  
  Vice President and Chief Information Officer                                        
 
(a) Represents the value of shares of our common stock contributed to the accounts of the named executives in the Employee Stock Ownership Plan.
 
(b) Mr. Offerman also serves as President and Chief Executive Officer of Capella University.
Option Grants in Fiscal 2004
      The following table presents information concerning stock options granted during fiscal 2004 to our named executive officers.
                                                 
                Potential Realizable
            Option Term   Value at Assumed
                Annual Rates of Stock
        Percent of Total       Price Appreciation for
    Number of Shares   Options Granted   Exercise or       Option Term (a)
    Underlying   to Employees   Base Price   Expiration    
Name   Options Granted   in 2004   Per Share   Date   5% ($)   10% ($)
                         
Stephen G. Shank
    19,973 (b)     5%     $ 17.72       07/27/2014                  
      5,643 (c)     1%     $ 19.49       07/27/2009                  
Michael J. Offerman
    15,211 (d)     4%     $ 17.72       07/27/2014                  
Paul A. Schroeder
    15,211 (e)     4%     $ 17.72       07/27/2014                  
Heidi K. Thom
    25,000 (f)     6%     $ 17.72       07/27/2014                  
Scott M. Henkel
    35,000 (g)     8%     $ 15.13       05/11/2014                  
 
(a) In accordance with the rules of the SEC, the amounts shown on this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually and do not reflect our estimates or projections of the future price of our common stock. These amounts represent assumed rates of appreciation in the value of our common stock from the initial public offering price, assuming an initial public offering price of $           per share. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses

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associated with the exercise. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock, the option holder’s continued employment through the option period, and the date on which the options are exercised.
 
(b) The options were granted under our 1999 Stock Option Plan on July 28, 2004, and vest as to 25% of the shares on each of the first four anniversaries of the date of grant.
 
(c) The options were granted under our 1999 Stock Option Plan on July 28, 2004, and vest as to 100% of the shares on July 28, 2008.
 
(d) The options were granted under our 1999 Stock Option Plan on July 28, 2004, and vest as to 25% of the shares on each of the first four anniversaries of the date of grant.
 
(e) The options were granted under our 1999 Stock Option Plan on July 28, 2004, and vest as to 25% of the shares on each of the first four anniversaries of the date of grant.
 
(f) The options were granted under our 1999 Stock Option Plan on July 28, 2004, and vest as to 25% of the shares on each of the first four anniversaries of the date of grant.
 
(g) The options were granted under our 1999 Stock Option Plan on May 12, 2004, and vest as to 25% of the shares on each of the first four anniversaries of January 20, 2004.

Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
      The following table presents information concerning the stock options exercised during the last fiscal year by each of our named executive officers and the fiscal year-end value of unexercised options held by each of our named executive officers as of December 31, 2004.
                                                 
            Number of Shares    
            Underlying Unexercised   Value of
            Options at   In-the-Money Options
            December 31, 2004   at December 31, 2004 (a)
    Shares Acquired   Value        
Name   on Exercise   Realized   Exercisable   Unexercisable   Exercisable   Unexercisable
                         
Stephen G. Shank
                98,544       79,471                  
Michael J. Offerman
                61,296       49,101                  
Paul A. Schroeder
                80,162       55,700                  
Heidi K. Thom
                12,500       62,500                  
Scott M. Henkel
                      35,000                  
 
(a)  There was no public trading market for the common stock as of December 31, 2004. Accordingly, these values have been calculated in accordance with the rules of the Securities and Exchange Commission, on the basis of the initial public offering price per share of $          , less the applicable exercise price.
Employment Agreements
Michael J. Offerman, Ed.D.
      On April 17, 2001, we entered into a letter agreement with Michael Offerman, pursuant to which Dr. Offerman agreed to serve as our Senior Vice President and President and Chief Executive Officer of Capella University. This agreement was amended on November 10, 2003, at which time Dr. Offerman agreed to assume certain additional responsibilities related to these positions. Pursuant to the terms of the amended agreement, Dr. Offerman received, among other things, (1) an annual base salary of $240,000, (2) an annual incentive compensation award targeted at 40% of base salary, and (3) options to purchase 75,000 shares of our common stock at an exercise price of $14.25 per share, 56,250 shares of which have vested and 18,750 shares of which will vest on June 11, 2005, subject to acceleration in certain situations. Dr. Offerman is subject to a confidentiality and non-compete agreement. In the event that Dr. Offerman’s employment terminates involuntarily for any reason other than for cause, he will be entitled to certain severance benefits, including (1) 12 months severance pay if termination occurs in the first 12 months, (2) six months severance pay if termination occurs after the first year of employment and (3) outplacement assistance. If Dr. Offerman is unable to find employment due to the restrictions of the

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confidentiality and non-compete agreement, Dr. Offerman will be entitled to a monthly severance benefit equal to the lesser of 12 months or the time which it takes to secure suitable employment, provided that in no event will such severance entitlement be less than six months.
Scott M. Henkel
      On January 6, 2004, we entered into a letter agreement with Scott Henkel, pursuant to which Mr. Henkel agreed to serve as our Vice President and Chief Information Officer. Pursuant to the terms of the letter agreement, Mr. Henkel received, among other things, (1) an initial annual base salary of $185,000, (2) an annual incentive compensation award targeted at 35% of base salary, and (3) options to purchase 35,000 shares of our common stock at an exercise price of $15.13 per share, 8,750 shares of which have vested and 8,750 shares of which will vest on each of January 20, 2006, 2007 and 2008, subject to acceleration in certain situations. In the event that Mr. Henkel’s employment terminates, he may be eligible under the executive severance plan for severance benefits. Mr. Henkel is subject to a confidentiality, non-competition and inventions agreement.
Paul A. Schroeder
      On March 9, 2001, we entered into a letter agreement with Paul Schroeder, pursuant to which Mr. Schroeder agreed to serve as our Senior Vice President and Chief Financial Officer (Mr. Schroeder currently serves as our Senior Vice President, Business Management). Pursuant to the terms of the letter agreement, Mr. Schroeder received, among other things, (1) an initial annual base salary of $205,000, (2) a hiring bonus of $25,000, (3) an annual incentive compensation award targeted at 40% of base salary, and (4) options to purchase 100,000 shares of our common stock at an exercise price of $14.25 per share, 75,000 shares of which have vested and 25,000 shares of which will vest on April 9, 2005, subject to acceleration in certain situations. In the event that Mr. Schroeder’s employment terminates involuntarily for any reason other than for cause, he will receive a severance benefit consisting of six months base salary. Mr. Schroeder is subject to a confidentiality, non-competition and inventions agreement.
Heidi K. Thom
      On June 4, 2003, we entered into a letter agreement with Heidi Thom, pursuant to which Ms. Thom agreed to serve as our Vice President, Marketing (Ms. Thom currently serves as our Senior Vice President of Marketing). Pursuant to the terms of the letter agreement, Ms. Thom received, among other things, (1) an initial annual base salary of $210,000, (2) a hiring bonus of $35,000, (3) an annual incentive compensation award targeted at 40% of base salary, and (4) options to purchase 50,000 shares of our common stock at the exercise price of $11.92, 12,500 shares of which have vested and 12,500 shares of which will vest on each of June 30, 2005, 2006 and 2007, subject to acceleration in certain situations. In the event that Ms. Thom’s employment terminates, she may be eligible under the executive severance plan for severance benefits. Ms. Thom is subject to a confidentiality, non-competition and inventions agreement.
Employment-Related Arrangements
      Executive Severance Plan. In March 2003, we established the Capella Education Company Executive Severance Plan, referred to as the Executive Severance Plan, to provide severance pay and other benefits to eligible employees. To be eligible, the employees must (1) be designated in writing by our Chief Executive Officer, (2) have completed 90 days of service with us from the most recent date of hire, (3) have their employment terminated under certain circumstances and (4) execute a release.
      Participants who experience a qualifying severance event will be eligible to receive severance benefits, based on employee classification, including severance pay ranging from four to twelve months, outplacement assistance up to six to twelve months, and continuation coverage under certain employee benefit plans (subject to adjustment, alternative or previous severance benefits, and limitations on total severance awards). In lieu of the benefits provided under the Executive Severance Plan, we have provided specific severance benefits to certain of our executives under such executives’ employment agreements. The

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Executive Severance Plan provides that any employment agreement that specifically provides for the payment of severance benefits will remain in full force and effect.
      Our board of directors, Chief Executive Officer, or any other individual or committee to whom such authority has been delegated may amend or terminate the plan. We intend to amend the Executive Severance Plan, effective upon the completion of this offering. The amended plan, as currently contemplated, cannot be amended to reduce benefits or alter the plan’s terms, except as may be required by law, for a period of 24 months following a change in control, as defined in the plan. In addition, the amended plan, as currently contemplated, will provide that any amendment to the plan, or termination of the plan, adopted within six months prior to a change in control will become null and void upon the change in control and the plan will revert to its provisions in effect prior to the change in control. The amended plan, as currently contemplated, will terminate immediately upon our filing for relief in bankruptcy or on such date as an order for relief in bankruptcy is entered against us.
      Capella Education Company Annual Incentive Plan for Management Employees — 2005. We plan to adopt the Capella Education Company Annual Incentive Plan for Management Employees — 2005, referred to as the Bonus Plan. The Bonus Plan sets forth the terms for cash incentive payments to our management-level employees based on our financial performance in 2005. The compensation committee of our board of directors will administer the Bonus Plan and will have the power to determine which employees are eligible to participate and the incentive potential for each participant; however, the committee may delegate this authority to an executive officer with respect to incentive awards granted to employees who are not executive officers and the executive committee of our board of directors will administer our Chief Executive Officer’s incentive award. Under the Bonus Plan, each participant has a target incentive payment equal to a specified percentage of his or her base compensation. The compensation committee will set objectives, based on our financial plan, for (1) full-year revenue and profit and (2) revenue and profit in the second half of 2005, which includes our third and fourth quarters. Payment of 70% of the target incentive will be based on actual full-year revenue and profit as compared to the objective, with the possibility of earning up to 140% of the target incentive if our performance exceeds the objective and a prorated partial payment if the objective is partially achieved. Payment of 30% of the target incentive will be based on actual revenues and profit for the third and fourth quarters of 2005 as compared to the objective. As a result, the participant could earn a maximum incentive payment equal to 170% of his or her target incentive.
      In order to be eligible to receive a payment under the Bonus Plan, a participant generally must be employed on the payment date, which will be within two and a half months following our year-end, unless the participant is entitled to receive a payment under the Bonus Plan pursuant to the terms of our Executive Severance Plan. A participant who terminates employment due to disability or retirement will be entitled to receive a prorated incentive payment based on actual performance. Employees who are hired or promoted to a management-level position prior to October 1, 2005 will be entitled to a prorated incentive payment based on actual performance, and the compensation committee has discretion to award an incentive payment to an employee who is promoted after October 1, 2005. The compensation committee has the authority to amend or terminate the Bonus Plan, including modification of the financial targets to reflect any material changes in our business. No amendment or termination will affect the right of a participant to receive any incentive payment earned under the Bonus Plan for the portion of the year up to the amendment or termination.
Existing Stock, Stock Option Plans and Other Incentive Plans
      Stock Option Plans. We have adopted two stock plans: (1) the Capella Education Company 1999 Stock Option Plan; and (2) the Learning Ventures International, Inc. 1993 Stock Option Plan. We intend to adopt an additional stock plan, the Capella Education Company 2005 Stock Incentive Plan, prior to the completion of this offering.
      Capella Education Company 2005 Stock Incentive Plan. We plan to adopt the Capella Education Company 2005 Stock Incentive Plan, referred to as the 2005 Plan. The 2005 Plan will authorize the

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granting of stock-based awards to our officers, directors, employees, consultants and advisors. We intend to reserve an aggregate of                      shares of common stock for issuance under the 2005 Plan. The compensation committee of our board of directors will administer the 2005 Plan and will have the power to determine when and to whom awards will be granted, determine the amount of each award and establish the terms and conditions of each award, including exercise price, vesting schedule and settlement terms. The types of awards that may be granted under the 2005 Plan include incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance units and other stock-based awards. Our board of directors may terminate, suspend or modify the 2005 Plan at any time; provided, however, that certain amendments require approval of our shareholders. Further, no action may be taken which adversely affects any rights under outstanding awards without the holder’s consent. No shares or rights to acquire shares have been issued under the 2005 Plan; however, in connection with this offering, we intend to issue options to purchase                      shares of our common stock at an exercise price per share equal to the price of shares sold in this offering.
      Capella Education Company 1999 Stock Option Plan. The Capella Education Company 1999 Stock Option Plan, referred to as the 1999 Plan, was adopted by the board of directors in December 1999 and approved by our shareholders in December 2000. We have reserved an aggregate of 1,650,000 shares of our common stock (subject to adjustments in the case of a merger, consolidation, reorganization, recapitalization, stock dividend, or other change in corporate structure) for issuance under the 1999 Plan to our employees, officers, directors, advisors, consultants, and any individual that we desire to induce to become an employee. The compensation committee of our board of directors administers the 1999 Plan and has the power to fix any terms and conditions for the grant or exercise of any award under the 1999 Plan. The types of awards that may be granted under the 1999 Plan include incentive stock options and non-qualified stock options. Each option will be governed by the terms of the option agreement and will expire 10 years after the date of the grant, or an earlier date in the case of a 10% shareholder or a terminated employee. Our board of directors may amend, suspend, or discontinue the 1999 Plan at any time; provided, however, that certain amendments require approval of our shareholders. Further, no action may be taken which adversely affects any rights under outstanding awards without the option holder’s consent.
      As of March 31, 2005, we had granted options to purchase a total of 1,438,609 shares of our common stock (excluding cancelled or expired options) under the 1999 Plan at exercise prices of $11.12 to $20.00 per share, of which options to purchase 1,412,516 shares are outstanding. Our board of directors intends to approve a resolution prior to the completion of this offering to cease making additional grants under the 1999 Plan.
      Learning Ventures International, Inc. 1993 Stock Option Plan. The Learning Ventures International, Inc. 1993 Stock Option Plan, referred to as the 1993 Plan, was approved by our board of directors in February 1993 and by our shareholders on February 24, 1993. We have reserved an aggregate of 1,825,000 shares of common stock (subject to adjustments in the case of a merger, consolidation, reorganization, recapitalization, stock dividend, or other change in corporate structure) to any employees, officers, directors, consultants, and independent contractors. The compensation committee of our board of directors administers the 1993 Plan and has the power to determine the terms of each option grant, including the exercise price, the recipient and the number of shares subject to each option. The compensation committee also may amend or modify the terms of an option and accelerate the time at which an option may be exercised. The types of awards that may be granted under the 1993 Plan include incentive stock options and non-qualified stock options. Each option will be governed by the terms of the option agreement, but an incentive stock option may not extend more than 10 years from the date of the grant and a non-qualified stock option may not extend more than 15 years from the date of the grant. Our board of directors may amend or discontinue the 1993 Plan at any time; provided, however, that certain amendments require approval of our shareholders. Further, no action may be taken which adversely affects any rights under outstanding awards without the option holder’s consent.
      As of March 31, 2005, we had granted options to purchase a total of 1,628,877 shares of our common stock (excluding cancelled or expired options) under the 1993 Plan at exercise prices of $1.00 to

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$15.65 per share, of which options to purchase 203,995 shares are outstanding. The 1993 Plan was terminated on February 23, 2003 and we cannot grant additional options under the 1993 Plan.
      Employee Stock Ownership Plan. In 1999, we adopted the Capella Education Company Employee Stock Ownership Plan, referred to as the ESOP, a qualified employee stock purchase plan under Section 401(a) of the Internal Revenue Code. The ESOP provides that we may contribute, at our discretion, common stock or cash for the benefit of our eligible employees. To be eligible to share in the ESOP contribution for a plan year, the employee must satisfy certain service requirements and be employed by us on December 31 of the plan year. During 2003, we contributed 47,782 shares to the plan, related to 2002 plan compensation. During 2004, we contributed 47,093 shares to the plan, related to 2003 plan compensation. Shares related to 2004 plan compensation will be contributed in 2005, within the time period required by the Internal Revenue Code. Participants become vested in their ESOP contributions after completing three years of service with us, except in the event of retirement, disability or death, in which case the participants’ shares become fully vested and nonforfeitable. Distributions from the ESOP are in shares of our common stock. Prior to the completion of this offering, we have certain obligations to repurchase, at fair market value determined by the annual independent valuation, shares from participants/beneficiaries. This obligation will no longer apply once our shares are publicly traded. We recognized $467,621, $541,439 and $1,130,799, of compensation expense, in the years ended 2002, 2003 and 2004, respectively, related to the ESOP contributions. The individual ESOP trustees are also our employees. The trustees hold the ESOP contributions and make distributions to participants or beneficiaries. The ESOP trust is invested primarily in shares of our common stock.
      401(k) Plan. We maintain the Capella Education Company Retirement Savings Plan, which was originally adopted in July 1994, and which is referred to as the 401(k) plan, a cash or deferred arrangement qualified under Section 401(a) of the Internal Revenue Code. The related 401(k) plan trust is not subject to tax under current tax law. Under the provisions of the 401(k) plan that are effective beginning in April 2005, a participant may defer a portion of his or her pre-tax salary, commissions and bonuses through payroll deductions, up to the statutorily prescribed annual limits. If a new employee does not make an election to defer, 4% of his or her compensation automatically will be deferred unless the employee elects otherwise. Participants age 50 and older by the end of the year may make additional “catch-up” contributions to the 401(k) plan, in accordance with statutory requirements. The percentage elected to be deferred by highly compensated participants (as defined by statute) may be required to be lower to satisfy Internal Revenue Code requirements. In April 2005, we implemented a matching contribution program based on employee contributions on a per pay period basis. The match equals 50% of the employee’s contributions on the first 4% of compensation. In addition, at the discretion of our board of directors, we may make discretionary profit-sharing contributions into our 401(k) plan for eligible employees. Any employer contributions will be subject to a five-year vesting schedule, except that any participant with three or more years of service on April 1, 2005, who was fully vested under the plan’s prior vesting schedule will also be fully vested in future contributions. No employer contributions were made prior to April 2005. The 401(k) plan’s trustee holds and invests the plan contributions at the participant’s direction. Although we have not expressed any intent to do so, we do have the right to discontinue, terminate or amend the 401(k) plan at any time, subject to the provisions of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
      Since January 1, 2002, we have engaged in the following transactions with certain of our executive officers, directors, holders of more than 5% of our voting securities and their affiliates and immediate family members:
      Issuance of Class F Preferred Stock and Class G Preferred Stock. In February 2002, we entered into an agreement with investors pursuant to which we issued and sold 1,425,457 shares of our Class F preferred stock at a price per share of $11.71. In January 2003, the parties agreed to amend this agreement pursuant to which all of the shares of Class F preferred stock were exchanged for shares of Class G preferred stock. In addition, concurrently with the exchange, we issued and sold 2,184,540 shares of our Class G preferred stock at a price per share of $11.12.
      The following table summarizes sales by us of our Class F preferred stock and Class G preferred stock over the past three years to certain of our directors, executive officers, holders of more than 5% of our voting securities, and their affiliates and immediate family members in private placement financing transactions:
                 
    Shares of   Shares of
    Class F   Class G
Investors (a)   Preferred Stock (b)   Preferred Stock (c)
         
Directors and executive officers:
               
Stephen G. Shank (d)
    17,079.00        
Michael J. Offerman (e)
    4,270.00        
Paul A. Schroeder (e)
    6,405.00        
Elizabeth M. Rausch (e)
    4,270.00        
David W. Smith (c)
          8,992.00  
S. Joshua Lewis (e)
    42,699.00        
Stephen J. Weiss and Piper Jaffray as custodian
for Stephen J. Weiss IRA (f)
    12,810.00        
Russell A. Gullotti (g)
    10,000.00        
Piper Jaffray as custodian
for Joseph C. Gaylord IRA (h)
    4,270.00        
5% shareholders:
               
Forstmann entities (i)
    640,478.00        
Maveron entities (c)(j)
          674,460.20  
Putnam entities (e)
    640,478.00        
 
(a) See “Principal and Selling Shareholders” for additional information about ownership of shares held by these shareholders.
 
(b) The Class F preferred stock was issued and sold on January 31, 2002, for an aggregate purchase price of $16,692,101.47. In January 2003, all shares of Class F preferred stock were exchanged for shares of Class G preferred stock pursuant to an exchange agreement. Each share of Class F preferred stock was exchanged for 1.053 shares of our Class G preferred stock. As a result, there are no shares of Class F preferred stock currently outstanding.
 
(c) The Class G preferred stock was issued and sold on January 15, 2003, for an aggregate purchase price of $7,599,988.42. Each share of Class G preferred stock is convertible into one share of common stock, subject to adjustments. We expect that each share of Class G preferred stock will convert into a share of common stock upon the closing of this offering.
 
(d) Mr. Shank originally acquired 17,985.17 shares of Class G preferred stock pursuant to the exchange agreement discussed in footnote (b) above and subsequently transferred 14,967 shares of Class G

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preferred stock to the TCV entities and 3,018 shares of Class G preferred stock to the Maveron entities.
 
(e) Messrs. Offerman, Schroeder and Lewis, Ms. Rausch, The S. Joshua and Teresa D. Lewis Issue Trust, and the Putnam entities obtained their Class G preferred stock pursuant to the exchange agreement discussed in footnote (b) above.
 
(f) Stephen J. Weiss was an executive officer of the company from 1998 to 2003.
 
(g) Russell A. Gullotti was a director of the company from 2001 to 2004.
 
(h) Joseph C. Gaylord was an executive officer of the company from 2003 to 2004.
 
(i) The Forstmann entities consist of Forstmann Little & Co. Equity Partnership-VII, L.P. and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P. Gordon A. Holmes, a director of the company, is a general partner of FLC XXXII Partnership, L.P. and FLC XXXIII Partnership, L.P., the general partners of the Forstmann entities. The Forstmann entities originally obtained 674,460.20 shares of Class G preferred stock pursuant to the exchange agreement described in footnote (b) above. The Forstmann entities subsequently transferred 369,023 shares of Class G preferred stock to the TCV entities and 74,400 shares of Class G preferred stock to the Maveron entities.
 
(j) Jody G. Miller, a director of the company, is a venture partner at Maveron LLC, an affiliate of the Maveron entities. The Maveron entities acquired 674,460.20 shares of Class G preferred stock pursuant to the Class G preferred issuance discussed in footnote (b) above and acquired an additional 77,418 shares of Class G preferred stock pursuant to a transfer of 3,018 shares of Class G preferred stock to the Maveron entities by Mr. Shank and a transfer of 74,400 shares of Class G preferred stock to the Maveron entities by the Forstmann entities.

      Board Representation Agreement. In January 2003, we entered into a board representation agreement in connection with the offering of our Class G preferred stock. The parties to this agreement include: Stephen Shank, Judy Shank, Susan Shank, Mary Retzlaff, Elizabeth Rausch, Michael Offerman, Paul Schroeder, David Smith, Joshua Lewis, The Joshua S. and Teresa D. Lewis Issue Trust, Cherry Tree Ventures IV, the Forstmann Little entities, the Maveron entities, the Putnam entities, TCV V, L.P. and TCV Member Fund L.P., referred to as the TCV entities, as transferees of the Forstmann Little & Co. Equity Partnership-VII, L.P. (Forstmann VII), Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P. (Forstmann VIII) and Insight-Salmon River LLC, as transferee of NCS Pearson, Inc. (NCS Pearson). The board representation agreement is described in further detail under the heading “— Certain Rights Related to Our Board of Directors — Board Representation Agreement.”
      Investor Rights Agreement. In January 2003, we entered into a second amended and restated investor rights agreement in connection with the offering of our Class G preferred stock. The parties to this agreement include: Stephen Shank, Joshua Lewis, Elizabeth Rausch, Michael Offerman, Paul Schroeder, David Smith, the Forstmann Little entities, the Maveron entities, the Putnam entities, and the TCV entities, as transferees of Forstmann VII and VIII and Stephen Shank. The investor rights agreement is described in further detail under the heading “— Board Observation Rights; Inspection Rights” and “Description of Capital Stock — Registration and Other Rights.”
      Registration Rights Agreement. In January 2003, we entered into amendment no. 3 to a registration rights agreement in connection with the offering of our Class G preferred stock. Pursuant to the terms of this agreement, we agreed to register all of the NCS Pearson’s shares of our Class D preferred stock. In November 2004, NCS Pearson transferred all of its shares of Class D preferred stock to Insight-Salmon River LLC pursuant to a share purchase agreement. Joshua Lewis, a director of our company, is an affiliate of Insight-Salmon River LLC. Pursuant to the share purchase agreement between NCS Pearson and Insight-Salmon River LLC, the registration rights under the registration rights agreement may be assigned to Insight-Salmon River LLC at such time as Insight-Salmon River LLC requests the transfer of the rights and the obligations under the registration rights agreement. The registration rights agreement is

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described in further detail under the heading “Description of Capital Stock — Registration and Other Rights.”
      Founder Stock Sales. On March 9, 2005, Mr. Stephen G. Shank, our founder, Chairman and Chief Executive Officer, sold 14,967 shares of Class G preferred stock to the TCV entities and 3,018 shares of Class G preferred stock to the Maveron entities. In addition, since January 1, 2002, Mr. Shank has also transferred 322,397 shares of common stock and preferred stock to (i) his wife, Judy Shank, (ii) his daughter, Mary Shank Retzlaff, both in her individual capacity and as trustee of the Stephen Shank 2004 Grantor Retained Annuity Trust, and (iii) his daughter, Susan Shank, both in her individual capacity and as trustee of the Emma Jia Chen Retzlaff Trust and Judith Shank 2004 Grantor Retained Annuity Trust.

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PRINCIPAL AND SELLING SHAREHOLDERS
      The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2005, and as adjusted to reflect the sale of common stock being offered in this offering, for:
  •  each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding common stock,
 
  •  each of our directors,
 
  •  each of our named executive officers,
 
  •  all of our directors and executive officers as a group, and
 
  •  each selling shareholder.
      Footnote (a) below provides a brief explanation of what is meant by the term “beneficial ownership.” For the purpose of calculating the percentage of shares beneficially owned by any shareholder, the number of shares of common stock deemed outstanding “prior to offering” assumes the conversion of all outstanding shares of our Class A preferred stock, our Class B preferred stock, our Class D preferred stock, our Class E preferred stock, and our Class G preferred stock into an aggregate of 9,180,644 shares of our common stock and includes shares of common stock subject to options and warrants held by beneficial owners that are exercisable within 60 days of March 31, 2005.
      The number of shares of common stock outstanding “After Offering” includes an additional                      shares of common stock offered by us in the offering.
      The address for each named executive officer is 225 South 6th Street, 9th Floor, Minneapolis, Minnesota 55402.

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            Shares        
    Shares Beneficially       Beneficially       Shares Beneficially
    Owned Prior to the       Owned After       Owned After
    Offering (a)   Shares   Offering   Over-Allotment   Over-Allotment (b)
        Being       Shares Being    
Name of Beneficial Owner   Shares   Percent   Offered   Shares   Percent   Offered (b)   Shares   Percent
                                 
Principal Shareholders
                                                               
Forstmann Little & Co. entities (c)
    1,107,197       9.8%                                                  
Cherry Tree Ventures IV, L.P. (d)
    1,748,000       15.5%                                                  
Entities affiliated with Technology Crossover Ventures (e)
    1,859,999       16.5%                                                  
Putnam entities (f)
    674,459       6.0%                                                  
Maveron entities (g)
    1,049,457       9.3%                                                  
Salmon River and Insight entities (h)
    1,178,378       10.4%                                                  
Directors and Named Executive Officers
                                                               
Stephen G. Shank (i)
    2,392,223       21.0%                                                  
Michael J. Offerman (j)
    65,792       *                                                  
Paul A. Schroeder (k)
    111,906       1.0%                                                  
Heidi K. Thom (l)
    12,500       *                                                  
Scott M. Henkel (m)
    8,750       *                                                  
Tony J. Christianson (d)
    1,748,000       15.5%                                                  
Gordon A. Holmes (n)
    231,036       2.0%                                                  
S. Joshua Lewis (o)
    1,216,849       10.8%                                                  
Jody G. Miller
                                                           
James A. Mitchell (p)
    54,775       *                                                  
David W. Smith (q)
    14,492       *                                                  
Jeffrey W. Taylor
                                                           
Darrell R. Tukua (r)
    5,000       *                                                  
Jon Q. Reynolds, Jr. (e)
    1,859,999       16.5%                                                  
All directors and executive officers as a group (18 persons)
    7,758,261       66.7%                                                  
Selling Shareholders
                                                               
 
 * Less than 1%
 
(a) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities and includes shares of common stock issuable pursuant to the exercise of stock options that are immediately exercisable or exercisable within 60 days. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Percentage ownership calculations prior to the offering, after the offering, and after over-allotment are based on 11,281,446 shares,                      shares and                      shares, respectively, of common stock outstanding.
 
(b) Amounts presented assume that the over-allotment option is exercised in full.
 
(c) Consists of (1) 876,161 shares of common stock issuable upon conversion of preferred stock owned by Forstmann Little & Co. Equity Partnership-VI, L.P. (Equity-VI); (2) 144,397 shares of common stock issuable upon conversion of preferred stock owned by Forstmann Little & Co. Equity Partnership-VII, L.P. (Equity-VII); and (3) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P. (MBO-VIII). Each of Equity-VI, Equity-VII and MBO-VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Equity-VI and Equity-VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of MBO-VIII is FLC XXXIII Partnership, L.P. (FLC XXXIII). The general partners of FLC XXXII and FLC XXXIII are Theodore J. Forstmann, Thomas H. Lister, Winston W. Hutchins, Jamie C. Nicholls, Gordon A. Holmes, a director of the company, and T. Geoffrey

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McKay. Accordingly, each of the individuals named above, other than Messrs. Holmes and McKay for the reasons described below, may be deemed the beneficial owners of shares owned by Equity-VI, Equity-VII and MBO-VIII. Messrs. Holmes and McKay do not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Equity-VI and, accordingly, neither Mr. Holmes nor Mr. McKay is deemed to be a beneficial owner of these shares. In addition, Mr. McKay does not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Equity-VII or MBO-VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares. The address of Equity-VI, Equity-VII and MBO-VIII is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New York 10153.
 
(d) Consists of 50,000 shares of common stock and 1,698,000 shares of common stock issuable upon conversion of preferred stock owned by Cherry Tree Ventures IV, L.P. The general partner of Cherry Tree Ventures IV, L.P. is CTV Partners IV. CTV Partners IV is controlled by Tony J. Christianson and Gordon Stofer, its managing partners, who share voting and investment power with respect to the shares beneficially owned by Cherry Tree Ventures IV, L.P. Messrs. Christianson and Stofer disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address of Cherry Tree Ventures IV, L.P. is 301 Carlson Parkway, Suite 103, Minnetonka, MN 55305.
 
(e) Consists of (1) 6,289 shares of common stock and 1,819,229 shares of common stock issuable upon conversion of preferred stock owned by TCV V, L.P.; and (2) 119 shares of common stock and 34,362 shares of common stock issuable upon conversion of preferred stock owned by TCV V Member Fund, L.P. The general partner of TCV V, L.P. and TCV V Member Fund, L.P. is Technology Crossover Management V, L.L.C. (TCM V). The investment activities of TCM V are managed by Jon Q. Reynolds, Jr., a director of the company, Jay C. Hoag, Richard H. Kimball, John L. Drew, Henry J. Feinberg and William J.G. Griffith IV (collectively, the TCM Members) who share voting and investment power with respect to the shares beneficially owned by TCV V, L.P. and TCV V Member Fund, L.P. TCM V and the TCM Members disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address of TCV V, L.P. and TCV V Member Fund, L.P. is 528 Ramona Street, Palo Alto, CA 94301.
 
(f) Consists of (1) 224,820 shares of common stock issuable upon conversion of preferred stock owned by Putnam OTC & Emerging Growth Fund; and (2) 449,639 shares of common stock issuable upon conversion of preferred stock owned by TH Lee, Putnam Emerging Opportunities Portfolio. The investment adviser of Putnam OTC & Emerging Growth Fund is Putnam Investment Management, LLC, which is a wholly owned subsidiary of Putnam, LLC, which is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., a company traded on the New York Stock Exchange. The investment adviser of TH Lee, Putnam Emerging Opportunities Portfolio is TH Lee, Putnam Capital Management, LLC. TH Lee, Putnam Capital Management, LLC is indirectly majority owned by Putnam, LLC, which is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., a company traded on the New York Stock Exchange. Marsh & McLennan Companies, Inc. and Putnam, LLC disclaim beneficial ownership of all such shares, and further state that neither of them have any power to vote or dispose of, or direct the voting or disposition of, any of such shares. The address for Putnam OTC & Emerging Growth Fund and TH Lee, Putnam Emerging Opportunities Portfolio is One Post Office Square, Boston, MA 02109.
 
(g) Consists of (1) 1,089 shares of common stock and 887,867 shares of common stock issuable upon conversion of preferred stock owned by Maveron Equity Partners 2000, L.P.; (2) 42 shares of common stock and 34,357 shares of common stock issuable upon conversion of preferred stock owned by Maveron Equity Partners 2000-B, L.P.; and (3) 161 shares of common stock and 125,941 shares of common stock issuable upon conversion of preferred stock owned by MEP 2000 Associates LLC. The general partner of Maveron Equity Partners 2000, L.P. and Maveron Equity Partners 2000-B, L.P. is Maveron General Partner 2000 LLC. Maveron General Partner 2000 LLC is controlled by

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Dan Levitan, Howard Schultz, and Debra Somberg, its managing partners, who share voting and investment power with respect to the shares beneficially owned by Maveron Equity Partners 2000, L.P. and Maveron Equity Partners 2000-B, L.P. The managing member of MEP 2000 Associates LLC is Maveron LLC. Maveron LLC is controlled by Dan Levitan, Howard Schultz, and Debra Somberg, its managing members, who share voting and investment power with respect to the shares beneficially owned by MEP 2000 Associates LLC. Mr. Levitan, Mr. Schultz, and Ms. Somberg disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address for Maveron LLC is 505 Fifth Avenue South, Suite 600, Seattle, WA 98112.
 
(h) Consists of (1) 750,000 shares of common stock issuable upon conversion of preferred stock owned by Insight-Salmon River LLC; (2) 10,000 shares of common stock owned by Insight Venture Partners IV, L.P.; (3) 272,222 shares of common stock issuable upon conversion of preferred stock owned by Salmon River Capital I LLC; and (4) 146,156 shares of common stock issuable upon conversion of preferred stock owned by Salmon River CIP LLC. The managing member of Insight-Salmon River LLC is Salmon River Capital LLC, and the non-managing members of Insight-Salmon River LLC are Insight Venture Partners IV, L.P., Insight Venture Partners (Fund B) IV, L.P., Insight Venture Partners (Co-Investor) IV, L.P., and Insight Venture Partners (Cayman) IV, L.P. (the Insight Partnerships). Salmon River Capital LLC, as managing member of Insight-Salmon River LLC, generally controls the voting power over the shares held by Insight-Salmon River LLC, but the Insight Partnerships have shared voting power with Salmon River Capital LLC over such shares with respect to certain matters. In addition, Salmon River Capital LLC and the Insight Partnerships have shared investment power over the shares held by Insight-Salmon River LLC. The managing member of Salmon River Capital LLC is S. Joshua Lewis, a director of the company. The general partner of the Insight Partnerships is Insight Venture Associates, LLC. The managing member of Insight Venture Associates, LLC is Insight Holdings Group, LLC. Insight Holdings Group, LLC is managed by its board of managers. Accordingly, Mr. Lewis, Insight Venture Associates, LLC, and Insight Holdings Group, LLC have shared voting and investment powers with respect to the shares beneficially owned by Insight-Salmon River LLC. The foregoing is not an admission by such persons that such persons are the beneficial owners of the shares held by Insight-Salmon River LLC, and each disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. Insight Venture Associates, LLC and Insight Holdings Group, LLC have voting and investment power with respect to the shares beneficially owned by Insight Venture Partners IV, L.P. The foregoing is not an admission by Insight Venture Associates, LLC or Insight Holdings Group, LLC that they are the beneficial owners of the shares held by Insight Venture Partners IV, and each of disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. The managing member of Salmon River Capital I LLC and Salmon River CIP LLC is Salmon River Capital LLC. The managing member of Salmon River Capital LLC is Mr. Lewis. Mr. Lewis has voting and investment powers with respect to the shares beneficially owned by Salmon River Capital I LLC and Salmon River CIP LLC. The foregoing is not an admission by Mr. Lewis that he is the beneficial owner of the shares held by Salmon River Capital I LLC and Salmon River CIP LLC, and Mr. Lewis disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The address for the Salmon River and Insight entities is 680 Fifth Avenue, 8th Floor, New York, NY 10019.
 
(i) Consists of (1) 597,094 shares of common stock owned by Stephen G. Shank, 1,380,188 shares of common stock issuable upon conversion of preferred stock owned by Mr. Shank, and 98,544 shares of common stock underlying options that are exercisable within 60 days granted to Mr. Shank; (2) 115,000 shares of common stock controlled by Mary Shank Retzlaff, Mr. Shank’s daughter, as trustee of the Stephen Shank 2004 Grantor Retained Annuity Trust; (3) 85,397 shares of common stock issuable upon conversion of preferred stock owned by Judy Shank, Mr. Shank’s wife; (4) 115,000 shares of common stock controlled by Susan Shank, Mr. Shank’s daughter, as trustee of the Judith Shank 2004 Grantor Retained Annuity Trust; and (5) 1,000 shares of common stock controlled by Susan Shank, as trustee of the Emma Jia Chen Retzlaff 2004 Irrevocable Trust.

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(j) Includes 4,496 shares of common stock issuable upon conversion of preferred stock and 61,296 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Offerman.
 
(k) Includes 6,744 shares of common stock issuable upon conversion of preferred stock and 105,162 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Schroeder.
 
(l) Consists of 12,500 shares of common stock underlying options, that are exercisable within 60 days, granted to Ms. Thom.
 
(m) Consists of 8,750 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Henkel.
 
(n) Consists of (1) 144,397 shares of common stock issuable upon conversion of preferred stock owned by Forstmann Little & Co. Equity Partnership–VII, L.P. (Equity-VII); and (2) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership–VIII, L.P. (MBO-VIII). Each of Equity-VI, Equity-VII and MBO-VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Equity-VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of MBO-VIII is FLC XXXIII Partnership, L.P. (FLC XXXIII). The general partners of FLC XXXII and FLC XXXIII are Theodore J. Forstmann, Thomas H. Lister, Winston W. Hutchins, Jamie C. Nicholls, Gordon A. Holmes, and T. Geoffrey McKay. Accordingly, each of the individuals named above, other than Mr. McKay for the reasons described below, may be deemed the beneficial owners of shares owned by Equity-VII and MBO-VIII, and have shared voting and investment powers with respect to the shares owned by Equity-VII and MBO-VIII. Mr. McKay does not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Equity-VII or MBO-VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares.
 
(o) Consists of (1) 750,000 shares of common stock issuable upon conversion of preferred stock owned by Insight-Salmon River LLC; (2) 272,222 shares of common stock issuable upon conversion of preferred stock owned by Salmon River Capital I LLC; (3) 146,156 shares of common stock issuable upon conversion of preferred stock owned by Salmon River CIP LLC; (4) 35,971 shares of common stock issuable upon conversion of preferred stock owned by S. Joshua Lewis; and (5) 12,500 shares of common stock underlying options that are exercisable within 60 days granted to S. Joshua Lewis. The managing member of Insight-Salmon River LLC is Salmon River Capital LLC, and the non-managing members of Insight-Salmon River LLC are Insight Venture Partners IV, L.P., Insight Ventures Partners (Fund B) IV, L.P., Insight Venture Partners (Co-Investor) IV, L.P., and Insight Venture Partners (Cayman) IV, L.P. (The Insight Partnerships). Salmon River Capital LLC, as managing member of Insight-Salmon River LLC, generally controls the voting power over the shares held by Insight-Salmon River LLC, but The Insight Partnerships have shared voting power with Salmon River Capital LLC over such shares with respect to certain matters. In addition, Salmon River Capital LLC and The Insight Partnerships have shared investment power over the shares held by Insight-Salmon River LLC. The managing member of Salmon River Capital LLC is S. Joshua Lewis. The general partner of The Insight Partnerships is Insight Venture Associates, LLC. The managing member of Insight Venture Associates, LLC is Insight Holdings Group, LLC. The managing member of Insight Holdings Group, LLC is managed by its board of managers. Accordingly, Mr. Lewis, Insight Venture Associates, LLC, and Insight Holdings Group, LLC have shared voting and investment powers with respect to the shares beneficially owned by Insight-Salmon River LLC. The foregoing is not an admission by such persons that such persons are the beneficial owners of the shares held by Insight-Salmon River LLC, and each disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. The managing member of Salmon River Capital I LLC and Salmon River CIP LLC is Salmon River Capital LLC. The managing member of Salmon River Capital LLC is Mr. Lewis. Mr. Lewis has voting and investment powers with respect to the shares beneficially owned by Salmon River Capital I LLC and Salmon River CIP

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LLC. The foregoing is not an admission by Mr. Lewis that he is the beneficial owner of the shares held by Salmon River Capital I LLC and Salmon River CIP LLC, and Mr. Lewis disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.
 
(p) Consists of (1) 41,275 shares of common stock controlled by James A. Mitchell, as trustee of the James A. Mitchell Trust; and (2) 13,500 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Mitchell.
 
(q) Consists of 8,992 shares of common stock issuable upon conversion of preferred stock and 5,500 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Smith.
 
(r) Consists of 5,000 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Tukua.

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DESCRIPTION OF CAPITAL STOCK
      We are authorized to issue                      shares of common stock, $0.10 par value per share, and                      shares of preferred stock .
      Upon completion of this offering, our authorized capital stock will consist of                      shares of common stock, $0.10 par value per share, and                      shares of undesignated preferred stock. No shares of preferred stock will be issued or outstanding. Each outstanding share of our common stock will be validly issued, fully paid and non-assessable. In addition,                      shares of our common stock will be reserved for issuance upon exercise of outstanding options and warrants.
      The following description of the material provisions of our capital stock and our amended and restated articles of incorporation, amended and restated bylaws and other agreements with and among our shareholders is only a summary, does not purport to be complete and is qualified by applicable law and the full provisions of our amended and restated articles of incorporation, amended and restated bylaws and other agreements. You should refer to our amended and restated articles of incorporation, amended and restated bylaws and related agreements as in effect upon the closing of this offering, which are included as exhibits to the registration statement of which this prospectus is a part.
Common Stock
      As of March 31, 2005, and including the conversion of all outstanding convertible and redeemable convertible preferred stock into common stock, there were 11,281,446 shares of common stock outstanding, held of record by approximately 113 persons.
      Voting Rights. Holders of common stock are entitled to one vote per share on any matter to be voted upon by shareholders. All shares of common stock rank equally as to voting and all other matters. The shares of common stock have no preemptive or conversion rights, no redemption or sinking fund provisions, are not liable for further call or assessment and are not entitled to cumulative voting rights.
      Dividend Rights. Subject to the prior rights of holders of preferred stock, for as long as such stock is outstanding, the holders of common stock are entitled to receive ratably any dividends when and as declared from time to time by the board of directors out of funds legally available for dividends. We have never declared or paid cash dividends. We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate paying cash dividends on the common stock in the foreseeable future.
      Liquidation Rights. Upon a liquidation or dissolution of our company, whether voluntary or involuntary, creditors and holders of our preferred stock with preferential liquidation rights will be paid before any distribution to holders of our common stock. After such distribution, holders of common stock are entitled to receive a pro rata distribution per share of any excess amount.
Preferred Stock
      Upon completion of the offering, all of our issued and outstanding Class A preferred stock, Class B preferred stock, Class D preferred stock, Class E preferred stock and Class G preferred stock will convert into an aggregate of 9,180,644 shares of common stock. All shares of our Class F preferred stock converted to shares of Class G preferred stock when we issued our Class G preferred stock. In addition, in May 2001, we redeemed all 54,929 outstanding shares of our Class C preferred stock for an aggregate consideration of $164,787 as provided in our articles of incorporation. The conversion of our issued and outstanding preferred stock into common stock will occur at the applicable conversion price of each class of preferred stock as provided in our articles of incorporation. Upon conversion, all accrued and unpaid dividends on the preferred stock will be eliminated.

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Undesignated Capital Stock
      Under our amended and restated articles of incorporation, which will be effective upon the completion of this offering, the board of directors has authority to issue the undesignated stock without shareholder approval. The board of directors may also determine or alter for each class of stock the voting powers, designations, preferences, and special rights, qualifications, limitations or restrictions as permitted by law. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. Issuing preferred stock provides flexibility in connection with possible acquisitions and other corporate purposes, but could also, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock.
Warrants
      As of March 31, 2005, we had outstanding warrants to purchase an aggregate of 266,326 shares of our common stock at exercise prices of $5.40 or $17.10 per share, subject to adjustments to the exercise price and number of shares of common stock underlying these warrants upon the occurrence of specified events, including any recapitalization, consolidation or merger, or sale of all assets.
  •  In connection with the sale of our Class D preferred stock, on June 16, 1998, we issued to Legg Mason Wood Walker, Incorporated a warrant to purchase 131,238 shares of common stock at an exercise price of $5.40 per share. The warrant was amended on April 20, 2000, February 21, 2002 and January 22, 2003. The warrant expires on June 16, 2005, and was exercisable immediately upon issuance.
 
  •  In connection with the sale of our Class E preferred stock, on May 11, 2000, we issued to Legg Mason Wood Walker, Incorporated a warrant to purchase 135,088 shares of common stock at an exercise price of $17.10 per share. The warrant was amended on February 21, 2002 and January 22, 2003. The warrant expires on the earlier of May 11, 2005 or the second anniversary of our initial public offering. The warrant was exercisable immediately upon issuance.
Registration and Other Rights
      As of March 31, 2005, the holders of 4,879,429 shares of common stock issuable upon conversion of our preferred stock and 266,326 shares issuable upon exercise of our outstanding warrants will be entitled to certain rights with respect to the registration of these shares under the Securities Act of 1933.
      We entered into a registration rights agreement with NCS Pearson, an investor of our Class D preferred stock, on June 16, 1998, as amended on each of April 20, 2000, February 21, 2002 and January 22, 2003. Pursuant to the registration rights agreement, NCS Pearson has the right, at any time six months after the completion of our initial public offering, to demand that we file a registration statement covering the offer and sale of its registrable shares, subject to a reduction, so long as NCS Pearson holds securities aggregating not less than $5,000,000, or if the market value is less than $5,000,000, NCS Pearson holds all of the shares issued upon conversion of its Class D preferred stock. We are obligated to effect no more than two such demand registrations. If we are eligible to file a registration statement on Form S-3, NCS Pearson has the right to demand that we file a registration on Form S-3 covering the offer and sale of its registrable securities, so long as 100,000 shares will be registered. We are not obligated to register the registrable shares on Form S-3 pursuant to this demand right on more than two occasions during any calendar year. In addition, NCS Pearson also has certain piggyback rights, which may require us to include its registrable shares in our registration statement, subject to a reduction. The registration rights under the agreement terminate on the first to occur of June 30, 2005 or when the registrable shares may immediately be sold under Rule 144 of the Securities Act of 1933. We have agreed to pay the registration fees and the legal and accounting fees associated with the registration. In November 2004, NCS Pearson transferred all of its shares of Class D preferred stock to Insight-Salmon River LLC. Joshua Lewis, a director of our company, is an affiliate of Insight-Salmon River LLC. Pursuant to the

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share purchase agreement between NCS Pearson and Insight-Salmon River LLC, the registration rights described above may be assigned to Insight-Salmon River LLC at such time as Insight requests, by notice to NCS Pearson, the transfer of the rights and the obligations under the registration rights agreement.
      We entered into a second amended and restated investor rights agreement with certain holders of our Class E preferred stock and Class G preferred stock on January 22, 2003. Pursuant to the second amended and restated investor rights agreement, certain holders of our Class E preferred stock and Class G preferred stock and any holder or holders of shares of our common stock equal to at least 10% of the shares of Class E preferred stock originally issued have the right, at any time six months after the completion of our initial public offering, to demand that we file a registration statement covering the offer and sale of the registrable shares, subject to a reduction, so long as the registrable shares have an aggregate offering price of at least $1,000,000. We are obligated to effect up to two such registrations for certain shareholders. If we are eligible to file a registration on Form S-3, certain shareholders may request such registration, so long as the aggregate offering price of the shares will be at least $1,000,000. We are not obligated to register the eligible shares on Form S-3 on more than three occasions. In addition, certain shareholders have piggyback rights, which may require us to include their shares in our registration statement, subject to a reduction. The registration rights under the agreement terminate when the registrable shares may immediately be sold under Rule 144 of the Securities Act of 1933. We have agreed to pay all expenses of the registration, excluding fees and expenses of holder’s counsel and any underwriting or selling commissions.
      We granted registration rights to Legg Mason Wood Walker, Incorporated under (1) the warrant for the purchase of 131,238 shares of our common stock issued to Legg Mason Wood Walker on June 16, 1998, as amended on each of May 11, 2000, February 21, 2002 and January 22, 2003, and (2) the warrant for the purchase of 135,088 shares of our common stock issued to Legg Mason Wood Walker on May 11, 2000, as amended on each of February 21, 2002 and January 22, 2003. Under each warrant, Legg Mason Wood Walker has certain piggyback rights, which may require us to include shares of our common stock issuable upon conversion of the warrants in our registration statement, subject to a reduction. The piggyback rights under the first warrant terminate on June 30, 2007, and the piggyback rights under second warrant terminate on the earlier of (1) June 30, 2007, (2) any public sale of such warrant securities pursuant to a registration statement, Section 4(1) or Rule 144 of the Securities Act of 1933, (3) the time at which the warrant securities are eligible for sale under Rule 144 without volume limits, or (4) a violation of the transfer provisions. We have agreed to pay all expenses of the registration, excluding fees and expenses of holder’s counsel and any underwriting or selling commissions.
Provisions of Minnesota Law and Our Articles and By-laws with Anti-Takeover Implications
      In connection with this offering, we intend to amend and restate our certificate of incorporation and bylaws. Certain provisions of Minnesota law, our amended and restated articles of incorporation and our amended and restated by-laws may be deemed to have an anti-takeover effect or may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in the shareholder’s best interests, including those attempts that might result in a premium being paid over the market price for the shares held by a shareholder.
Minnesota Law
      Control Share Acquisitions. We have opted not to be governed by the provisions of Section 302A.671 of the Minnesota Statutes. Section 302A.671 applies, with certain exceptions, to any acquisition of a corporation’s voting stock from a person other than the corporation, and other than in connection with certain mergers and exchanges to which the corporation is a party, that results in the acquiring person owning 20% or more of the corporation’s voting stock then outstanding. Similar triggering events occur at the one-third and majority ownership levels. Section 302A.671 requires approval of the granting of voting rights for the shares received pursuant to any such acquisitions by a majority vote of a corporation’s shareholders. In general, shares acquired without this approval are denied voting rights and can be called for redemption at their then fair market value by the corporation within 30 days after the acquiring person

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has failed to deliver a timely information statement to the corporation or the date the shareholders voted not to grant voting rights to the acquiring person’s shares.
      Business Combinations. We are subject to the provisions of Section 302A.673 of the Minnesota Statutes. Section 302A.673 generally prohibits any business combination by a corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of the corporation’s voting shares within four years following such interested shareholder’s share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the corporation’s board of directors before the interested shareholder’s share acquisition date.
      Takeover Offer. We are subject to the provisions of Section 302A.675 of the Minnesota Statutes. Section 302A.675 generally prohibits an offeror from acquiring shares of a publicly held Minnesota corporation within two years following the offeror’s last purchase of the corporation’s shares pursuant to a takeover offer with respect to that class of shares, unless the corporation’s shareholders are able to sell their shares to the offeror upon substantially equivalent terms as those provided in the earlier takeover offer. This statute will not apply if the acquisition of shares is approved by a committee of all of the disinterested members of our board of directors before the purchase of any shares by the offeror pursuant to a takeover offer.
      Power to Acquire Shares. We are subject to the provisions of Section 302A.553, subdivision 3, of the Minnesota Statutes. Section 302A.553, subdivision 3, prohibits a corporation from purchasing any voting shares owned for less than two years from a holder of more than 5% of its outstanding voting stock for more than the market value of the shares. Exceptions to this provision are provided if the share purchase is approved by a majority of the corporation’s shareholders or if the corporation makes a repurchase offer of equal or greater value to all shareholders.
Articles of Incorporation and Bylaws
      Our amended and restated articles of incorporation, which will be effective upon the completion of this offering, will provide that the holders of our capital stock do not have cumulative voting rights. Our amended and restated articles of incorporation also will provide that any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. This limitation on the filling of vacancies could make it difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of us.
      Our amended and restated articles of incorporation also will provide that the board of directors has the power to issue any or all of the shares of undesignated capital stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking shareholder approval. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. Issuing preferred stock provides flexibility in connection with possible acquisitions and other corporate purposes, but could also, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock.
      Our amended and restated bylaws, which will be effective upon the completion of this offering, will provide that:
  •  any action required or permitted to be taken by the shareholders at an annual meeting or special meeting of shareholders may only be taken if it is properly brought before such meeting;
 
  •  special meetings of the shareholders may only be called by the chief executive officer, chief financial officer, the board of directors or holders of at least 10% of the voting power of all shares then entitled to vote, provided that any special meeting called by one or more shareholders to take action concerning a proposed business combination may be called only by holders of at least 25% of the voting power of all shares then entitled to vote; and

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  •  in order for any matter to be considered properly brought before a meeting, a shareholder must comply with requirements to provide advance notice to us.
      These provisions could delay until the next shareholders’ meeting shareholder actions that are favored by the holders of a significant amount of shares of our outstanding voting stock.
Limitations of Director Liability
      Our amended and restated articles of incorporation will limit personal liability for breach of the fiduciary duty of our directors to the fullest extent provided by Minnesota law. Such provisions eliminate the personal liability of directors for damages occasioned by breach of fiduciary duty, except for liability based on the director’s duty of loyalty to us or our shareholders, liability for acts or omissions not made in good faith, liability for acts or omissions involving intentional misconduct or knowing violation of law, liability based on payments of improper dividends, liability based on a transaction from which the director derives an improper personal benefit, liability based on violation of state securities laws, and liability for acts occurring prior to the date such provision was added. Any amendment to or repeal of such provisions will not adversely affect any right or protection of a director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
Indemnification of Directors, Officers and Employees
      Our amended and restated bylaws will provide that we will, under certain circumstances and subject to certain limitations, indemnify any of our director, officer or employee made or threatened to be made a party to a proceeding by reason of that director’s, officer’s or employee’s former or present official capacity with us against judgments, penalties, fines, settlements and reasonable expenses. Any such director, officer or employee is also entitled, subject to certain limitations, to payment or reimbursement of reasonable expenses in advance of the final disposition of the proceeding.
The Nasdaq National Market
      We intend to apply for quotation on The Nasdaq National Market under the symbol “CAPU.”
Transfer Agent and Registrar
      The transfer agent and registrar for our common stock is Wells Fargo Bank, National Association.

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SHARES ELIGIBLE FOR FUTURE SALE
      Prior to this offering, there was no market for our common stock. We can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of our common stock in the public market, or the perception that those sales may occur, could adversely affect prevailing market prices and impair our future ability to raise capital through the sale of our equity at a time and price we deem appropriate.
      Upon the completion of this offering, based upon the number of shares of our common stock outstanding as of                     , 2005, and assuming the conversion of all outstanding shares of our preferred stock into                      shares of our common stock upon the completion of this offering, we will have                      shares (or in the event the underwriter’s over-allotment option is exercised,                      shares) of our common stock outstanding. Of these shares,                      shares (or in the event the underwriter’s over-allotment option is exercised,                      shares) of our common stock sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock purchased by our “affiliates”, as that term is defined in Rule 144 under the Securities Act of 1933, which would be subject to the limitations and restrictions described below.
      The remaining                      shares of our common stock outstanding upon completion of this offering are deemed “restricted shares,” as that term is defined under Rule 144 of the Securities Act.
      Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144, 144(k) or 701 under the Securities Act, which rules are described below.
      The restricted shares and the shares held by our affiliates will be available for sale in the public market as follows:
  •                       shares will be eligible for immediate sale on the date of this prospectus because such shares may be sold pursuant to Rule 144(k);
 
  •                       shares will be eligible for sale at various times beginning 90 days after the date of this prospectus pursuant to Rules 144, 144(k) and 701; and
 
  •                       shares subject to the lock-up agreements will be eligible for sale at various times beginning 180 days after the date of this prospectus pursuant to Rules 144, 144(k) and 701.
Rule 144
      In general, under Rule 144 as currently in effect, a person, or persons whose shares must be aggregated, who has beneficially owned restricted shares of our common stock for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of the following:
  •  one percent of the number of shares of common stock then outstanding, which will equal approximately                      shares immediately after this offering, or
 
  •  the average weekly trading volume of our common stock on The Nasdaq National Market during the four calendar weeks preceding the date of filing of a notice on Form 144 with respect to the sale.
      Sales under Rule 144 are also generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 144(k)
      Under Rule 144(k), a person, or persons whose shares must be aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially

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owned the shares proposed to be sold for at least two years would be entitled to sell the shares under Rule 144(k) without complying with the manner of sale, public information, volume limitations or notice or public information requirements of Rule 144. Therefore, unless otherwise restricted, the shares eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering.
Rule 701
      Certain of our current and former directors, employees and consultants who acquired their shares in connection with awards pursuant to our 1993 and 1999 stock option plans, each of which is a written compensatory plan, are entitled to rely on the resale provisions of Rule 701 under the Securities Act of 1933. Under Rule 701, these shareholders, whether or not they are our affiliates, are permitted to sell the shares subject to Rule 701 without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus. In addition, non-affiliates may sell their Rule 701 shares without complying with the volume, notice or public information requirements of Rule 144 describe above.
Registration of Form S-8
      We intend to file registration statements on Form S-8 under the Securities Act of 1933 to register shares of common stock issuable under our 1993, 1999 and 2005 stock option plans, and shares of our common stock to be issued for contributions to our ESOP. These registration statements are expected to be filed shortly after the date of this prospectus and will be effective upon filing. As a result, after the effective date of these Form S-8 registration statements, shares issued pursuant to our 1993, 1999 and 2005 stock option plans, including upon the exercise of stock options, and shares issued for contributions to our ESOP will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates described above and the lock-up agreements described below.
      As of March 31, 2005:
  •  203,995 shares of common stock were reserved pursuant to our 1993 Plan for future issuance in connection with the exercise of outstanding options previously awarded under this plan, and options with respect to 200,495 of shares had vested; and
 
  •  1,412,516 shares of common stock were reserved pursuant to our 1999 Plan for future issuance in connection with the exercise of outstanding options previously awarded under this plan, and options with respect to 563,755 of shares had vested.
Lock-Up Agreements
      For a description of the lock-up agreements with the underwriters that restrict sales of shares by us, or directors and executive officers and certain of our other employees and shareholders, see the information under the heading “Underwriting.”
Registration Rights
      For a description of registration rights with respect to our common stock, see the information under the heading titled “Description of Capital Stock — Registration and Other Rights.”

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U.S. FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
      The following is a general discussion of the material U.S. federal income and estate tax consequences to non-U.S. Holders with respect to the acquisition, ownership and disposition of our common stock. In general, a “Non-U.S. Holder” is any holder of our common stock other than the following:
  •  a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the “substantial presence” test under section 7701(b)(3) of the Code;
 
  •  a corporation (or an entity treated as a corporation) created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia;
 
  •  an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
 
  •  a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or certain other trusts that have a valid election to be treated as a U.S. person in effect.
      This discussion is based on current provisions of the Internal Revenue Code, Treasury Regulations promulgated under the Internal Revenue Code, judicial opinions, published positions of the Internal Revenue Service, and all other applicable authorities, all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation or any aspects of state, local, or non-U.S. taxation, nor does it consider any specific facts or circumstances that may apply to particular Non-U.S. Holders that may be subject to special treatment under the U.S. federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions, brokers, dealers in securities, and U.S. expatriates. If a partnership is a beneficial owner of our common stock, the treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. This discussion assumes that the Non-U.S. Holder will hold our common stock as a capital asset, generally property held for investment.
      Prospective investors are urged to consult their tax advisors regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of acquiring, holding and disposing of shares of common stock.
Dividends
      In general, dividends paid to a Non-U.S. Holder will be subject to U.S. withholding tax at a rate equal to 30% of the gross amount of the dividend, or a lower rate prescribed by an applicable income tax treaty, unless the dividends are effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States. Under applicable Treasury Regulations, a Non-U.S. Holder will be required to satisfy certain certification requirements, generally on IRS Form W-8BEN, directly or through an intermediary, in order to claim a reduced rate of withholding under an applicable income tax treaty. If tax is withheld in an amount in excess of the amount applicable under an income tax treaty, a refund of the excess amount may generally be obtained by filing an appropriate claim for refund with the IRS.
      Dividends that are effectively connected with such a U.S. trade or business generally will not be subject to U.S. withholding tax if the Non-U.S. Holder files the required forms, including IRS Form W-8ECI, or any successor form, with the payor of the dividend, but instead generally will be subject to U.S. federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a resident of the United States. A corporate Non-U.S. Holder that receives effectively connected dividends may be subject to an additional branch profits tax at a rate of 30%, or a lower rate prescribed by an applicable income tax treaty, on the repatriation from the United States of its “effectively connected earnings and profits,” subject to adjustments.

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Gain on Sale or Other Disposition of Common Stock
      In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of the Non-U.S. Holder’s shares of common stock unless:
  •  the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, in which case the branch profits tax discussed above may also apply if the Non-U.S. Holder is a corporation;
 
  •  the Non-U.S. Holder is an individual who holds shares of common stock as capital assets and is present in the United States for 183 days or more in the taxable year of disposition and various other conditions are met.
Information Reporting and Backup Withholding
      Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the recipient. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced by an applicable income tax treaty. Under tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.
      Payments made to a Non-U.S. Holder that is not an exempt recipient generally will be subject to backup withholding, currently at a rate of 28%, unless a Non-U.S. Holder certifies as to its foreign status, which certification may be made on IRS Form W-8BEN.
      Proceeds from the disposition of common stock by a Non-U.S. Holder effected by or through a United States office of a broker will be subject to information reporting and backup withholding, currently at a rate of 28% of the gross proceeds, unless the Non-U.S. Holder certifies to the payor under penalties of perjury as to, among other things, its address and status as a Non-U.S. Holder or otherwise establishes an exemption. Generally, United States information reporting and backup withholding will not apply to a payment of disposition proceeds if the transaction is effected outside the United States by or through a non-U.S. office of a broker. However, if the broker is, for U.S. federal income tax purposes, a U.S. person, a controlled foreign corporation, a foreign person who derives 50% or more of its gross income for specified periods from the conduct of a U.S. trade or business, specified U.S. branches of foreign banks or insurance companies, or, a foreign partnership with various connections to the United States, information reporting but not backup withholding will apply unless:
  •  the broker has documentary evidence in its files that the holder is a Non-U.S. Holder and other conditions are met; or
 
  •  the holder otherwise establishes an exemption.
      Backup withholding is not an additional tax. Rather, the amount of tax withheld is applied to the U.S. federal income tax liability of persons subject to backup withholding. If backup withholding results in an overpayment of U.S. federal income taxes, a refund may be obtained, provided the required documents are filed with the IRS.
Estate Tax
      Our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as specifically defined for U.S. federal estate tax purposes) at the time of death will be includible in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

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UNDERWRITING
      Under the terms and subject to the conditions contained in an underwriting agreement dated                    , 2005, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston LLC is acting as the representative, the following respective numbers of shares of common stock:
           
    Number of
Underwriter   Shares
     
Credit Suisse First Boston LLC
       
Banc of America Securities LLC
       
Piper Jaffray & Co. 
       
       
 
Total
       
       
      The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
      We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to                     additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.
      The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $           per share. The underwriters and selling group members may allow a discount of $           per share on sales to other broker/ dealers. After the initial public offering, the representative may change the public offering price and concession and discount to broker/ dealers.
      The following table summarizes the compensation and estimated expenses we and the selling shareholders will pay:
                                 
    Per Share   Total
         
    Without   With   Without   With
    Over-allotment   Over-allotment   Over-allotment   Over-allotment
                 
Underwriting Discounts and Commissions paid by us
  $       $       $       $    
Expenses payable by us
  $       $       $       $    
Underwriting Discounts and Commissions paid by selling shareholders
  $       $       $       $    
Expenses payable by the selling shareholders
  $       $       $       $    
      The representative has informed us that it does not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.
      We have agreed that we will not offer, sell, contract 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 of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston LLC, for a period of 180 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the

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18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse First Boston LLC waives such extension in writing.
      Our officers and directors, the selling shareholders and certain of our other employees and shareholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions is to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston LLC, for a period of 180 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse First Boston LLC waives such extension in writing. However, the “lock-up” period will not be extended at any time at which our common stock are “actively traded securities,” as defined in Regulation M under the Securities and Exchange Act of 1934 and research reports under Rule 139 of the Securities Act may otherwise be issued with respect to the company.
      The underwriters have reserved for sale at the initial public offering price up to                      shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the 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.
      We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act of 1933, or contribute to payments that the underwriters may be required to make in that respect.
      We intend to apply to list the shares of common stock on The Nasdaq National Market.
      Certain of the underwriters and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for us and our affiliates in the ordinary course of business, for which they received, or will receive, customary fees and expenses.
      Prior to the offering, there has been no market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters and will not necessarily reflect the market price of the common stock following the offering. The principal factors that will be considered in determining the initial public offering price will include:
  •  the information presented in this prospectus and otherwise available to the underwriters;
 
  •  the history of and the prospectus for the industry in which we will compete;
 
  •  the ability of our management;
 
  •  the prospects for our future earning;
 
  •  the present state of our development and our current financial condition;

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  •  the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and
 
  •  the general condition of the securities markets at the time of the offering.
      We offer no assurances that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market for the common stock will develop and continue after the offering.
      In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934.
  •  Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
 
  •  Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.
 
  •  Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over- allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
 
  •  Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
      These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.
      A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representative may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet distributions on the same basis as other allocations.

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NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
      The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling shareholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
      By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling shareholders and the dealer from whom the purchase confirmation is received that:
  •  the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws,
 
  •  where required by law, that the purchaser is purchasing as principal and not as agent, and
 
  •  the purchaser has reviewed the text above under Resale Restrictions.
Rights of Action – Ontario Purchasers Only
      Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us and the selling shareholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling shareholders. In no case will the amount recoverable in any action exceed the price at which the common stock were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling shareholders will have no liability. In the case of an action for damages, we and the selling shareholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
      All of our directors and officers as well as the experts named herein and the selling shareholders 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 us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

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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 the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation.

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LEGAL MATTERS
      The validity of the shares of common stock offered by this prospectus and other legal matters will be passed upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.
EXPERTS
      The consolidated financial statements of Capella Education Company at December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
      We have filed with the Securities and Exchange Commission a registration statement on Form S-1, which includes amendments and exhibits, under the Securities Act and the rules and regulations under the Securities Act of 1933 for the registration of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information that is in the registration statement and its exhibits and schedules. Certain portions of the registration statement have been omitted as allowed by the rules and regulations of the Securities and Exchange Commission. Statements in this prospectus which summarize documents are not necessarily complete, and in each case you should refer to the copy of the document filed as an exhibit to the registration statement. You may read and copy the registration statement, including exhibits and schedules filed with it, and reports or other information we may file with the Securities and Exchange Commission at the public reference facilities of the Securities and Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. In addition, the registration statement and other public filings can be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov.
      Upon completion of this offering, we will become subject to information and periodic reporting requirements of the Exchange Act of 1934, and we will file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish our shareholders written annual reports containing financial statements audited by our independent auditors, and make available to our shareholders quarterly reports for the first three quarters of each year containing unaudited interim financial statements.

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CAPELLA EDUCATION COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page
     
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capella Education Company
      We have audited the accompanying consolidated balance sheets of Capella Education Company (the Company) as of December 31, 2003 and 2004, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 Capella Education Company at December 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
  /s/ Ernst & Young LLP
Minneapolis, Minnesota
February 4, 2005, except for the Stock-Based Compensation section of Note 2, as to which the date is April 14, 2005

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Capella Education Company
Consolidated Balance Sheets
                     
    As of
    December 31,
     
    2003   2004
         
    (In thousands, except
    per share amounts)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 1,340     $ 5,480  
 
Short-term investments
    39,850       44,500  
 
Accounts receivable, net of allowance of $713 in 2003 and $1,065 in 2004
    2,976       5,878  
 
Prepaid expenses and other current assets
    1,151       3,056  
 
Deferred income taxes
          1,398  
             
Total current assets
    45,317       60,312  
Restricted cash
    471       391  
Property and equipment, net
    9,614       12,126  
Deferred income taxes
          7,197  
             
Total assets
  $ 55,402     $ 80,026  
             
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
               
 
Accounts payable
  $ 2,522     $ 3,144  
 
Accrued liabilities
    10,672       12,253  
 
Income taxes payable
          140  
 
Deferred revenue
    4,027       6,526  
 
Current portion of capital lease obligations
    580       314  
             
Total current liabilities
    17,801       22,377  
Capital lease obligations
    371       8  
             
Total liabilities
    18,172       22,385  
Redeemable preferred stock:
               
 
Class E Redeemable Convertible Preferred Stock, $0.01 par value:
               
   
Authorized shares – 2,596
               
   
Issued and outstanding shares – 2,596
               
   
Redemption value: $37,000
    34,985       34,985  
 
Class G Redeemable Convertible Preferred Stock, $0.01 par value:
               
   
Authorized shares – 2,185
               
   
Issued and outstanding shares – 2,185
               
   
Redemption value: $24,292
    22,661       22,661  
             
Total redeemable preferred stock
    57,646       57,646  
Shareholders’ equity (deficit):
               
 
Class A Convertible Preferred Stock, $1.00 par value:
               
   
Authorized shares – 3,000
               
   
Issued and outstanding shares – 2,810
    2,810       2,810  
 
Class B Convertible Preferred Stock, $2.50 par value:
               
   
Authorized shares – 1,180
               
   
Issued and outstanding shares – 460
    1,150       1,150  
 
Class D Convertible Preferred Stock, $4.50 par value:
               
   
Authorized shares – 1,022
               
   
Issued and outstanding shares – 1,022
    4,600       4,600  
 
Common stock, $0.10 par value:
               
   
Authorized shares – 10,000
               
   
Issued and outstanding shares – 1,826 in 2003 and 2,074 in 2004
    183       208  
 
Additional paid-in capital
    3,569       5,166  
 
Deferred compensation
    (4 )      
 
Accumulated deficit
    (32,724 )     (13,939 )
             
Total shareholders’ equity (deficit)
    (20,416 )     (5 )
             
Total liabilities, redeemable preferred stock and shareholders’ equity (deficit)
  $ 55,402     $ 80,026  
             
The accompanying notes are an integral part of these consolidated financial statements.

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Capella Education Company
Consolidated Statements of Operations
                           
    Year Ended December 31,
     
    2002   2003   2004
             
    (In thousands,
    except per share amounts)
Revenues
  $ 49,556     $ 81,785     $ 117,689  
 
Costs and expenses
                       
Instructional costs and services
    27,247       42,402       57,512  
Selling and promotional
    15,559       21,161       33,989  
General and administrative
    12,744       14,152       16,323  
                   
 
Total costs and expenses
    55,550       77,715       107,824  
                   
Operating income (loss)
    (5,994 )     4,070       9,865  
Other income, net
    327       427       724  
                   
Income (loss) before income taxes
    (5,667 )     4,497       10,589  
Income tax expense (benefit)
          104       (8,196 )
                   
Net income (loss)
  $ (5,667 )   $ 4,393     $ 18,785  
                   
Net income (loss) per common share:
                       
 
Basic
  $ (3.70 )   $ 2.63     $ 9.34  
                   
 
Diluted
  $ (3.70 )   $ 0.39     $ 1.62  
                   
Weighted average number of common shares outstanding:
                       
 
Basic
    1,532       1,669       2,011  
                   
 
Diluted
    1,532       11,154       11,595  
                   
The accompanying notes are an integral part of these consolidated financial statements.

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Capella Education Company
Consolidated Statement of Shareholders’ Equity (Deficit)
                                                                                                 
    Class A   Class B   Class D                        
    Convertible   Convertible   Convertible                    
    Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Additional            
                    Paid-In   Deferred   Accumulated    
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Compensation   Deficit   Total
                                                 
    (In thousands)
Balance at December 31, 2001
    2,810     $ 2,810       460     $ 1,150       1,022     $ 4,600       1,502     $ 150     $ 1,821     $ (80 )   $ (31,450 )   $ (20,999 )
Exercise of stock options
                                        12       1       44                   45  
Issuance of common stock to the Employee Stock Ownership Plan
                                        35       4       334                   338  
Employee Stock Ownership Plan distribution
                                        (1 )           (6 )                 (6 )
Amortization of deferred compensation
                                                          39             39  
Net loss
                                                                (5,667 )     (5,667 )
                                                                         
Balance at December 31, 2002
    2,810       2,810       460       1,150       1,022       4,600       1,548       155       2,193       (41 )     (37,117 )     (26,250 )
Exercise of stock options
                                        176       17       789                   806  
Exercise of stock warrants
                                        56       6       120                   126  
Issuance of common stock to the Employee Stock Ownership Plan
                                        48       5       485                   490  
Amortization of deferred compensation
                                                          37             37  
Employee Stock Ownership Plan distribution
                                        (2 )           (18 )                 (18 )
Net income
                                                                4,393       4,393  
                                                                         
Balance at December 31, 2003
    2,810       2,810       460       1,150       1,022       4,600       1,826       183       3,569       (4 )     (32,724 )     (20,416 )
Exercise of stock options
                                        205       21       837                   858  
Income tax benefits associated with stock-based compensation
                                                    150                   150  
Issuance of common stock to the Employee Stock Ownership Plan
                                        47       4       637                   641  
Amortization of deferred compensation
                                                          4             4  
Employee Stock Ownership Plan distribution
                                        (4 )           (27 )                 (27 )
Net income
                                                                18,785       18,785  
                                                                         
Balance at December 31, 2004
    2,810     $ 2,810       460     $ 1,150       1,022     $ 4,600       2,074     $ 208     $ 5,166     $     $ (13,939 )   $ (5 )
                                                                         
The accompanying notes are an integral part of these consolidated financial statements.

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Capella Education Company
Consolidated Statements of Cash Flows
                             
    Year Ended December 31,
     
    2002   2003   2004
             
    (In thousands)
Operating activities
                       
Net income (loss)
  $ (5,667 )   $ 4,393     $ 18,785  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
 
Provision for bad debts
    3,001       616       1,376  
 
Depreciation and amortization
    3,108       4,177       5,454  
 
Asset impairment
    223       359       1,020  
 
Noncash equity-related expense
    506       578       1,135  
 
Deferred income taxes
                (8,445 )
 
Changes in operating assets and liabilities:
                       
   
Accounts receivable
    (2,067 )     (271 )     (4,278 )
   
Prepaid expenses and other assets
    359       (348 )     (1,905 )
   
Accounts payable
    (455 )     1,420       622  
   
Accrued liabilities
    (626 )     4,682       1,091  
   
Income taxes payable
                140  
   
Deferred revenue
    1,795       422       2,499  
                   
Net cash provided by operating activities
    177       16,028       17,494  
 
Investing activities
                       
Capital expenditures
    (3,859 )     (4,348 )     (8,986 )
Purchases of short-term investments
    (23,175 )     (53,000 )     (39,700 )
Sales of short-term investments
    11,225       30,600       35,050  
                   
Net cash used in investing activities
    (15,809 )     (26,748 )     (13,636 )
 
Financing activities
                       
Payments of capital lease obligations
    (136 )     (469 )     (629 )
Change in restricted cash
    (231 )     (241 )     80  
Proceeds from exercise of stock options
    45       806       858  
Proceeds from exercise of warrants
          126        
Employee Stock Ownership Plan distributions
    (6 )     (18 )     (27 )
Net proceeds from issuance of Class F Redeemable Convertible Preferred Stock
    15,416              
Net proceeds from issuance of Class G Redeemable Convertible Preferred Stock
          7,245        
                   
Net cash provided by financing activities
    15,088       7,449       282  
                   
Net increase (decrease) in cash and cash equivalents
    (544 )     (3,271 )     4,140  
Cash and cash equivalents at beginning of year
    5,155       4,611       1,340  
                   
Cash and cash equivalents at end of year
  $ 4,611     $ 1,340     $ 5,480  
                   
Supplemental disclosures of cash flow information
                       
Interest paid
  $ 16     $ 78     $ 56  
                   
Income taxes paid
  $     $ 104     $ 109  
                   
Noncash transactions:
                       
 
Purchase of equipment through capital lease obligations
  $ 626     $ 837     $  
                   
 
Issuance of common stock to the Employee Stock Ownership Plan
  $ 338     $ 490     $ 641  
                   
The accompanying notes are an integral part of these consolidated financial statements.

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Capella Education Company
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Nature of Business
      Capella Education Company (the Company) was incorporated on December 27, 1991. Through its wholly owned subsidiary, Capella University (the University), the Company manages its business on the basis of one reportable segment. The University is an online post-secondary education services company that offers a variety of bachelor’s, master’s and doctoral degree programs primarily targeted to working adults.
2. Summary of Significant Accounting Policies
Consolidation
      The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, after elimination of significant intercompany accounts and transactions.
Revenue Recognition
      The Company’s revenues consist of tuition, application and graduation fees and commissions we earn from bookstore and publication sales. Tuition revenue is deferred and recognized as revenue ratably over the period of instruction. Seminar tuition revenue is recognized over the length of the seminar, which ranges from two days to two weeks. Application fee revenue is deferred and recognized ratably over the average expected term of a learner at the University. Learners are billed a graduation fee upon applying for graduation for services provided in connection with evaluating compliance with graduation requirements. Graduation fee revenue is deferred and recognized ratably over the expected application assessment period for learners not expected to attend commencement ceremonies or over the period prior to the next commencement ceremony to account for learners who attend the ceremony. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in the accompanying consolidated financial statements. The Company also receives commissions from a third-party bookstore based on sales of textbooks and related school materials to the Company’s learners. Commission revenue is recognized as it is earned in conjunction with sales of textbooks and related materials to its learners.
Cash and Cash Equivalents
      The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Short-Term Investments
      The Company accounts for investments in accordance with the provisions of the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities . SFAS No. 115 addresses the accounting and reporting for investments in fixed maturity securities and for equity securities with readily determinable fair values. Currently, all of the Company’s investments are classified as available-for-sale. Available-for-sale investments are carried at fair value as determined by quoted market prices, with unrealized gains and losses, net of tax, reported as a separate component of shareholders’ equity (deficit). The Company’s investments consist primarily of auction rate securities that have contractual maturities greater than three months at the time of purchase. However, these securities contain interest rate reset dates at regular intervals, allowing for the Company to liquidate the investments within three months throughout the term of the contract. Because of this feature, the investments are carried at cost, which approximates fair value. Declines in fair value that are determined to be other than temporary, if any, are charged to earnings.

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
Realized gains and losses, if any, are included in earnings on a specific identified cost basis. There were no gains or losses realized during 2002, 2003 or 2004.
Allowance for Doubtful Accounts
      The Company records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of its learners to make required payments. The Company determines its allowance for doubtful accounts amount based on an analysis of the aging of the accounts receivable and historical write-off experience. Bad debt expense is recorded as a general and administrative expense in the consolidated statement of operations. The Company generally writes off accounts receivable balances deemed uncollectible prior to sending the accounts to collection agencies.
Concentration of Credit Risk
      Financial instruments, which potentially subject the Company to credit risk, consist primarily of investments and accounts receivable.
      Management believes that the credit risk related to investments is limited due to the adherence to an investment policy that requires investments to have a minimum Standard & Poor’s rating of A (or equivalent), and limits investments in any one issuer to the greater of 10% of the short-term portfolio at the time of purchase or $2,500. All of the Company’s investments as of December 31, 2003 and 2004, consist of cash, cash equivalents, and short-term investments rated AA or higher, further limiting the Company’s credit and market risk related to investments.
      Management believes that the credit risk related to accounts receivable is limited due to the large number and diversity of learners that principally comprise the Company’s customer base. The Company’s credit risk with respect to these accounts receivable is mitigated through the participation of a majority of the learners in federally funded financial aid programs.
      Transfers of funds from the financial aid programs to the Company are made in accordance with U.S. Department of Education (DOE) requirements.
      Approximately 51%, 61% and 69% of the Company’s revenues were collected from funds distributed under Title IV Programs of the Higher Education Act (Title IV Programs) for the years ended December 31, 2002, 2003 and 2004, respectively. The financial aid and assistance programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels.
      Extensive and complex regulations govern the financial assistance programs in which the Company’s learners participate. The Company’s administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, or termination proceeding, which could have a material adverse effect to the Company.
      As an exclusively online university, the “50% Rule,” enacted in 1992, would preclude the Company’s learners from participating in the Title IV Programs. However, in 1998, Congress authorized the DOE to establish and administer the Distance Education Demonstration Program (DEDP) for purposes of assessing the viability of online educational offerings. The Company was accepted as one of the first participants in the DEDP, and it remains a participant today. Absent congressional action to repeal the 50% Rule, the Company’s participation in the DEDP is a prerequisite to its ability to participate in Title IV Programs.

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      If the University was to lose its eligibility to participate in federal student financial aid programs, the learners at our University would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuitions and fees. See Note 14 for further information on the regulatory environment in which the Company operates.
Property and Equipment
      Property and equipment are stated at cost. Computer software is included in property and equipment and consists of purchased software, capitalized Web site development costs, and internally developed software. Capitalized Web site development costs consist mainly of salaries and outside development fees directly related to Web sites and various databases. Web site content development is expensed as incurred. Internally developed software represents qualifying salary and consulting costs for time spent on developing internal use software in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use .
      Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows:
     
Computer equipment
  2-3 years
Furniture and office equipment
  5-7 years
Computer software
  3 years
      Leasehold improvements and assets recorded under capital leases are amortized over the related lease term or estimated useful life, whichever is shorter.
Income Taxes
      The Company accounts for income taxes as prescribed by SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes the use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the related financial amounts using currently enacted tax laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized.
Use of Estimates
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
      The Company has adopted the disclosure-only provisions of the FASB Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, but applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Under APB Opinion No. 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
      Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
and Disclosure, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123.
      The fair value of the Company’s stock-based awards was estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:
                         
    Years Ended
    December 31,
     
    2002   2003   2004
             
Expected life (in years)
    6.0       6.0       6.0  
Expected volatility
    58.7 %     53.9 %     44.1 %
Risk-free interest rate
    3.4 %     3.8 %     3.9 %
Dividend yield
    0.0 %     0.0 %     0.0 %
      As our stock has not been publicly traded, the pro forma compensation expense determined under the fair-value-based method is based on a stock price volatility assumption that reflects the average volatility of our peer group of public post-secondary education companies. Our calculation of pro forma compensation expense also reflects estimates of forfeitures which are adjusted in subsequent periods as actual forfeitures differ from the original estimates.
      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a single measure of the fair value of its employee stock options.
      For purposes of pro forma disclosures, the estimated fair value of the option is amortized to expense over the option’s vesting period. The compensation expense determined under the fair-value-based method does not include assumed tax benefits related to non-qualified stock options until the fourth quarter of 2004, which is the first period we have not fully reserved for our net deferred tax assets with a valuation allowance.
      The Company’s pro forma information is as follows:
                           
    Years Ended December 31,
     
    2002   2003   2004
             
Net income (loss) as reported
  $ (5,667 )   $ 4,393     $ 18,785  
Deferred compensation expense included in net income (loss) as reported
    39       37       4  
Compensation expense determined under fair-value-based method
    (1,623 )     (1,779 )     (2,383 )
                   
Pro forma net income (loss)
  $ (7,251 )   $ 2,651     $ 16,406  
                   
Net income (loss) per common share:
                       
 
Basic – as reported
  $ (3.70 )   $ 2.63     $ 9.34  
 
Basic – pro forma
  $ (4.76 )   $ 1.59     $ 8.16  
 
Diluted – as reported
  $ (3.70 )   $ 0.39     $ 1.62  
 
Diluted – pro forma
  $ (4.76 )   $ 0.24     $ 1.43  

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
Impairment of Long-Lived Assets
      The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recorded impairment charges of $223, $359 and $1,020 during 2002, 2003 and 2004, respectively.
      The impairment charges primarily consist of the write-off of previously capitalized internal software development costs for software projects that were abandoned. These charges are recorded in general and administrative expenses in the consolidated statements of operations.
Advertising
      The Company expenses advertising costs as incurred. Advertising costs for 2002, 2003 and 2004 were $8,663, $12,248 and $17,825, respectively.
Net Income (Loss) Per Common Share
      Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during the periods presented. Diluted net income (loss) per common share increases the shares used in the per-share calculation by the dilutive effects of options, warrants, and convertible securities.
      The table below is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per common share calculation.
                           
    Year Ended December 31,
     
    2002   2003   2004
             
Numerator:
                       
 
Net income (loss)
  $ (5,667 )   $ 4,393     $ 18,785  
Denominator:
                       
 
Denominator for basic net income (loss) per common share – weighted average shares outstanding
    1,532       1,669       2,011  
 
Effect of preferred stock
          9,135       9,178  
 
Effect of dilutive stock options and warrants
          350       406  
                   
 
Denominator for diluted net income (loss) per common share
    1,532       11,154       11,595  
                   
 
Basic net income (loss) per common share
  $ (3.70 )   $ 2.63     $ 9.34  
 
Diluted net income (loss) per common share
  $ (3.70 )   $ 0.39     $ 1.62  
      As of December 31, 2003 and 2004, options to purchase 1,304 and 1,318 common shares, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would be antidilutive. For 2002, diluted net loss per common share is the same as basic net loss per common share because the effect of all options, warrants, and convertible securities was antidilutive. The incremental shares included for the effect of dilutive stock options do not include assumed tax benefits related to non-qualified stock options until the fourth quarter of 2004, which is the first period we have not fully reserved for our net deferred tax assets with a valuation allowance.

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
Reclassification
      Certain prior year items have been reclassified to conform to the current year presentation.
Comprehensive Income
      Comprehensive income includes all changes in the Company’s equity during a period from nonowner sources. Net income equaled comprehensive income for all periods presented.
New Accounting Standards
      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments and specifies that some financing arrangements with characteristics of both liabilities and equity must be classified as liabilities. Among the requirements of SFAS No. 150 is that all “mandatorily redeemable” securities be classified as liabilities. SFAS No. 150 was effective for the Company beginning in 2004. None of the Company’s current classes of redeemable preferred stock is considered “mandatorily redeemable” as defined by SFAS No. 150 because these securities are also convertible into common stock and, therefore, are not required to be classified as liabilities. The Company’s adoption of SFAS No. 150 did not have a material effect on its financial condition or results of operations.
      On December 16, 2004, the FASB issued an amendment to SFAS No. 123, Share-Based Payment (SFAS No. 123R). The Securities and Exchange Commission amended the compliance date on April 14, 2005, to require public companies to adopt the standard as of the beginning of the first annual period that begins after June 15, 2005. The Company is therefore required to implement this standard on January 1, 2006. The cumulative effect of adoption, if any, applied on a prospective basis, would be measured and recognized in the period of adoption. SFAS No. 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally requires instead that such transactions be accounted for using a fair-value-based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements, including stock options and employee stock purchase plans.
      The Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair-value-based method will have a significant impact on the Company’s results of operations, although it will have no impact on our overall cash position. The Company is currently evaluating option valuation methodologies and assumptions relative to the impact of SFAS No. 123R. The impact of adoption of Statement 123R cannot be predicted with more specificity at this time because it will depend on the methodology adopted, assumptions used and levels of share-based payments granted in the future. However, had we adopted Statement 123R using the Black-Scholes option valuation model in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per common share described earlier in this note.

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
3. Property and Equipment
      Property and equipment consisted of the following:
                 
    As of
    December 31,
     
    2003   2004
         
Computer software
  $ 10,162     $ 12,076  
Computer equipment
    3,943       5,077  
Furniture and office equipment
    3,587       5,445  
Leasehold improvements
    1,303       1,318  
             
      18,995       23,916  
Less accumulated depreciation and amortization
    (9,381 )     (11,790 )
             
Property and equipment, net
  $ 9,614     $ 12,126  
             
      Refer to Note 2 for information on the impairment of long-lived assets.
4. Accrued Liabilities
      Accrued liabilities consist of the following:
                 
    As of
    December 31,
     
    2003   2004
         
Accrued instructional fees
  $ 2,786     $ 2,626  
Accrued compensation and benefits
    3,546       3,952  
Customer deposits
    1,277       924  
Accrued vacation
    1,039       1,494  
Other
    2,024       3,257  
             
    $ 10,672     $ 12,253  
             
5. Financing Arrangements
      The Company entered into an unsecured $10,000 line of credit in August 2004 with Wells Fargo Bank. The line of credit has an expiration date of June 30, 2005. Any borrowings under the line of credit would bear interest at a rate of either LIBOR plus 2.5% or the Bank’s prime rate, at the Company’s discretion on the borrowing date. There have been no borrowings to date under the line of credit. The $10,000 line of credit replaces the $2,500 line of credit that was issued during December 2001.
      The Company has master lease agreements with the Company’s capital lessors. The lease agreements required security deposits as collateral. As of December 31, 2003 and 2004, collateral for the outstanding master lease agreements was $471 and $391, respectively, consisting of certificates of deposit recorded as restricted cash on the balance sheet.
6. Operating and Capital Lease Obligations
      The Company leases its office facilities and certain office equipment under various noncancelable lease arrangements, which have been accounted for as operating or capital leases, as appropriate.

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      Future minimum lease commitments under the leases as of December 31, 2004, are as follows:
                 
    Capital   Operating
         
2005
  $ 325     $ 1,617  
2006
    8       2,100  
2007
          2,147  
2008
          2,143  
2009
          2,194  
2010 and thereafter
          1,864  
             
Total minimum payments
    333     $ 12,065  
             
Less amount representing interest
    (11 )        
             
Present value of net minimum payments
    322          
Less current portion
    (314 )        
             
Long-term portion of capital lease obligations
  $ 8          
             
      Assets under capital leases with a cost of $1,614 and $1,204 and accumulated amortization of $687 and $880 at December 31, 2003 and 2004, respectively, are included in computer equipment, furniture and office equipment, and computer software (see Note 3). Amortization of the related lease assets is included with depreciation expense.
      The Company recognizes rent expense on a straight-line basis over the term of the lease, although the lease may include escalation clauses that provide for lower rent payments at the start of the lease term and higher lease payments at the end of the lease term.
      Total rent expense under operating leases for the years ended December 2002, 2003 and 2004 was $1,858, $2,214 and $2,940, respectively.
7. Litigation
      In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters, including, but not limited to, claims involving learners or graduates and routine employment matters. The Company does not believe that the outcome of any pending claims will have a material adverse impact on the consolidated financial position or results of operations.
8. Preferred Stock
      As of December 31, 2004, including the redeemable preferred stock in Note 9, the Company was authorized to issue 13,000 shares of preferred stock, of which 3,017 shares were available for issuance.
      The Class A, Class B and Class D preferred stock have certain voting and registration rights and have preference over common stock upon liquidation. The Class B and Class D shares rank equal to each other and to the Class E and Class G shares, and all rank senior to the Class A shares with respect to liquidation preference.
      The preferred stock shares are convertible at any time into shares of common stock at the option of the shareholder. The conversion price is subject to adjustments related to any stock splits, dividends, sales of common stock, or merger of the Company. The convertible preferred stock may be converted into common stock at the option of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed a specified amount.

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      The holders of convertible preferred stock are entitled to receive dividends in an amount to be determined by the Board of Directors, if declared by the Board of Directors. The Company has not declared dividends related to convertible preferred stock.
Class A Convertible Preferred Stock
      The Class A Convertible Preferred Stock is convertible at any time into shares of common stock at $1.00 per share. The Class A Convertible Preferred Stock may be converted into common stock at the option of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed $10,000. At any time subsequent to February 24, 2000, the Company has the right, but not the obligation, to redeem all outstanding Class A Convertible Preferred Stock at $1.00 per share. Upon notice of redemption, Class A preferred stockholders have 90 days in which to exercise their conversion option.
Class B Convertible Preferred Stock
      The Class B Convertible Preferred Stock is convertible at any time into shares of common stock at $2.50 per share. The Class B Convertible Preferred Stock may be converted into common stock at the option of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed $10,000. At any time subsequent to February 24, 2000, the Company has the right, but not the obligation, to redeem all outstanding Class B Convertible Preferred Stock at $2.50 per share. Upon notice of redemption, Class B preferred stockholders have 90 days in which to exercise their conversion option.
Class D Convertible Preferred Stock
      The Class D Convertible Preferred Stock is convertible at any time into shares of common stock at $4.50 per share. The Class D Convertible Preferred Stock may be converted upon the closing of an initial public offering in which gross proceeds to the Company and/or the selling shareholders exceed $20,000.
9. Redeemable Preferred Stock
      The Class E and Class G redeemable convertible preferred stock have certain voting and registration rights and have preference over common stock upon liquidation. The Class E and Class G shares rank equal to each other and to the Class B and Class D shares, and all rank senior to the Class A shares with respect to liquidation preference.
      The preferred stock shares are convertible at any time into shares of common stock at the option of the shareholder. The conversion price is subject to adjustments related to any stock splits, dividends, sales of common stock, or merger of the Company. The redeemable convertible preferred stock may be converted into common stock at the option of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed a specified amount.
      The holders of redeemable convertible preferred stock are entitled to receive dividends in an amount to be determined by the Board of Directors, if declared by the Board of Directors. The Company has not declared dividends related to redeemable convertible preferred stock.
Class E Redeemable Convertible Preferred Stock
      On April 20, 2000, the Company entered into an agreement with investors to issue and sell 2,596 shares of the Company’s Class E Redeemable Convertible Preferred Stock at $14.25 per share, par value

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
$0.01 per share. The Company received proceeds, less offering costs of $2,015, totaling $34,985 from the sale.
      At any time, and from time to time after the seventh anniversary of the original issue date, the holders of the Class E Redeemable Convertible Preferred Stock have the option, exercisable by the holders of not less than 25% (in the aggregate) of the then-outstanding shares of the Class E Redeemable Convertible Preferred Stock, to require the Company to redeem any or all of the shares of such Class E Redeemable Convertible Preferred Stock for a redemption price of $14.25 per share, plus an amount equal to all declared but unpaid dividends. The redemption price is subject to adjustment to reflect any stock splits, dividends, recapitalizations, combinations, or the like.
      At December 31, 2004, the Class E Redeemable Convertible Preferred Stock was convertible into shares of common stock at $13.69 per share. The Class E Redeemable Convertible Preferred Stock will be converted into common stock of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed $30,000, and the public offering price per share of common stock is at least $28.50, or lower amounts as may be approved by the holders of a majority of the shares of Class E Redeemable Convertible Preferred Stock.
      The Class E Redeemable Convertible Preferred Stock continues to be recorded at its fair value at the date of issuance, net of issuance costs, as it is probable that the shares will be converted to common stock rather than be redeemed. If redemption becomes probable, the carrying value will be accreted to the redemption value.
Class F Redeemable Convertible Preferred Stock
      On February 21, 2002, the Company entered into an agreement with investors to issue and sell 1,425 shares of the Company’s Class F Redeemable Convertible Preferred Stock at $11.71 per share, par value $.01 per share. The Company received proceeds, less offering costs of $1,276, totaling $15,416 from the sale.
      At any time, and from time to time after the seventh anniversary of the original issue date, the holders of the Class F Redeemable Convertible Preferred Stock had the option to require the Corporation to redeem any or all of the shares of such Class F Redeemable Convertible Preferred Stock for a redemption price of $11.71 per share, plus an amount equal to all declared but unpaid dividends. The redemption price was subject to adjustment to reflect any stock splits, dividends, recapitalizations, combinations, or the like.
      The Class F Redeemable Convertible Preferred Stock was convertible into shares of common stock at $11.71 per share, at the option of the shareholder. The conversion price was subject to adjustment to reflect any stock splits, dividends, sales of common stock, or merger of the Company. The Class F Redeemable Convertible Preferred Stock would have been converted into common stock of the Company upon the closing of an initial public offering in which gross proceeds to the Company exceed $30,000 and the public offering price per share of common stock was at least $28.50, or upon the affirmative vote or written consent of the holders of 60% of the outstanding shares of Class F Redeemable Convertible Preferred Stock. On January 22, 2003, the Company entered into an agreement with investors to exchange the Class F Redeemable Convertible Preferred Stock in full for the issuance of the Class G Redeemable Convertible Preferred Stock. The Company received no proceeds from the exchange.
Class G Redeemable Convertible Preferred Stock
      On January 22, 2003, the Company entered into an agreement with investors to issue and sell 2,185 shares of the Company’s Class G Redeemable Convertible Preferred Stock at $11.12 per share, par

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
value of $0.01 per share. Of the total shares sold, 1,501 shares were for the full exchange of Class F Redeemable Convertible Preferred Stock to Class G Redeemable Convertible Preferred Stock. The Company received no proceeds from the exchange. From the remaining 683 shares sold, the Company received proceeds, less offering costs of $350, totaling $7,245.
      At any time after February 21, 2009, the holders of the Class G Redeemable Convertible Preferred Stock have the option to require the Company to redeem any or all of the shares of such Class G Redeemable Convertible Preferred Stock for a redemption price of $11.12 per share, plus an amount equal to all declared but unpaid dividends. The redemption price is subject to adjustment to reflect any stock splits, dividends, recapitalizations, combinations, or the like.
      The Class G Redeemable Convertible Preferred Stock is convertible at any time into shares of common stock at $11.12 per share. The Class G Redeemable Convertible Preferred Stock will be converted into common stock of the Company upon the closing of an initial public offering in which the gross proceeds to the Company are at least $30,000, and the public offering price per share of common stock is at least $28.50, or upon the affirmative vote or written consent of the holders of 66 2 / 3 % of the outstanding shares of Class G Redeemable Convertible Preferred Stock.
      The Class G Redeemable Convertible Preferred Stock continues to be recorded at its fair value at the date of issuance, net of issuance costs, as it is probable that the shares will be converted to common stock rather than be redeemed. If redemption becomes probable, the carrying value will be accreted to the redemption value.
10. Stock Option Plan
      The Company has a stock option plan that includes both incentive stock options and non-qualified stock options to be granted to employees, directors, officers, and others. At December 31, 2004, the maximum number of shares of common stock reserved under the plan is 3,475 shares. The Board of Directors establishes the terms and conditions of all stock option grants, subject to the plan and applicable provisions of the Internal Revenue Code (the Code). Under the plan, options must be granted at an exercise price not less than the fair market value of the Company’s common stock on the grant date. The options expire on the date determined by the Board of Directors but may not extend more than ten years from the grant date. The options generally become exercisable over a four-year period. Unexercised options are canceled upon termination of employment and become available under the plan.

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Table of Contents

Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      Option activity is summarized as follows:
                                         
    Shares   Plan Options Outstanding       Weighted Average
    Available           Exercise Price
    for Grant   Incentive   Non-Qualified   Price Per Share   Per Share
                     
Balance at December 31, 2001
    706       901       283     $ 2.50 - $15.68     $ 9.42  
Granted
    (341 )     286       55       11.71 - 12.88       11.77  
Exercised
          (11 )           2.50 - 14.25       3.90  
Canceled
    105       (88 )     (17 )     2.50 - 14.25       12.25  
                               
Balance at December 31, 2002
    470       1,088       321       2.50 - 15.68       9.86  
Granted
    (481 )     375       106       11.12 - 13.11       12.07  
Exercised
          (146 )     (33 )     2.50 - 14.25       4.71  
Canceled
    100       (100 )     (28 )     4.50 - 14.25       12.18  
Additional shares reserved
    500                          
1993 plan expiration
    (98 )                        
                               
Balance at December 31, 2003
    491       1,217       366       2.50 - 15.68       10.93  
Granted
    (415 )     247       167       15.13 - 20.00       17.83  
Exercised
          (190 )     (20 )     2.50 - 14.25       4.42  
Canceled
    138       (140 )     (11 )     4.50 - 15.13       11.66  
                               
Balance at December 31, 2004
    214       1,134       502       2.50 - 20.00       13.45  
                               
      The following table summarizes information about stock options outstanding at December 31, 2004:
                                         
    Options Outstanding   Options Exercisable
         
    Number   Weighted       Number    
    Outstanding   Average   Weighted   Exercisable   Weighted
    as of   Remaining   Average   as of   Average
Range of   December 31,   Contractual   Exercise   December 31,   Exercise
Exercise Prices   2004   Life (Years)   Price   2004   Price
                     
$2.01 - $4.00
    17           $ 2.50       17     $ 2.50  
4.01 - 6.00
    118       3.8       4.50       118       4.50  
6.01 - 8.00
                             
8.01 - 10.00
    10       5.2       10.00       10       10.00  
10.01 - 12.00
    458       8.1       11.74       198       11.70  
12.01 - 14.00
    192       7.6       12.78       61       12.75  
14.01 - 16.00
    520       6.7       14.47       364       14.37  
16.01 - 18.00
    193       9.6       17.72              
18.01 - 20.00
    128       9.6       19.98       1       20.00  
                               
      1,636       7.5     $ 13.45       769     $ 11.72  
                               

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      The following is a summary of stock options granted during each of the three years in the period ended December 31, 2004:
                                                   
    2002   2003   2004
             
    Fair   Exercise   Fair   Exercise   Fair   Exercise
    Value   Price   Value   Price   Value   Price
                         
Weighted average:
                                               
 
Stock price greater than exercise price
  $     $     $     $     $     $  
 
Stock price equal to exercise price
    6.73       11.71       6.57       11.99       8.56       17.80  
 
Stock price less than exercise price
    6.47       12.88       6.25       13.11       8.02       19.49  
11. Deferred Compensation
      During 1999 and 2000, the Company recorded $102 and $113, respectively, of deferred compensation for certain stock options granted for the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of such options over the aggregate exercise price of such options. These options were fully vested during 2004. Deferred compensation recorded was amortized ratably over the period that the options vested and were adjusted for options which were canceled. Deferred compensation expense was $39, $37 and $4 for the years ended December 31, 2002, 2003 and 2004, respectively.
12. Warrants
      In September 1997, the Company issued warrants to purchase 50 shares of common stock at $2.50 per share. These warrants were exercised during 2003.
      In June 1998, the Company issued warrants to purchase 5 shares of common stock at $4.50 per share of common stock to an officer of the Company for personally guaranteeing a note. The warrants expire in June 2005. The estimated fair value assigned to these warrants was deemed to be immaterial.
      In addition, in 1998, the Company issued warrants to purchase 10 and 131 shares of common stock at $4.50 and $5.40 per share, respectively, in connection with the issuance of the Class D Convertible Preferred Stock. The warrants expire in June 2005.
      During 2003, there was a purchase of 6 shares of common stock resulting from a cashless exercise of the right to purchase the 10 shares of common stock at $4.50 per share.
      In January 2000, the Company issued warrants to purchase 3 shares of common stock in exchange for various consulting services to three nonemployees. The estimated fair value assigned to these warrants of $4 was charged to expense in 2000. In October 2001, the Company recognized an additional $19 in compensation expense due to an amendment to these warrants, which estimates the additional fair value assigned to these warrants as a result of the amendment. The warrants expired in 2002.
      In May 2000, the Company issued warrants to purchase 135 shares of common stock at $17.10 per share of common stock in connection with the issuance of the Class E Redeemable Convertible Preferred Stock. The warrants expire the earlier of May 2005 or on the second anniversary of the Company’s initial public offering.
13. Income Taxes
      The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
assessments. Realization of the deferred tax assets, net of deferred tax liabilities is principally dependent upon achievement of projected future taxable income. Given the uncertainty of future taxable income, the Company had provided a valuation allowance for all net deferred tax assets for all periods prior to 2004. Because the Company achieved three years of cumulative taxable income in 2004 and expects profitability in future years, the Company has concluded that it is more likely than not that all of its net deferred tax assets will be realized. As a result, in accordance with SFAS No. 109, the valuation allowance applied to such net deferred tax assets of $12,863 at December 31, 2003, has been reversed during the year ended December 31, 2004.
      At December 31, 2004, the Company had a net operating loss carryforward of approximately $22,109 for federal and state income tax purposes that is available to offset future taxable income. The net operating loss carryforwards expire at various dates through 2022. During 2004, the Company experienced an ownership change as defined under Section 382 of the Code. As a result, the utilization of the net operating loss carryforward will be subject to an annual limitation imposed by Section 382. However, the limitation is not expected to adversely impact the Company’s ability to utilize the carryforwards before they expire. The Company’s current federal tax provisions in 2003 and 2004 represent recognition of alternative minimum tax due for the respective periods.
      The components of income tax expense (benefit) are as follows:
                           
    Year Ended December 31,
     
    2002   2003   2004
             
Current:
                       
 
Federal
  $     $ 104     $ 187  
 
State
                62  
Deferred
                (8,445 )
                   
    $     $ 104     $ (8,196 )
                   
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
                         
    Year Ended December 31,
     
    2002   2003   2004
             
Statutory rate
    (34.0 )%     34.0 %     35.0 %
State income taxes
    (5.7 )     7.0       3.5  
Other
    (0.5 )     0.1       2.0  
Change in rate applied to deferred tax assets and liabilities
                3.6  
Change in valuation allowance
    40.2       (38.8 )     (121.5 )
                   
      %     2.3 %     (77.4 )%
                   

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      Significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2003 and 2004, are as follows:
                   
    As of
    December 31,
     
    2003   2004
         
Deferred tax assets:
               
 
Net operating loss carryforwards
  $ 12,450     $ 8,613  
 
Accounts receivable
    285       415  
 
Alternative minimum tax credit
    104       327  
 
Goodwill
    122       105  
 
Accrued liabilities
    807       981  
 
Other
    5       36  
             
      13,773       10,477  
Deferred tax liabilities:
               
 
Property and equipment
    (910 )     (1,882 )
             
      (910 )     (1,882 )
             
Net deferred tax asset before valuation allowance
    12,863       8,595  
Valuation allowance
    (12,863 )      
             
Net deferred tax asset
  $     $ 8,595  
             
      The Company adjusted the federal and state income tax rates used to record its net deferred tax assets in 2004 based upon an updated evaluation of the income tax benefits that will likely exist when the net deferred tax assets are realized on future tax returns. During 2004, the Company also recorded tax benefits of approximately $150 directly to additional paid-in capital related to the exercise of non-qualified stock options.
14. Regulatory
      The University is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the HEA and the regulations promulgated thereunder by the DOE subject the University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate in the various federal learner financial assistance under the Title IV Programs.
      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 DOE and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and the DOE’s extensive academic, administrative, and financial regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis.
      The Company performs periodic reviews of its compliance with the various applicable regulatory requirements. The Company has not been notified by any of the various regulatory agencies of any significant noncompliance matters.

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
      Political and budgetary concerns significantly affect the Title IV Programs. Congress reauthorizes the HEA and other laws governing Title IV Programs, approximately every five to eight years. The last reauthorization of the HEA was completed in 1998. The next Congressional reauthorization of the HEA is currently expected to be completed in 2005 or 2006. Because reauthorization had not yet been completed in a timely manner, in 2004 Congress extended the current provisions of the HEA through September 30, 2005. If reauthorization is not completed by September 30, 2005, Congress is expected to enact legislation to again extend to Title IV Programs as currently authorized under the HEA for up to one additional year. Additionally, Congress determines the funding level for each Title IV Program on an annual basis through budget and appropriations process. As of December 31, 2004, programs in which the Company’s learners participate are operative and sufficiently funded.
      As a wholly online university, the so-called “50% Rule,” enacted in 1992, would preclude the Company’s learners from participating in the Title IV Programs. However, in 1998, Congress authorized the DOE to establish and administer the DEDP for purposes of assessing the viability of online educational offerings. The Company was accepted as one of the first participants in the DEDP, and it remains a participant today. Absent congressional action to repeal the 50% Rule, the Company’s participation in the DEDP is a necessary prerequisite to its ability to participate in the Title IV Programs.
15. Employee Benefit Plan
      The Company sponsors an employee retirement savings plan, which qualifies under Section 401(k) of the Code. The plan provides eligible employees with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 18 are eligible to participate in the plan. The plan allows eligible employees to contribute up to 35% of their annual compensation. Contributions are subject to certain limitations. The plan allows the Company to consider making a discretionary contribution; however, there is no requirement that it do so. No employer contributions were made for the years ended December 31, 2002, 2003 and 2004.
16. Employee Stock Ownership Plan (ESOP)
      In 1999, the Company adopted a qualified ESOP in which the Company may contribute, at its discretion, common stock of the Company to its employees. In general, the Company has chosen to contribute 3% of employee compensation on an annual basis. However, the contributions are at the Company’s discretion. During 2002, the Company contributed 35 shares to the plan, related to 2001 compensation expense. During 2003, the Company contributed 48 shares to the plan, related to 2002 compensation expense. During 2004, the Company contributed 47 shares to the plan, related to 2003 compensation expense. Shares related to 2004 compensation expense will be contributed in 2005. Contributions vest over three years, except in the event of retirement, disability, or death, in which case the participants’ shares become fully vested and nonforfeitable. The Company has an obligation to repurchase, at fair market value determined by annual independent valuation, the allocated shares in the above events. The Company recognized $468, $541 and $1,131 of compensation expense in 2002, 2003 and 2004, respectively, related to the ESOP contributions.

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Capella Education Company
Notes to Consolidated Financial Statements – (Continued)
(In thousands, except per share data)
17. Quarterly Financial Summary (unaudited)
                                           
    First   Second   Third   Fourth (a)   Total
                     
2003
                                       
Revenues
  $ 17,936     $ 19,593     $ 20,747     $ 23,509     $ 81,785  
Operating income (loss)
    1,432       2,554       (375 )     459       4,070  
Net income (loss) (b)
    1,525       2,659       (273 )     482       4,393  
Net income (loss) per common share
                                       
 
Basic
  $ 0.99     $ 1.68     $ (0.16 )   $ 0.27     $ 2.63  
 
Diluted
  $ 0.14     $ 0.24     $ (0.16 )   $ 0.04     $ 0.39  
                                           
    First   Second   Third   Fourth (c)   Total
                     
2004
                                       
Revenues
  $ 26,488     $ 28,321     $ 28,040     $ 34,840     $ 117,689  
Operating income
    1,383       1,773       2,147       4,562       9,865  
Net income (b)
    1,466       1,892       2,310       13,117       18,785  
Net income per common share
                                       
 
Basic
  $ 0.77     $ 0.95     $ 1.12     $ 6.31     $ 9.34  
 
Diluted
  $ 0.13     $ 0.16     $ 0.20     $ 1.11     $ 1.62  
 
(a)  During the fourth quarter of 2003, we recorded an impairment charge of $359 related to previously capitalized software development costs for software projects that were abandoned.
 
(b)  Because the Company achieved three years of cumulative taxable income and expects profitability in future years, the Company concluded that it is more likely than not that all of its net deferred tax assets will be realized. As a result, in accordance with SFAS No. 109, the remaining valuation allowance applied to net deferred tax assets of $10,619 was reversed during the fourth quarter of 2004.
 
(c)  During the fourth quarter of 2004, we also recorded an impairment charge of $1,020 related to previously capitalized software development costs for software projects that were abandoned.

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(CAPELLA UNIVERSITY LOGO)


Table of Contents

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
      The following are the estimated expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement, other than underwriting discounts and commissions. All amounts shown are estimates except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee. The following expenses will be borne solely by the Registrant.
           
SEC registration fee
  $ 10,152  
NASD filing
    9,125  
Nasdaq listing fee
    *  
Legal fees and expenses
    *  
Accounting fees and expenses
    *  
Blue sky fees and expenses
    *  
Printing expenses
    *  
Transfer agent fees and expenses
    *  
Miscellaneous expenses
    *  
       
 
Total
  $ *  
       
 
To be completed by Amendment.
Item 14. Indemnification of Directors and Officers
      Section 302A.521, subd. 2, of the Minnesota Statutes requires that we indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with respect to the company, against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions if such person (i) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties or fines, (ii) acted in good faith, (iii) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director, (iv) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful, and (v) in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the company, or, in the case of performance by a director, officer or employee of the company involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the company. In addition, Section 302A.521, subd. 3, requires payment by us, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of our board of directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the board, by special legal counsel, by the shareholders, or by a court.
      Our by-laws provide that we shall indemnify each of our directors, officers and employees to the fullest extent permissible by Minnesota Statute, as detailed above. We also maintain a director and officer liability insurance policy.
      In addition, the registration rights agreement and the investor rights agreement that we entered into with certain of our preferred shareholders, and the warrants that we issued to Legg Mason Wood Walker,

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Incorporated, obligate us to indemnify such shareholders requesting or joining in a registration (and, in some instances, indemnify each underwriter of the securities so registered, as well as the officers, directors and partners of such shareholders) against any and all loss, damage, liability, cost and expense, including claims arising out of or based on any untrue statement, or alleged untrue statement, of any material fact contained in any registration statement, prospectus or other related document or any omission, or alleged omission, to state any material fact required to be stated or necessary to make the statements not misleading.
      The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of us and our officers and directors for certain liabilities arising under the Securities Act of 1933, or otherwise.
Item 15. Recent Sales of Unregistered Securities
Preferred Stock
  •  In January 2002, we issued 1,425,457 shares of our Class F preferred stock to accredited investors at a purchase price of $11.71 per share for an aggregate amount of $16,692,101.47. The sales were made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933.
 
  •  In January 2003, we issued 2,184,540.49 shares of our Class G preferred stock to accredited investors. Of the total shares issued, 683,452.20 shares were sold at a purchase price of $11.12 per share for an aggregate amount of $7,599,988.46. The sales were made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933. The remaining 1,501,088.29 shares were issued in full exchange of 1,425,457 shares of our Class F preferred stock. We received no proceeds from this exchange. The exchange was made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933.
Stock Option Grants and Option Exercises
      Since January 1, 2002, we have granted options to purchase 1,236,419 shares of our common stock to officers, directors and employees under our 1999 Plan at exercise prices ranging from $11.12 to $20.00 per share. During the same period, we issued and sold           shares of our common stock pursuant to option exercises at prices ranging from           to           per share. These sales were made in reliance on Rule 506 and Rule 701 promulgated under the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules
      (a) Exhibits
         
Exhibit    
Number   Description
     
  1 .1*   Form of Underwriting Agreement.
  3 .1   Articles of Incorporation of the Registrant, as amended to date and as currently in effect, including all Certificates of Designation.
  3 .2*   Form of Amended and Restated Articles of Incorporation of the Registrant to be effective upon completion of this offering.
  3 .3   Restated Bylaws of the Registrant.
  3 .4*   Form of Amended and Restated By-Laws of the Registrant to be effective upon completion of this offering.
  4 .1*   Specimen of common stock certificate.
  4 .2   Third Amended and Restated Co-Sale and Board Representation Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .3   Registration Rights Agreement, dated as of June 16, 1998, by and between the Registrant and National Computer Systems, Inc.

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Exhibit    
Number   Description
     
  4 .4   Amendment No. 1 to the Registration Rights Agreement, dated as of April 20, 2000, by and between the Registrant and National Computer Systems, Inc.
  4 .5   Amendment No. 2 to the Registration Rights Agreement, dated as of February 21, 2002, by and between the Registrant and NCS Pearson, Inc. (successor in interest to National Computer Systems, Inc.).
  4 .6   Amendment No. 3 to the Registration Rights Agreement, dated as of January 22, 2003, by and between the Registrant and NCS Pearson, Inc.
  4 .7   Second Amended and Restated Investor Rights Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .8   Warrant, dated as of June 16, 1998, issued by the Registrant to Legg Mason Wood Walker, Incorporated.
  4 .9   Amendment No. 1 to Warrant, dated as of April 20, 2000, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .10   Amendment No. 2 to Warrant, dated as of February 21, 2002, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .11   Amendment No. 3 to Warrant, dated as of January 22, 2003, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .12   Warrant, dated as of May 11, 2000, issued by the Registrant to Legg Mason Wood Walker, Incorporated.
  4 .13   Amendment No. 1 to Warrant, dated as of February 21, 2002, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .14   Amendment No. 2 to Warrant, dated as of January 22, 2003, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .15   Exchange Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .16   Class G Convertible Preferred Stock Purchase Agreement, dated as of January 15, 2003, by and among the Registrant and the shareholders named therein.
  4 .17   Class F Convertible Preferred Stock Purchase Agreement, dated as of January 31, 2002, by and among the Registrant and the shareholders named therein.
  4 .18   Class E Convertible Preferred Stock Purchase Agreement, dated as of April 20, 2000, by and among the Registrant and the shareholders named therein.
  5 .1*   Opinion of Faegre & Benson LLP.
  10 .1*   Capella Education Company 2005 Stock Incentive Plan.
  10 .2*   Form of Option Agreement for the Capella Education Company 2005 Stock Incentive Plan.
  10 .3   Capella Education Company 1999 Stock Option Plan, as amended.
  10 .4   Form of Non-Statutory Stock Option Agreement (Director) for the Capella Education Company 1999 Stock Option Plan.
  10 .5   Form of Non-Statutory Stock Option Agreement (Employee) for the Capella Education Company 1999 Stock Option Plan.
  10 .6   Form of Incentive Stock Option Agreement for the Capella Education Company 1999 Stock Option Plan.
  10 .7   Learning Ventures International, Inc. 1993 Stock Option Plan, as amended.
  10 .8   Form of Option Agreement for the Learning Ventures International, Inc. 1993 Stock Option Plan.
  10 .9*   Capella Education Company Employee Stock Ownership Plan.
  10 .10*   Capella Education Company Retirement Plan with Adoption Agreement and EGTRRA Amendment.
  10 .11*   Capella Education Company Form of Executive Severance Plan.

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Exhibit    
Number   Description
     
  10 .12*   Form of Severance Plan Release Agreement (for employee subject to valid non-competition agreement).
  10 .13*   Form of Severance Plan Release Agreement (for employee not subject to valid non-competition agreement).
  10 .14   Confidentiality, Non-Competition and Inventions Agreement, dated as of April 16, 2001, by and between the Registrant and Michael J. Offerman.
  10 .15   Confidentiality, Non-Competition and Inventions Agreement, dated as of May 9, 2001, by and between the Registrant and Paul A. Schroeder.
  10 .16   Form of Confidentiality, Non-Competition and Inventions Agreement (executed by Scott M. Henkel).
  10 .17   Offer Letter, dated as of March 9, 2001, by and between the Registrant and Paul A. Schroeder.
  10 .18   Offer Letter, dated as of November 10, 2003, by and between the Registrant and Michael J. Offerman.
  10 .19   Offer Letter, dated as of December 22, 2003, by and between the Registrant and Scott M. Henkel.
  10 .20   Offer Letter, dated June 3, 2003, by and between the Registrant and Heidi K. Thom.
  10 .21   Form of Nondisclosure Agreement (executed by Scott M. Henkel, Paul A. Schroeder, Stephen G. Shank, Heidi K. Thom, and Michael J. Offerman).
  10 .22   Office Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .23   Short Term Office Space Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .24   Memorandum of Lease, dated as of March 10, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .25   Office Lease, dated as of June 28, 2000, as amended, by and between the Registrant and 222 South Ninth Street Limited Partnership and ND Properties, Inc. as successor in interest to 222 South Ninth Street Limited Partnership.
  10 .26*   Library and Information Services Agreement, dated as of September 1, 2004, by and between Capella University and Milton S. Eisenhower Library of the Johns Hopkins University
  10 .27*   Software License Agreement, dated as of November 10, 2003, by and between Capella University and WebCT, Inc.
  10 .28*   Master Service Agreement, dated as of April 1, 2005, by and between the Registrant and Avenue A LLC.
  21 .1   Subsidiaries of the Registrant.
  23 .1   Consent of Ernst & Young.
  23 .2*   Consent of Faegre & Benson LLP (to be included in Exhibit No. 5.1 to Registration Statement).
  24 .1   Powers of Attorney.
 
To be filed by Amendment
  (b)  Financial Statement Schedule
Report of Independent Registered Public Accounting Firm on Schedule
  Schedule II – Valuation and Qualifying Accounts.
  Other schedules are omitted because they are not required.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Capella Education Company
      We have audited the consolidated financial statements of Capella Education Company as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, and have issued our report thereon dated February 4, 2005, except for the Stock-Based Compensation section in Note 2, as to which the date is April 14, 2005 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.
      In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
  /s/ Ernst & Young LLP
Minneapolis, Minnesota
February 4, 2005

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CAPELLA EDUCATION COMPANY
Schedule II – Valuation and Qualifying Accounts
Fiscal Years 2002, 2003 and 2004
                                 
        Additions        
    Beginning   Charged to       Ending
    Balance   Expense   Deductions   Balance
                 
    (In thousands)
Allowance accounts for the years ended:
                               
December 31, 2002
                               
Allowance for doubtful accounts
  $ 1,368     $ 3,001     $ (3,147 ) (a)   $ 1,222  
Deferred tax asset valuation allowance
    12,328       2,137 (b)           14,465  
 
December 31, 2003
                               
Allowance for doubtful accounts
    1,222       616       (1,125 ) (a)     713  
Deferred tax asset valuation allowance
    14,465             (1,602 ) (c)     12,863  
 
December 31, 2004
                               
Allowance for doubtful accounts
    713       1,376       (1,024 ) (a)     1,065  
Deferred tax asset valuation allowance
    12,863             (12,863 ) (d)      
 
(a) Write-off of accounts receivables.
 
(b) Increase in valuation allowance necessary to fully reserve for the related increase in net deferred tax assets.
 
(c) Reversal of valuation allowance in an amount equal to the reduction in net deferred tax assets due primarily to utilization of net operating loss carryforwards.
 
(d) Reversal of deferred tax valuation allowance as a result of achieving three years of cumulative taxable income in 2004 along with expectations of future profitability.

II-6


Table of Contents

Item 17. Undertakings.
      (a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
      (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in “Item 14 – Indemnification of Directors and Officers” above, 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.
      (c) The undersigned Registrant hereby undertakes that:
        (1) For purposes of determining any liability under the Securities Act of 1933, 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.
 
        (2) For the purpose of determining any liability under the Securities Act of 1933, 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.

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Table of Contents

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 Minneapolis, State of Minnesota, on the 18th day of April, 2005.
  Capella Education Company
  By  /s/ Stephen G. Shank
 
 
  Stephen G. Shank
  Chairman of the Board of Directors
  and Chief Executive Officer
      Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on April 18, 2005.
         
Signature   Title
     
 
/s/ Stephen G. Shank
 
Stephen G. Shank
  Chairman and Chief Executive Officer
(Principal Executive Officer)
 
/s/ Lois M. Martin
 
Lois M. Martin*
  Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
/s/ Joseph C. Gaylord
 
Joseph C. Gaylord*
  Vice President and Corporate Controller
(Principal Accounting Officer)
 
/s/ S. Joshua Lewis
 
S. Joshua Lewis*
  Director
 
/s/ James A. Mitchell
 
James A. Mitchell*
  Director
 
/s/ David W. Smith
 
David W. Smith*
  Director
 
/s/ Tony J. Christianson
 
Tony J. Christianson*
  Director
 
/s/ Gordon A. Holmes
 
Gordon A. Holmes*
  Director
 
/s/ Jody G. Miller
 
Jody G. Miller*
  Director
 
/s/ Jeffrey W. Taylor
 
Jeffrey W. Taylor*
  Director
 
/s/ Darrell R. Tukua
 
Darrell R. Tukua*
  Director
 
/s/ Jon Q. Reynolds, Jr.
 
Jon Q. Reynolds, Jr.*
  Director
 
Stephen G. Shank, by signing his name hereto, does hereby sign this document on behalf of each of the above-named officers and/or directors of the Registrant pursuant to powers of attorney duly executed by such persons.
  By  /s/ Stephen G. Shank
 
 
  Stephen G. Shank
  Attorney-in-Fact

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Table of Contents

INDEX TO EXHIBITS
         
Exhibit    
Number   Description
     
  1 .1*   Form of Underwriting Agreement.
  3 .1   Articles of Incorporation of the Registrant, as amended to date and as currently in effect, including all Certificates of Designation.
  3 .2*   Form of Amended and Restated Articles of Incorporation of the Registrant to be effective upon completion of this offering.
  3 .3   Restated Bylaws of the Registrant.
  3 .4*   Form of Amended and Restated By-Laws of the Registrant to be effective upon completion of this offering.
  4 .1*   Specimen of common stock certificate.
  4 .2   Third Amended and Restated Co-Sale and Board Representation Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .3   Registration Rights Agreement, dated as of June 16, 1998, by and between the Registrant and National Computer Systems, Inc.
  4 .4   Amendment No. 1 to the Registration Rights Agreement, dated as of April 20, 2000, by and between the Registrant and National Computer Systems, Inc.
  4 .5   Amendment No. 2 to the Registration Rights Agreement, dated as of February 21, 2002, by and between the Registrant and NCS Pearson, Inc. (successor in interest to National Computer Systems, Inc.).
  4 .6   Amendment No. 3 to the Registration Rights Agreement, dated as of January 22, 2003, by and between the Registrant and NCS Pearson, Inc.
  4 .7   Second Amended and Restated Investor Rights Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .8   Warrant, dated as of June 16, 1998, issued by the Registrant to Legg Mason Wood Walker, Incorporated.
  4 .9   Amendment No. 1 to Warrant, dated as of April 20, 2000, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .10   Amendment No. 2 to Warrant, dated as of February 21, 2002, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .11   Amendment No. 3 to Warrant, dated as of January 22, 2003, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .12   Warrant, dated as of May 11, 2000, issued by the Registrant to Legg Mason Wood Walker, Incorporated.
  4 .13   Amendment No. 1 to Warrant, dated as of February 21, 2002, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .14   Amendment No. 2 to Warrant, dated as of January 22, 2003, by and between the Registrant and Legg Mason Wood Walker, Incorporated.
  4 .15   Exchange Agreement, dated as of January 22, 2003, by and among the Registrant and the shareholders named therein.
  4 .16   Class G Convertible Preferred Stock Purchase Agreement, dated as of January 15, 2003, by and among the Registrant and the shareholders named therein.
  4 .17   Class F Convertible Preferred Stock Purchase Agreement, dated as of January 31, 2002, by and among the Registrant and the shareholders named therein.
  4 .18   Class E Convertible Preferred Stock Purchase Agreement, dated as of April 20, 2000, by and among the Registrant and the shareholders named therein.
  5 .1*   Opinion of Faegre & Benson LLP.
  10 .1*   Capella Education Company 2005 Stock Incentive Plan.
  10 .2*   Form of Option Agreement for the Capella Education Company 2005 Stock Incentive Plan.
  10 .3   Capella Education Company 1999 Stock Option Plan, as amended.


Table of Contents

         
Exhibit    
Number   Description
     
  10 .4   Form of Non-Statutory Stock Option Agreement (Director) for the Capella Education Company 1999 Stock Option Plan.
  10 .5   Form of Non-Statutory Stock Option Agreement (Employee) for the Capella Education Company 1999 Stock Option Plan.
  10 .6   Form of Incentive Stock Option Agreement for the Capella Education Company 1999 Stock Option Plan.
  10 .7   Learning Ventures International, Inc. 1993 Stock Option Plan, as amended.
  10 .8   Form of Option Agreement for the Learning Ventures International, Inc. 1993 Stock Option Plan.
  10 .9*   Capella Education Company Employee Stock Ownership Plan.
  10 .10*   Capella Education Company Retirement Plan with Adoption Agreement and EGTRRA Amendment.
  10 .11*   Capella Education Company Form of Executive Severance Plan.
  10 .12*   Form of Severance Plan Release Agreement (for employee subject to valid non-competition agreement).
  10 .13*   Form of Severance Plan Release Agreement (for employee not subject to valid non-competition agreement).
  10 .14   Confidentiality, Non-Competition and Inventions Agreement, dated as of April 16, 2001, by and between the Registrant and Michael J. Offerman.
  10 .15   Confidentiality, Non-Competition and Inventions Agreement, dated as of May 9, 2001, by and between the Registrant and Paul A. Schroeder.
  10 .16   Form of Confidentiality, Non-Competition and Inventions Agreement (executed by Scott M. Henkel).
  10 .17   Offer Letter, dated as of March 9, 2001, by and between the Registrant and Paul A. Schroeder.
  10 .18   Offer Letter, dated as of November 10, 2003, by and between the Registrant and Michael J. Offerman.
  10 .19   Offer Letter, dated as of December 22, 2003, by and between the Registrant and Scott M. Henkel.
  10 .20   Offer Letter, dated June 3, 2003, by and between the Registrant and Heidi K. Thom.
  10 .21   Form of Nondisclosure Agreement (executed by Scott M. Henkel, Paul A. Schroeder, Stephen G. Shank, Heidi K. Thom, and Michael J. Offerman).
  10 .22   Office Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .23   Short Term Office Space Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .24   Memorandum of Lease, dated as of March 10, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
  10 .25   Office Lease, dated as of June 28, 2000, as amended, by and between the Registrant and 222 South Ninth Street Limited Partnership and ND Properties, Inc. as successor in interest to 222 South Ninth Street Limited Partnership.
  10 .26*   Library and Information Services Agreement, dated as of September 1, 2004, by and between Capella University and Milton S. Eisenhower Library of the Johns Hopkins University
  10 .27*   Software License Agreement, dated as of November 10, 2003, by and between Capella University and WebCT, Inc.
  10 .28*   Master Service Agreement, dated as of April 1, 2005, by and between the Registrant and Avenue A LLC.
  21 .1   Subsidiaries of the Registrant.
  23 .1   Consent of Ernst & Young.
  23 .2*   Consent of Faegre & Benson LLP (to be included in Exhibit No. 5.1 to Registration Statement).
  24 .1   Powers of Attorney.
 
To be filed by Amendment

EXHIBIT 3.1

ARTICLES OF INCORPORATION
OF
UNIVERSITY GROUP, INC

To form a Minnesota business corporation under and pursuant to the Minnesota Business Corporation Act, the following Articles of Incorporation are adopted:

ARTICLE 1. NAME

The name of the Corporation is University Group, Inc.

ARTICLE 2. REGISTERED OFFICE

The address of the registered office of the corporation is Interchange North Building, Suite 500, 300 South Highway 169, St. Louis Park, Minnesota 55426.

ARTICLE 3. AUTHORIZED SHARES

The aggregate number of authorized common shares of the Corporation is five (5) million, of par value of $.10 per share.

ARTICLE 4. INCORPORATOR

The name and address of the incorporator, who is a natural person of full age, are:

William R Hibbs, Esq.

c/o Dorsey & Whitney
2200 First Bank Place East
Minneapolis, Minnesota 55402

ARTICLE 5. CUMULATIVE VOTING

There shall be no cumulative voting by shareholders of the Corporation.

ARTICLE 6. PREEMPTIVE RIGHTS

The shareholders of the Corporation shall not have any preemptive rights to subscribe for or acquire securities or rights to purchase securities of any class, kind, or series of the Corporation.


ARTICLE 7. DIRECTOR LIABILITY

A director of this Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article 7 became effective.

If the Minnesota Business Corporation Act is hereafter amended to authorize any further limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as amended.

Any repeal or modification of the foregoing provisions of the Article 7 by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

IN WITNESS WHEREOF, the undersigned, Incorporator for the Corporation, has executed this document on this 27th day of December, 1991.

/s/ William R. Hibbs
--------------------------------
William R. Hibbs, Esq.

STATE OF    MINNESOTA      )
                           ) ss.
COUNTY OF  HENNEPIN        )

On this 27th day of December, 1991, before me, a Notary Public within and for said county, personally appeared William R. Hibbs, Esq., to me known to be the person described in and who executed the foregoing instrument.

(Notarial Seal)                                  /s/ Darlene R. Spangler
                                                 -------------------------------
                                                 Notary Public

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EXHIBIT 3.1
AMENDMENT AND RESTATEMENT OF
ARTICLES OF INCORPORATION OF
UNIVERSITY GROUP, INC

This Amendment and Restatement has been adopted pursuant to Chapter 302A of the Minnesota Statutes, the Minnesota Business Corporation Act, and supersedes the original Articles.

ARTICLE I. NAME

The name of the Corporation is Learn Net, Inc.

ARTICLE II. REGISTERED OFFICE

The address of the registered office of the Corporation is 1400 Northland Plaza, 3800 West 80th Street, Minneapolis, Minnesota 55431.

ARTICLE III. AUTHORIZED SHARES

Section 1. Shares and Classes Authorized

(A) Authorized Capital Stock. The aggregate number of shares which the Corporation has the authority to issue is twenty-three million (23,000,000) shares, ten million (10,000,000) of which shall be designated common shares, $.10 par value (the "Common Shares"), and three million (3,000,000) of which shall be designated Class A convertible preferred shares, $1.00 par value (the "Class A Preferred Shares"). The Common Shares and the Class A Preferred Shares are herein sometimes referred to collectively as "Capital Stock."

(B) Additional Preferred Shares. Additionally, the Board of Directors of the Corporation is hereby authorized to cause to be issued from time to time, by resolution or resolutions adopted by such Board, an additional ten million (10,000,000) preferred shares. The Board is authorized to cause such preferred shares to be issued in one or more classes and/or series, to establish the designation and number of shares of each such class or series, and to fix the relative rights and preferences of the shares of each such class or series, all to the full extent permitted by Minnesota Statutes, Section 302A.401, or any successor provision. Without limiting the generality of the foregoing, the Board of Directors is authorized to provide that shares of a class or series of preferred stock:

(1) are entitled to cumulative, partially cumulative or noncumulative dividends or other distributions in payable in cash, capital stock or indebtedness of the Corporation or other property, at such times and in such amounts as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;


(2) are entitled to a preference with respect to payment of dividends over one or more other classes and/or series of capital stock of the Corporation;

(3) are entitled to a preference with respect to any distribution of assets of the Corporation upon its liquidation, dissolution or winding up over one or more other classes and/or series of capital stock of the Corporation in such amount as is set forth in the Board resolutions establishing such class or series or as is determined in a manner specified in such resolutions;

(4) are redeemable or exchangeable at the option of the Corporation and/or on a mandatory basis for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(5) are entitled to the benefits of such sinking fund, if any, as is required to be established by the Corporation for the redemption and/or purchase of such shares by the Board resolutions establishing such class or series;

(6) are convertible at the option of the holders thereof into shares of any other class or series of capital stock of the Corporation, at such times or upon the occurrence of such events, and upon such terms, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(7) are exchangeable at the option of the holders thereof for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(8) are entitled to such voting rights, if any, as are specified in the Board resolutions establishing such class or series (including, without limiting the generality of the foregoing, the right to elect one or more directors voting alone as a single class or series or together with one or more other classes and/or series of preferred stock, if so specified by such Board resolutions) at all times or upon the occurrence of specified events; and

(9) are subject to restrictions on the issuance of additional shares of preferred stock of such class or series or of any other class or series, or on the reissuance of shares of preferred stock of such class or series or of any other

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class or series, or on increases or decreases in the number of authorized shares of preferred stock of such class or series or of any other class or series.

Without limiting the generality of the foregoing authorizations, any of the rights and preferences of a class or series of preferred stock may be made dependent upon facts ascertainable outside the Board resolutions establishing such class or series, and may incorporate by reference some or all of the terms of any agreements, contracts or other arrangements entered into by the Corporation in connection with the issuance of such class or series, all to the full extent permitted by Minnesota Statutes. Unless otherwise specified in the Board resolutions establishing a class or series of preferred stock, holders of a class or series of preferred stock shall not be entitled to cumulate their votes in any election of directors in which they are entitled to vote and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation.

Section 2. Description of the Capital Stock.

The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares or the holders thereof are as follows:

(A) Voting Rights.

Each holder of Common Shares shall have one vote on all matters submitted to the shareholders for each Common Share standing in the name of such holder on the books of this Corporation. Each holder of Class A Preferred Shares shall have one vote on all matters submitted to the shareholders for each Common Share which such holder of Class A Preferred Shares would be entitled to receive upon the conversion of his Class A Preferred Shares pursuant to the provisions of
Section 2(C)(3). No holder of any shares of Capital Stock shall have any cumulative voting rights.

(B) Preemptive Rights.

No holders of shares of any class of Capital Stock shall be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of this Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

(C) Class A Preferred Shares.

(1) Dividends. Dividends shall be payable on Class A Preferred Shares out of funds legally available for the declaration of dividends, only if and when declared by this Corporation's Board of Directors. However, in no event shall any dividend be paid on any Common Shares unless equal or greater dividends are paid on the Class A Preferred Shares. Class A Preferred Shares shall be counted on an

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as-if-converted basis in determining whether dividends paid on the Class A Preferred Shares are equal to or greater than the dividends paid on the Common Shares.

(2) Liquidation Right and Preference. In the event of the liquidation, dissolution or winding up of this Corporation, whether voluntary or involuntary, the holders of Class A Preferred Shares shall be entitled to receive in cash, out of the assets of this Corporation, an amount equal to the par value of each outstanding Preferred Share (that is, $1.00 per share), plus all accumulated but unpaid dividends, before any payment shall be made or any assets distributed to the holders of Common Shares or any other class of shares of this Corporation ranking junior to the Class A Preferred Shares. If, upon any liquidation, dissolution or winding up of this Corporation, the assets of this Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of such Class A Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled Following such payment to the holders of Class A Preferred Shares upon such liquidation, dissolution or winding up of this Corporation, the holders of Common Shares shall then be entitled, to the exclusion of the holders of Class A Preferred Shares, to receive in cash or in kind, all remaining assets of this Corporation, if any.

The merger or consolidation of this Corporation into or with another corporation or the merger or consolidation of any other corporation into or with this Corporation (in which consolidation or merger the shareholders of this Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of this Corporation, shall be deemed to be a liquidation or dissolution of this Corporation for purposes of this Section 2(C)(2).

(3) Conversion Rights.

(a) Optional Conversion. At the option of the holder thereof, all Class A Preferred Shares then held by such holder shall be convertible into Common Shares of this Corporation in accordance with the provisions and subject to the adjustments provided for in Section 2(C)(3)(b); provided, however, that each Class A Preferred Share called for redemption by this Corporation shall cease to be convertible on and after the redemption date if provision shall have been made for its payment. In order to exercise the conversion privilege, a holder of Class A Preferred Shares shall surrender the certificate or certificates evidencing all Class A Preferred Shares then held by such holder to this Corporation at its principal office, duly endorsed to this Corporation and accompanied by written notice to this Corporation that the holder elects to convert all of such shares. Class A Preferred Shares converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the

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holder of such Class A Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of Common Shares issuable upon conversion. As promptly as practicable on or after the conversion date, this Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share, and a certificate or certificates for the balance of Class A Preferred Shares surrendered, if any, not so converted into Common Shares.

(b) Conversion Price and Adjustments. The number of Common Shares issuable in exchange for each Class A Preferred Share upon either optional or automatic conversion shall be equal to One Dollar ($1.00) divided by the conversion price then in effect for Class A Preferred Shares (the "Class A Conversion Price"). The Class A Conversion Price shall initially be One Dollar ($1.00), but such Class A Conversion Price shall be subject to adjustment from time to time, as provided in the following sentence. In case this corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Class A Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of this Corporation shall be combined into a smaller number of shares, the Class A Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(c) Rights to Preconversion Distributions. The holders of Class A Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares:

(i) in case this Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or other than in Common Shares, then thereafter each holder of Class A Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class A Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares.

-5-

(ii) Subject to the provisions of Section 2(C)(2) regarding liquidation rights, if any capital reorganization or reclassification of the Capital Stock of this Corporation, or consolidation or merger of this Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class A Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of this Corporation immediately theretofore receivable upon the conversion of such Class A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore receivable upon the conversion or such Class A Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Class A Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Class A Conversion Price and of the number of shares receivable upon the conversion of such Class A Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Class A Preferred Shares. This Corporation shall not effect any such reorganization, reclassification consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Class A Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive.

(d) Notice of Certain Events. In case any time:

(i) this Corporation shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

-6-

(ii) this Corporation shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of this Corporation, or consolidation or merger of this Corporation with, or sale of all or substantially all of its assets, to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of this Corporation;

then, in any one or more of said cases, this Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class A Preferred Shares at the addresses of such holders as shown on the books of this Corporation, of the date on which (A) the books of this Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which this Corporation's transfer books are dosed in respect thereto.

(4) Redemption Rights.

(a) This corporation shall at any time have the conditional right, but not the obligation, to purchase and redeem all, but not less than all, of the then outstanding Class A Preferred Shares at the redemption price, plus all accrued but unpaid dividends, if the exercise of such conditional redemption option is approved by all of the members of this Corporation's Board of Directors. The "redemption price" of all Class A Preferred Shares shall be the par value of such Class A Preferred Shares. Within thirty (30) days after the meeting of the Board of Directors at which the exercise of such conditional redemption right was approved by the requisite number of members of the Board, the Corporation shall deliver notice of exercise to all holders of Class A Preferred Shares subject to redemption. Thereafter, each holder of Class A Preferred Shares subject to redemption shall have a period of ninety (90) days in which to convert his Class A Preferred

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Shares into Common Shares pursuant to the provisions of Section
2(C)(3). If the holder of Class A Preferred Shares subject to redemption does not convert his Class A Preferred Shares into Common Shares within such ninety (90) day period, the Class A Preferred Shares shall thereafter be redeemed pursuant to the provisions of this Section 2(C)(4).

(b) This Corporation shall complete the redemption of all Class A Preferred Shares outstanding on the date of expiration of the ninety (90) day notice period described in part (a) of this
Section 2(C)(4) by (i) notifying the holders of such outstanding Class A Preferred Shares of the date on which the shares will be redeemed, and (ii) depositing in trust with a bank or trust company located in the United States of America and having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000), within ten (10) days after the expiration of the ninety (90) day notice period described in part (a) of this Section 2(C)(4), an amount in cash out of moneys legally available therefor sufficient to redeem such Class A Preferred Shares at the redemption prices specified in this Section 2(C)(4), with instructions and authority to such bank or trust company to pay the redemption price on or after the date fixed for redemption, upon surrender by such holders of the certificates evidencing the shares being redeemed, which certificates shall be properly endorsed in blank. If the certificates evidencing such shares are not surrendered, the dividends with respect to such shares shall cease to accrue after the date fixed for redemption and all rights with respect to such shares shall forthwith after such date cease and terminate, except only the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. Any moneys deposited by this Corporation pursuant to this paragraph and unclaimed at the end of one year after the date fixed for redemption shall be repaid to this Corporation upon its request expressed in a resolution of its Board of Directors, and thereafter the holders of shares so called for redemption shall be entitled to receive payment of the redemption price only from this Corporation. All Class A Preferred Shares which are in any manner redeemed or acquired by this Corporation shall be retired and canceled and none of such shares shall be reissued.

ARTICLE 4. DIRECTOR LIABILITY

A director of this Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections

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302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article 4 became effective.

If the Minnesota Business Corporation Act is hereafter amended to authorize any further limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as amended.

Any repeal or modification of the foregoing provisions of the Article 4 by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

IN WITNESS WHEREOF, the undersigned, Incorporator of the Corporation, has executed this document on this 11th day of February, 1993.

/s/ William R. Hibbs
---------------------------
William R. Hibbs, Esq.

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EXHIBIT 3.1

AMENDMENT AND RESTATEMENT OF
ARTICLES OF INCORPORATION OF
LEARN-NET, INC.

This Amendment and Restatement has bean adopted pursuant to Chapter 302A of the Minnesota Statutes, the Minnesota Business Corporation Act, and supersedes the original Articles.

ARTICLE I. NAME

The name of the Corporation is Learning Ventures, Inc.

ARTICLE II REGISTERED OFFICE

The address of the registered office of the Corporation is 1400 Northland Plaza, 3800 West 80th Street, Minneapolis, Minnesota 55431.

ARTICLE III. AUTHORIZED SHARES

Section 1. Shares and Classes Authorized.

(A) Authorized Capital Stock. The aggregate number of shares which the Corporation has the authority to issue is twenty-three million (23,000,000) shares, ten million (10,000,000) of which shall be designated common shares, $.10 par value (the "Common Shares"), and three million (3,000,000) of which shall be designated Class A convertible preferred shares, $1.00 par value (the "Class A Preferred Shares"). The Common Shares and the Class A Preferred Shares are herein sometimes referred to collectively as "Capital Stock." Additionally, the Board of Directors of the corporation is hereby authorized to cause to be issued from time to time, by resolution or resolutions adopted by such Board, an additional ten million (10,000,000) preferred shares (the "Open Term Preferred Shares").

(B) Open Term Preferred Shares. The Board is authorized to cause the Open Term Preferred Shares to be issued in one or more classes and/or series, to establish the designation and number of shares of each such class or series, and to fix the relative rights and preferences of the shares of each such class or series, all to the full extent permitted by Minnesota Statutes, Section 302A.401, or any successor provision. Without limiting the generality of the foregoing, the Board of Directors is authorized to provide that shares of a class or series of preferred stock:

(1) are entitled to cumulative, partially cumulative or noncumulative dividends or other distributions in payable in cash, capital stock or indebtedness of the corporation or other property, at such times and in such amounts as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;


(2) are entitled to a preference with respect to payment of dividends over one or more other classes and/or series of capital stock of the Corporation;

(3) are entitled to a preference with respect to any distribution of assets of the Corporation upon its liquidation, dissolution or winding up over one or more other classes and/or series of capital stock of the Corporation in such amount as is set forth in the Board resolutions establishing such class or series or as is determined in a manner specified in such resolutions;

(4) are redeemable or exchangeable at the option of the Corporation and/or on a mandatory basis for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(5) are entitled to the benefits of such sinking fund, if any, as is required to be established by the Corporation for the redemption and/or purchase of such shares by the Board resolutions establishing such class or series;

(6) are convertible at the option of the holders thereof into shares of any other class or series of capital stock of the Corporation, at such times or upon the occurrence of such events, and upon such terms, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(7) are exchangeable at the option of the holders thereof for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions;

(8) are entitled to such voting rights, if any, as are specified in the Board resolutions establishing such class or series (including, without limiting the generality of the foregoing, the right to elect one or more directors voting alone as a single class or series or together with one or more other classes and/or series of preferred stock, if so specified by such Board resolutions) at all times or upon the occurrence of specified events; and

(9) are subject to restrictions on the issuance of additional shares of preferred stock of such class or series or of any other class or series, or on the reissuance of shares of preferred stock of such class or series or of any other

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class or series, or on increases or decreases in the number of authorized shares of preferred stock of such class or series or of any other class or series.

Without limiting the generality of the foregoing authorizations, any of the rights and preferences of a class or series of preferred stock may be made dependent upon facts ascertainable outside the Board resolutions establishing such class or series, and may incorporate by reference some or all of the terms of any agreements, contracts or other arrangements entered into by the Corporation in connection with the issuance of such class or series, all to the full extent permitted by Minnesota Statutes. Unless otherwise specified in the Board resolutions establishing a class or series of preferred stock, holders of a class or series of preferred stock shall not be entitled to cumulate their votes in any election of directors in which they are entitled to vote and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation.

Section 2. Description of the Capital Stock.

The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares or the holders thereof are as follows:

(A) Voting Rights.

Each holder of Common Shares shall have one vote on all matters submitted to the shareholders for each Common Share standing in the name of such holder on the books of this Corporation. Each holder of Class A Preferred Shares shall have one vote on all matters submitted to the shareholders for each Common Share which such holder of Class A Preferred Shares would be entitled to receive upon the conversion of his Class A Preferred Shares pursuant to the provisions of
Section 2(C)(3). No holder of any shares of Capital Stock shall have any cumulative voting rights.

(B) Preemptive Rights.

No holders of shares of any class of Capital Stock shall be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of this Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

(C) Class A Preferred Shares.

(1) Dividends. Dividends shall be payable on Class A Preferred Shares out of funds legally available for the declaration of dividends, only if and when declared by this Corporation's Board of Directors. However, in no event shall any dividend be paid on any Common Shares unless equal or greater dividends are paid an the Class A Preferred Shares. Class A Preferred Shares shall be counted on an as-if-converted

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basis in determining whether dividends paid on the Class A Preferred Shares are equal to or greater than the dividends paid on the Common Shares.

(2) Liquidation Right and Preference. In the event of the liquidation, dissolution or winding up of this Corporation, whether voluntary or involuntary, the holders of Class A Preferred Shares shall be entitled to receive in cash, out of the assets of this Corporation, an amount equal to the par value of each outstanding Preferred Share (that is, $1.00 per share), plus all accumulated but unpaid dividends, before any payment shall be made or any assets distributed to the holders of Common Shares or any other class of shares of this Corporation ranking junior to the Class A Preferred Shares. If, upon any liquidation, dissolution or winding up of this Corporation, the assets of this Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of such Class A Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Class A Preferred Shares upon such liquidation, dissolution or winding up of this Corporation, the holders of Common Shares shall then be entitled, to the exclusion of the holders of Class A Preferred Shares, to receive in cash or in kind, all remaining assets of this Corporation, if any.

The merger or consolidation of this Corporation into or with another corporation or the merger or consolidation of any other corporation into or with this corporation (in which consolidation or merger the shareholders of this Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of this Corporation, shall be deemed to be a liquidation or dissolution of this Corporation for purposes of this Section 2(C)(2).

(3) Conversion Rights.

(a) Optional Conversion. At the option of the holder thereof, all Class A Preferred Shares then held by such holder shall be convertible into Common Shares of this Corporation in accordance with the provisions and subject to the adjustments provided for in Section 2(C)(3)(c); provided, however, that each Class A Preferred Share called for redemption by this Corporation shall cease to be convertible on and after the redemption date if provision shall have been made for its payment. In order to exercise the conversion privilege, a holder of Class A Preferred Shares shall surrender the certificate or certificates evidencing all Class A Preferred Shares then held by such holder to this Corporation at its principal office, duly endorsed to this Corporation and accompanied by written notice to this Corporation that the holder elects to convert all of such shares. Class A Preferred Shares converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class A Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of

-4-

Common Shares issuable upon conversion. As promptly as practicable on or after the conversion date, this Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share, and a certificate or certificates for the balance of Class A Preferred Shares surrendered, if any, not so converted into Common Shares.

(b) Automatic Conversion. The Class A Preferred Shares shall be automatically converted into Common Shares, upon the election of this Corporation and delivery of written notice of such election to the holders of the Class A Preferred Shares (which election and notice may be delivered within ninety (90) days before or after the automatic conversion event described below without affecting the effective time of such automatic conversion), if this Corporation closes the issuance and sale of Common Shares in one or more underwritten public offerings, pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the gross proceeds received by this Corporation equal or exceed Ten Million Dollars ($10,000,000).

(c) Conversion Price and Adjustments. The number of Common Shares issuable in exchange for each Class A Preferred Share upon either optional or automatic conversion shall be equal to One Dollar ($1.00) divided by the conversion price then in effect for Class A Preferred Shares (the "Class A Conversion Price"). The Class A Conversion Price shall initially be One Dollar ($1.00), but such Class A Conversion Price shall be subject to adjustment from time to time, as provided in the following sentence. In case this Corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Class A Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of this Corporation shall be combined into a smaller number of shares, the Class A Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(d) Rights to Preconversion Distributions. The holders of Class A Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares:

(i) In case this Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or other than in Common Shares, then thereafter each holder of Class A Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class A Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all

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dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions, and originating directly or indirectly from such Common Shares.

(ii) Subject to the provisions of Section 2(C)(2) regarding liquidation rights, if any capital reorganization or reclassification of the Capital Stock of this Corporation, or consolidation or merger of this Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class A Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of this Corporation immediately theretofore receivable upon the conversion of such Class A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore receivable upon the conversion or such Class A Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Class A Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Class A Conversion Price and of the number of shares receivable upon the conversion of such Class A Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Class A Preferred Shares. This Corporation shall not effect any such reorganization, reclassification consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than this Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Class A Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive.

(e) Notice of Certain Events. In case any time:

(i) this Corporation shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

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(ii) this Corporation shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of this corporation, or consolidation or merger of this Corporation with, or sale of all or substantially all of its assets, to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of this Corporation;

then, in any one or more of said cases, this Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class A Preferred Shares at the addresses of such holders as shown on the books of this Corporation, of the date on which (A) the books of this Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which this Corporation's transfer books are closed in respect thereto.

(4) Redemption Rights.

(a) At any time after February 24, 2000, the Corporation shall have the conditional right, but not the obligation, to purchase and redeem all, but not less than all, of the then outstanding Class A Preferred Shares at the redemption price, plus all accrued but unpaid dividends, if the exercise of such conditional redemption option is approved by all of the members of this Corporation's Board of Directors. The "redemption price" of all Class A Preferred Shares shall be the par value of such Class A Preferred Shares. Within thirty (30) days after the meeting of the Board of Directors at which the exercise of such conditional redemption right was approved by the requisite number of members of the Board, the Corporation shall deliver notice of exercise to all holders of Class A Preferred Shares subject to redemption. Thereafter, each holder of Class A Preferred Shares subject to redemption shall have a period of ninety (90) days in which to convert his Class A Preferred Shares into Common Shares pursuant to the provisions of Section 2(C)(3). If the holder of Class A Preferred Shares subject to redemption does not convert his Class A Preferred Shares into Common Shares within such

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ninety (90) day period, the Class A Preferred Shares shall thereafter be redeemed pursuant to the provisions of this Section 2(C)(4).

(b) This Corporation shall complete the redemption of all Class A Preferred Shares outstanding on the date of expiration of the ninety (90) day notice period described in part (a) of this Section 2(C)(4) by (i) notifying the holders of such outstanding Class A Preferred Shares of the date on which the shares will be redeemed, and (ii) depositing in trust with a bank or trust company located in the United States of America and having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000), within ten (10) days after the expiration of the ninety (90) day notice period described in part (a) of this Section
2(C)(4), an amount in cash out of moneys legally available therefor sufficient to redeem such Class A Preferred Shares at the redemption prices specified in this Section 2(C)(4), with instructions and authority to such bank or trust company to pay the redemption price on or after the date fixed for redemption, upon surrender by such holders of the certificates evidencing the shares being redeemed, which certificates shall be properly endorsed in blank. If the certificates evidencing such shares are not surrendered, the dividends with respect to such shares shall cease to accrue after the date fixed for redemption and all rights with respect to such shares shall forthwith after such date cease and terminate, except only the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. Any moneys deposited by this Corporation pursuant to this paragraph and unclaimed at the end of one year after the date fixed for redemption shall be repaid to this Corporation upon its request expressed in a resolution of its Board of Directors, and thereafter the holders of shares so called for redemption shall be entitled to receive payment of the redemption price only from this Corporation. All Class A Preferred Shares which are in any manner redeemed or acquired by this Corporation shall be retired and canceled and none of such shares shall be reissued.

ARTICLE 4. DIRECTOR LIABILITY

A director of this corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived an improper personal benefit; or (v) for any act or omission occurring prior to the date when this Article 4 became effective.

If the Minnesota Business Corporation Act is hereafter amended to authorize any further limitation of the liability of a director, then the liability of a director of the

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Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as amended.

Any repeal or modification of the foregoing provisions of the Article 4 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

IN WITNESS WHEREOF, the undersigned, Incorporator of the Corporation, has executed this document on this 22nd day of February, 1993.

/s/ William R. Hibbs
---------------------------
William R. Hibbs, Esq.

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EXHIBIT 3.1

MINNESOTA SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION

BEFORE COMPLETING THIS FORM, PLEASE READ INSTRUCTIONS LISTED BELOW.

CORPORATE NAME:(List the name of the company prior to any desired name change)

Learning Ventures, Inc.

This amendment Is effective on the day it Is filed with the Secretary of State, unless you indicate another date, no later than 30 days after filing with the Secretary of State. November 15, 1993

The following amendment(s) of articles regulating the above corporation were adopted: (Insert full text of newly amended article(s) indicating which article(s) is (are) being amended or added.) If the full text of the amendment will not fit in the space provided, attach additional numbered pages. (Total number of pages including this form______ .)

ARTICLE 2

The address of the registered office of the corporation is 121 South 8th Street, Suite 730, Minneapolis, Minnesota 55402.

This amendment has been approved pursuant to Minnesota Statutes chapter 302A or 317A. I certify that I am authorized to execute this amendment and I further certify that I understand that by signing this amendment, I am subject to the penalties of perjury as set forth in section 609.48 as if I had signed this amendment under oath.

 /s/ Marie Hubonette, Asst. Corp. Secretary
-------------------------------------------
      (Signature of Authorized Person)


EXHIBIT 3.1

MINNESOTA SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION

BEFORE COMPLETING THIS FORM, PLEASE READ INSTRUCTIONS LISTED BELOW.

CORPORATE NAME:(List the name of the company prior to any desired name change)

Learning Ventures, Inc.

This amendment Is effective on the day it Is filed with the Secretary of State, unless you indicate another date, no later than 30 days after filing with the Secretary of State.__________________

The following amendment(s) of articles regulating the above corporation were adopted: (Insert full text of newly amended article(s) indicating which article(s) is (are) being amended or added.) If the full text of the amendment will not fit in the space provided, attach additional numbered pages. (Total number of pages including this form _________ .)

ARTICLE______

See attached Certificate of Designation of Class B Convertible Preferred Stock of Learning Ventures, Inc. pursuant to Article IIIB of the Restated Articles of Incorporation.

This amendment has been approved pursuant to Minnesota Statutes chapter 302A or 317A. I certify that I am authorized to execute this amendment and I further certify that I understand that by signing this amendment, I am subject to the penalties of perjury as set forth in section 609.48 as if I had signed this amendment under oath.

/s/ Paul F. Clifford
--------------------------
Paul Clifford, Secretary


EXHIBIT 3.1

CERTIFICATE OF DESIGNATION
OF
CLASS B CONVERTIBLE PREFERRED STOCK
OF
LEARNING VENTURES, INC

I, Paul F. Clifford, the Secretary of Learning Ventures, Inc., a Minnesota corporation (the "Corporation"), do hereby certify that by a written action of the Board of Directors of the Corporation dated as of October 25, 1994, the following resolutions effecting the creation of a series of preferred stock designated as "Class B Convertible Preferred Stock" were duly approved by the Board of Directors of the Corporation and that such resolutions have not been subsequently modified or rescinded

RESOLVED, that the Corporation shall create a class of shares of preferred stock designated as "Class B Convertible Preferred Shares" and will reserve One Hundred Eighty Thousand (180,000) of the Corporation's authorized but unissued shares of preferred stock for issuance under such class.

FURTHER RESOLVED, that the Class B Convertible Preferred Shares shall be entitled to the relative rights and preferences described in the attached Exhibit A.

I further certify that the document attached hereto and marked Exhibit A and entitled "Learning Ventures, Inc. Certificate of Designation for Class B Convertible Preferred Stock" is a true and correct copy of the document referred to in the foregoing resolutions.

IN WITNESS WHEREOF, I have executed this certificate as of this 25th day of October, 1994.

/s/ Paul F. Clifford
---------------------------
Paul F. Clifford, Secretary


EXHIBIT 3.1

EXHIBIT A

LEARNING VENTURES, INC

CERTIFICATE OF DESIGNATION
FOR
CLASS B CONVERTIBLE PREFERRED STOCK

1. Designation; Number of Shares; Par Value. A class of shares of preferred stock of Learning Ventures, Inc. (the "Corporation") shall be designated as Class B Convertible Preferred Stock (the "Class B Preferred Shares"). The number of shares constituting the Class B Preferred Shares shall be One Hundred Eighty Thousand (180,000) shares. The "Class B Preferred Shares shall have a par value of $2.50 per share.

2. Voting Rights. On all matters submitted to the shareholders, each holder of Class B Preferred Shares shall have one vote for each share of common stock of the Corporation which such holder of Class B Preferred Shares would be entitled to receive upon the conversion of such holder's Class B Preferred Shares pursuant to the provisions of Section 6. No holder of any Class B Preferred Shares shall have any cumulative voting rights.

3. No Preemptive Rights. Holders of Class B Preferred Shares shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

4. Dividends. The Class B Preferred Shares shall rank equal to the Class A convertible preferred stock of the Corporation (the "Class A Preferred Shares") and senior to the common stock of the Corporation (the "Common Shares") with respect to the payment of dividends. Dividends shall be payable on Class B Preferred Shares out of funds legally available for the declaration of dividends only if and when declared by the Corporation's Board of Directors. However, in no event shall any dividend be paid on any Common Shares or any other class of shares of the Corporation ranking equal to or junior to the Class B Preferred Shares unless equal or greater dividends are paid on the Class B Preferred Shares. All shares of stock of the Corporation shall be counted on an as-if-converted-to-Common-Shares basis in determining whether dividends paid on the Class B Preferred Shares are equal to or greater than the dividends paid on any other shares.

5. Liquidation Right and Preference. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the


holders of Class B Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to the par value of each outstanding Class B Preferred Share (i.e., $2.50 per share), plus all accumulated but unpaid dividends, before any payment shall be made or any assets distributed to the holders of Common Shares or any other class of shares of the Corporation ranking junior to the Class B Preferred Shares. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class B Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class B Preferred Shares upon such liquidation, dissolution or winding up of the Corporation, the holders of Common Shares and any other class of shares of the Corporation ranking junior to the Class B Preferred Shares shall then be entitled, to the exclusion of the holders of Class B Preferred Shares, to receive in cash or in kind, all remaining assets of the Corporation, if any.

The merger or consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this Section 5.

6. Conversion into Common Shares.

(a) Optional Conversion. At the option of the holder thereof, all Class B Preferred Shares then held by such holder shall be convertible into Common Shares of the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c); provided, however, that each Class B Preferred Share called for redemption by the Corporation shall cease to be convertible on and after the redemption date if provision shall have been made for its payment. In order to exercise the conversion privilege, a holder of Class B Preferred Shares shall surrender the certificate or certificates evidencing all Class B Preferred Shares then held by such holder to the Corporation at its principal office, duly endorsed to the Corporation and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Class B Preferred Shares converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class B Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of Common Shares issuable upon conversion. As promptly

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as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share.

(b) Automatic Conversion. The Class B Preferred Shares shall be automatically converted into Common Shares, upon the election of the Corporation and delivery of written notice of such election to the holders of the Class B Preferred Shares (which election and notice shall be delivered within ninety (90) days before or after the automatic conversion event described below without affecting the effective time of such automatic conversion), if the Corporation closes the issuance and sale of Common Shares in one or more underwritten public offerings, pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the gross proceeds received by the Corporation equal or exceed Ten Million Dollars ($10,000,000).

(c) Conversion Price and Adjustments. The number of Common Shares issuable in exchange for each Class B Preferred Share upon either optional or automatic conversion shall be equal to One Dollar ($1.00) divided by the conversion price then in effect for Class B Preferred Shares (the "Class B Conversion Price"). The Class B Conversion Price shall initially be One Dollar ($1.00), but such Class B Conversion Price shall be subject to adjustment from time to time, as provided in the following sentence. In case the Corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Class B Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of the Corporation shall be combined into a smaller number of shares, the Class B Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(d) Rights to Preconversion Distributions. The holders of Class B Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares:

(i) In case the Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or other than in Common Shares, then thereafter each holder of Class B Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class B Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any

-3-

such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares.

(ii) Subject to the provisions of Section 5 regarding liquidation rights, if any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class B Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of the Corporation immediately theretofore receivable upon the conversion of such Class B Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore receivable upon the conversion or such Class B Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Class B Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Class B Conversion Price and of the number of shares receivable upon the conversion of such Class B Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Class B Preferred Shares. The Corporation shall not effect any such reorganization, reclassification consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than the Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Class B Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive.

(e) Notice of Certain Events. In case any time:

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(i) the Corporation shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization,, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or sale of all or substantially all of its assets, to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class B Preferred Shares at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are dosed in respect thereto.

7. Conversion Into Preferred Shares.

If the Corporation issues, between October 25, 1994 and December 31, 1995, any shares of preferred stock, each share of which is convertible into one Common Share, other than Class A Preferred Shares or Class B Preferred Shares (such stock hereinafter referred to as the "Class C Preferred Shares"), then the Class B Preferred Shares shall be convertible into Class C Preferred Shares at the option of the holder thereof or the Corporation, as provided in this Section 7.

(a) Holder's Conversion Option. If the par value of the Class C Preferred Shares is less than $2.50 per share, then all Class B Preferred Shares shall be convertible into Class C Preferred Shares at the option of the holder of such Class B Preferred Shares. This conversion option shall be exercisable for

-5-

a period of 90 days following the closing of the first sale of Class C Preferred Shares which occurs prior to December 31, 1995, and shall expire at the end of such 90-day period; provided, however, that each Class B Preferred Share called for redemption by the Corporation pursuant to
Section 8 shall cease to be convertible on and after the redemption date if provision shall have been made for its payment. In order to exercise the conversion privilege, a holder of Class B Preferred Shares shall surrender the certificate or certificates evidencing all Class B Preferred Shares then held by such holder to the Corporation at its principal office, duly endorsed to the Corporation and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Class B Preferred Shares converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares in accordance with the foregoing provisions, and at such time the rights of the holder of such Class B Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of the Class C Preferred Shares issuable upon such conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Class C Preferred Shares issuable upon such conversion, computed to the nearest one hundredth of a full share.

(b) Corporation's Conversion Option. If the par value of the Class C Preferred Shares is greater than or equal to $2.50 per share, then all Class B Preferred Shares shall be convertible into Class C Preferred Shares at the option of the Corporation. This conversion option shall be exercisable for a period of 90 days following the closing of the first sale of Class C Preferred Shares which occurs prior to December 31,1995, and shall expire at the end of such 90-day period. In order to exercise the conversion privilege, the Corporation shall send written notice of such exercise to all holders of Class B Preferred Shares by first class mail, postage prepaid, addressed to such holders at the addresses shown on the books of the Corporation. As promptly as practicable following receipt of such conversion notice, a holder of Class B Preferred Shares shall surrender the certificate or certificates evidencing all Class B Preferred Shares then held by such holder to the Corporation at its principal office, duly endorsed to the Corporation. Class B Preferred Shares converted at the option of the Corporation shall be deemed to have been converted on the day the Corporation mails notice of its exercise of the conversion option, and at such time the rights of a holder of Class B Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of the Class C Preferred Shares issuable upon such conversion. As promptly as practicable after receipt of the share certificates representing the converted Class B Preferred Shares, the Corporation shall issue and mail or deliver to each holder a certificate or certificates for the number of Class C Preferred Shares issuable upon conversion, computed to the nearest one hundredth of a full share.

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(c) Conversion Price. The number of Class C Preferred Shares issuable in exchange for each Class B Preferred Share upon either the holder's or the Corporation's exercise of its conversion option shall be equal to the par value of one Class B Preferred Share (i.e. $2.50) divided by the par value of one Class C Preferred Share.

(d) Termination of Conversion Rights. If the Corporation does not complete a sale of Class C Preferred Shares on or before December 31, 1995, the conversion rights provided in this Section 7 shall terminate and shall be of no further force or effect.

8. Redemption Rights:

(a) At any time after February 24, 2000, the Corporation shall have the conditional right, but not the obligation, to purchase and redeem all, but not less than all, of the then outstanding Class B Preferred Shares at the redemption price, plus all accrued but unpaid dividends, if the exercise of such conditional redemption option is approved by all of the members of the Corporation's Board of Directors. The "redemption price" of the Class B Preferred Shares shall be the par value of such Class B Preferred Shares. Within thirty (30) days after the meeting of the Board of Directors at which the exercise of such conditional redemption right was approved by all members of the Board, the Corporation shall deliver notice of redemption to all holders of Class B Preferred Shares. Thereafter, each holder of Class B Preferred Shares subject to redemption shall have a period of ninety (90) days in which to convert such holder's Class B Preferred Shares into Common Shares pursuant to the provisions of
Section 6. If a holder of Class B Preferred Shares subject to redemption does not convert such holder's Class B Preferred Shares into Common Shares within such ninety (90) day period, the Class B Preferred Shares shall thereafter be redeemed pursuant to the provisions of this Section 8(b).

(b) The Corporation shall complete the redemption of all Class B Preferred Shares outstanding on the date of expiration of the ninety (90) day notice period described in part (a) of this Section 8 by (i) notifying the holders of such outstanding Class B Preferred Shares of the date on which the shares will he redeemed, and (ii) depositing in trust with a bank or trust company located in the United States of America and having capital, surplus and undivided profits of at least Five Million Dollars
($5,000,000), within ten (10) days after the expiration of the ninety (90) day notice period described in part (a) of this Section 8, an amount in cash out of moneys legally available therefor sufficient to redeem such Class B Preferred Shares at the redemption price specified in this Section 8, with instructions and authority to such bank or trust company to pay the redemption price on or after the date fixed for

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redemption, upon surrender by such holders of the certificates evidencing the shares being redeemed, which certificates shall be properly endorsed in blank. If the certificates evidencing such shares are not surrendered, the dividends with respect to such shares shall cease to accrue after the date fixed for redemption and all rights with respect to such shares shall forthwith after such date cease and terminate, except only the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. Any moneys deposited by the Corporation pursuant to this paragraph and unclaimed at the end of one year after the date fixed for redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, and thereafter the holders of shares so called for redemption shall be entitled to receive payment of the redemption price only from the Corporation. All Class B Preferred Shares which are in any manner redeemed or acquired by the Corporation shall be retired and canceled and none of such shares shall be reissued.

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EXHIBIT 3.1

CERTIFICATE OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
LEARNING VENTURES, INC.

Adopted Pursuant to Minn. Stat. Ch. 302A

Pursuant to the unanimous resolution of the directors and shareholders of the corporation dated December 27, 1995, adopted pursuant to the authority granted under Minn. Stat. Sections. 302A.239 and 302A.441, the Articles of Incorporation of the corporation are hereby amended as follows:

Article I of the Articles of Incorporation be and the same is hereby amended by deleting the whole thereof and inserting in its place the following:

ARTICLE I

The name of this corporation shall be Learning Ventures International, Inc.

IN TESTIMONY WHEREOF, I have hereunto set my hand this 9th day of May, 1996.

/s/ Paul F. Clifford
---------------------------
Secretary
Learning Ventures
        International, Inc.


EXHIBIT 3.1

ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LEARNING VENTURES INTERNATIONAL, INC.

Learning Ventures International, Inc., a Minnesota corporation, hereby adopts and files with the Secretary of State these Articles of Amendment pursuant to Section 302A.139 of the Minnesota Business Corporation Act.

1. The rights and preferences of the Corporation's Class B Convertible Preferred Shares shall be amended, and an additional One Million (1,000,000) of the Corporation's authorized but unissued shares of preferred stock shall be reserved for issuance under such class, resulting in a total of One Million One Hundred Eighty Thousand (1,180,000) shares of preferred stock being reserved for issuance under such class, all as set forth in the Amended and Restated Certificate of Designation for Class B Convertible Preferred Stock attached hereto as Exhibit A.

2. There is hereby created a new class of preferred stock of the Corporation which shall be designated as Class C Preferred Shares, and Fifty-Five Thousand (55,000) of the Corporation's authorized but unissued shares of preferred stock shall be reserved for issuance under such class, all as set forth in the Certificate of Designation for Class C Preferred Stock attached hereto as Exhibit B.

3. The remaining provisions of the Articles of Incorporation shall remain unchanged.

4. These Articles of Amendment have been approved and adopted by the directors and shareholders of Learning Ventures International, Inc. as required by the Minnesota Business Corporation Act

Date: September 29, 1997                             LEARNING VENTURES
                                                     INTERNATIONAL, INC.

                                                     By /s/ Stephen Shank
                                                        -----------------------
                                                       Its President


EXHIBIT 3.1

EXHIBIT A

LEARNING VENTURES INTERNATIONAL, INC.

AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION
FOR
CLASS B CONVERTIBLE PREFERRED STOCK

1. Designation; Number of Shares; Par Value. A class of shares of preferred stock of Learning Ventures International, Inc. (the "Corporation") shall be designated as Class B Convertible Preferred Stock (the "Class B Preferred Shares"). The number of shares constituting the Class B Preferred Shares shall be One Million One Hundred Eighty Thousand (1,180,000) shares. The Class B Preferred Shares shall have a par value of $2.50 per share.

2. Voting Rights. On all matters submitted to the shareholders, each holder of Class B Preferred Shares shall have one vote for each share of common stock of the Corporation which such holder of Class B Preferred Shares would be entitled to receive upon the conversion of such holder's Class B Preferred Shares pursuant to the provisions of Section 6. No holder of any Class B Preferred Shares shall have any cumulative voting rights.

3. No Preemptive Rights . Holders of Class B Preferred Shares shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

4. Dividends. The Class B Preferred Shares shall rank senior to the Class A convertible preferred stock of the Corporation (the "Class A Preferred Shares") and senior to the common stock of the Corporation (the "Common Shares") with respect to the payment of dividends. Dividends shall be payable on Class B Preferred Shares out of funds legally available for the declaration of dividends only if and when declared by the Corporation's Board of Directors. However, in no event shall any dividend be paid on any Class A Preferred Shares, Common Shares or any other class of shares of the Corporation ranking equal to or junior to the Class B Preferred Shares unless equal or greater dividends are paid on the Class B Preferred Shares. All shares of stock of the Corporation shall be counted on an as-if-converted-to-Common-Shares basis in determining whether dividends paid on the Class B Preferred Shares are equal to or greater than the dividends paid on any other shares.


5. Liquidation Right and Preference. The Class B Preferred Shares shall rank senior to the Class A Preferred Shares and senior to the Common Shares with respect to the liquidation of the Corporation. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class B Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to the par value of each outstanding Class B Preferred Share (i.e., $2.50 per share), plus all accumulated but unpaid dividends, before any payment shall be made or any assets distributed to the holders of Class A Preferred Shares, Common Shares or any other class of shares of the Corporation ranking junior to the Class B Preferred Shares. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class B Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class B Preferred Shares upon such liquidation, dissolution or winding up of the Corporation, the holders of Class A Preferred Shares, Common Shares and any other class of shares of the Corporation ranking junior to the Class B Preferred Shares shall then be entitled, to the exclusion of the holders of Class B Preferred Shares, to receive in cash or in kind, all remaining assets of the Corporation, if any.

The merger or consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this Section 5.

6. Conversion into Common Shares.

(a) Optional Conversion. At the option of the holder thereof, all Class B Preferred Shares then held by such holder shall be convertible into Common Shares of the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c); provided, however, that each Class B Preferred Share called for redemption by the Corporation shall cease to be convertible on and after the redemption date if provision shall have been made for its payment. In order to exercise the conversion privilege, a holder of Class B Preferred Shares shall surrender the certificate or certificates evidencing all Class B Preferred Shares then held by such holder to the Corporation at its principal office, duly endorsed to the Corporation and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Class B Preferred Shares converted at the option of

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the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class B Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of Common Shares issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share.

(b) Automatic Conversion. The Class B Preferred Shares shall be automatically converted into Common Shares, upon the election of the Corporation and delivery of written notice of such election to the holders of the Class B Preferred Shares (which election and notice shall be delivered within ninety (90) days before or after the automatic conversion event described below without affecting the effective time of such automatic conversion), if the Corporation closes the issuance and sale of Common Shares in one or more underwritten public offerings, pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the gross proceeds received by the Corporation equal or exceed Ten Million Dollars ($10,000,000).

(c) Conversion Price and Adjustments. The number of Common Shares issuable in exchange for each Class B Preferred Share upon either optional or automatic conversion shall be equal to One Dollar ($1.00) divided by the conversion price then in effect for Class B Preferred Shares (the "Class B Conversion Price"). The Class B Conversion Price shall initially be One Dollar ($1.00), but such Class B Conversion Price shall be subject to adjustment from time to time, as provided in the following sentence. In case the Corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Class B Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of the Corporation shall be combined into a smaller number of shares, the Class B Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(d) Rights to Preconversion Distributions. The holders of Class B Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares:

(i) In case the Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or other than in Common Shares, then thereafter

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each holder of Class B Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class B Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any, stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares.

(ii) Subject to the provisions of Section 5 regarding liquidation rights, if any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class B Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of the Corporation immediately theretofore receivable upon the conversion of such Class B Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding common shares equal to the number of Common Shares immediately theretofore receivable upon the conversion or such Class B Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Class B Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Class B Conversion Price and of the number of shares receivable upon the conversion of such Class B Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Class B Preferred Shares. The Corporation shall not effect any such reorganization, reclassification consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than the Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Class B Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to

-4-

deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive.

(e) Notice of Certain Events. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets, to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class B Preferred Shares at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

7. Redemption Rights.

(a) At any time after February 24, 2000, the Corporation shall have the conditional right, but not the obligation, to purchase and redeem all, but not less than all, of the then outstanding Class B Preferred Shares at the redemption price, plus all accrued but unpaid dividends, if the exercise of such

-5-

conditional redemption option is approved by all of the members of the Corporation's Board of Directors. The "redemption price" of the Class B Preferred Shares shall be the par value of such Class B Preferred Shares. Within thirty (30) days after the meeting of the Board of Directors at which the exercise of such conditional redemption right was approved by all members of the Board, the Corporation shall deliver notice of redemption to all holders of Class B Preferred Shares. Thereafter, each holder of Class B Preferred Shares subject to redemption shall have a period of ninety (90) days in which to convert such holder's Class B Preferred Shares into Common Shares pursuant to the provisions of Section
6. If a holder of Class B Preferred Shares subject to redemption does not convert such holder's Class B Preferred Shares into Common Shares within such ninety (90) day period, the Class B Preferred Shares shall thereafter be redeemed pursuant to the provisions of this Section 7(b).

(b) The Corporation shall complete the redemption of all Class B Preferred Shares outstanding on the date of expiration of the ninety (90) day notice period described in part (a) of this Section 7 by (i) notifying the holders of such outstanding Class B Preferred Shares of the date on which the shares will be redeemed, and (ii) depositing in trust with a bank or trust company located in the United States of America and having capital, surplus and undivided profits of at least Five Million Dollars
($5,000,000), within ten (10) days after the expiration of the ninety (90) day notice period described in part (a) of this Section 7, an amount in cash out of moneys legally available therefor sufficient to redeem such Class B Preferred Shares at the redemption price specified in this Section 7, with instructions and authority to such bank or trust company to pay the redemption price on or after the date fixed for redemption, upon surrender by such holders of the certificates evidencing the shares being redeemed, which certificates shall be properly endorsed in blank. If the certificates evidencing such shares are not surrendered, the dividends with respect to such shares shall cease to accrue after the date fixed for redemption and all rights with respect to such shares shall forthwith after such date cease and terminate, except only the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. Any moneys deposited by the Corporation pursuant to this paragraph and unclaimed at the end of one year after the date fixed for redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, and thereafter the holders of shares so called for redemption shall be entitled to receive payment of the redemption price only from the Corporation. All Class B Preferred Shares which are in any manner redeemed or acquired by the Corporation shall be retired and canceled and none of such shares shall be reissued.

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EXHIBIT 3.1

EXHIBIT B

LEARNING VENTURES INTERNATIONAL, INC.

CERTIFICATE OF DESIGNATION
FOR
CLASS C PREFERRED STOCK

1. Designation; Number of Shares; Par Value. A class of shares of preferred stock of Learning Ventures International, Inc. (the "Corporation") shall be designated as Class C Preferred Stock (the "Class C Preferred Shares"). The number of shares constituting the Class C Preferred Shares shall be Fifty-Five Thousand (55,000) shares. The Class C Preferred Shares shall have a par value of $0.01 per share.

2. Voting Rights. Holders of Class C Preferred Shares shall not be entitled to vote in the election of directors or on any other matters submitted for vote to the shareholders of the Corporation; provided, however, that each holder of Class C Preferred Shares shall have one vote for each Class C Preferred Share on any proposal to change the rights or preferences of the Class C Preferred Shares.

3. No Preemptive Rights. Holders of Class C Preferred Shares shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

4. No Dividends. The Class C Preferred Shares shall not be entitled to any dividends.

5. Liquidation Right and Preference. The Class C Preferred Shares shall rank equal to the Class B convertible preferred stock of the Corporation (the "Class B Preferred Shares"), and senior to the Class A convertible preferred stock of the Corporation (the "Class A Preferred Shares") and the common stock of the Corporation (the "Common Shares") with respect to the liquidation of the Corporation. In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class C Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to Three Dollars ($3.00) for each outstanding Class C Preferred Share after payment is made to the holders of any class of shares of the Corporation ranking senior to the Class C Preferred Shares, and before any payment shall be made or any assets distributed to the holders of Class A Preferred Shares, Common Shares or any other class of shares of the Corporation ranking junior to the Class C Preferred


Shares. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of Class C Preferred Shares, Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class C Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Class C Preferred Shares, Class B Preferred Shares and any other class of shares of the Corporation ranking equal to the Class C Preferred Shares upon such liquidation, dissolution or winding up of the Corporation, the holders of Class A Preferred Shares, Common Shares and any other class of shares of the Corporation ranking junior to the Class C Preferred Shares shall then be entitled, to the exclusion of the holders of Class C Preferred Shares, to receive in cash or in kind, all remaining assets of the Corporation, if any.

The merger or consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this Section 5.

6. Designation of Additional Series. The Corporation shall have the power to issue additional series of preferred stock which rank equal to or senior to the Class C Preferred Shares with respect to the payment of dividends and payment upon the liquidation of the Corporation, and to increase the number of authorized shares of any such series, without the vote or consent of the holders of the Class C Preferred Shares.

7. Redemption.

(a) At any time and from time to time, the Corporation shall have the right to purchase and redeem all or any portion of the then outstanding Class C Preferred Shares at the redemption price of Three Dollars ($3.00) for each outstanding Class C Preferred Share. If the Corporation purchases and redeems less than all of the then outstanding Class C Preferred Shares, such purchase and redemption shall be pro rata from each holder of Class C Preferred Shares, based on the number of Class C Preferred Shares then held by each.

(b) The Corporation shall purchase and redeem all of the then outstanding Class C Preferred Shares at the redemption price of Three Dollars ($3.00) for each outstanding Class C Preferred Share upon the earlier of (i) June 1, 2001, (ii) the completion by the Corporation of any single financing from the sale of Common Shares which results in net proceeds to the Corporation (determined by deducting selling commissions and all other costs

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and expenses of the financing) of not less than Six Million Dollars ($6,000,000), (iii) the consolidation or merger of the Corporation with another corporation (other than a wholly-owned subsidiary of the Corporation) if the Corporation is not the surviving corporation, or (iv) the sale of substantially all of the assets of the Corporation. Any redemption required pursuant to item (i) above shall occur on or before June 1, 2001, and any redemption required pursuant to item (ii), (iii) or
(iv) above shall occur within thirty (30) days after the event triggering the redemption.

(c) The Corporation shall complete the redemption of Class C Preferred Shares as described in part (a) or (b) of this Section 7 by (i) notifying the holders of such outstanding Class C Preferred Shares of the date on which the shares will be redeemed, and (ii) depositing in trust with a bank or trust company located in the United States of America and having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000), within ten (10) days after the date of such notice, an amount in cash out of funds legally available therefor sufficient to redeem such Class C Preferred Shares called for redemption at the redemption price specified in this Section 7, with instructions and authority to such bank or trust company to pay the redemption price on or after the date fixed for redemption, upon surrender by such holders of the certificates evidencing the shares being redeemed, which certificates shall be properly endorsed in blank. If the certificates evidencing such shares are not surrendered, all rights with respect to such shares shall forthwith after such date cease and terminate, except only the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. Any funds deposited by the Corporation pursuant to this paragraph and unclaimed at the end of one year after the date fixed for redemption shall be repaid to the corporation upon its request expressed in a resolution of its Board of Directors, and thereafter the holders of shares so called for redemption shall be entitled to receive payment of the redemption price only from the Corporation. All Class C Preferred Shares which are in any manner redeemed or acquired by the Corporation shall be retired and canceled and none of such shares shall be reissued.

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EXHIBIT 3.1

CERTIFICATE OF DESIGNATION
OF
CLASS D CONVERTIBLE PREFERRED STOCK
OF
LEARNING VENTURES INTERNATIONAL, INC.

I, Paul F. Clifford, the Secretary of Learning Ventures International, Inc., a Minnesota corporation (the "Corporation"), do hereby certify that at a meeting of the Board of Directors of the Corporation held on June 16, 1998, the following resolutions effecting the creation of a series of preferred stock designated as "Class D Convertible Preferred Stock" were duly approved by the Board of Directors of the Corporation and that such resolutions have not been subsequently modified or rescinded

RESOLVED, that the Corporation shall create a class of shares of preferred stock designated as "Class D Convertible Preferred Stock" and will reserve One Million Twenty Two Thousand Two Hundred Twenty Two (1,022,222) of the Corporation's authorized but unissued shares of preferred stock for issuance under such class.

FURTHER RESOLVED, that shares of the Class D Convertible Preferred Stock shall be entitled to the relative rights and preferences described in the attached Exhibit A.

I further certify that the document attached hereto and marked Exhibit A and entitled "Learning Ventures International, Inc. Certificate of Designation for Class D Convertible Preferred Stock" is a true and correct copy of the document referred to in the foregoing resolutions.

IN WITNESS WHEREOF, I have executed this certificate as of this 16th day of June, 1998.

 s/s Paul F. Clifford
----------------------------
 Paul F. Clifford, Secretary


EXHIBIT 3.1

EXHIBIT A

LEARNING VENTURES INTERNATIONAL, INC.

CERTIFICATE OF DESIGNATION
FOR CLASS D CONVERTIBLE PREFERRED STOCK

1. Designation; Number of Shares; Par Value. A class of shares of preferred stock of Learning Ventures International, Inc. (the "Corporation") shall be designated as Class D Convertible Preferred Stock (the "Class D Preferred Shares"). The number of shares constituting the Class D Preferred Shares shall be One Million Twenty Two Thousand Two Hundred Twenty Two (1,022,222) shares. The Class D Preferred Shares shall have a par value of $4.50 per share.

2. Voting Rights. On all matters submitted to the shareholders, each holder of Class D Preferred Shares shall have one vote for each share of common stock of the Corporation which such holder of Class D Preferred Shares would be entitled to receive upon the conversion of such holder's Class D Preferred Shares pursuant to the provisions of Section 6. No holder of any Class D Preferred Shares shall have any cumulative voting rights.

3. No Preemptive Rights. Holders of Class D Preferred Shares shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

4. Dividends. The Class D Preferred Shares shall rank equal to the Class B convertible preferred stock of the Corporation (the "Class B Preferred Shares"), senior to the Class A convertible preferred stock of the Corporation (the "Class A Preferred Shares"), senior to the Class C preferred stock of the Corporation (the "Class C Preferred Shares") and senior to the common stock of the Corporation (the "Common Shares") with respect to payment of dividends. Dividends shall be payable on Class D Preferred Shares out of funds legally available for the declaration of dividends only if and when declared by the Corporation's Board of Directors. However, in no event shall any dividend be paid on any Class B Preferred Shares, Class A Preferred Shares, Class C Preferred Shares, Common Shares or any other class of shares of the Corporation ranking equal to or junior to the Class D Preferred Shares unless equal or greater dividends are paid on the Class D Preferred Shares. All shares of stock of the Corporation shall be counted on an as-if-converted-to-Common-Shares basis in determining whether dividends paid on the Class D Preferred Shares are equal to or greater than the dividends paid on any other shares.


5. Liquidation Right and Preference. The Class D Preferred Shares shall rank equal to the Class B Preferred Shares, equal to the Class C Preferred Shares, senior to the Class A Preferred Shares and senior to the Common Shares with respect to the liquidation of the Corporation. In the event of the liquidation, dissolution or winding up or the Corporation, whether voluntary or involuntary, the holders of the Class D Preferred Shares shall be entitled to receive in cash, out of the assets of the Corporation, an amount equal to the par value of each outstanding Class D Preferred Share (i.e., $4.50 per share), plus all accumulated but unpaid dividends, before any payment shall be made or any assets distributed to the holders of Class A Preferred Series, Common Shares or any other class of shares of the Corporation ranking junior to the Class D Preferred Shares. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation are insufficient to pay the amounts described in the preceding sentence, the holders of the Class D Preferred Shares, Class B Preferred Shares, Class C Preferred Shares and any other class of shares of the Corporation ranking equal to the Class D Preferred Shares shall share pro rata in any such distribution in proportion to the full amounts to which they would otherwise be respectively entitled. Following such payment to the holders of Class D Preferred Shares, Class B Preferred Shares, Class C Preferred Shares and any other class of shares of the Corporation ranking equal to the Class D Preferred Shares upon such liquidation, dissolution or winding up of the Corporation, the holders of the Class A Preferred Shares, Common Shares and any other class of shares of the Corporation ranking junior to the Class D Preferred Shares shall then be entitled, to the exclusion of the holders of Class D Preferred Shares, to receive in cash or in kind, all remaining assets of the Corporation, if any.

The merger or consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation or dissolution of the Corporation for purposes of this Section 5.

6. Conversion into Common Shares.

(a) Optional Conversion. At the option of the holder thereof, all Class D Preferred Shares then held by such holder shall be convertible into Common Shares of the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c). In order to exercise the conversion privilege, a holder of Class D Preferred Shares shall surrender the certificate or certificates evidencing all Class D Preferred Shares then held by such holder to the Corporation at its principal office, duly endorsed to the Corporation and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Class D Preferred Shares converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class D Preferred Shares shall cease and such holder shall be treated for all purposes as the record holder of Common Shares issuable upon conversion. As

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promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder a certificate or certificates for the number of Common Shares issuable upon conversion, computed to the nearest one hundredth of a full share.

(b) Automatic Conversion. The Class D Preferred Shares shall be automatically converted into Common Shares, (i) upon the election of the holders of a majority of the outstanding Class D Preferred Shares to convert their Class D Preferred Shares into Common Shares; or (ii) upon the election of the Corporation and delivery of written notice of such election to the holders of the Class D Preferred Shares (which election and notice shall be delivered within ninety (90) days before or after the automatic conversion event described below without affecting the effective time of such automatic conversion), if the Corporation closes the issuance and sale of Common Shares in one or more underwritten public offerings, pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the gross proceeds received by the Corporation and/or selling shareholders, if any, equal or exceed Twenty Million Dollars ($20,000,000) at an average price per Common Share of at least $5.40.

(c) Conversion Price and Adjustments. The number of Common Shares issuable in exchange for each Class D Preferred Share upon either optional or automatic conversion shall be equal to Four Dollars and Fifty Cents ($4.50) divided by the conversion price then in effect for Class D Preferred Shares (the "Class D Conversion Price"). The Class D Conversion Price shall initially be Four Dollars and Fifty Cents ($4.50), but such Class D Conversion Price shall be subject to adjustment from time to time, as hereinafter provided:

(i) In case the Corporation shall at any time subdivide or split its outstanding Common Shares into a greater number of shares or declare any dividend payable in Common Shares, the Class D Conversion Price in effect immediately prior to such subdivision, split or dividend shall be proportionately decreased, and conversely, in case the outstanding Common Shares of the Corporation shall be combined into a smaller number of shares, the Class D Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(ii) If and whenever the Corporation shall issue or sell any Common Shares for a consideration per share less than the Class D Conversion Price then in effect (other than options issued and issuable under the Corporation's 1993 Stock Option Plan dated February 24, 1993, as amended through September 29, 1997 (the "Plan"), and shares issued and issuable upon exercise of such options; options for the issuance of up to five hundred thousand (500,000) additional shares issuable under any future amendment to the Plan or successor plan and shares issuable upon exercise of such options; options, warrants and rights to purchase shares outstanding or which the Corporation

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has agreed to issue in writing prior to June 16, 1998 and shares issuable upon the exercise or conversion thereof; and dividends payable in Common Shares), or shall issue any options, warrants or other rights for the purchase of such shares at a consideration per share of less than the Class D Conversion Price then in effect, the Class D Conversion Price in effect immediately prior to such issuance or sale shall be adjusted and shall be equal to (A) the Class D Conversion Price then in effect, multiplied by (B) a fraction, the numerator of which shall be an amount equal to the sum of (1) the number of Common Shares outstanding immediately prior to such issuance or sale multiplied by the Class D Conversion Price then in effect, and (2) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of Common Shares outstanding immediately after such issuance or sale plus the number of the Common Shares issuable upon the exercise of any purchase rights thus issued, by
(bb) the Class D Conversion Price then in effect. If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class D Conversion Price subsequently expire without exercise, the Class D Conversion Price shall be recomputed by deleting such options, warrants or other purchase rights. If the Class D Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Class D Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights.

(iii) The anti-dilution provisions of this section 6(c) may be waived by the affirmative vote of the holders (acting together as a class) of at least ninety percent (90%) of the then outstanding Class D Preferred Shares.

(d) Notice of Class D Conversion Price Adjustment. Upon any adjustment of the Class D Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Class D Preferred Shares at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Class D Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the Conversion of Class D Preferred Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(e) Rights to Preconversion Distributions. The holders of Class D Preferred Shares shall have the following rights to certain properties received by the holders of Common Shares:

(i) In case the Corporation shall declare a dividend or distribution upon Common Shares payable other than in cash out of earnings or surplus or

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other than in Common Shares, then thereafter each holder of Class D Preferred Shares upon the conversion thereof will be entitled to receive the number of Common Shares into which such Class D Preferred Shares shall be converted, and, in addition and without payment therefor, the property which such holder would have received as a dividend if continuously since the record date for any such dividend or distribution such holder (A) had been the record holder of the number of Common Shares then received, and (B) had retained all dividends or distributions in stock or securities payable in respect of such Common Shares or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Shares.

(ii) Subject to the provisions of Section 5 regarding liquidation rights, if any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class D Preferred Shares shall thereafter have the right to receive, in lieu of Common Shares of the Corporation immediately theretofore receivable upon the conversion of such Class D Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Common Shares equal to the number of Common Shares immediately theretofore receivable upon the conversion of such Class D Preferred Shares had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of the Class D Preferred Shares to the end that the provisions hereof (including without limitation provisions for adjustments of the Class D Conversion Price and of the number of shares receivable upon the conversion of such Class D Preferred Shares) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of such Class D Preferred Shares. The Corporation shall not effect any such reorganization, reclassification, consolidation, merger or sale, unless prior to the consummation thereof the surviving corporation (if other than the Corporation), the corporation resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of the Class D Preferred Shares at the last address of such holders appearing on the books of the Corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive.

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(f) Notice of Certain Events. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets, to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class D Preferred Shares at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

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EXHIBIT 3.1

ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LEARNING VENTURES INTERNATIONAL, INC.

Learning Ventures International, Inc., a Minnesota corporation, hereby adopts and files with the Secretary of State these Articles of Amendment pursuant to Section 302A.139 of the Minnesota Business Corporation Act.

1. The name of the corporation is Learning Ventures International, Inc.

2. Article I of the Articles of Incorporation of Learning Ventures International, Inc. is hereby amended and restated in its entirety to read as follows:

ARTICLE I. NAME

The name of the corporation is Capella Education Company.

3. The other provisions of the Articles of Incorporation shall remain unchanged.

4. This amendment shall be effective June 1, 1999.

5. This amendment has been approved and adopted by the directors and shareholders of Learning Ventures International, Inc. as required by the Minnesota Business Corporation Act.

Date: May 28, 1999                                    LEARNING VENTURES
                                                      INTERNATIONAL, INC.

                                                      By  /s/ Paul F. Clifford
                                                         -----------------------

                                                         Its  Secretary


EXHIBIT 3.1

CAPELLA EDUCATION COMPANY

STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
SERIES E CONVERTIBLE PREFERRED STOCK

The undersigned, Stephen G. Shank, the Chief Executive Officer of Capella Education Company, a Minnesota corporation (the "Corporation"), does hereby certify that the following resolutions establishing Series E Convertible Preferred Stock of the Corporation, pursuant to Minnesota Statutes, Section 302A.401, were duly adopted on May 10, 2000 by a Stock Committee of the board of Directors of the Corporation duly authorized by the directors of the Corporation:

RESOLVED, there is hereby established a new class of Series E Convertible Preferred Stock of this Company with the rights, preferences and privileges as set forth in the Certificate of Designation attached hereto as Exhibit A to these resolutions (the "Certificate of Designation");

RESOLVED, that the appropriate officers of this Company are authorized and directed to make, execute and file with the Minnesota Secretary of State in the method required by law, the Certificate of Designation, and to take all other actions they may deem necessary or advisable to effect adoption of the Certificate of Designation; and

RESOLVED, that the officers of the Company, and each of them, be and hereby are authorized and directed, for and on behalf of the Company, to execute such documents and take such other action as they, and each of them, deem necessary, desirable and in the best interest of the Company to complete the transactions contemplated by the foregoing resolutions.

[remainder of page intentionally blank]


IN WITNESS WHEREOF, I have subscribed my name this 10th day of May, 2000.

/s/ Stephen G. Shank
-----------------------------------------
Stephen G. Shank,
President and Chief Executive Officer
Capella Education Company

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EXHIBIT A

CAPELLA EDUCATION COMPANY

CERTIFICATE OF DESIGNATION
FOR CLASS E CONVERTIBLE PREFERRED STOCK

1. DESIGNATION; NUMBER OF SHARES; PAR VALUE.

A class of shares of preferred stock of Capella Education Company (the "Corporation") shall be designated as Class E Convertible Preferred Stock (the "Class E Preferred Stock"). The number of shares constituting the Class E Preferred Stock shall be Two Million Five Hundred Ninety-Six Thousand Four Hundred Ninety-One (2,596,491) shares. The Class E Preferred Stock shall have a par value of $.01 per share.

2. VOTING RIGHTS.

(a) GENERAL. On all matters submitted to the shareholders, each holder of Class E Preferred Stock shall have one vote for each share of common stock of the Corporation (the "Common Stock") which such holder of Class E Preferred Stock would be entitled to receive upon the conversion of such holder's Class E Preferred Stock pursuant to the provisions hereof. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the Corporation shall vote as a single class on all matters submitted to the shareholders. No holder of any Class E Preferred Stock shall have any cumulative voting rights.

(b) ADDITIONAL CLASS VOTES BY CLASS E STOCK. Without the affirmative vote of the holders of a majority of the Class E Preferred Stock at the time outstanding at a meeting of the holders of Class E Preferred Stock called for such purpose or written consent of the holders (acting together as a class) of a majority of the Class E Preferred Stock at the time outstanding, the Corporation shall not:

(1) create, authorize or issue any shares of capital stock ranking senior to or having a priority over the Class E Preferred Stock as to the payment or distribution of dividends or of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation; or

(2) amend, alter, modify or repeal any provision of the Articles of Incorporation of the Corporation so as to alter the rights and preferences of the Class E Preferred Stock; or

(3) redeem, repurchase or acquire (or make any payment into, or set aside, a sinking fund for such purposes) any of the Corporation's capital stock, except any such redemption, repurchase or acquisition which is:


(i) pursuant to mandatory redemption obligations set forth herein or in the Articles of Incorporation (including any certificate of designation) as of the date of filing of this Certificate of Designation;

(ii) Common Stock issued under employee benefit plans of the Corporation;

(iii) made pursuant to a repurchase agreement approved by the Board of Directors; or

(4) effect any acquisition of the Corporation by another entity by means of any transaction or series of related transactions with the Corporation (including, without limitation any merger, consolidation or recapitalization), which results in 50% or more of the voting capital stock of the Corporation being acquired by persons who were not shareholders of the Corporation prior to such transaction or series of transactions, unless such acquisition provides for the exchange or payment of consideration in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which a share of Class E Preferred Stock is then convertible, having a value equal to or greater than $42.75 (subject to appropriate adjustments for stock dividends, stock splits, combinations and similar recapitalization affecting the Class E Preferred Stock) (a "Qualified Amount"); or

(5) effect any sale or other disposition of all or substantially all of the assets of the Corporation, unless such sale, if followed by an immediate liquidation, would result in distributable proceeds in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which a share of Class E Preferred Stock is then convertible, in a Qualified Amount; or

(6) effect the liquidation or dissolution of the Company, unless such liquidation or dissolution would result in distributable proceeds in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which a share of Class E Preferred Stock is then convertible, in a Qualified Amount.

(c) VALUATION OF NON-CASH CONSIDERATION. In connection with any transaction set forth in Section 2(b) above involving the receipt of consideration or proceeds in a form other than cash, the fair market value of such non-cash consideration or proceeds shall be utilized in determining whether such transaction must be approved by the holders of Class E Preferred Stock pursuant to Section 2(b). The fair market value of any non-cash consideration will be determined as follows:

(i) the fair market value of stock and other securities that are publicly traded shall be the average of the last closing market price of such stock or securities on each of the ten trading days ending five business days

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prior to the execution by the Company of a definitive agreement, or adoption by the Board of Directors of the Company of any plan, relating to such transaction (the "Time of Determination");

(ii) the fair market value of stock and other equity securities that are not publicly traded and the value of all other non-cash consideration, other than consideration of the nature described in clause (iii) below, shall be the fair market value thereof at the Time of Determination as mutually agreed by the Company and a director designated to serve on the Board of Directors by a holder of Class E Preferred Stock (a "Class E Director"), or if the Company and a Class E Director are unable to reach an agreement within five business days of receipt of written notice from the Company of such transaction by the Class E Director, as determined by an investment banking firm or other person experienced in valuing such stock, equity securities or other non-cash consideration mutually acceptable to a Class E Director and the Company, or if they are unable to agree, or there exists no such Class E Director, then a nationally recognized investment banking firm selected in good faith by the Board of Directors of the Company; or

(iii) the value of any promissory note or other debt instrument that is not publicly traded and the value of any and all deferred installments of the consideration and any other deferral of payments included in the total consideration shall be deemed to be the face amount of the promissory notes or other debt instruments or the total amount of payments that are deferred with respect to deferred obligations that are not evidenced by promissory notes or other debt instruments.

A security is "publicly traded" if such security is part of a class of securities that is listed on the New York or American stock exchanges (or on a foreign stock exchange of comparable depth and liquidity) or is traded on the NASDAQ Stock Market.

(d) MEETINGS. A proper officer of the Corporation may, and upon the written request of the holders of record of at least twenty-five percent (25%) of the shares of Class E Preferred Stock then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the holders of Class E Preferred Stock, for the purpose of holding a class vote pursuant to
Section 2(b). If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of record of at least twenty-five percent (25%) of the outstanding shares of Class E Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders.

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3. NO PREEMPTIVE RIGHTS.

Holders of Class E Preferred Stock shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for, or otherwise creating a right to acquire, any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise.

4. DIVIDENDS.

In the event any dividend or distribution is declared or made with respect to outstanding shares of any class of capital stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of Class E Preferred Stock. In the event any dividend or distribution is declared or made with respect to the Common Stock or any class of capital stock convertible or exchangeable into Common Stock of the Corporation, each holder of shares of Class E Preferred Stock (and any other holder of capital stock so convertible or exchangeable and entitled to payment of such dividend or distribution) shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of capital stock are then convertible on the date established as the record date with respect to such dividend or distribution. In case any portion of the dividend or distribution declared or made by the Corporation shall be in a form other than cash, the fair market value of such non-cash portion, as determined in good faith by the Board of Directors of the Company, shall be utilized in determining the comparable dividend or distribution to be declared or made with respect to the outstanding shares of Class E Preferred Stock.

5. LIQUIDATION RIGHT AND PREFERENCE.

In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (a "Liquidation Event"), the holders of the Class E Preferred Stock shall be entitled to receive, in respect of each share of Class E Preferred Stock, the greater of (i) the amount of $14.25 (subject to appropriate adjustment for any stock dividends, combinations or splits with respect to such share), plus the aggregate amount of all declared but unpaid dividends on such share of Class E Preferred Stock (the "Class E Preference Amount") or (ii) the aggregate amount that would be payable in the Liquidation Event in respect of the share or shares of Common Stock into which such share of Class E Preferred Stock would be convertible if all of the holders were to convert their shares of Class E Preferred Stock into shares of Common Stock immediately prior to the Liquidation Event, and the Class E Preference Amount was not paid in preference to any class of Junior Stock, as hereafter provided.

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Upon occurrence of a Liquidation Event, the holders of then outstanding shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), Class C Preferred Stock, Class D Convertible Preferred Stock ("Class D Preferred Stock"), Class E Preferred Stock and any other class of capital stock hereafter established ranking on a parity in such Liquidation Event with the Class B Preferred Stock, Class C, Class D Preferred Stock and Class E Preferred Stock (collectively, "Parity Stock") shall be entitled to be paid as to each share of such Parity Stock, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Class A Convertible Preferred Stock ("Class A Preferred Stock"), Common Stock or any other class or series of capital stock hereafter established ranking junior in a Liquidation Event to the Parity Stock (collectively, "Junior Stock"), and after distribution of any of the assets of the Corporation, to the extent of the liquidation preference applicable thereto, to the holders of any class or series of capital stock hereafter established ranking senior in a Liquidation Event to the Parity Stock (collectively "Senior Stock"), out of assets available for distribution, an amount, plus the aggregate amount of all declared but unpaid dividends on such shares, equal to $2.50 per share in the case of the Class B Preferred Stock (the "Class B Preference Amount"), $3.00 per share in the case of the Class C Preferred Stock (the "Class C Preference Amount"), $4.50 per share in the case of the Class D Preferred Stock (the "Class D Preference Amount") (subject, in each case, to appropriate adjustment for any stock dividends, combinations or splits with respect to each share), the Class E Preference Amount in the case of the Class E Preferred Stock, and, in the case of any other Parity Stock, such amount as shall be specified in the applicable Certificate of Designation (the "Parity Preference Amount", and, together with the Class B Preference Amount, Class C Preference Amount, Class D Preference Amount and Class E Preference Amount, collectively, the "Parity Preference Amounts").

If, upon any Liquidation Event, the remaining assets of the Corporation available for distribution to the holders of Parity Stock are insufficient to pay the holders of Parity Stock their full Parity Preference Amounts to which they are entitled, the holders of Parity Stock shall share pro rata in any such distribution in proportion to the full Parity Preference Amounts to which they would otherwise be respectively entitled.

Following such payment of Parity Preference Amounts to the holders of Parity Stock, and payment to the holders of any Senior Stock of any preferential amount to which they are entitled, the holders of the Junior Stock shall then be entitled, to the exclusion of the holders of Parity Stock or Senior Stock, to receive in cash or in kind, all remaining assets of the Corporation, if any, in accordance with their relative priorities in a Liquidation Event.

6. CONVERSION INTO COMMON STOCK.

(a) OPTIONAL CONVERSION. At the option of the holder thereof, any or all Class E Preferred Stock then held by such holder shall be convertible into Common Stock of the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c). In order to exercise the conversion privilege, a holder of Class E Preferred Stock shall surrender the certificate or certificates duly endorsed to the Corporation evidencing the shares of Class E Preferred Stock each holder wishes to convert to the

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Corporation at its principal office and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Any shares of Class E Preferred Stock converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class E Preferred Stock with respect to such shares shall cease and such holder shall be treated as the record holder of the number of shares of Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder (i) a certificate or certificates for the number of Common Stock issuable upon conversion, computed to the nearest one hundredth of a full share, (ii) any cash adjustment required pursuant to Section 6(f), and
(iii) in the event of a conversion in part, a certificate or certificates for the whole number of shares of Class E Preferred Stock not being so converted.

(b) AUTOMATIC CONVERSION. The Class E Preferred Stock shall automatically be converted into Common Stock of the Corporation, without any act by the Corporation or the holders of the Class E Preferred Stock, concurrently with the closing of the first public offering by the Corporation of shares of Common Stock of the Corporation registered under the Securities Act of 1933, as amended, in which (1) the aggregate gross public offering price of the securities sold for cash by the Corporation in the offering is at least $30.0 million, or such lower amount as may be approved by the holders of a majority of the shares of Class E Preferred Stock then outstanding, and (2) the public offering price per share of Common Stock is at least $28.50 (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), or such lower amount as may be approved by the holders of a majority of the shares of Class E Preferred Stock then outstanding. Each holder of a share of Class E Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Class E Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering. Upon such conversion, each holder of a share of Class E Preferred Stock shall immediately surrender such share in exchange for (i) appropriate stock certificates representing a share or shares of Common Stock of the Corporation, and (ii) any cash adjustment required pursuant to Section 6(f).

(c) CONVERSION PRICE AND ADJUSTMENTS. The number of shares of Common Stock issuable in exchange for each share of Class E Preferred Stock upon either optional or automatic conversion shall be equal to $14.25 divided by the conversion price then in effect for Class E Preferred Stock (the "Class E Conversion Price"). The Class E Conversion Price shall initially be $14.25, but such Class E Conversion Price shall be subject to adjustment from time to time, as hereinafter provided:

(i) In case the Corporation shall at any time (A) declare a dividend or make a distribution on Common Stock payable in Common Stock (other than dividends or distributions payable to holders of the Series E Preferred Stock including dividends paid as contemplated by Section 4), (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a

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smaller number of shares, (D) issue any shares of its capital stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation), or (E) consolidate with, or merge with or into, any other person, the Class E Conversion Price in effect (and, where appropriate, the securities into which the Class E Preferred Stock are then convertible) at the time of the record date for such dividend or distribution or on the effective date of such subdivision, split, combination, consolidation, merger or reclassification shall be adjusted so that the conversion of the Class E Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock or other securities of the Corporation (or other securities into which such shares of Common Stock have been converted, exchanged, combined, consolidated, merged or reclassified pursuant to clause
6(c)(i)(C), 6(c)(i)(D) or 6(c)(i)(E) above) which, if the Class E Preferred Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger or reclassification. Such adjustment shall be made successively whenever an event listed above shall occur.

(ii) If and whenever the Corporation shall issue or sell any Common Stock for a consideration per share less than the Class E Conversion Price then in effect, or shall issue any options, warrants or other rights for the purchase of such shares at a consideration per share of less than the Class E Conversion Price then in effect (other than securities subject to Section 6(c)(i) hereof; options issued as of April 20, 2000 under existing stock option plans of the Corporation, and 730,729 shares issuable upon exercise of such options; options for the issuance of up to 533,137 additional shares under any existing stock option plan of the Corporation and shares issuable upon exercise of such options; warrants to purchase 198,960 shares outstanding as of April 20, 2000, warrants to purchase 135,088 shares to be issued in connection with the issuance of the Class E Preferred Stock and shares issuable upon the exercise thereof; 2,810,000 shares of Class A Preferred Stock, 460,000 shares of Class B Preferred Stock, 1,022,222 shares of Class D Preferred Stock and shares issuable upon conversion thereof; shares issued to the employee stock ownership plan of the Corporation, provided such contribution is approved by the compensation committee of the Board of Directors of the Corporation and does not exceed that number of shares the fair market value of which is three percent (3%) of annual compensation (as measured by applicable benefit plan rules) (any of the foregoing share amounts shall be subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like)), the Class E Conversion Price in effect immediately prior to such issuance or sale shall be reduced to an amount determined by multiplying (A) the Class E Conversion Price then in effect, and (B) a fraction, the numerator of which shall be an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Class E Conversion Price then in effect, and (2) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the

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denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock outstanding immediately after such issuance or sale plus the number of shares of Common Stock issuable upon the exercise of any purchase rights thus issued, by (bb) the Class E Conversion Price then in effect. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Company, shall be utilized in the foregoing computation.

For purposes of this Section 6(c), "Common Stock outstanding" shall include, in addition to Common Stock issued and outstanding, those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock and Common Stock issuable upon the exercise, exchange or conversion of any other outstanding right to acquire Common Stock.

If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class E Conversion Price subsequently expire without exercise, the Class E Conversion Price shall be recomputed by deleting such expired options, warrants or other purchase rights. If the Class E Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Class E Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights.

(iii) In case the Corporation shall fix a record date for the issuance on a pro rata basis of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into or exercisable or exchangeable for shares of Common Stock) at a price per share of Common Stock (or having a conversion, exercise or exchange price per share of Common Stock, in the case of a security convertible into, or exercisable or exchangeable for, shares of Common Stock) less than the Class E Conversion Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Class E Conversion Price shall be adjusted pursuant to
Section 6(c)(ii) hereof, as though such maximum number of shares of Common Stock had been so issued for an aggregate consideration payable by the holders of such rights, options, warrants or other securities prior to their receipt of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value of such non-cash consideration shall be determined as set forth in Section 6(c)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed; and in the event that such rights, options or warrants are not so issued or expire in whole or in part unexercised, or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class E

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Conversion Price shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Class E Conversion Price shall be the Class E Conversion Price that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Class E Conversion Price shall be adjusted pursuant to Section 6(c)(ii) to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class E Conversion Price shall be adjusted to reflect the Class E Conversion Price which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Class E Conversion Price shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Class E Conversion Price was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this Section 6(c)(iii). Notwithstanding anything herein to the contrary, no adjustment in the Class E Conversion Price shall be made under this Section 6(c)(iii) to the extent the holders of Class E Preferred Stock participate in any such distribution in accordance with
Section 4 hereof.

(iv) The anti-dilution provisions of this Section 6(c) may be waived by the affirmative vote of the holders (acting together as a class) of a majority of the then outstanding Class E Preferred Stock.

(d) NOTICE OF CLASS E CONVERSION PRICE ADJUSTMENT. Upon any adjustment of the Class E Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Class E Preferred Stock at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Class E Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Class E Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(e) NOTICE OF CERTAIN EVENTS. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Stock or make any distribution (other than regular cash dividends) to the holders of Common Stock; or

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(ii) the Corporation shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class E Preferred Stock at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

(f) FRACTIONAL SHARES. In connection with the conversion of any shares of Class E Preferred Stock, no fractions of shares of Common Stock shall be required to be issued to the holder of such shares of Class E Preferred Stock, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Conversion Price per share of Common Stock on the business day next preceding the business day on which such shares of Class E Preferred Stock are deemed to have been converted.

(g) RESERVATION OF SHARES.

(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Class E Preferred Stock.

(ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Class E Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation.

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(h) TRANSFER TAXES. The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Class E Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Class E Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

7. OPTIONAL REDEMPTION AT THE ELECTION OF THE HOLDERS OF CLASS E PREFERRED STOCK.

(a) ELECTION.

(i) At any time and from time to time after the seventh anniversary of the original issue date of the shares of Class E Preferred Stock, the holders of the then outstanding shares of the Class E Preferred Stock shall have the option, exercisable by the holders of not less than 25% (in the aggregate) of the then outstanding shares of the Class E Preferred Stock, voting as a single class, by giving a written notice to the Corporation (the "Redemption Notice"), to require the Corporation to redeem any or all of the shares of such Class E Preferred Stock of such holders then outstanding. Upon the affirmative vote by the holders of a majority of the outstanding shares of Class E Preferred Stock, the holders of all outstanding shares of Class E Preferred Stock will be required to have such shares redeemed (a "Mandatory Redemption").

(ii) Within five (5) days after receiving the Redemption Notice, the Corporation shall send a copy of such notice to all other holders of record of the Class E Preferred Stock. Such other holders may elect to participate in the Redemption Notice by notifying the Corporation in writing within ten (10) days after receiving a copy of the Redemption Notice from the Corporation. Upon receipt of such Redemption Notice, the Board shall within thirty (30) days specify a date on which the redemption of such shares provided herein will take place (the "Redemption Date"), which shall be no less than forty-five (45) days and no more than ninety
(90) days after receipt of the Redemption Notice.

(iii) The Corporation shall have no obligation to honor more than two (2) redemption requests of the holders of shares of Class E Preferred Stock.

(b) REDEMPTION PRICE. The redemption price for each share of the Class E Preferred Stock (the "Redemption Price") shall be $14.25 (subject to adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share.

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(c) NOTIFICATION. At least fifteen (15) days prior to the Redemption Date, the Corporation shall mail written notice by first class mail, postage prepaid, to each holder of record of the Class E Preferred Stock who sought redemption, at its address last shown on the records of the Corporation, notifying such holder of such redemption, specifying the Redemption Date, the Redemption Price and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, or its certificate or certificates representing the shares to be redeemed (such notice, the "Closing Notice").

(d) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class E Preferred Stock to be redeemed shall surrender its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Redemption Price due to such holder. From and after the date a holder of shares of the Class E Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class E Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(e) INSUFFICIENT FUNDS. If, on any Redemption Date, funds of the Corporation legally available therefor shall be insufficient to redeem all of the shares of Class E Preferred Stock required to be redeemed, funds to the extent legally available shall be used to redeem the maximum possible number of such shares ratably on the basis of the relative value of such shares based on the Redemption Prices of such shares on such date if the funds of the Corporation legally available therefore had been sufficient to redeem all shares required to be redeemed on such date. Thereafter, the Corporation shall use its best efforts to obtain sufficient funds to redeem the balance of such shares. When additional funds of the Corporation become legally available for the redemption of the balance of such shares, such additional funds will be used to redeem at the Redemption Price (together with interest at the annual rate of 9%) the balance of the shares which the Corporation was therefore obligated to redeem, ratably on the basis set forth in the preceding sentence. Notwithstanding anything herein to the contrary, if the Redemption Price is not paid when due, all powers, preferences, rights, qualifications, limitations and restrictions (including, without limitation, dividend rights, conversion rights, and liquidation preferences, and voting rights) with respect to shares surrendered for redemption, but not actually redeemed, shall continue until the Redemption Price is paid in full.

(f) REISSUE. Any shares of Class E Preferred Stock redeemed pursuant to this Section 7 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class E Preferred Stock, but shall instead have

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the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

8. OPTIONAL REDEMPTION AT THE ELECTION OF THE CORPORATION.

(a) ELECTION. At any time and from time to time after the seventh anniversary of the original issue date of the shares of Class E Preferred Stock, to the extent the Corporation shall have funds legally available for such payment, and subject to the rights of the holders pursuant to Section 6 hereof, the Corporation shall have the right to purchase and redeem all or any portion of the then outstanding shares of Class E Preferred Stock. The Board of Directors shall specify a Redemption Date, which shall be not less than thirty
(30) days nor more than sixty (60) days from the date the Corporation shall mail a Closing Notice to the holders of Class E Preferred Stock.

(b) REDEMPTION PRICE. The redemption price for each share of Class E Preferred Stock redeemed pursuant to this Section 8 shall be the Redemption Price, plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share.

(c) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class E Preferred Stock to be redeemed shall surrender its certificate or certificate representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Redemption Price due to such holder. From and after the date a holder of shares of the Class E Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class E Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(d) PARTIAL REDEMPTION. In the event of a redemption of less than all of the outstanding shares of Class E Preferred Stock pursuant to the first paragraph of this Section 8, redemption as among the holders of such shares of Class E Preferred Stock shall be on a pro rata basis.

(e) REISSUE. Any shares of Class E Preferred Stock redeemed pursuant to this Section 8 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class E Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

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STATEMENT OF CANCELLATION
OF
CAPELLA EDUCATION COMPANY

The undersigned officer of Capella Education Company (the "Corporation") hereby certifies that:

1. The name of the Corporation is Capella Education Company.

2. The Corporation has repurchased and canceled 54,929 Shares of Class C Preferred Stock of the Corporation.

2. There are currently no shares of Class C Preferred Stock outstanding.

3. The 54,929 shares formerly designated as Class C Preferred Stock shall be canceled and not subject to reissue.

4. After giving effect to the cancellation, the Company shall be authorized to issue shares in the amount and class as follows:

10,000,000 Common Stock 3,000,000 Class A Convertible Preferred Stock 1,180,000 Class B Convertible Preferred Stock 71 Class C Preferred Stock 1,022,222 Class D Convertible Preferred Stock 2,596,491 Class E Convertible Preferred Stock 5,146,287 Preferred Stock (undesignated as to class or series)

IN WITNESS WHEREOF, the undersigned has executed this statement of cancellation this 6th day of June, 2001.

CAPELLA EDUCATION COMPANY

By: /s/ Paul F. Clifford
    --------------------------------------

Its: Corporate Secretary


ARTICLES OF AMENDMENT
OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CAPELLA EDUCATION COMPANY

The undersigned, Paul F. Clifford, Secretary of Capella Education Company, a Minnesota corporation, (the "Corporation"), hereby certifies that:

(i) The name of the Corporation is Capella Education Company.

(ii) Article 3 Section 1 (A) of the Corporation's Amended and Restated Articles of Incorporation has been amended to read in its entirety as follows:

"(A) Authorized Capital Stock. The aggregate number of shares which the Corporation has the authority to issue is twenty-eight million (28,000,000) shares, fifteen million (15,000,000) of which shall be designated common shares, $.10 par value (the "Common Shares") and three million (3,000,000) of which shall be designated Class A convertible preferred shares, $1.00 par value (the "Class A Preferred Shares"). The Common Shares and the Class A Preferred Shares are herein sometimes referred to collectively as "Capital Stock." Additionally, the Board of Directors of the Corporation is hereby authorized to cause to be issued from time to time, by resolution or resolutions adopted by such Board, an additional ten million (10,000,000) preferred shares (the "Open Term Preferred Shares")."

(iii) The foregoing amendment has been adopted pursuant to Chapter 302A of the Minnesota Statutes.

IN WITNESS WHEREOF, I have subscribed my name this 6th day of July, 2001.

/s/ Paul F. Clifford
--------------------------------
Paul F. Clifford, Secretary


STATEMENT OF CANCELLATION
OF THE STATEMENT FIXING THE RIGHTS AND PREFERENCES
OF THE CLASS C PREFERRED STOCK
OF
CAPELLA EDUCATION COMPANY

The undersigned officer of Capella Education Company (the "Company") hereby certifies that:

1. The name of the Company is Capella Education Company.

2. The Company's Board of Directors has directed that the statement fixing the rights and preferences of the Company's Class C Preferred Stock be canceled pursuant to Section 302A.133 of the Minnesota Statutes.

3. There are currently no shares of Class C Preferred Stock outstanding.

4. The 71 shares formerly designated as Class C Preferred Stock shall have the status of authorized but unissued, undesignated preferred shares.

5. After giving effect to the cancellation, the Company shall be authorized to issue shares in the amount and class as follows:

15,000,000 Common Stock
3,000,000 Class A Convertible Preferred Stock 1,180,000 Class B Convertible Preferred Stock 1,022,222 Class D Convertible Preferred Stock 2,596,491 Class E Convertible Preferred Stock 5,146,358 preferred shares (undesignated as to class or series)

IN WITNESS WHEREOF, the undersigned has executed this statement of cancellation this 22nd day of January, 2002.

CAPELLA EDUCATION COMPANY

By: /s/ Paul Schroeder
    --------------------------------

Its: SVP & CFO


CAPELLA EDUCATION COMPANY

STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
CLASS F CONVERTIBLE PREFERRED STOCK

The undersigned, Paul Schroeder, the Senior Vice President of Capella Education Company, a Minnesota corporation (the "Corporation"), hereby certifies that the following resolutions establishing Class F Convertible Preferred Stock of the Corporation pursuant to Minnesota Statutes, Section 302A.401 were duly adopted by the directors of the Corporation on January 31, 2002:

RESOLVED, that (i) the form of the Certificate of Designation for the Class F Convertible Preferred Stock (the "Certificate of Designation") attached hereto as Exhibit B is hereby authorized and approved; (ii) there is hereby established a new Class F Convertible Preferred Stock of this Company with the rights, preferences and privileges as set forth in the Certificate of Designation; (iii) the appropriate officers of this Company are authorized and directed to make, execute and file with the Minnesota Secretary of State in the method required by law, the Certificate of Designation, in substantially the form approved hereby, with such changes, deletions and insertions as any of such officers shall approve, the execution and filing of the Certificate of Designation by any of the officers of the Company being conclusive evidence of such approval, and
(iv) each of the officers of the Company is hereby authorized to take all other actions they may deem necessary or advisable to effect adoption of the Certificate of Designation.

RESOLVED FURTHER, that the officers of the Company, and each of them, are authorized for and on behalf of the Company, to execute and deliver such other instruments or documents and to take such other actions as they, or any of them, may deem necessary or advisable to carry out the purposes of the foregoing resolutions.

[remainder of page intentionally blank]


IN WITNESS WHEREOF, I have subscribed my name this 7th day of February, 2002.

/s/ Paul Schroeder
------------------------------------
Paul Schroeder,
Senior Vice President
Capella Education Company

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EXHIBIT B

CAPELLA EDUCATION COMPANY

CERTIFICATE OF DESIGNATION
FOR CLASS F CONVERTIBLE PREFERRED STOCK

1. DESIGNATION; NUMBER OF SHARES; PAR VALUE.

A class of shares of preferred stock of Capella Education Company (the "Corporation") shall be designated as Class F Convertible Preferred Stock (the "Class F Preferred Stock"). The number of shares constituting the Class F Preferred Stock shall be 1,425,457. The Class F Preferred Stock shall have a par value of $.01 per share.

2. VOTING RIGHTS.

(a) GENERAL. On all matters submitted to the shareholders, each holder of Class F Preferred Stock shall have one vote for each share of common stock of the Corporation (the "Common Stock") which such holder of Class F Preferred Stock would be entitled to receive upon the conversion of such holder's Class F Preferred Stock pursuant to the provisions hereof. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the Corporation shall vote as a single class on all matters submitted to the shareholders. No holder of any Class F Preferred Stock shall have any cumulative voting rights.

(b) ADDITIONAL CLASS VOTES BY CLASS F STOCK. Without the affirmative vote of the holders of a majority of the Class F Preferred Stock at the time outstanding at a meeting of the holders of Class F Preferred Stock called for such purpose or written consent of the holders (acting together as a class) of a majority of the Class F Preferred Stock at the time outstanding, the Corporation shall not:

(1) create, authorize, issue or reclassify any outstanding shares of capital stock into any shares of capital stock ranking senior to or on parity with the Class F Preferred Stock as to the payment or distribution of dividends or of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation; or

(2) amend, alter, modify or repeal any provision of the Articles of Incorporation of the Corporation so as to alter the rights and preferences of the Class F Preferred Stock; or

(3) redeem, repurchase or acquire (or make any payment into, or set aside, a sinking fund for such purposes), or declare or pay any dividend or make any other


distribution on, any of the Corporation's capital stock, except any such redemption, repurchase, acquisition, dividend or distribution which is:

(i) pursuant to mandatory redemption obligations set forth herein or in the Articles of Incorporation (including any certificate of designation) as of the date of filing of this Certificate of Designation;

(ii) Common Stock issued under employee benefit plans of the Corporation;

(iii) made pursuant to a repurchase agreement approved by at least 66 2/3% of the members of the Board of Directors; or

(iv) a dividend pro rata to all holders of the class or series of securities upon which such dividend is declared in shares of Common Stock or capital stock of the Corporation that ranks junior to the Class F Preferred Stock as to the payment or distribution of dividends and of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation.

(4) effect any acquisition of the Corporation by another entity by means of any transaction or series of related transactions with the Corporation (including, without limitation any merger, consolidation or recapitalization), which results in 50% or more of the voting capital stock of the Corporation being acquired by persons who were not shareholders of the Corporation prior to such transaction or series of transactions, unless such acquisition provides for the exchange or payment of consideration in respect of each share of Class F Preferred Stock, or the shares of Common Stock or other securities into which a share of Class F Preferred Stock is then convertible, having a value equal to or greater than $42.75 (subject to appropriate adjustments for stock dividends, stock splits, combinations and recapitalizations and similar events affecting the Class F Preferred Stock) (a "Qualified Amount"); or

(5) effect any sale or other disposition of all or substantially all of the assets of the Corporation, unless such sale, if followed by an immediate liquidation, would result in distributable proceeds in respect of each share of Class F Preferred Stock, or the shares of Common Stock or other securities into which a share of Class F Preferred Stock is then convertible, in a Qualified Amount; or

(6) effect the liquidation or dissolution of the Corporation, unless such liquidation or dissolution would result in distributable proceeds in respect of each share of Class F Preferred Stock, or the shares of Common Stock or other securities into which a share of Class F Preferred Stock is then convertible, in a Qualified Amount.

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(c) VALUATION OF NON-CASH CONSIDERATION. In connection with any transaction set forth in Section 2(b) above involving the receipt of consideration or proceeds in a form other than cash, the fair market value of such non-cash consideration or proceeds shall be utilized in determining whether such transaction must be approved by the holders of Class F Preferred Stock pursuant to Section 2(b). The fair market value of any non-cash consideration will be determined as follows:

(i) the fair market value of stock and other securities that are publicly traded shall be the average of the last closing market price of such stock or securities on each of the ten trading days ending five business days prior to the execution by the Corporation of a definitive agreement, or adoption by the Board of Directors of the Corporation of any plan, relating to such transaction (the "Time of Determination");

(ii) the fair market value of stock and other equity securities that are not publicly traded and the value of all other non-cash consideration, other than consideration of the nature described in clause (iii) below, shall be the fair market value thereof at the Time of Determination as mutually agreed by the Corporation and a director designated to serve on the Board of Directors by the holders of Class F Preferred Stock (a "Class F Director"), or if the Corporation and a Class F Director are unable to reach an agreement within five business days of receipt of written notice from the Corporation of such transaction by the Class F Director, as determined by an investment banking firm or other person experienced in valuing such stock, equity securities or other non-cash consideration mutually acceptable to a Class F Director and the Corporation, or if they are unable to agree, or there exists no such Class F Director, then a nationally recognized investment banking firm selected in good faith by the Board of Directors of the Corporation; or

(iii) the value of any promissory note or other debt instrument that is not publicly traded and the value of any and all deferred installments of the consideration and any other deferral of payments included in the total consideration shall be deemed to be the face amount of the promissory notes or other debt instruments or the total amount of payments that are deferred with respect to deferred obligations that are not evidenced by promissory notes or other debt instruments.

A security is "publicly traded" if such security is part of a class of securities that is listed on the New York or American stock exchanges (or on a foreign stock exchange of comparable depth and liquidity) or is traded on the NASDAQ Stock Market.

(d) MEETINGS. A proper officer of the Corporation may, and upon the written request of the holders of record of at least twenty-five percent (25%) of the shares of Class F Preferred Stock then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the holders of Class F Preferred Stock, for the purpose of holding a

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class vote pursuant to Section 2(b). If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty
(20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of record of at least twenty-five percent (25%) of the outstanding shares of Class F Preferred Stock may designate in writing their own representative to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders.

3. NO PREEMPTIVE RIGHTS.

Holders of Class F Preferred Stock shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for, or otherwise creating a right to acquire, any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise.

4. DIVIDENDS.

Subject to the affirmative voting requirement of Section 2(b)(3) of this Certificate of Designation, in the event any dividend or distribution is declared or made with respect to outstanding shares of any class of capital stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of Class F Preferred Stock. Subject to the affirmative voting requirement of Section 2(b)(3) of this Certificate of Designation, in the event any dividend or distribution is declared or made with respect to the Common Stock or any class of capital stock convertible or exchangeable into Common Stock of the Corporation, each holder of shares of Class F Preferred Stock (and any other holder of capital stock so convertible or exchangeable and entitled to payment of such dividend or distribution) shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of capital stock are then convertible on the date established as the record date with respect to such dividend or distribution. In case any portion of the dividend or distribution declared or made by the Corporation shall be in a form other than cash, the fair market value of such non-cash portion, as determined in good faith by the Board of Directors of the Corporation, shall be utilized in determining the comparable dividend or distribution to be declared or made with respect to the outstanding shares of Class F Preferred Stock.

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5. LIQUIDATION RIGHT AND PREFERENCE.

In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (a "Liquidation Event"), the holders of the Class F Preferred Stock shall be entitled to receive, in respect of each share of Class F Preferred Stock, the greater of (i) the amount of $23.42 (subject to appropriate adjustment for any stock dividends, combinations or splits with respect to such share), plus the aggregate amount of all declared but unpaid dividends on such share of Class F Preferred Stock (the "Class F Preference Amount") or (ii) the aggregate amount that would be payable in the Liquidation Event in respect of the share or shares of Common Stock into which such share of Class F Preferred Stock would be convertible if all of the holders were to convert their shares of Class F Preferred Stock into shares of Common Stock immediately prior to the Liquidation Event, and the Class F Preference Amount was not paid in preference to any class of Junior Stock, as hereafter provided.

Upon occurrence of a Liquidation Event, the holders of then outstanding shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), Class D Preferred Stock ("Class D Preferred Stock"), Class E Convertible Preferred Stock ("Class E Preferred Stock"), Class F Preferred Stock and any other class of capital stock hereafter established ranking on a parity in such Liquidation Event with the Class B Preferred Stock, Class D Preferred Stock, Class E Preferred Stock and Class F Preferred Stock (collectively, "Parity Stock") shall be entitled to be paid as to each share of such Parity Stock, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Class A Convertible Preferred Stock ("Class A Preferred Stock"), Common Stock or any other class or series of capital stock hereafter established ranking junior in a Liquidation Event to the Parity Stock (collectively, "Junior Stock"), and after distribution of any of the assets of the Corporation, to the extent of the liquidation preference applicable thereto, to the holders of any class or series of capital stock hereafter established ranking senior in a Liquidation Event to the Parity Stock (collectively "Senior Stock"), out of assets available for distribution, an amount, plus the aggregate amount of all declared but unpaid dividends on such shares, equal to $2.50 per share in the case of the Class B Preferred Stock (the "Class B Preference Amount"), $4.50 per share in the case of the Class D Preferred Stock (the "Class D Preference Amount"), $14.25 per share in the case of the Class E Preferred Stock (the "Class E Preference Amount") (subject, in each case, to appropriate adjustment for any stock dividends, combinations or splits with respect to each share), the Class F Preference Amount in the case of the Class F Preferred Stock, and, in the case of any other Parity Stock, such amount as shall be specified in the applicable Certificate of Designation (the "Parity Preference Amount", and, together with the Class B Preference Amount, Class D Preference Amount, Class E Preference Amount and Class F Preference Amount, collectively, the "Parity Preference Amounts").

If, upon any Liquidation Event, the remaining assets of the Corporation available for distribution to the holders of Parity Stock are insufficient to pay the holders of Parity Stock their full Parity Preference Amounts to which they are entitled, the holders of

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Parity Stock shall share pro rata in any such distribution in proportion to the full Parity Preference Amounts to which they would otherwise be respectively entitled.

Following such payment of Parity Preference Amounts to the holders of Parity Stock, and payment to the holders of any Senior Stock of any preferential amount to which they are entitled, the holders of the Junior Stock shall then be entitled, to the exclusion of the holders of Parity Stock or Senior Stock, to receive in cash or in kind, all remaining assets of the Corporation, if any, in accordance with their relative priorities in a Liquidation Event.

The merger or consolidation of the Corporation into or with another corporation or the merger or consolidation of any other corporation into or with the Corporation (in which consolidation or merger the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation or merger), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a Liquidation Event for purposes of this Section 5.

6. CONVERSION INTO COMMON STOCK.

(a) OPTIONAL CONVERSION. At the option of the holder thereof, at any time and from time to time any or all Class F Preferred Stock then held by such holder shall be convertible into Common Stock of the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c). In order to exercise the conversion privilege, a holder of Class F Preferred Stock shall surrender the certificate or certificates duly endorsed to the Corporation evidencing the shares of Class F Preferred Stock each holder wishes to convert to the Corporation at its principal office and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Any shares of Class F Preferred Stock converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class F Preferred Stock with respect to such shares shall cease and such holder shall be treated as the record holder of the number of shares of Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder (i) a certificate or certificates for the number of shares of Common Stock issuable upon conversion, rounding down to the nearest full share, (ii) any cash adjustment required pursuant to Section 6(f), and (iii) in the event of a conversion in part, a certificate or certificates for the whole number of shares of Class F Preferred Stock not being so converted.

(b) AUTOMATIC CONVERSION. The Class F Preferred Stock shall automatically be converted into Common Stock of the Corporation, without any act by the Corporation or the holders of the Class F Preferred Stock, concurrently
(i) with the closing of the first public offering by the Corporation of shares of Common Stock of the Corporation registered under the Securities Act of 1933, as amended, in which (1) the aggregate gross proceeds received by the Corporation in the offering are at least $30.0 million, and (2) the public offering price per share of Common Stock is at least $28.50 (as adjusted from time to

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time to reflect stock splits, dividends, recapitalizations, combinations or the like), or (ii) upon the affirmative vote or written consent of the holders of a majority of the outstanding shares of Class F Preferred Stock then outstanding; provided, however, if any other class or series of preferred stock of the Corporation would remain outstanding after the conversion of the Class F Preferred Stock, the affirmative vote or written consent of holders of 60% of the outstanding shares of Class F Preferred Stock shall be required for automatic conversion pursuant to this clause (ii). In the case of a conversion pursuant to clause (i), each holder of a share of Class F Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Class F Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering. Upon any conversion pursuant to this Section
6(b), each holder of a share of Class F Preferred Stock shall immediately surrender such share in exchange for (i) appropriate stock certificates representing a share or shares of Common Stock of the Corporation, and (ii) any cash adjustment required pursuant to Section 6(f).

(c) CONVERSION PRICE AND ADJUSTMENTS. The number of shares of Common Stock issuable in exchange for each share of Class F Preferred Stock upon either optional or automatic conversion shall be computed to the nearest hundredth of a share and shall be equal to $11.71 divided by the conversion price then in effect for Class F Preferred Stock (the "Class F Conversion Price"). The Class F Conversion Price shall initially be $11.71, but such Class F Conversion Price shall be subject to adjustment from time to time, as hereinafter provided:

(i) In case the Corporation shall at any time (A) declare a dividend or make a distribution on Common Stock payable in Common Stock (other than dividends or distributions payable to holders of the Series F Preferred Stock including dividends paid as contemplated by Section 4), (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a smaller number of shares, (D) issue any shares of its capital stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation), or (E) consolidate with, or merge with or into, any other person, the Class F Conversion Price in effect (and, where appropriate, the securities into which the Class F Preferred Stock are then convertible) at the time of the record date for such dividend or distribution or on the effective date of such subdivision, split, combination, consolidation, merger or reclassification shall be adjusted so that the conversion of the Class F Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock or other securities of the Corporation (or other securities into which such shares of Common Stock have been converted, exchanged, combined, consolidated, merged or reclassified pursuant to clause
6(c)(i)(C), 6(c)(i)(D) or 6(c)(i)(E) above) which, if the Class F Preferred Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger or reclassification. Such adjustment shall be made successively whenever an event listed above shall occur.

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(ii) If, at any time after the first anniversary of the original issue date of the shares of Class F Preferred Stock, the Corporation shall issue or sell any Common Stock for a consideration per share less than the Class F Conversion Price then in effect, or shall issue any options, warrants or other rights for the purchase of such shares at a consideration per share of less than the Class F Conversion Price then in effect (other than securities subject to Section 6(c)(i) hereof; options issued as of January 31, 2002 under existing stock option plans of the Corporation, and 1,184,290 shares issuable upon exercise of such options; options for the issuance of up to 706,492 additional shares under any existing stock option plan of the Corporation and shares issuable upon exercise of such options; warrants to purchase 334,048 shares outstanding as of January 31, 2002; 2,810,000 shares of Class A Preferred Stock and shares issued upon conversion thereof; 460,000 shares of Class B Preferred Stock and shares issued upon conversion thereof; 1,022,222 shares of Class D Preferred Stock and shares issued upon conversion thereof; 2,596,491 shares of Class E Preferred Stock and shares issuable upon conversion thereof; shares issued to the employee stock ownership plan of the Corporation, provided such contribution is approved by the compensation committee of the Board of Directors of the Corporation and does not exceed that number of shares the fair market value of which is three percent (3%) of annual compensation (as measured by applicable benefit plan rules) (any of the foregoing share amounts shall be subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) (all of the foregoing are collectively referred to as the "Exempt Securities")), the Class F Conversion Price in effect immediately prior to such issuance or sale shall be reduced to an amount determined by multiplying (A) the Class F Conversion Price then in effect, and (B) a fraction, the numerator of which shall be an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Class F Conversion Price then in effect, and (2) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise of such purchase rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock outstanding immediately after such issuance or sale plus the number of shares of Common Stock issuable upon the exercise of any purchase rights thus issued, by (bb) the Class F Conversion Price then in effect. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Corporation, shall be utilized in the foregoing computation.

For purposes of this Section 6(c), "Common Stock outstanding" shall include, in addition to Common Stock issued and outstanding, those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock and Common Stock issuable upon the exercise, exchange or conversion of any other outstanding right to acquire Common Stock.

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If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class F Conversion Price subsequently expire without exercise, the Class F Conversion Price shall be recomputed by deleting such expired options, warrants or other purchase rights. If the Class F Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Class F Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights.

(iii) If, on or prior to the first anniversary of the original issue date of the shares of Class F Preferred Stock, the Corporation shall issue or sell any Common Stock (other than Exempt Securities) for a consideration per share less than the Class F Conversion Price then in effect, or shall issue any options, warrants or other rights for the purchase of such shares (other than Exempt Securities) at a consideration per share of less than the Class F Conversion Price then in effect, the Class F Conversion Price shall be reduced to an amount equal to the per share consideration payable to the Corporation in such sale or issuance. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Corporation, shall be utilized to determine the consideration per share.

If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class F Conversion Price subsequently expire without exercise, the Class F Conversion Price shall be readjusted as if such options, warrants or other purchase rights had not been issued. If the Class F Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Class F Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights.

(iv) In case the Corporation shall fix a record date for the issuance on a pro rata basis of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into or exercisable or exchangeable for shares of Common Stock) at a price per share of Common Stock (or having a conversion, exercise or exchange price per share of Common Stock, in the case of a security convertible into, or exercisable or exchangeable for, shares of Common Stock) less than the Class F Conversion Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Class F Conversion Price shall be adjusted pursuant to
Section 6(c)(ii) or Section 6(c)(iii), as the case may be, as though such maximum number of shares of Common Stock had been so issued for an aggregate consideration payable by the holders of such rights, options, warrants or other securities prior to their receipt of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value

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of such non-cash consideration shall be determined as set forth in Section 6(c)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed; and in the event that such rights, options or warrants are not so issued or expire in whole or in part unexercised, or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class F Conversion Price shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Class F Conversion Price shall be the Class F Conversion Price that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Class F Conversion Price shall be adjusted pursuant to Section 6(c)(ii) or Section 6(c)(iii), as the case may be, to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class F Conversion Price shall be adjusted to reflect the Class F Conversion Price which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Class F Conversion Price shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Class F Conversion Price was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this Section 6(c)(iv). Notwithstanding anything herein to the contrary, no adjustment in the Class F Conversion Price shall be made under this Section 6(c)(iv) to the extent the holders of Class F Preferred Stock participate in any such distribution in accordance with Section 4 hereof.

(iv) The anti-dilution provisions of this Section 6(c) may be waived by the affirmative vote of the holders (acting together as a class) of 67% or more of the then outstanding Class F Preferred Stock.

(d) NOTICE OF CLASS F CONVERSION PRICE ADJUSTMENT. Upon any adjustment of the Class F Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Class F Preferred Stock at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Class F Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Class F Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

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(e) NOTICE OF CERTAIN EVENTS. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Stock or make any distribution (other than regular cash dividends) to the holders of Common Stock; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class F Preferred Stock at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

(f) FRACTIONAL SHARES. In connection with the conversion of any shares of Class F Preferred Stock, no fractions of shares of Common Stock shall be issued to the holder of such shares of Class F Preferred Stock, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Class F Conversion Price per share of Common Stock on the business day next preceding the business day on which such shares of Class F Preferred Stock are deemed to have been converted.

(g) RESERVATION OF SHARES.

(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Class F Preferred Stock.

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(ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Class F Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation.

(h) TRANSFER TAXES. The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Class F Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Class F Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

7. OPTIONAL REDEMPTION AT THE ELECTION OF THE HOLDERS OF CLASS F PREFERRED STOCK.

(a) ELECTION.

(i) At any time after the seventh anniversary of the original issue date of the shares of Class F Preferred Stock, upon the affirmative vote or written consent of the holders of a majority of the outstanding shares of Class F Preferred Stock, the Corporation shall be required to redeem all of the outstanding shares of Class F Preferred Stock and the holders of all outstanding shares of Class F Preferred Stock shall be required to have such shares redeemed (a "Mandatory Redemption"). The holders of Class F Preferred Stock shall deliver to the Corporation written notice of such affirmative vote or written consent (the "Redemption Notice").

(ii) Within five business days after receiving the Redemption Notice, the Corporation shall send a copy of such Redemption Notice to all other holders of record of the Class F Preferred Stock. Upon receipt of the Redemption Notice, the Board shall within thirty (30) days specify a date on which the redemption of such shares provided herein shall take place (the "Redemption Date"), which shall be no less than forty-five (45) days and no more than ninety (90) days after receipt of the Redemption Notice.

(b) OPTIONAL REDEMPTION PRICE. The redemption price for each share of the Class F Preferred Stock shall be an amount equal to $11.71 (subject to adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share (the "Optional Redemption Price").

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(c) NOTIFICATION. At least fifteen (15) days prior to the Redemption Date, the Corporation shall mail written notice by first class mail, postage prepaid, to each holder of record of the Class F Preferred Stock, at its address last shown on the records of the Corporation, notifying such holder of such redemption, specifying the Redemption Date, the Optional Redemption Price and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, or its certificate or certificates representing the shares to be redeemed (such notice, the "Closing Notice").

(d) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class F Preferred Stock shall surrender its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Optional Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Optional Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Optional Redemption Price due to such holder. From and after the date a holder of shares of the Class F Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class F Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(e) INSUFFICIENT FUNDS. If, on any Redemption Date, funds of the Corporation legally available therefor shall be insufficient to redeem all of the shares of Class F Preferred Stock required to be redeemed, funds to the extent legally available shall be used to redeem the maximum possible number of such shares ratably on the basis of the relative value of such shares based on the Optional Redemption Prices of such shares on such date if the funds of the Corporation legally available therefore had been sufficient to redeem all shares required to be redeemed on such date. Thereafter, the Corporation shall use its best efforts to obtain sufficient funds to redeem the balance of such shares. When additional funds of the Corporation become legally available for the redemption of the balance of such shares, such additional funds will be used to redeem at the Optional Redemption Price (together with interest at the annual rate of 9%) the balance of the shares which the Corporation was therefore obligated to redeem, ratably on the basis set forth in the preceding sentence. Notwithstanding anything herein to the contrary, if the Optional Redemption Price is not paid when due, all powers, preferences, rights, qualifications, limitations and restrictions (including, without limitation, dividend rights, conversion rights, and liquidation preferences, and voting rights) with respect to shares surrendered for redemption, but not actually redeemed, shall continue until the Optional Redemption Price is paid in full.

(f) REISSUE. Any shares of Class F Preferred Stock redeemed pursuant to this Section 7 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class F Preferred Stock, but shall instead have

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the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

8. OPTIONAL REDEMPTION AT THE ELECTION OF THE CORPORATION.

(a) ELECTION. At any time and from time to time after the seventh anniversary of the original issue date of the shares of Class F Preferred Stock, to the extent the Corporation shall have funds legally available for such payment, and subject to the rights of the holders pursuant to Section 6 hereof, the Corporation shall have the right to purchase and redeem all or any portion of the then outstanding shares of Class F Preferred Stock. The Board of Directors shall specify a Redemption Date, which shall be not less than thirty
(30) days nor more than sixty (60) days from the date the Corporation shall mail a Closing Notice to the holders of Class F Preferred Stock.

(b) MANDATORY REDEMPTION PRICE. The redemption price for each share of the Class F Preferred Stock shall be an amount equal to $23.42 (subject to adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share (the "Mandatory Redemption Price").

(c) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class F Preferred Stock to be redeemed shall surrender its certificate or certificate representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Mandatory Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Mandatory Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Mandatory Redemption Price due to such holder. From and after the date a holder of shares of the Class F Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class F Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(d) PARTIAL REDEMPTION. In the event of a redemption of less than all of the outstanding shares of Class F Preferred Stock pursuant to the first paragraph of this Section 8, redemption as among the holders of such shares of Class F Preferred Stock shall be on a pro rata basis.

(e) REISSUE. Any shares of Class F Preferred Stock redeemed pursuant to this Section 8 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class F Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

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ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CAPELLA EDUCATION COMPANY

The undersigned, being the Secretary of Capella Education Company, a Minnesota corporation (the "Company"), hereby certifies that:

(i) The name of the Company is Capella Education Company.

(ii) The Company's Certificate of Designation for Class E Convertible Preferred Stock is amended and restated as shown in Exhibit A.

(iii) The foregoing amendments have been adopted pursuant to Chapter 302A of the Minnesota Statutes.

IN WITNESS WHEREOF, I have subscribed my name this ____ day of January, 2003.

      /s/ Paul Clifford
------------------------------
Secretary
Capella Education Company


CAPELLA EDUCATION COMPANY

AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
FOR CLASS E CONVERTIBLE PREFERRED STOCK

1. DESIGNATION; NUMBER OF SHARES; PAR VALUE.

A class of shares of preferred stock of Capella Education Company (the "Corporation") shall be designated as Class E Convertible Preferred Stock (the "Class E Preferred Stock"). The number of shares constituting the Class E Preferred Stock shall be Two Million Five Hundred Ninety-Six Thousand Four Hundred Ninety-One (2,596,491) shares. The Class E Preferred Stock shall have a par value of $.01 per share.

2. VOTING RIGHTS.

(a) GENERAL. On all matters submitted to the shareholders, each holder of Class E Preferred Stock shall have one vote for each share of common stock of the Corporation (the "Common Stock") which such holder of Class E Preferred Stock would be entitled to receive upon the conversion of such holder's Class E Preferred Stock pursuant to the provisions hereof. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the Corporation shall vote as a single class on all matters submitted to the shareholders. No holder of any Class E Preferred Stock shall have any cumulative voting rights.

(b) ADDITIONAL CLASS VOTES BY CLASS E STOCK. Without the affirmative vote of the holders of a majority of the Class E Preferred Stock at the time outstanding at a meeting of the holders of Class E Preferred Stock called for such purpose or written consent of the holders (acting together as a class) of a majority of the Class E Preferred Stock at the time outstanding, the Corporation shall not:

(1) create, authorize or issue any shares of capital stock ranking senior to or having a priority over the Class E Preferred Stock as to the payment or distribution of dividends or of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation; or

(2) amend, alter, modify or repeal any provision of the Articles of Incorporation of the Corporation so as to alter the rights and preferences of the Class E Preferred Stock; or

(3) redeem, repurchase or acquire (or make any payment into, or set aside, a sinking fund for such purposes) any of the Corporation's capital stock, except any such redemption, repurchase or acquisition which is:


(i) pursuant to mandatory redemption obligations set forth herein or in the Articles of Incorporation (including any certificate of designation) as of the date of filing of this Certificate of Designation;

(ii) Common Stock issued under employee benefit plans of the Corporation;

(iii) made pursuant to a repurchase agreement between the Corporation and any of its employees, officers or directors approved by the Board of Directors; or

(4) effect any acquisition of the Corporation by another entity by means of any transaction or series of related transactions with the Corporation (including, without limitation any merger, consolidation or recapitalization), which results in 50% or more of the voting capital stock of the Corporation being acquired, by exchange, cancellation or otherwise, by persons who were not shareholders of the Corporation prior to such transaction or series of transactions, unless such acquisition provides for the exchange or payment of consideration in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class E Preferred Stock is then convertible, having a value equal to or greater than $28.50 (subject to appropriate adjustments for stock dividends, stock splits, combinations and similar recapitalization affecting the Class E Preferred Stock) (a "Qualified Amount"); or

(5) effect any sale or other disposition of all or substantially all of the assets of the Corporation, unless such sale, if followed by an immediate liquidation, would result in distributable proceeds in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class E Preferred Stock is then convertible, in a Qualified Amount; or

(6) effect the liquidation or dissolution of the Company, unless such liquidation or dissolution would result in distributable proceeds in respect of each share of Class E Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class E Preferred Stock is then convertible, in a Qualified Amount.

(c) VALUATION OF NON-CASH CONSIDERATION. In connection with any transaction set forth in Section 2(b) above involving the receipt of consideration or proceeds in a form other than cash, the fair market value of such non-cash consideration or proceeds shall be utilized in determining whether such transaction must be approved by the holders of Class E Preferred Stock pursuant to Section 2(b). The fair market value of any non-cash consideration will be determined as follows:

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(i) the fair market value of stock and other securities that are publicly traded shall be the average of the last closing market price of such stock or securities on each of the ten trading days ending five business days prior to the execution by the Company of a definitive agreement, or adoption by the Board of Directors of the Company of any plan, relating to such transaction (the "Time of Determination");

(ii) the fair market value of stock and other equity securities that are not publicly traded and the value of all other non-cash consideration, other than consideration of the nature described in clause (iii) below, shall be the fair market value thereof at the Time of Determination as mutually agreed by the Company and a director designated to serve on the Board of Directors by a holder of Class E Preferred Stock (a "Class E Director"), or if the Company and a Class E Director are unable to reach an agreement within five business days of receipt of written notice from the Company of such transaction by the Class E Director, as determined by an investment banking firm or other person experienced in valuing such stock, equity securities or other non-cash consideration mutually acceptable to a Class E Director and the Company, or if they are unable to agree, or there exists no such Class E Director, then a nationally recognized investment banking firm selected in good faith by the Board of Directors of the Company; or

(iii) the value of any promissory note or other debt instrument that is not publicly traded and the value of any and all deferred installments of the consideration and any other deferral of payments included in the total consideration shall be deemed to be the face amount of the promissory notes or other debt instruments or the total amount of payments that are deferred with respect to deferred obligations that are not evidenced by promissory notes or other debt instruments.

A security is "publicly traded" if such security is part of a class of securities that is listed on the New York or American stock exchanges (or on a foreign stock exchange of comparable depth and liquidity) or is traded on the NASDAQ Stock Market.

(d) MEETINGS. A proper officer of the Corporation may, and upon the written request of the holders of record of at least twenty-five percent (25%) of the shares of Class E Preferred Stock then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the holders of Class E Preferred Stock, for the purpose of holding a class vote pursuant to
Section 2(b). If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of record of at least twenty-five percent (25%) of the outstanding shares of Class E Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by

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the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders.

3. NO PREEMPTIVE RIGHTS.

Holders of Class E Preferred Stock shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for, or otherwise creating a right to acquire, any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise.

4. DIVIDENDS.

In the event any dividend or distribution is declared or made with respect to outstanding shares of any class of capital stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of Class E Preferred Stock. In the event any dividend or distribution is declared or made with respect to the Common Stock or any class of capital stock convertible or exchangeable into Common Stock of the Corporation, each holder of shares of Class E Preferred Stock (and any other holder of capital stock so convertible or exchangeable and entitled to payment of such dividend or distribution) shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of capital stock are then convertible on the date established as the record date with respect to such dividend or distribution. In case any portion of the dividend or distribution declared or made by the Corporation shall be in a form other than cash, the fair market value of such non-cash portion, as determined in good faith by the Board of Directors of the Company, shall be utilized in determining the comparable dividend or distribution to be declared or made with respect to the outstanding shares of Class E Preferred Stock.

5. LIQUIDATION RIGHT AND PREFERENCE.

In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (a "Liquidation Event"), the holders of the Class E Preferred Stock shall be entitled to receive, in respect of each share of Class E Preferred Stock, the greater of (i) the amount of $14.25 (subject to appropriate adjustment for any stock dividends, combinations or splits with respect to such share), plus the aggregate amount of all declared but unpaid dividends on such share of Class E Preferred Stock (the "Class E Preference Amount") or (ii) the aggregate amount that would be payable in the Liquidation Event in respect of the share or shares of Common Stock into which such share of Class E Preferred Stock would be convertible if all of the holders were to convert their shares of Class E Preferred Stock into shares of Common Stock immediately prior to the

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Liquidation Event, and the Class E Preference Amount was not paid in preference to any class of Junior Stock, as hereafter provided.

Upon occurrence of a Liquidation Event, the holders of then outstanding shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), Class C Preferred Stock, Class D Convertible Preferred Stock ("Class D Preferred Stock"), Class E Preferred Stock and any other class of capital stock hereafter established ranking on a parity in such Liquidation Event with the Class B Preferred Stock, Class C, Class D Preferred Stock and Class E Preferred Stock (collectively, "Parity Stock") shall be entitled to be paid as to each share of such Parity Stock, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Class A Convertible Preferred Stock ("Class A Preferred Stock"), Common Stock or any other class or series of capital stock hereafter established ranking junior in a Liquidation Event to the Parity Stock (collectively, "Junior Stock"), and after distribution of any of the assets of the Corporation, to the extent of the liquidation preference applicable thereto, to the holders of any class or series of capital stock hereafter established ranking senior in a Liquidation Event to the Parity Stock (collectively "Senior Stock"), out of assets available for distribution, an amount, plus the aggregate amount of all declared but unpaid dividends on each such share, equal to $2.50 per share in the case of the Class B Preferred Stock (the "Class B Preference Amount"), $3.00 per share in the case of the Class C Preferred Stock (the "Class C Preference Amount"), $4.50 per share in the case of the Class D Preferred Stock (the "Class D Preference Amount") (subject, in each case, to appropriate adjustment for any stock dividends, combinations or splits with respect to each share), the Class E Preference Amount in the case of the Class E Preferred Stock, and, in the case of any other Parity Stock, such amount as shall be specified in the applicable Certificate of Designation (the "Parity Preference Amount", and, together with the Class B Preference Amount, Class C Preference Amount, Class D Preference Amount and Class E Preference Amount, collectively, the "Parity Preference Amounts").

If, upon any Liquidation Event, the remaining assets of the Corporation available for distribution to the holders of Parity Stock are insufficient to pay the holders of Parity Stock their full Parity Preference Amounts to which they are entitled, the holders of Parity Stock shall share pro rata in any such distribution in proportion to the full Parity Preference Amounts to which they would otherwise be respectively entitled.

Following such payment of Parity Preference Amounts to the holders of Parity Stock, and payment to the holders of any Senior Stock of any preferential amount to which they are entitled, the holders of the Junior Stock shall then be entitled, to the exclusion of the holders of Parity Stock or Senior Stock, to receive in cash or in kind, all remaining assets of the Corporation, if any, in accordance with their relative priorities in a Liquidation Event.

6. CONVERSION INTO COMMON STOCK.

(a) OPTIONAL CONVERSION. At the option of the holder thereof, any or all Class E Preferred Stock then held by such holder shall be convertible into Common Stock of

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the Corporation in accordance with the provisions and subject to the adjustments provided for in Section 6(c). In order to exercise the conversion privilege, a holder of Class E Preferred Stock shall surrender the certificate or certificates duly endorsed to the Corporation evidencing the shares of Class E Preferred Stock each holder wishes to convert to the Corporation at its principal office and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Any shares of Class E Preferred Stock converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class E Preferred Stock with respect to such shares shall cease and such holder shall be treated as the record holder of the number of shares of Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder (i) a certificate or certificates for the number of Common Stock issuable upon conversion, computed to the nearest one hundredth of a full share,
(ii) any cash adjustment required pursuant to Section 6(f), and (iii) in the event of a conversion in part, a certificate or certificates for the whole number of shares of Class E Preferred Stock not being so converted.

(b) AUTOMATIC CONVERSION. The Class E Preferred Stock shall automatically be converted into Common Stock of the Corporation, without any act by the Corporation or the holders of the Class E Preferred Stock, concurrently with the closing of the first public offering by the Corporation of shares of Common Stock of the Corporation registered under the Securities Act of 1933, as amended, in which (1) the aggregate gross public offering price of the securities sold for cash by the Corporation in the offering is at least $30.0 million, or such lower amount as may be approved by the holders of a majority of the shares of Class E Preferred Stock then outstanding, and (2) the public offering price per share of Common Stock is at least $28.50 (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), or such lower amount as may be approved by the holders of a majority of the shares of Class E Preferred Stock then outstanding. Each holder of a share of Class E Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Class E Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering. Upon such conversion, each holder of a share of Class E Preferred Stock shall immediately surrender such share in exchange for (i) appropriate stock certificates representing a share or shares of Common Stock of the Corporation, and (ii) any cash adjustment required pursuant to Section 6(f).

(c) CONVERSION PRICE AND ADJUSTMENTS. The number of shares of Common Stock issuable in exchange for each share of Class E Preferred Stock upon either optional or automatic conversion shall be equal to $14.25 divided by the conversion price then in effect for Class E Preferred Stock (the "Class E Conversion Price"). The Class E Conversion Price shall initially be $14.25, but such Class E Conversion Price shall be subject to adjustment from time to time, as hereinafter provided:

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(i) In case the Corporation shall at any time (A) declare a dividend or make a distribution on Common Stock payable in Common Stock (other than dividends or distributions payable to holders of the Series E Preferred Stock including dividends paid as contemplated by Section 4), (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a smaller number of shares, (D) issue any shares of its capital stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation), or (E) consolidate with, or merge with or into, any other person, the Class E Conversion Price in effect (and, where appropriate, the securities into which the Class E Preferred Stock are then convertible) at the time of the record date for such dividend or distribution or on the effective date of such subdivision, split, combination, consolidation, merger or reclassification shall be adjusted so that the conversion of the Class E Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock or other securities of the Corporation (or other securities into which such shares of Common Stock have been converted, exchanged, combined, consolidated, merged or reclassified pursuant to clause 6(c)(i)(C), 6(c)(i)(D) or 6(c)(i)(E) above) which, if the Class E Preferred Stock had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger or reclassification. Such adjustment shall be made successively whenever an event listed above shall occur.

(ii) If and whenever the Corporation shall issue or sell any Common Stock for a consideration per share less than the Class E Conversion Price then in effect, or shall issue or sell any options, warrants or other rights (including, without limitation, securities convertible into or exercisable for Common Stock) for the purchase of such shares at a consideration per share of less than the Class E Conversion Price then in effect (other than securities subject to Section 6(c)(i) hereof; options issued as of April 20, 2000 under existing stock option plans of the Corporation, and 730,729 shares issuable upon exercise of such options; options for the issuance of up to 533,137 additional shares under any existing stock option plan of the Corporation and shares issuable upon exercise of such options; warrants to purchase 198,960 shares outstanding as of April 20, 2000, warrants to purchase 135,088 shares to be issued in connection with the issuance of the Class E Preferred Stock and shares issuable upon the exercise thereof; 2,810,000 shares of Class A Preferred Stock, 460,000 shares of Class B Preferred Stock, 1,022,222 shares of Class D Preferred Stock and shares issuable upon conversion thereof; shares issued to the employee stock ownership plan of the Corporation, provided such contribution is approved by the compensation committee of the Board of Directors of the Corporation and does not exceed that number of shares the fair market value of which is three percent (3%) of annual compensation (as measured by applicable benefit plan rules) (any of the foregoing share amounts shall be subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like)), the Class E Conversion Price in effect immediately prior to such issuance

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or sale shall be reduced to an amount determined by multiplying (A) the Class E Conversion Price then in effect, and (B) a fraction, the numerator of which shall be an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Class E Conversion Price then in effect, and (2) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise or conversion of such purchase or acquisition rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock outstanding immediately after such issuance or sale plus the number of shares of Common Stock issuable upon the exercise or conversion of any purchase or acquisition rights thus issued, by (bb) the Class E Conversion Price then in effect. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Company, shall be utilized in the foregoing computation.

For purposes of this Section 6(c), "Common Stock outstanding" shall include, in addition to Common Stock issued and outstanding, those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock and Common Stock issuable upon the exercise, exchange or conversion of any other outstanding right to acquire Common Stock.

If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class E Conversion Price subsequently expire without exercise, the Class E Conversion Price shall be recomputed by deleting such expired options, warrants or other purchase rights. If the Class E Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase or acquisition rights, no further adjustment of the Class E Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights or acquisition rights or the conversion of such purchase or acquisition rights.

(iii) In case the Corporation shall fix a record date for the issuance on a pro rata basis of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into or exercisable or exchangeable for shares of Common Stock) at a price per share of Common Stock (or having a conversion, exercise or exchange price per share of Common Stock, in the case of a security convertible into, or exercisable or exchangeable for, shares of Common Stock) less than the Class E Conversion Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Class E Conversion Price shall be adjusted pursuant to
Section 6(c)(ii) hereof, as though such maximum number of shares of Common Stock had been so issued for an aggregate consideration payable by the holders of such rights, options, warrants or other securities prior to their receipt

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of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value of such non-cash consideration shall be determined as set forth in Section 6(c)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed; and in the event that such rights, options or warrants are not so issued or expire in whole or in part unexercised, or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this
Section 6(c)), the Class E Conversion Price shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Class E Conversion Price shall be the Class E Conversion Price that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Class E Conversion Price shall be adjusted pursuant to Section 6(c)(ii) to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class E Conversion Price shall be adjusted to reflect the Class E Conversion Price which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Class E Conversion Price shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Class E Conversion Price was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this Section 6(c)(iii). Notwithstanding anything herein to the contrary, no adjustment in the Class E Conversion Price shall be made under this Section 6(c)(iii) to the extent the holders of Class E Preferred Stock participate in any such distribution in accordance with Section 4 hereof.

(iv) The anti-dilution provisions of this Section 6(c) may be waived by the affirmative vote of the holders (acting together as a class) of a majority of the then outstanding Class E Preferred Stock.

(d) NOTICE OF CLASS E CONVERSION PRICE ADJUSTMENT. Upon any adjustment of the Class E Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Class E Preferred Stock at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Class E Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Class E Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

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(e) NOTICE OF CERTAIN EVENTS. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Stock or make any distribution (other than regular cash dividends) to the holders of Common Stock; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class E Preferred Stock at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

(f) FRACTIONAL SHARES. In connection with the conversion of any shares of Class E Preferred Stock, no fractions of shares of Common Stock shall be required to be issued to the holder of such shares of Class E Preferred Stock, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Conversion Price per share of Common Stock on the business day next preceding the business day on which such shares of Class E Preferred Stock are deemed to have been converted.

(g) RESERVATION OF SHARES.

(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Class E Preferred Stock.

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(ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Class E Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation.

(h) TRANSFER TAXES. The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Class E Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Class E Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

7. OPTIONAL REDEMPTION AT THE ELECTION OF THE HOLDERS OF CLASS E PREFERRED STOCK.

(a) ELECTION.

(i) At any time and from time to time after the seventh anniversary of the original issue date of the shares of Class E Preferred Stock, the holders of the then outstanding shares of the Class E Preferred Stock shall have the option, exercisable by the holders of not less than 25% (in the aggregate) of the then outstanding shares of the Class E Preferred Stock, voting as a single class, by giving a written notice to the Corporation (the "Redemption Notice"), to require the Corporation to redeem any or all of the shares of such Class E Preferred Stock of such holders then outstanding. Upon the affirmative vote by the holders of a majority of the outstanding shares of Class E Preferred Stock, the holders of all outstanding shares of Class E Preferred Stock will be required to have such shares redeemed (a "Mandatory Redemption").

(ii) Within five (5) days after receiving the Redemption Notice, the Corporation shall send a copy of such notice to all other holders of record of the Class E Preferred Stock. Such other holders may elect to participate in the Redemption Notice by notifying the Corporation in writing within ten (10) days after receiving a copy of the Redemption Notice from the Corporation. Upon receipt of such Redemption Notice, the Board shall within thirty (30) days specify a date on which the redemption of such shares provided herein will take place (the "Redemption Date"), which shall be no less than forty-five (45) days and no more than ninety
(90) days after receipt of the Redemption Notice.

(iii) The Corporation shall have no obligation to honor more than two (2) redemption requests of the holders of shares of Class E Preferred Stock.

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(b) REDEMPTION PRICE. The redemption price for each share of the Class E Preferred Stock (the "Redemption Price") shall be $14.25 (subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share.

(c) NOTIFICATION. At least fifteen (15) days prior to the Redemption Date, the Corporation shall mail written notice by first class mail, postage prepaid, to each holder of record of the Class E Preferred Stock who sought redemption, at its address last shown on the records of the Corporation, notifying such holder of such redemption, specifying the Redemption Date, the Redemption Price and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, or its certificate or certificates representing the shares to be redeemed (such notice, the "Closing Notice").

(d) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class E Preferred Stock to be redeemed shall surrender its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Redemption Price due to such holder. From and after the date a holder of shares of the Class E Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class E Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(e) INSUFFICIENT FUNDS. If, on any Redemption Date, funds of the Corporation legally available therefor shall be insufficient to redeem all of the shares of Class E Preferred Stock required to be redeemed, funds to the extent legally available shall be used to redeem the maximum possible number of such shares ratably on the basis of the relative value of such shares based on the Redemption Prices of such shares on such date if the funds of the Corporation legally available therefore had been sufficient to redeem all shares required to be redeemed on such date. Thereafter, the Corporation shall use its best efforts to obtain sufficient funds to redeem the balance of such shares. When additional funds of the Corporation become legally available for the redemption of the balance of such shares, such additional funds will be used to redeem at the Redemption Price (together with interest at the annual rate of 9%) the balance of the shares which the Corporation was therefore obligated to redeem, ratably on the basis set forth in the preceding sentence. Notwithstanding anything herein to the contrary, if the Redemption Price is not paid when due, all powers, preferences, rights, qualifications, limitations and restrictions (including, without limitation, dividend rights, conversion rights, and liquidation preferences, and voting

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rights) with respect to shares surrendered for redemption, but not actually redeemed, shall continue until the Redemption Price is paid in full.

(f) REISSUE. Any shares of Class E Preferred Stock redeemed pursuant to this Section 7 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class E Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

8. OPTIONAL REDEMPTION AT THE ELECTION OF THE CORPORATION.

(a) ELECTION. At any time and from time to time after the seventh anniversary of the original issue date of the shares of Class E Preferred Stock, to the extent the Corporation shall have funds legally available for such payment, and subject to the rights of the holders pursuant to Section 6 hereof, the Corporation shall have the right to purchase and redeem all or any portion of the then outstanding shares of Class E Preferred Stock. The Board of Directors shall specify a Redemption Date, which shall be not less than thirty
(30) days nor more than sixty (60) days from the date the Corporation shall mail a Closing Notice to the holders of Class E Preferred Stock.

(b) REDEMPTION PRICE. The redemption price for each share of Class E Preferred Stock redeemed pursuant to this Section 8 shall be the Redemption Price, plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share.

(c) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class E Preferred Stock to be redeemed shall surrender its certificate or certificate representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Redemption Price due to such holder. From and after the date a holder of shares of the Class E Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class E Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(d) PARTIAL REDEMPTION. In the event of a redemption of less than all of the outstanding shares of Class E Preferred Stock pursuant to the first paragraph of this Section 8, redemption as among the holders of such shares of Class E Preferred Stock shall be on a pro rata basis.

(e) REISSUE. Any shares of Class E Preferred Stock redeemed pursuant to this Section 8 shall permanently be retired, shall no longer be deemed outstanding and shall

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not under any circumstances be reissued as Class E Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

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CAPELLA EDUCATION COMPANY

STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
CLASS G CONVERTIBLE PREFERRED STOCK

The undersigned, Paul Clifford, the Secretary of Capella Education Company, a Minnesota corporation (the "Corporation"), hereby certifies that the following resolutions establishing Class G Convertible Preferred Stock of the Corporation pursuant to Minnesota Statutes, Section 302A.401 were duly adopted by the directors of the Corporation on January 15, 2003:

RESOLVED FURTHER, that (i) the form of the Certificate of Designation for the Class G Convertible Preferred Stock (the "Class G Certificate") attached hereto as Exhibit C is hereby authorized and approved; (ii) there is hereby established a new Class G Convertible Preferred Stock of this Company with the rights, preferences and privileges as set forth in the Class G Certificate; (iii) the appropriate officers of this Company are authorized and directed to make, execute and file with the Minnesota Secretary of State in the method required by law, the Class G Certificate, in substantially the form approved hereby, with such changes, deletions and insertions as any of such officers shall approve, the execution and filing of the Class G Certificate by any of the officers of the Company being conclusive evidence of such approval, and
(iv) each of the officers of the Company is hereby authorized to take all other actions they may deem necessary or advisable to effect adoption of the Class G Certificate.

RESOLVED FURTHER, that the officers of the Company, and each of them, are authorized for and on behalf of the Company, to execute and deliver such other instruments or documents and to take such other actions as they, or any of them, may deem necessary or advisable to carry out the purposes of the foregoing resolutions.

[remainder of page intentionally blank]


IN WITNESS WHEREOF, I have subscribed my name this ____ day of January, 2003.

/s/ Paul Clifford
-----------------------------------------
Paul Clifford,
Secretary
Capella Education Company

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CAPELLA EDUCATION COMPANY

CERTIFICATE OF DESIGNATION
FOR CLASS G CONVERTIBLE PREFERRED STOCK

1. DESIGNATION; NUMBER OF SHARES; PAR VALUE.

A class of shares of preferred stock of Capella Education Company (the "Corporation") shall be designated as Class G Convertible Preferred Stock (the "Class G Preferred Stock"). The number of shares constituting the Class G Preferred Stock shall be 2,184,550. The Class G Preferred Stock shall have a par value of $.01 per share.

2. VOTING RIGHTS.

(a) GENERAL. On all matters submitted to the shareholders, each holder of Class G Preferred Stock shall have one vote for each share of common stock of the Corporation (the "Common Stock") which such holder of Class G Preferred Stock would be entitled to receive upon the conversion of such holder's Class G Preferred Stock pursuant to the provisions hereof. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the Corporation shall vote as a single class on all matters submitted to the shareholders. No holder of any Class G Preferred Stock shall have any cumulative voting rights.

(b) ADDITIONAL CLASS VOTES BY CLASS G STOCK. Without the affirmative vote of the holders of 66 2/3% of the Class G Preferred Stock at the time outstanding at a meeting of the holders of Class G Preferred Stock called for such purpose or written consent of the holders (acting together as a class) of 66 2/3% of the Class G Preferred Stock at the time outstanding, the Corporation shall not:

(1) create, authorize, issue or reclassify any outstanding shares of capital stock into any shares of capital stock ranking senior to or on parity with the Class G Preferred Stock as to the payment or distribution of dividends or of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation; or

(2) amend, alter, modify or repeal any provision of the Articles of Incorporation of the Corporation so as to alter the rights and preferences of the Class G Preferred Stock; or

(3) redeem, repurchase or acquire (or make any payment into, or set aside, a sinking fund for such purposes), or declare or pay any dividend or make any other


distribution on, any of the Corporation's capital stock, except any such redemption, repurchase, acquisition, dividend or distribution which is:

(i) pursuant to mandatory redemption obligations set forth herein or in the Articles of Incorporation (including any certificate of designation) as of the date of filing of this Certificate of Designation;

(ii) Common Stock issued under employee benefit plans of the Corporation;

(iii) made pursuant to a repurchase agreement between the Corporation and any of its employees, officers or directors approved by at least 66 2/3% of the members of the Board of Directors; or

(iv) a dividend pro rata to all holders of the class or series of securities upon which such dividend is declared in shares of Common Stock or capital stock of the Corporation that ranks junior to the Class G Preferred Stock as to the payment or distribution of dividends and of assets upon the liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation.

(4) effect any acquisition of the Corporation by another entity by means of any transaction or series of related transactions with the Corporation (including, without limitation any merger, consolidation or recapitalization), which results in 50% or more of the voting capital stock of the Corporation being acquired, by exchange, cancellation or otherwise, by persons who were not shareholders of the Corporation prior to such transaction or series of transactions, unless such acquisition provides for the exchange or payment of consideration in respect of each share of Class G Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class G Preferred Stock is then convertible, having a value equal to or greater than $28.50 (subject to appropriate adjustments for stock dividends, stock splits, combinations and recapitalizations and similar events affecting the Class G Preferred Stock) (a "Qualified Amount"); or

(5) effect any sale or other disposition of all or substantially all of the assets of the Corporation, unless such sale, if followed by an immediate liquidation, would result in distributable proceeds in respect of each share of Class G Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class G Preferred Stock is then convertible, in a Qualified Amount; or

(6) effect the liquidation or dissolution of the Corporation, unless such liquidation or dissolution would result in distributable proceeds in respect of each share of Class G Preferred Stock, or the shares of Common Stock or other securities into which each such share of Class G Preferred Stock is then convertible, in a Qualified Amount.

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(c) VALUATION OF NON-CASH CONSIDERATION. In connection with any transaction set forth in Section 2(b) above involving the receipt of consideration or proceeds in a form other than cash, the fair market value of such non-cash consideration or proceeds shall be utilized in determining whether such transaction must be approved by the holders of Class G Preferred Stock pursuant to Section 2(b). The fair market value of any non-cash consideration will be determined as follows:

(i) the fair market value of stock and other securities that are publicly traded shall be the average of the last closing market price of such stock or securities on each of the ten trading days ending five business days prior to the execution by the Corporation of a definitive agreement, or adoption by the Board of Directors of the Corporation of any plan, relating to such transaction (the "Time of Determination");

(ii) the fair market value of stock and other equity securities that are not publicly traded and the value of all other non-cash consideration, other than consideration of the nature described in clause (iii) below, shall be the fair market value thereof at the Time of Determination as mutually agreed by the Corporation and a director designated to serve on the Board of Directors by the holders of Class G Preferred Stock (a "Class G Director"), or if the Corporation and a Class G Director are unable to reach an agreement within five business days of receipt of written notice from the Corporation of such transaction by the Class G Director, as determined by an investment banking firm or other person experienced in valuing such stock, equity securities or other non-cash consideration mutually acceptable to a Class G Director and the Corporation, or if they are unable to agree, or there exists no such Class G Director, then a nationally recognized investment banking firm selected in good faith by the Board of Directors of the Corporation; or

(iii) the value of any promissory note or other debt instrument that is not publicly traded and the value of any and all deferred installments of the consideration and any other deferral of payments included in the total consideration shall be deemed to be the face amount of the promissory notes or other debt instruments or the total amount of payments that are deferred with respect to deferred obligations that are not evidenced by promissory notes or other debt instruments.

A security is "publicly traded" if such security is part of a class of securities that is listed on the New York or American stock exchanges (or on a foreign stock exchange of comparable depth and liquidity) or is traded on the NASDAQ Stock Market.

(d) MEETINGS. A proper officer of the Corporation may, and upon the written request of the holders of record of at least twenty-five percent (25%) of the shares of Class G Preferred Stock then outstanding addressed to the Secretary of the Corporation shall,

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call a special meeting of the holders of Class G Preferred Stock, for the purpose of holding a class vote pursuant to Section 2(b). If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holders of record of at least twenty-five percent (25%) of the outstanding shares of Class G Preferred Stock may designate in writing their own representative to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders.

3. NO PREEMPTIVE RIGHTS.

Holders of Class G Preferred Stock shall not be entitled, as a matter of right, to subscribe for, purchase or receive any part of any stock of the Corporation of any class whatsoever, or of securities convertible into or exchangeable for, or otherwise creating a right to acquire, any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise.

4. DIVIDENDS.

Subject to the affirmative voting requirement of Section 2(b)(3) of this Certificate of Designation, in the event any dividend or distribution is declared or made with respect to outstanding shares of any class of capital stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of Class G Preferred Stock. Subject to the affirmative voting requirement of Section 2(b)(3) of this Certificate of Designation, in the event any dividend or distribution is declared or made with respect to the Common Stock or any class of capital stock convertible or exchangeable into Common Stock of the Corporation, each holder of shares of Class G Preferred Stock (and any other holder of capital stock so convertible or exchangeable and entitled to payment of such dividend or distribution) shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of capital stock are then convertible on the date established as the record date with respect to such dividend or distribution. In case any portion of the dividend or distribution declared or made by the Corporation shall be in a form other than cash, the fair market value of such non-cash portion, as determined in good faith by the Board of Directors of the Corporation, shall be utilized in determining the comparable dividend or distribution to be declared or made with respect to the outstanding shares of Class G Preferred Stock.

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5. LIQUIDATION RIGHT AND PREFERENCE.

In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (a "Liquidation Event"), the holders of the Class G Preferred Stock shall be entitled to receive, in respect of each share of Class G Preferred Stock , the greater of (i) the amount of $22.24 (subject to appropriate adjustment for any stock dividends, combinations or splits with respect to such share), plus the aggregate amount of all declared but unpaid dividends on such share of Class G Preferred Stock (the "Class G Preference Amount") or (ii) the aggregate amount that would be payable in the Liquidation Event in respect of the share or shares of Common Stock into which such share of Class G Preferred Stock would be convertible if all of the holders were to convert their shares of Class G Preferred Stock into shares of Common Stock immediately prior to the Liquidation Event, and the Class G Preference Amount was not paid in preference to any class of Junior Stock, as hereafter provided.

Upon occurrence of a Liquidation Event, the holders of then outstanding shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), Class D Preferred Stock ("Class D Preferred Stock"), Class E Convertible Preferred Stock ("Class E Preferred Stock"), Class G Preferred Stock and any other class of capital stock hereafter established ranking on a parity in such Liquidation Event with the Class B Preferred Stock, Class D Preferred Stock, Class E Preferred Stock and Class G Preferred Stock (collectively, "Parity Stock") shall be entitled to be paid as to each share of such Parity Stock, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Class A Convertible Preferred Stock ("Class A Preferred Stock"), Common Stock or any other class or series of capital stock hereafter established ranking junior in a Liquidation Event to the Parity Stock (collectively, "Junior Stock"), and after distribution of any of the assets of the Corporation, to the extent of the liquidation preference applicable thereto, to the holders of any class or series of capital stock hereafter established ranking senior in a Liquidation Event to the Parity Stock (collectively "Senior Stock"), out of assets available for distribution, an amount, plus the aggregate amount of all declared but unpaid dividends on each such share, equal to $2.50 per share in the case of the Class B Preferred Stock (the "Class B Preference Amount"), $4.50 per share in the case of the Class D Preferred Stock (the "Class D Preference Amount"), $14.25 per share in the case of the Class E Preferred Stock (the "Class E Preference Amount") (subject, in each case, to appropriate adjustment for any stock dividends, combinations or splits with respect to each share), the Class G Preference Amount in the case of the Class G Preferred Stock, and, in the case of any other Parity Stock, such amount as shall be specified in the applicable Certificate of Designation (the "Parity Preference Amount", and, together with the Class B Preference Amount, Class D Preference Amount, Class E Preference Amount and Class G Preference Amount, collectively, the "Parity Preference Amounts").

If, upon any Liquidation Event, the remaining assets of the Corporation available for distribution to the holders of Parity Stock are insufficient to pay the holders of Parity Stock their full Parity Preference Amounts to which they are entitled, the holders of

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Parity Stock shall share pro rata in any such distribution in proportion to the full Parity Preference Amounts to which they would otherwise be respectively entitled.

Following such payment of Parity Preference Amounts to the holders of Parity Stock, and payment to the holders of any Senior Stock of any preferential amount to which they are entitled, the holders of the Junior Stock shall then be entitled, to the exclusion of the holders of Parity Stock or Senior Stock, to receive in cash or in kind, all remaining assets of the Corporation, if any, in accordance with their relative priorities in a Liquidation Event.

The merger or consolidation of the Corporation into or with another corporation, the merger or consolidation of any other corporation into or with the Corporation or a plan of exchange between the Corporation and any other corporation (in which consolidation, merger or plan of exchange the shareholders of the Corporation receive any distributions of cash or securities or other property as a result of such consolidation, merger or plan of exchange), or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation, shall be deemed to be a Liquidation Event for purposes of this
Section 5.

6. CONVERSION INTO COMMON STOCK.

(a) OPTIONAL CONVERSION. At the option of the holder thereof, at any time and from time to time any or all Class G Preferred Stock then held by such holder shall be convertible into Common Stock of the Corporation in accordance with the provisions and subject to the adjustments provided for in
Section 6(c). In order to exercise the conversion privilege, a holder of Class G Preferred Stock shall surrender the certificate or certificates duly endorsed to the Corporation evidencing the shares of Class G Preferred Stock each holder wishes to convert to the Corporation at its principal office and accompanied by written notice to the Corporation that the holder elects to convert all of such shares. Any shares of Class G Preferred Stock converted at the option of the holder shall be deemed to have been converted on the day of surrender of the certificate representing such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holder of such Class G Preferred Stock with respect to such shares shall cease and such holder shall be treated as the record holder of the number of shares of Common Stock issuable upon conversion. As promptly as practicable on or after the conversion date, the Corporation shall issue and mail or deliver to such holder (i) a certificate or certificates for the number of shares of Common Stock issuable upon conversion, rounding down to the nearest full share, (ii) any cash adjustment required pursuant to Section 6(f), and (iii) in the event of a conversion in part, a certificate or certificates for the whole number of shares of Class G Preferred Stock not being so converted.

(b) AUTOMATIC CONVERSION. The Class G Preferred Stock shall automatically be converted into Common Stock of the Corporation, without any act by the Corporation or the holders of the Class G Preferred Stock, concurrently
(i) with the closing of the first public offering by the Corporation of shares of Common Stock of the Corporation registered under the Securities Act of 1933, as amended, in which (1) the aggregate gross

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proceeds received by the Corporation in the offering are at least $30.0 million, and (2) the public offering price per share of Common Stock is at least $28.50 (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), or (ii) upon the affirmative vote or written consent of the holders of 66 2/3% of the outstanding shares of Class G Preferred Stock then outstanding; provided, however, if any other class or series of preferred stock of the Corporation would remain outstanding after the conversion of the Class G Preferred Stock, the affirmative vote or written consent of holders of 70% of the outstanding shares of Class G Preferred Stock shall be required for automatic conversion pursuant to this clause (ii). In the case of a conversion pursuant to clause (i), each holder of a share of Class G Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Class G Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering. Upon any conversion pursuant to this Section 6(b), each holder of a share of Class G Preferred Stock shall immediately surrender such share in exchange for (i) appropriate stock certificates representing a share or shares of Common Stock of the Corporation, and (ii) any cash adjustment required pursuant to Section 6(f).

(c) CONVERSION PRICE AND ADJUSTMENTS. The number of shares of Common Stock issuable in exchange for each share of Class G Preferred Stock upon either optional or automatic conversion shall be computed to the nearest hundredth of a share and shall be equal to $11.12 divided by the conversion price then in effect for Class G Preferred Stock (the "Class G Conversion Price"). The Class G Conversion Price shall initially be $11.12, but such Class G Conversion Price shall be subject to adjustment from time to time, as hereinafter provided:

(i) In case the Corporation shall at any time (A) declare a dividend or make a distribution on Common Stock payable in Common Stock (other than dividends or distributions payable to holders of the Class G Preferred Stock including dividends paid as contemplated by Section 4), (B) subdivide or split the outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock into a smaller number of shares, (D) issue any shares of its capital stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) (other than an event treated under Section 5 as a Liquidation Event), or (E) consolidate with, or merge with or into, any other person (other than an event treated under Section 5 as a Liquidation Event), the Class G Conversion Price in effect (and, where appropriate, the securities into which the Class G Preferred Stock are then convertible) at the time of the record date for such dividend or distribution or on the effective date of such subdivision, split, combination, consolidation, merger or reclassification shall be adjusted so that the conversion of the Class G Preferred Stock after such time shall entitle the holder to receive the aggregate number of shares of Common Stock or other securities of the Corporation (or other securities into which such shares of Common Stock have been converted, exchanged, combined, consolidated, merged or reclassified pursuant to clause 6(c)(i)(C), 6(c)(i)(D) or 6(c)(i)(E) above) which, if the Class G Preferred Stock had been converted

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immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, merger or reclassification. Such adjustment shall be made successively whenever an event listed above shall occur.

(ii) If, at any time after February 21, 2003, the Corporation shall issue or sell any Common Stock for a consideration per share less than the Class G Conversion Price then in effect or shall issue or sell any options, warrants or other rights (including, without limitation, securities convertible into or exercisable for Common Stock) for the purchase of such shares at a consideration per share of less than the Class G Conversion Price then in effect (other than securities subject to
Section 6(c)(i) hereof; options issued as of January 31, 2002 under existing stock option plans of the Corporation, and 1,184,290 shares issuable upon exercise of such options; options for the issuance of up to 706,492 additional shares under any existing stock option plan of the Corporation and shares issuable upon exercise of such options; warrants to purchase 334,048 shares outstanding as of January 31, 2002; 2,810,000 shares of Class A Preferred Stock and shares issued upon conversion thereof; 460,000 shares of Class B Preferred Stock and shares issued upon conversion thereof; 1,022,222 shares of Class D Preferred Stock and shares issued upon conversion thereof; 2,596,491 shares of Class E Preferred Stock and shares issuable upon conversion thereof; shares issued to the employee stock ownership plan of the Corporation, provided such contribution is approved by the compensation committee of the Board of Directors of the Corporation and does not exceed that number of shares the fair market value of which is three percent (3%) of annual compensation (as measured by applicable benefit plan rules) (any of the foregoing share amounts shall be subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) (all of the foregoing are collectively referred to as the "Exempt Securities")), the Class G Conversion Price in effect immediately prior to such issuance or sale shall be reduced to an amount determined by multiplying (A) the Class G Conversion Price then in effect, and (B) a fraction, the numerator of which shall be an amount equal to the sum of
(1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Class G Conversion Price then in effect, and (2) the total consideration payable to this Corporation upon such issuance or sale of such shares and such purchase rights and upon the exercise or conversion of such purchase or acquisition rights, and the denominator of which shall be the amount determined by multiplying (aa) the number of shares of Common Stock outstanding immediately after such issuance or sale plus the number of shares of Common Stock issuable upon the exercise or conversion of any purchase or acquisition rights thus issued, by (bb) the Class G Conversion Price then in effect. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Corporation, shall be utilized in the foregoing computation.

For purposes of this Section 6(c), "Common Stock outstanding" shall include, in addition to Common Stock issued and outstanding, those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock and Common

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Stock issuable upon the exercise, exchange or conversion of any other outstanding right to acquire Common Stock.

If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class G Conversion Price subsequently expire without exercise, the Class G Conversion Price shall be recomputed by deleting such expired options, warrants or other purchase rights. If the Class G Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase or acquisition rights, no further adjustment of the Class G Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase or acquisition rights or the conversion of such purchase or acquisition rights.

(iii) If, on or prior to February 21, 2003, the Corporation shall issue or sell any Common Stock (other than Exempt Securities) for a consideration per share less than the Class G Conversion Price then in effect, or shall issue or sell any options, warrants or other rights (including, without limitation, securities convertible into or exercisable for Common Stock) for the purchase or acquisition of such shares (other than Exempt Securities) at a consideration per share of less than the Class G Conversion Price then in effect, the Class G Conversion Price shall be reduced to an amount equal to the per share consideration payable to the Corporation in such sale or issuance. The consideration per share payable to the Corporation in a sale or issuance of options, warrants or other rights for the purchase or acquisition of shares of Common Stock shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the sale of issue of such options, warrants or other rights, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such options, warrants or other rights or conversion or exercise of such other rights, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such options, warrants or other rights or conversion or exercise of such other rights. In case any portion of the consideration to be received by the Corporation shall be in a form other than cash, the fair market value of such non-cash consideration, as determined in good faith by the Board of Directors of the Corporation, shall be utilized to determine the consideration per share.

If any options, warrants or other purchase rights that are taken into account in any such adjustment of the Class G Conversion Price subsequently expire without exercise, the Class G Conversion Price shall be readjusted as if such options, warrants or other purchase rights had not been issued. If the Class G Conversion Price is adjusted as the result of the issuance of any options, warrants or other purchase rights, no further adjustment of the Class G Conversion Price shall be made at the time of the exercise of such options, warrants or other purchase rights.

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(iv) In case the Corporation shall fix a record date for the issuance on a pro rata basis of rights, options or warrants to the holders of its Common Stock or other securities entitling such holders to subscribe for or purchase shares of Common Stock (or securities convertible into or exercisable or exchangeable for shares of Common Stock) at a price per share of Common Stock (or having a conversion, exercise or exchange price per share of Common Stock, in the case of a security convertible into, or exercisable or exchangeable for, shares of Common Stock) less than the Class G Conversion Price on such record date, the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants (or conversion of such convertible securities) shall be deemed to have been issued and outstanding as of such record date and the Class G Conversion Price shall be adjusted pursuant to
Section 6(c)(ii) or Section 6(c)(iii), as the case may be, as though such maximum number of shares of Common Stock had been so issued for an aggregate consideration payable by the holders of such rights, options, warrants or other securities prior to their receipt of such shares of Common Stock. In case any portion of such consideration shall be in a form other than cash, the fair market value of such non-cash consideration shall be determined as set forth in Section 6(c)(ii) hereof. Such adjustment shall be made successively whenever such record date is fixed; and in the event that such rights, options or warrants are not so issued or expire in whole or in part unexercised, or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class G Conversion Price shall again be adjusted as follows: (A) in the event that all of such rights, options or warrants expire unexercised, the Class G Conversion Price shall be the Class G Conversion Price that would then be in effect if such record date had not been fixed; (B) in the event that less than all of such rights, options or warrants expire unexercised, the Class G Conversion Price shall be adjusted pursuant to
Section 6(c)(ii) or Section 6(c)(iii), as the case may be, to reflect the maximum number of shares of Common Stock issuable upon exercise of such rights, options or warrants that remain outstanding (without taking into effect shares of Common Stock issuable upon exercise of rights, options or warrants that have lapsed or expired); and (C) in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled (other than pursuant to adjustment provisions therein comparable to those contained in this Section 6(c)), the Class G Conversion Price shall be adjusted to reflect the Class G Conversion Price which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock. Notwithstanding anything herein to the contrary, no further adjustment to the Class G Conversion Price shall be made upon the issuance or sale of Common Stock upon the exercise of any rights, options or warrants to subscribe for or purchase Common Stock, if any adjustment in the Class G Conversion Price was made or required to be made upon the record date for the issuance or sale of such rights, options or warrants under this
Section 6(c)(iv). Notwithstanding anything herein to the contrary, no adjustment in the Class G Conversion Price shall be made under this
Section 6(c)(iv) to the extent

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the holders of Class G Preferred Stock participate in any such distribution in accordance with Section 4 hereof.

(v) The anti-dilution provisions of this Section 6(c) may be waived by the affirmative vote of the holders (acting together as a class) of 67% or more of the then outstanding Class G Preferred Stock.

(d) NOTICE OF CLASS G CONVERSION PRICE ADJUSTMENT. Upon any adjustment of the Class G Conversion Price, then and in each such case the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Class G Preferred Stock at the addresses of such holders as shown on the books of this Corporation, which notice shall state the Class G Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Class G Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

(e) NOTICE OF CERTAIN EVENTS. In case any time:

(i) the Corporation shall pay any dividend payable in stock upon Common Stock or make any distribution (other than regular cash dividends) to the holders of Common Stock; or

(ii) the Corporation shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; or

(iii) there shall be any capital reorganization, reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with, or sale of all or substantially all of its assets to another corporation; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give written notice, by first-class mail, postage prepaid, addressed to the holders of Class G Preferred Stock at the addresses of such holders as shown on the books of the Corporation, of the date on which (A) the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days

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prior to the record date or the date on which the Corporation's transfer books are closed in respect thereto.

(f) FRACTIONAL SHARES. In connection with the conversion of any shares of Class G Preferred Stock, no fractions of shares of Common Stock shall be issued to the holder of such shares of Class G Preferred Stock, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Class G Conversion Price per share of Common Stock on the business day next preceding the business day on which such shares of Class G Preferred Stock are deemed to have been converted.

(g) RESERVATION OF SHARES.

(i) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued shares of Common Stock as shall be required for the purpose of effecting conversions of the Class G Preferred Stock.

(ii) Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Class G Preferred Stock, the Corporation shall comply with all applicable federal and state laws and regulations which require action to be taken by the Corporation.

(h) TRANSFER TAXES. The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Class G Preferred Stock pursuant hereto; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Class G Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

7. OPTIONAL REDEMPTION AT THE ELECTION OF THE HOLDERS OF CLASS G PREFERRED STOCK.

(a) ELECTION.

(i) At any time after February 21, 2009, upon the affirmative vote or written consent of the holders of 66 2/3% of the outstanding shares of Class G Preferred Stock, the Corporation shall be required to redeem all of the outstanding shares of Class G Preferred Stock and the holders of all outstanding shares of Class G Preferred Stock shall be required to have such shares redeemed (a "Mandatory Redemption"). The holders of Class G Preferred Stock shall deliver to the

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Corporation written notice of such affirmative vote or written consent (the "Redemption Notice").

(ii) Within five business days after receiving the Redemption Notice, the Corporation shall send a copy of such Redemption Notice to all other holders of record of the Class G Preferred Stock. Upon receipt of the Redemption Notice, the Board shall within thirty (30) days specify a date on which the redemption of such shares provided herein shall take place (the "Redemption Date"), which shall be no less than forty-five (45) days and no more than ninety (90) days after receipt of the Redemption Notice.

(b) OPTIONAL REDEMPTION PRICE. The redemption price for each share of the Class G Preferred Stock shall be an amount equal to $11.12 (subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share (the "Optional Redemption Price").

(c) NOTIFICATION. At least fifteen (15) days prior to the Redemption Date, the Corporation shall mail written notice by first class mail, postage prepaid, to each holder of record of the Class G Preferred Stock, at its address last shown on the records of the Corporation, notifying such holder of such redemption, specifying the Redemption Date, the Optional Redemption Price and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, or its certificate or certificates representing the shares to be redeemed (such notice, the "Closing Notice").

(d) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class G Preferred Stock shall surrender its certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Optional Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Optional Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Optional Redemption Price due to such holder. From and after the date a holder of shares of the Class G Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class G Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(e) INSUFFICIENT FUNDS. If, on any Redemption Date, funds of the Corporation legally available therefor shall be insufficient to redeem all of the shares of Class G Preferred Stock required to be redeemed, funds to the extent legally available shall be used to redeem the maximum possible number of such shares ratably on the basis of the

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relative value of such shares based on the Optional Redemption Prices of such shares on such date if the funds of the Corporation legally available therefore had been sufficient to redeem all shares required to be redeemed on such date. Thereafter, the Corporation shall use its best efforts to obtain sufficient funds to redeem the balance of such shares. When additional funds of the Corporation become legally available for the redemption of the balance of such shares, such additional funds will be used to redeem at the Optional Redemption Price (together with interest at the annual rate of 9%) the balance of the shares which the Corporation was therefore obligated to redeem, ratably on the basis set forth in the preceding sentence. Notwithstanding anything herein to the contrary, if the Optional Redemption Price is not paid when due, all powers, preferences, rights, qualifications, limitations and restrictions (including, without limitation, dividend rights, conversion rights, and liquidation preferences, and voting rights) with respect to shares surrendered for redemption, but not actually redeemed, shall continue until the Optional Redemption Price is paid in full.

(f) REISSUE. Any shares of Class G Preferred Stock redeemed pursuant to this Section 7 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class G Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

8. OPTIONAL REDEMPTION AT THE ELECTION OF THE CORPORATION.

(a) ELECTION. At any time and from time to time after February 21, 2009, to the extent the Corporation shall have funds legally available for such payment, and subject to the rights of the holders pursuant to Section 6 hereof, the Corporation shall have the right to purchase and redeem all or any portion of the then outstanding shares of Class G Preferred Stock. The Board of Directors shall specify a Redemption Date, which shall be not less than thirty
(30) days nor more than sixty (60) days from the date the Corporation shall mail a Closing Notice to the holders of Class G Preferred Stock.

(b) MANDATORY REDEMPTION PRICE. The redemption price for each share of the Class G Preferred Stock shall be an amount equal to $22.24 (subject to appropriate adjustment from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) plus an amount equal to all declared but unpaid dividends, if any, payable with respect to such share (the "Mandatory Redemption Price").

(c) SURRENDER AND PAYMENT. On or prior to the Redemption Date, each holder of shares of Class G Preferred Stock to be redeemed shall surrender its certificate or certificate representing such shares to the Corporation, in the manner and at the place designated in the Closing Notice, and thereupon the Mandatory Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. The Mandatory Redemption Price due to each holder shall be payable, from any source of funds legally available therefor, by delivery on the Redemption Date of a certified or bank cashier's check in an amount equal to the aggregate Mandatory Redemption Price due to

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such holder. From and after the date a holder of shares of the Class G Preferred Stock has received payment in full by receipt of cash, all rights of such holder with respect to such Class G Preferred Stock so redeemed shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.

(d) PARTIAL REDEMPTION. In the event of a redemption of less than all of the outstanding shares of Class G Preferred Stock pursuant to the first paragraph of this Section 8, redemption as among the holders of such shares of Class G Preferred Stock shall be on a pro rata basis.

(e) REISSUE. Any shares of Class G Preferred Stock redeemed pursuant to this Section 8 shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued as Class G Preferred Stock, but shall instead have the status of authorized Open Term Preferred Stock, as defined in the Corporation's Restated Articles of Incorporation.

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STATEMENT OF CANCELLATION
OF THE STATEMENT FIXING THE RIGHTS AND PREFERENCES
OF THE CLASS F CONVERTIBLE PREFERRED STOCK
OF
CAPELLA EDUCATION COMPANY

The undersigned officer of Capella Education Company (the "Company") hereby certifies that:

1. The name of the Company is Capella Education Company.

2. The Company's Board of Directors has directed that the statement fixing the rights and preferences of the Company's Class F Convertible Preferred Stock be canceled pursuant to Section 302A.133 of the Minnesota Statutes.

3. There are currently no shares of Class F Convertible Preferred Stock outstanding.

4. The 1,425,457 shares formerly designated as Class F Convertible Preferred Stock shall have the status of authorized but unissued, undesignated preferred shares.

5. After giving effect to the cancellation, the Company shall be authorized to issue shares in the amount and class as follows:

15,000,000 Common Stock 3,000,000 Class A Convertible Preferred Stock 1,180,000 Class B Convertible Preferred Stock 1,022,222 Class D Convertible Preferred Stock 2,596,491 Class E Convertible Preferred Stock 2,184,550 Class G Convertible Preferred Stock 2,961,808 preferred shares (undesignated as to class or series)

IN WITNESS WHEREOF, the undersigned has executed this statement of cancellation this 19th day of February, 2003.

CAPELLA EDUCATION COMPANY

By:    /s/ Paul Schroeder
   ------------------------------------
Its:Senior Vice President and
    Chief Financial Officer


EXHIBIT 3.3

RESTATED BYLAWS
OF CAPELLA EDUCATION COMPANY
(FORMERLY LEARNING VENTURES, INC.)

(EFFECTIVE JULY 18, 2002)

ARTICLE I.
OFFICES, CORPORATE SEAL

Section 1.01. Registered Office. The registered office of the Corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or resolution of the Directors filed with the Secretary of State of Minnesota changing the registered office.

Section 1.02. Other Offices. The Corporation may have such other offices, within or without the State of Minnesota, as the Directors shall, from time to time, determine.

Section 1.03. Corporate Seal. The Corporation shall have no seal.

ARTICLE II
MEETINGS OF SHAREHOLDERS

Section 2.01. Place and Time of Meetings. Except as provided otherwise by the Minnesota Business Corporation Act, meetings of the shareholders may be held at any place, within or without the State of Minnesota, as may from time to time be designated by the Directors and, in the absence of such designation, shall be held at the registered office of the Corporation in the State of Minnesota. The Directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o'clock
a.m.

Section 2.02. Regular Meetings.

(a) A regular meeting of the shareholders shall be held on such date as the Board of Directors shall by resolution establish.

(b) At a regular meeting the shareholders, voting as provided in the Articles of Incorporation and these Bylaws, shall designate the number of Directors to constitute the Board of Directors (subject to the authority of the Board of Directors thereafter to increase or decrease the number of Directors as permitted by law), shall elect qualified successors for Directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and shall transact such other business as may properly come before them.

Section 2.03. Special Meetings. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the President, the Treasurer, two or more Directors or by a shareholder or shareholders holding 10% or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or affect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by 25% or more of the voting


power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the President or Treasurer of the Corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the Board of Directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the Corporation. Special meetings shall be held on the date and at the time and place fixed by the President or the Board of Directors, except that a special meeting called by or at demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes as stated in the notice of the meeting.

Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, the meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a meeting is convened, the shareholders present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders originally present to leave less than a quorum.

Section 2.05. Voting. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the Articles of Incorporation or statutes provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the Corporation. Jointly owned shares may be voted by any joint owner unless the Corporation receives written notice from anyone of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the Articles of Incorporation, or these Bylaws.

Section 2.06. Record Date. The Board of Directors may fix a date, not exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the Corporation after any record date so fixed. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting.

Section 2.07. Notice of Meetings. There shall be mailed to each shareholder, shown by the books of the Corporation to be a holder of record of voting shares, at his address as shown by the books of the Corporation, a notice setting out the time and place of each regular meeting and each special meeting, except (unless otherwise provided in Section 2.04 hereof) where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of

2

adjournment, which notice shall be mailed at least five days prior thereto (unless otherwise provided in Section 2.04 hereof); except that notice of a meeting at which a plan of merger or exchange is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen days prior thereto. Every notice of any special meeting called pursuant to Section 2.03 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purposes stated in the notice. The written notice of any meeting at which a plan of merger or exchange is to be considered shall so state such as a purpose of the meeting. A copy or short description of the plan of merger or exchange shall be included in or enclosed with such notice.

Section 2.08. Waiver of Notice. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting orally or in writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.

Section 2.09. Written Action. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action.

ARTICLE III.
DIRECTORS

Section 3.01. General Powers. The business and affairs of the Corporation shall be managed by or under the authority of the Board of Directors, except as otherwise permitted by statute.

Section 3.02. Number, Qualification and Term of Office. Until the organizational meeting of the Board of Directors, the number of Directors shall be the number named by the Incorporator of the Corporation. Thereafter, the number of Directors shall be increased or decreased from time to time by resolution of the Board of Directors or the shareholders. Directors need not be shareholders. Each of the Directors shall hold office until the regular meeting of shareholders next held after such Director's election and until such Director's successor shall have been elected and shall qualify, or until the earlier death, resignation, removal, or disqualification of such Director.

Section 3.03. Board Meetings. Meetings of the Board of Directors may be held from time to time at such time and place within or without the State of Minnesota as may be designated in the notice of such meeting.

Section 3.04. Calling Meetings; Notice. Meetings of the Board of Directors may be called by the Chairman of the Board by giving at least twenty-four hours' notice, or by any other Director by giving at least five days' notice, of the date, time and place thereof to each Director by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the Board of Directors has been announced at a previous meeting of the Board, no notice is required. Notice of an

3

adjourned meeting of the Board of Directors need not be given other than by announcement at the meeting at which adjournment is taken.

Section 3.05. Waiver of Notice. Notice of any meeting of the Board of Directors may be waived by any Director either before, at, or after such meeting orally or in a writing signed by such Director. A Director, by his attendance at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the Director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting.

Section 3.06. Quorum. A majority of the Directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting.

Section 3.07. Absent Directors. A Director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such Director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the Director has consented or objected.

Section 3.08. Conference Communications. Any or all Directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the Directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such Directors participating pursuant to this Section 3.08 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique.

Section 3.09. Vacancies, Newly Created Directorships. Vacancies on the Board of Directors of this Corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining Directors of the Board although less than a quorum; newly created Directorships resulting from an increase in the authorized number of Directors by action of the Board of Directors as permitted by Section 3.02 may be filled by a majority vote of the Directors serving at the time of such increase; and each Director elected pursuant to this Section 3.09 shall be a Director until such Director's successor is elected by the shareholders at their next regular or special meeting.

Section 3.10. Removal. Any or all of the Directors may be removed from office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of Directors except, as otherwise provided by the Minnesota Business Corporation Act, Section 302A.223, as amended, when the shareholders have the right to cumulate their votes. A Director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining Directors if the shareholders have not elected Directors in the interim between the time of the appointment to fill

4

such vacancy and the time of the removal. In the event that the entire Board or anyone or more Directors be so removed, new Directors maybe elected at the same meeting.

Section 3.11. Committees. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the Corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be Directors, appointed by affirmative vote of a majority of the Directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors.

A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the Directors present.

Section 3.12. Written Action. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the Directors or committee members, unless the articles provide otherwise and the action need not be approved by the shareholders.

Section 3.13. Compensation. Directors who are not salaried officers of this Corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. The Board of Directors may, by resolution, provide that all Directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any Director from serving this Corporation in any other capacity and receiving proper compensation therefor.

ARTICLE IV.
OFFICERS

Section 4.01. Number. The officers of the Corporation shall consist of a Chairman of the Board (if one is elected by the Board), the President, one or more Vice Presidents (if desired by the Board), a Treasurer, a Secretary (if one is elected by the Board) and such other officers and agents as may, from time to time, be elected by the Board of Directors. Any number of offices may be held by the same person.

Section 4.02. Election, Term of Office and Qualifications. The Board of Directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the Directors present, from within or without their number, the President, Treasurer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms in office provided for in these Bylaws or a resolution of the Board of Directors not inconsistent therewith. The President and all other officers who may be Directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their Directorship.

5

Section 4.03. Removal and Vacancies. Any officer may be removed from his office by the Board of Directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy in an office of the Corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors.

Section 4.04. Chairman of the Board. The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and Directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors.

Section 4.05. President. The President shall be the chief executive officer and shall have general active management of the business of the Corporation. In the absence of the Chairman of the Board, he shall preside at all meetings of the shareholders and Directors. He shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute and deliver, in the name of the Corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the articles or Bylaws or by the Board of Directors to some other officer or agent of the Corporation. He shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders, and in general, shall perform all duties usually incident to the office of the President. He shall have such other duties as may, from time to time, be prescribed by the Board of Directors.

Section 4.06. Vice President. Each Vice President, if one or more is elected, shall have such powers and shall perform such duties as prescribed by the Board of Directors or by the President. In the event of the absence or disability of the President, the Vice President{s) shall succeed to his power and duties in the order designated by the Board of Directors.

Section 4.07. Secretary. The Secretary, if one is elected, shall be secretary of and shall attend all meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the Corporation. He shall give proper notice of meetings of shareholders and Directors. He shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President.

Section 4.08. Treasurer. The Treasurer shall be the chief financial officer and shall keep accurate financial records for the Corporation. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the Corporation in such banks and depositories as the Board of Directors shall, from time to time, designate. He shall have power to endorse, for deposit, all notes, checks and drafts received by the Corporation. He shall disburse the funds of the Corporation, as ordered by the Board of Directors, making proper vouchers therefor. He shall render to the President and the Directors, whenever requested, an account of all his transactions as Treasurer and of the financial condition of the Corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President.

Section 4.09. Compensation. The officers of the Corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors.

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ARTICLE V.
SHARES AND THEIR TRANSFER

Section 5.01. Certificates for Shares. All shares of the Corporation shall be certificated shares. Every owner of shares of the Corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Directors, certifying the number of shares of the Corporation owned by such shareholder. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the Corporation, by the President and by the Secretary or an assistant Secretary or by such officers as the Board of Directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile if authorized by the Board of Directors. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 5.04.

Section 5.02. Issuance of Shares. The Board of Directors is authorized to cause to be issued shares of the Corporation up to the full amount authorized by .the Articles of Incorporation in such amounts as may be determined by the Board of Directors and as may be permitted by law. Shares may be issued for any consideration, including, without limitation, in consideration of cash or other property, tangible or intangible, received or to be received by the Corporation under a written agreement, of services rendered or to be rendered to the Corporation: under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of approval of the issuance of shares, the Board of Directors shall state, by resolution, its determination of the fair value to the Corporation in monetary terms of any consideration other than cash for which shares are to be issued.

Section 5.03. Transfer of Shares. Transfer of shares on the books of the Corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The Corporation may treat as the absolute owner of shares of the Corporation, the person or persons in whose name shares are registered on the books of the Corporation.

Section 5.04. Loss of Certificates. Except as otherwise provided by the Minnesota Business Corporation Act, Section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen, or destroyed shall make an affidavit of that fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the Corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the Corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed.

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ARTICLE VI.
DISTRIBUTIONS, RECORD DATE

Section 6.01. Distributions. Subject to the provisions of the Articles of Incorporation, of these Bylaws, and of law, the Board of Directors may authorize and cause the Corporation to make distributions whenever, and in such amounts or forms as, in its opinion, are deemed advisable.

Section 6.02. Record Date. Subject to any provisions of the Articles of Incorporation, the Board of Directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any distribution as the record date for the determination of the shareholders entitled to receive payment of the distribution and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such distribution notwithstanding any transfer of shares on the books of the Corporation after the record date.

ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR

Section 7.01. Share Register. The Board of Directors of the Corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the Board:

(1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder;

(2) and a record of the dates on which certificates or transaction statements representing shares were issued.

Section 7.02. Other Books and Records. The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its Minnesota registered office within ten days after receipt by an officer of the Corporation of a written demand for them made by a shareholder or other person authorized by the Minnesota Business Corporation Act, Section 302A.461, originals or copies of:

(1) records of all proceedings of shareholders for the last three years;

(2) records of all proceedings of the Board for the last three years;

(3) its articles and all amendments currently in effect;

(4) its Bylaws and all amendments currently in effect;

(5) financial statements required by the Minnesota Business Corporation Act, Section 302A.463 and the financial statements for the most recent interim period prepared in the course of the operation of the Corporation for distribution to the shareholders or to a governmental agency as a matter of public record;

(6) reports made to shareholders generally within the last three years;

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(7) a statement of the names and usual business addresses of its Directors and principal officers; and

(8) any shareholder voting or control agreements of which the Corporation is aware.

Section 7.03. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors.

ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP

The Corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the Directors present, and:

(1) is in the usual and regular course of business of the Corporation;

(2) is with, or for the benefit of, a related corporation, an organization in which the Corporation has a financial interest, an organization with which the Corporation has a business relationship, or an organization to which the Corporation has the power to make donations;

(3) is with, or for the benefit of, an officer or other employee of the Corporation or a subsidiary, including an officer or employee who is a Director of the Corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board, to benefit the Corporation; or has been approved by (a) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (b) the unanimous affirmative vote of the holders of all outstanding shares whether or not entitled to vote.

Such loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the Directors present approve, including, without limitation, a pledge of or other security interest in shares of the Corporation. Nothing in this Section shall be deemed to deny, limit or restrict the powers of guaranty, surety or warranty of the Corporation at common law or under a statute of the State of Minnesota.

ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS

The Corporation shall indemnify all officers and Directors of the Corporation, for such expenses and liabilities, in such manner, under such circumstances and to such extent as permitted by the Minnesota Business Corporation Act Section 302A.521, as now enacted or hereafter amended.

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ARTICLE X.
AMENDMENTS

These Bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting. Such authority of the Board of Directors is subject to the power of the shareholders, exercisable in the manner provided in the Minnesota Business Corporation Act, Section 3O2A.181, subd. 3, to adopt, amend, repeal Bylaws adopted, amended, or repealed by the Board of Directors. After the adoption of the initial Bylaws, the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing Directors or filling vacancies in the Board of Directors, or fixing the number of Directors or their classifications, qualifications, or terms of office, except that the Board of Directors may adopt or amend any bylaw to increase their number.

ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS

Section 11.01. Voting Securities Held by the Corporation. Unless otherwise ordered by the Board of Directors, the President shall have full power and authority on behalf of the Corporation (a) to attend any meeting of security holders of other corporations in which the Corporation may hold securities and to vote such securities on behalf of this Corporation; (b) to execute any proxy for such meeting on behalf of the Corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this Corporation. At such meeting, the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the Corporation possesses. The Board of Directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the President or any other person or persons.

Section 11.02. Purchase and Sale of Securities. Unless otherwise ordered by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the Corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons.

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EXHIBIT 4.2

THIRD AMENDED AND RESTATED CO-SALE AND
BOARD REPRESENTATION AGREEMENT

This THIRD AMENDED AND RESTATED CO-SALE AND BOARD REPRESENTATION AGREEMENT
("Agreement") dated as of January 22, 2003, by and among Capella Education Company (the "Company"), Stephen Shank ("Shank"), Cherry Tree Ventures IV, a Minnesota limited partnership ("Cherry Tree"), NCS Pearson, Inc. as successor to National Computer Systems, Inc. ("Pearson"), Forstmann Little & Co. Equity Partnership-VI, L.P. ("Equity-VI"), Forstmann Little & Co. Equity Partnership-VII, L.P. ("Equity-VII"), Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P. ("MBO-VIII" and, together with Equity-VI and Equity-VII, the "Forstmann Little Entities"), SmartForce plc ("SmartForce"), Putnam OTC and Emerging Growth Fund ("Putnam OTC"), TH LEE, Putnam Investment Trust - TH LEE, Putnam Emerging Opportunities Portfolio ("Putnam TH LEE" and, together with Putnam OTC, "Putnam"), DRW Venture Partners LP ("Dain"), ThinkEquity Investment Partners LLC ("Think Equity"), the Management Investors (the "Management Investors") listed on Schedule 1 attached hereto for the benefit of each of them, Maveron Equity Partners 2000, L.P., Maveron Equity Partners 2000-B, L.P. and MEP 2000 Associates LLC (collectively the "Maveron Entities"), Judy Shank ("Judy"), Susan Shank ("Susan"), Mary Retzlaff ("Retzlaff"), (collectively, the "Shareholders") and Joseph Gaylord ("Gaylord"), a resident of Minnesota, shall supersede and replace that certain Second Amended and Restated Co-Sale and Board Representation Agreement dated February 21, 2002 by and among Shank, Cherry Tree, Pearson, the Forstmann Little Entities, SmartForce, Putnam, Dain, Think Equity, the Management Investors, Gaylord and the Company (the "Prior Agreement") and be effective as of the date of this Agreement. The Prior Agreement is hereby cancelled and terminated in its entirety and shall be of no further force and effect.

WHEREAS, the Maveron Entities and David Smith ("Smith") (collectively, the "Purchasers") have executed the Maveron Class G Convertible Preferred Stock Purchase Agreement dated as of January 15, 2003 with the Company (the "Purchase Agreement"), pursuant to which the Purchasers will acquire shares of Class G Convertible Preferred Stock ("Class G Preferred Stock") which will become part of the outstanding shares of capital stock of the Company ("Capital Stock") (hereinafter the term "Capital Stock" shall be deemed to include any shares of Capital Stock subsequently acquired by a Shareholder and any rights by a Shareholder to acquire any additional shares of Capital Stock and shall exclude any shares acquired from Harold Abel ("Abel") pursuant to Shareholder Agreement No. 2 (as defined in Section 2));

WHEREAS, Equity-VII, MBO-VIII, Putnam, Think Equity, Dain, Gaylord and the Management Investors (other than Smith) (collectively referred to as the "Class F Investors") have entered into an exchange agreement (the "Exchange Agreement"), pursuant to which the Class F Investors agree to exchange (the "Exchange") each of the outstanding shares of Class F Convertible Preferred Stock of the Company (the "Class F Preferred Stock") held by such investor for shares of Class G Preferred Stock;

WHEREAS, certain of the parties hereto own shares of Capital Stock as set forth in Schedule 2.4 to the Purchase Agreement;


WHEREAS, the execution and delivery of this Agreement by each Shareholder is a condition to the purchase of the Class G Preferred Stock by the Purchasers and the exchange of the Class F Preferred Stock for Class G Preferred Stock by the Class F Investors; and

WHEREAS, the parties hereto desire that the Purchasers consummate the purchase of Class G Preferred Stock contemplated by the Purchase Agreement and are willing to enter into this Agreement as an inducement to the Purchasers to complete the purchase of the Class G Preferred Stock.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

1. RESTRICTION ON TRANSFER. (a) Each of Shank, Judy, Cherry Tree, the Forstmann Little Entities, Pearson, SmartForce, the Maveron Entities and Putnam (collectively, the "Co-Sale Shareholders") agrees, on behalf of such Co-Sale Shareholder and any transferee of any shares of Capital Stock owned by such Co-Sale Shareholder, not to sell, transfer or otherwise dispose of (or enter into a binding agreement to sell, transfer or otherwise dispose of) all or any of such Co-Sale Shareholder's shares of Capital Stock now or hereafter owned by such Co-Sale Shareholder, unless the right of co-sale set forth in Section 2 of this Agreement has been fully complied with to the extent applicable.

(b) Each Shareholder agrees, on behalf of such Shareholder and any transferee of any shares of Capital Stock owned by such Shareholder, not to sell, transfer or otherwise dispose of (or enter into a binding agreement to sell, transfer or otherwise dispose of) all or any of such Shareholder's shares of Capital Stock now or hereafter owned by such Shareholder, unless such transferee shall become a signatory to this Agreement, and upon execution and delivery of this Agreement, such transferee shall be deemed a Shareholder for purposes of this Agreement. The obligations of this Section 1(b) shall terminate upon an IPO (as defined in Section 2).

2. RIGHT OF CO-SALE. Except as hereinafter provided, each Co-Sale Shareholder agrees that such Co-Sale Shareholder will not sell, transfer or otherwise dispose of any shares of Capital Stock (or any rights to acquire shares of Capital Stock) without permitting each of the other Co-Sale Shareholders (the "Benefiting Shareholders") to participate as a seller in such transaction on a pro rata basis according to common share holdings (with preferred shares of the Company being counted on an as-if-converted basis) as of the date of receipt of the notice described below in this Section 2.

The following sale, transfer or other disposal of shares of Capital Stock shall not be covered by this right of co-sale:

(a) sale of shares of Capital Stock by any of the Co-Sale Shareholders in a bona fide underwritten public offering pursuant to a registration statement filed by the Company pursuant to the Securities Act of 1933, as now or hereafter amended (the "1933 Act");

(b) sale of shares of Capital Stock in a market transaction in a bona fide public market, either pursuant to such a registration statement or Rule 144 (or any successor rule) promulgated under the 1933 Act;

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(c) transfer of shares of Capital Stock (i) during the lifetime of a Co-Sale Shareholder to the spouse of such Co-Sale Shareholder or to the children, spouses of children or grandchildren of such Co-Sale Shareholder or to a trust or trusts for benefit of any of the foregoing, or (ii) by gift or testamentary disposition to any person, so long as the transferee, donee or distributee assumes in writing the obligations of such Co-Sale Shareholder under this Agreement and agrees to be treated as a "Shareholder" and a "Co-Sale Shareholder" for all purposes of this Agreement; or

(d) transfers by Cherry Tree, Putnam, any Maveron Entity or any Forstmann Little Entity to any of their respective partners, members, investors, or other affiliates (including without limitation affiliated investment funds), so long as the transferee assumes in writing the obligations of such Shareholder under this Agreement and agrees to be treated as a "Shareholder" and a "Co-Sale Shareholder" for all purposes of this Agreement.

Any Co-Sale Shareholder that intends to sell, transfer or otherwise dispose of shares of Capital Stock in a transaction subject to these rights of co-sale (the "Selling Shareholder") shall give prompt written notice of such intent to each Benefiting Shareholders, and each Benefiting Shareholder shall notify the Selling Shareholder within 20 days of receipt of such notice whether such Benefiting Shareholder wishes to participate in such transaction and bear a pro rata portion of the expenses incident thereto. Failure of a Benefiting Shareholder to respond within such 20-day period shall be deemed a declination of any right to participate in such transaction provided that: (i) such transaction is fully closed and consummated within 90 days of the expiration of such 20-day period; (ii) the terms of the actual transaction include no fewer or greater number of shares of Capital Stock than those set forth in the notice hereunder; and (iii) no purchasers or ultimate legal or beneficial holders of such shares of Capital Stock are involved in the transaction in addition to those disclosed in any such notice. Failure to meet any of the foregoing conditions shall require a new notification and right of co-sale with regard to such transaction under this Section 2. Each Co-Sale Shareholder acknowledges the obligations of Shank and Cherry Tree under that certain Shareholder Agreement dated May 24, 1993 by and between Abel, Shank, and Cherry Tree ("Shareholder Agreement No. 2") and agrees that any exercise of rights by a Benefiting Shareholder hereunder shall be conducted in a manner which facilitates compliance by the Selling Shareholder of such obligations.

The provisions of Section 1(a) and this Section 2 shall terminate at such time as the Company consummates a sale of shares of Capital Stock pursuant to an effective registration statement under the 1933 Act in which the aggregate gross proceeds to the Company and/or selling shareholders, if any, equal or exceed $20,000,000 at an average price per share of at least $5.40 (an "IPO") (subject to adjustment for stock splits, stock dividends, combinations, recapitalizations and the like) or, if earlier, as to any Co-Sale Shareholder at such time as such Co-Sale Shareholder is the beneficial owner of fewer than 140,000 shares of Capital Stock (subject to adjustment for stock splits, stock dividends, combinations, recapitalizations and the like).

3. REPRESENTATION ON BOARD OF DIRECTORS.

(a) From and after the Closing, the Company shall take all necessary or desirable action within its control to, and the Shareholders shall take all necessary or

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desirable action within its control (including, without limitation, voting its shares) to, cause the following persons to be elected as directors in connection with each annual or special meeting held for the election of directors of the Company following the date hereof:

(i) Pearson shall have the right to designate one person for appointment as a director (the "Pearson Director"), who shall initially be Jeff Taylor;

(ii) Cherry Tree shall have the right to designate one person for appointment as a director (the "Cherry Tree Director"), who shall initially be Tony Christianson;

(iii) Equity-VI shall have the right to designate one person for appointment as a director (the "Equity-VI Director"), who shall initially be Gordon Holmes;

(iv) So long as Shank (i) is chief executive officer of the Company or (ii) owns not less than the Minimum Equity Amount (as defined below), Shank shall have the right to designate one person (which may be Shank) for appointment as a director (the "Shank Director"), who shall initially be Stephen Shank;

(v) The holders of 66 2/3% of the then outstanding shares of Class G Preferred Stock shall have the right to designate one person for appointment as a director, who shall initially be Russell Gullotti (the "Class G Director");

(vi) The Forstmann Little Entities holding shares of Capital Stock of the Company and Shank (or if Shank is not the chief executive officer of the Company, the chief executive officer of the Company) shall have the right to jointly designate one person for appointment as a director (the "Forstmann-Shank Director"), provided however, that Shank hereby agrees that he shall approve the appointment of Thomas H. Lister or T. Geoffrey McKay if the Forstmann Little Entities desire to appoint either Mr. Lister or Mr. McKay to such directorship;

(vii) The directors designated pursuant to (i) - (v) above (by majority vote) shall have the right to jointly designate one person for appointment as a director (the "Preferred Director"; together with the Pearson Director, the Cherry Tree Director, the Equity-VI Director, the Shank Director, the Forstmann-Shank Director and the Class G Director, the "Designated Directors"), who shall initially by Joshua Lewis; and

(viii) The Board of Directors shall include two independent directors, who shall initially be James Mitchell and David Smith;

"Independent" director shall mean a person who is not an affiliate (as defined in the 1933 Act) of the Company or any Shareholder.

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(b) In connection with any annual or special meeting of shareholders at which the term of any Designated Director is to expire, the Company shall (to the extent within its control), and the Shareholders shall, take all necessary action to cause a Designated Director to be nominated. At any time at which the Shareholders have the right to, or will vote for, or consent to, electing the members of the Board of Directors, the Shareholders shall vote all shares of Capital Stock then owned by them (including shares of Capital Stock hereafter acquired by them) in favor of the election of the Designated Directors to the Board of Directors.

(c) As soon as practicable following Closing, the Company shall (to the extent within its control), and the Shareholders shall (to the extent within their control), cause the appointment of (i) a person designated by the Forstmann Little Entities holding shares of Capital Stock of the Company to serve on the Audit Committee of the Board of Directors (which shall consist of no more than five persons or such greater number as the Board of Directors shall unanimously approve) and (ii) a person designated by the Forstmann Little Entities holding shares of Capital Stock of the Company to serve on the Compensation Committee of the Board of Directors (which shall consist of no more than six persons or such greater number as the Board of Directors shall unanimously approve).

(d) If at any time a Shareholder (or Shareholders, in the case of a director designated by more than one Shareholder) desires to remove, with or without cause, a designee which such Shareholder (or Shareholders) has the right to designate (whether directly or through their Designated Director), upon notice of such determination, each Shareholder shall vote all of its shares of Capital Stock to remove such designee or designees. In the event of any vacancy arising by reason of the resignation, death, removal or inability to serve of any Designated Director, each Shareholder shall vote all of its shares of Capital Stock for the election of the successor selected by the Shareholder (or Shareholders, in the case of a director designated by more than one Shareholder) who have the right to designate (whether directly or through their Designated Director) such Designated Director. For purposes of this paragraph (d), the chief executive officer of the Company shall be deemed to be a Shareholder having the right to co-designate the Forstmann-Shank director.

(e) The provisions of this Section 3 shall terminate upon the consummation of an IPO, or, if earlier, as to the rights with respect to naming a Designated Director, such rights shall terminate for any Shareholder at such time as such Shareholder is the beneficial owner of less than 5% of the outstanding Capital Stock of the Company on a fully diluted basis (the "Minimum Equity Amount"); provided, however, that the provisions of this Section 3 with respect to the Equity-VI Director shall not terminate until such time as the Forstmann Little Entities are the beneficial owners, collectively, of less than the Minimum Equity Amount; and provided, further that the provisions of this Section 3 with respect to the Forstmann-Shank Director shall not terminate until such time as the Forstmann Little Entities are the beneficial owners, collectively, of less than 10% of the outstanding Capital Stock of the Company on a fully diluted basis.

(f) The right to designate a director under this Section 3 may be transferred and assigned by a Shareholder only to a transferee of not less than 50% of the Capital Stock held (or which such Shareholder has the right to acquire) at the date hereof by such

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Shareholder, so long as the transferee assumes in writing the obligations of such Shareholder under this Agreement and agrees to be treated as a "Shareholder" for all purposes of this Agreement.

(g) Notwithstanding anything else herein, the Board of Directors may increase the size of the Board of Directors up to ten (10) total directors to add additional independent directors with a unanimous vote of the then existing members of the Board of Directors. "Independent" director shall mean a person who is not an affiliate (as defined in the 1933 Act) of the Company or any Shareholder.

4. AGREEMENT TO VOTE CLASS G PREFERRED STOCK BY MANAGEMENT INVESTORS.

(a) With respect to all matters on which the holders of Class G Preferred Stock are entitled to vote such shares, each Management Investor agrees, on behalf of such Management Investor and any transferee of any shares of Class G Preferred Stock owned by such Management Investor, to vote, at any meeting of the stockholders of the Company, however called, including any adjourned or postponed meeting, and in any action by written consent of the stockholders of the Company or in any other circumstances upon which a vote, consent or other approval is sought, all shares of Class G Preferred Stock owned by such Management Investor in the manner directed by Shank.

(b) To secure the obligations of the Management Investors to vote their shares of Class G Preferred Stock in accordance with Section 4(a) of this Agreement, each Management Investor hereby appoints Shank as such Management Investor's true and lawful proxy and attorney, with full power of substitution, to vote (or act by execution of written consents) all of such Management Investors' shares of Class G Preferred Stock in accordance with Section 4(a) hereof. The proxy and powers granted by the Management Investors pursuant to this Section are coupled with an interest and are given to secure the performance of the Management Investors' duties under this Section 4. Each Management Investor acknowledges and agrees that the proxy and powers granted pursuant to this Section 4 are a material inducement to the Company's and the Maveron Entities' entering into this Agreement and the Purchase Agreement and Equity-VII's, MBO-VIII's and Putnam's entering into this Agreement and the Exchange Agreement. Such proxy shall be irrevocable for the term of this Agreement will be binding on any successor in interest of the Management Investor and shall survive the death, incompetency and disability of any Management Investor or any other individual holder of a Management Investor's shares of Class G Preferred Stock. This proxy shall operate to revoke any prior proxy as to the Class G Preferred Stock heretofore granted by each such Management Investor. Upon the death, incompetency, disability or the termination (whether voluntary or involuntary) of employment, of Shank (a "Termination Event"), all shares of Class G Preferred Stock owned by Management Investors and Shank shall be voted pro rata in the same manner and proportion as the votes cast collectively by the Forstmann Little Entities, the Maveron Entities and Putnam. Upon a Termination Event, the Management Investors and Shank (or his legal representative) shall appoint a person or persons, mutually acceptable to the Forstmann Little Entities, the Maveron Entities and Putnam, as the true and lawful proxy and attorney of the Management Investors and Shank, with full power of substitution, to vote the Management Investors' and Shank's shares as provided in the prior sentence.

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(c) The rights granted to Shank pursuant to this Section 4 shall not be transferable, in whole or in part, to any other person or entity.

(d) The provisions of this Section 4 shall terminate upon the consummation of an IPO.

5. LEGENDS AND STOP TRANSFER ORDERS.

(a) LEGEND. The following legend shall be affixed to each of the certificates representing shares of Capital Stock standing in the name of a Shareholder on the books of the Company and, so long as this Agreement shall remain in effect, such legend shall be affixed to certificates representing shares of Capital Stock acquired by any Shareholder (whether beneficially or legally) or issued or reissued to such Shareholder, such legend to be and remain upon such certificates and any reissuance or transfer thereof unless and until removed pursuant to the provisions of
Section 5(c):

The securities represented by this certificate are subject to certain transfer restrictions, co-sale and voting rights set forth in a Third Amended and Restated Co-Sale and Board Representation Agreement, dated as of January 22, 2003, and may not be sold, transferred or otherwise disposed of except in compliance with the terms of such agreement, a copy of which is available for inspection in the principal office of Company.

(b) STOP TRANSFER ORDER. A stop transfer order shall be placed with the Company, as well as any transfer agent appointed by the Company, preventing transfer of any of the securities referred to in Section 5(a) pending compliance with the conditions set forth in any such legend.

(c) REMOVAL OF LEGENDS. Any legend endorsed on a certificate or instrument evidencing a security subject to this Agreement shall be removed, and the Company shall be authorized to issue a certificate or instrument without such legend to the holder of such security, if this Agreement has expired by its terms or such security is being disposed of pursuant to the terms of this Agreement in a transaction which upon completion will leave the shares of Capital Stock free and clear of this Agreement.

6. COVENANTS.

(a) REIMBURSEMENT OF DIRECTORS. The Company shall reimburse the director designated by the holders of the shares of Class G Preferred Stock for all reasonable costs and expenses associated with attending meetings of the Board or any committee thereof.

(b) INDEMNIFICATION OF DIRECTORS. (i) The Company shall indemnify, defend and hold harmless each person who serves as a member of the Board or committee thereof from and against all losses, claims, damages and expenses (including reasonable attorneys' fees and expenses) to the fullest extent permitted from time to time under applicable Law (as defined in the Purchase Agreement).

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(ii) To the fullest extent permitted from time to time under applicable Law, the Company shall pay, on an as-incurred basis, the reasonable fees and expenses of the directors (including reasonable attorneys' fees and expenses) in advance of the final disposition of any Litigation (as defined in the Purchase Agreement) that is the subject of the right to indemnification.

(iii) In the event of any Litigation, subject to the provisions of any insurance policy the director shall be entitled to control the defense thereof with counsel of the director's own choosing reasonably acceptable to the Company and the Company shall cooperate in the defense thereof; provided, that, such director shall have no power to settle or compromise any Litigation for which indemnification is being sought without the prior written consent of the Company which shall not be unreasonably withheld.

(iv) The Articles of Incorporation and By-Laws of the Company shall contain provisions for the indemnification and exculpation of directors to the maximum extent permitted under applicable Law, and shall be amended as and when necessary to effectuate the foregoing.

(v) The Company shall cause to be maintained in effect, with financially sound insurers, a policy of directors' and officers' liability insurance on terms and amounts substantially similar to the directors' and officers' liability insurance maintained as of the date hereof. Upon the Company's initial public offering, the Company shall expand such directors' and officers' liability insurance so that it shall be on such terms and in such amounts as are customary for similarly situated public companies.

(c) BOARD MEETINGS. The Company agrees, as a general practice, to hold meetings of its Board of Directors periodically, and in any case not less than once every calendar quarter, and to hold meetings of the committees of its Board of Directors as frequently as is necessary or appropriate.

(d) INSURANCE. The Company will procure and maintain insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, errors and omissions coverage), on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as the Company believes is customary in the case of similarly situated entities engaged in the same or similar business and all such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws.

(e) NON-DISCLOSURE AND INVENTION AGREEMENTS. The Company shall cause all Key Employees currently employed or hereafter hired by the Company to execute the Company's Statement of Policy and Employee Responsibilities (which includes non-

8

disclosure and invention assignment provisions) in a form that is determined by the executive officers of the Company to reasonably protect the proprietary information of the Company. "Key Employee" shall mean any executive officer and any officer having policy-making functions, including, without limitation, the persons set forth on Schedule 6(e).

7. TERMINATION OF PRIOR AGREEMENT. As of the date of this Agreement, the Prior Agreement is hereby cancelled and terminated in its entirety and is of no further force and effect.

8. MISCELLANEOUS PROVISIONS.

(a) ENTIRE AGREEMENT. This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior understandings, agreements or representations, written or oral, relating to the subject matter hereof.

(b) COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which will be an original and all of which taken together shall constitute one and the same agreement, and any party hereto may execute this Agreement by signing any such counterpart.

(c) SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule, the validity, legality and enforceability of the other provision of this Agreement will not be affected or impaired thereby.

(d) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors and assigns. Subject to compliance with the terms of this Agreement and the limitations herein expressed, including, without limitation, the limitations set forth in Section 4(c), all or any of the rights granted to any of the Shareholders under this Agreement may be assigned in whole or in part to a transferee of Capital Stock of any such Shareholder (a "Transferee"). As a condition precedent to such assignment being effective, the Company and each other Shareholder shall be given written notice prior to the transfer, stating the name and address of the Transferee and identifying the securities with respect to which such rights are being transferred, and each Transferee shall become a signatory to this Agreement, and upon execution and delivery of this Agreement, such Transferee shall be deemed a Shareholder for purposes of this Agreement.

(e) MODIFICATION, AMENDMENT, WAIVER OR TERMINATION. With the written consent of the Company and the holders of a majority of the shares of capital stock of the Company (assuming full conversion of all shares of preferred stock of the Company) held by the Shareholders at such time (the "Agreement Shares"), (i) the obligations of the Company and the Shareholders under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) and (ii) this Agreement may be amended, changed,

9

discharged or terminated. Notwithstanding the foregoing, this Agreement may not be amended (i) in a manner adverse to any Shareholder without the consent of such Shareholder unless such amendment affects all Shareholders in the same fashion or (ii) in a manner which disproportionately benefits any Shareholder unless each other Shareholder not sharing ratably in such benefit has consented thereto. Neither this Agreement nor any provisions hereof may be amended, changed, waived, discharged or terminated orally, but only by a signed statement in writing.

(f) NOTICES. Any notices or other communications required by this Agreement shall be given by sending such notices or other communications by registered mail to the appropriate party at its last known address as shown on the books and records of the Company.

(g) HEADINGS. The headings and any table of contents contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

(h) GOVERNING LAW. ALL MATTERS RELATING TO THE INTERPRETATION, CONSTRUCTION, VALIDITY AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW PROVISIONS THEREOF.

(i) THIRD-PARTY BENEFIT. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights, remedies, obligations or liabilities of any nature whatsoever.

(j) WAIVER OF JURY TRIAL. EACH PARTY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

(k) REMEDIES. The parties agree that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may, in its discretion, apply to any court of law or equity of competent jurisdiction for specific performance and injunctive relief in order to enforce or prevent any violations this Agreement, and any party against whom such proceeding is brought hereby waives the claim or defense that such party has an adequate remedy at law and agrees not to raise the defense that the other party has an adequate remedy at law.

(l) ADVICE OF COUNSEL. Each party acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this agreement.

(m) EFFECTIVE TIME. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

(n) MASSACHUSETTS BUSINESS TRUSTS. A copy of the Agreement and Declaration of Trust of each Putnam fund or series investment company
(each, a "Fund")

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that is a Massachusetts business trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of such Fund by the Trustees of the relevant Fund as Trustees, and not individually, and that the obligations of this Agreement are not binding upon any of the Trustees, officers and shareholders of the Fund individually but are binding only upon the assets and property of such Fund.

(o) INDIVIDUAL RETIREMENT ACCOUNTS. Gaylord agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 ("Gaylord IRA") and any other party necessary, to perform all of the obligations of the Gaylord IRA under this Agreement. Any notice given to the Gaylord IRA under this Agreement shall also be given to: Joseph Gaylord, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 339-8022.

Stephen Weiss agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 ("Weiss IRA") and any other party necessary, to perform all of the obligations of the Weiss IRA under this Agreement. Any notice given to the Weiss IRA under this Agreement shall also be given to: Stephen Weiss, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 339-8022.

(p) CO-SALE SHAREHOLDER WAIVER. The Co-Sale Shareholders (other than the Maveron Entities) do hereby waive any and all rights under Section 1(a) and 2 of the Prior Agreement to participate as a seller in the Exchange or to receive any notice of the Exchange.

[The remainder of this page has been left blank intentionally. Signature page follows.]

11

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph of this Agreement.

CHERRY TREE VENTURES IV, A MINNESOTA
LIMITED PARTNERSHIP

By /s/ Tony Christianson
   --------------------------
   Its ______________________

NCS PEARSON, INC.

By /s/ James C. Afdahl
   ------------------------------------
   Its Vice President & Chief Financial
       Officer

FORSTMANN LITTLE & CO. EQUITY
PARTNERSHIP-VI, L.P.

By: FLC XXXII Partnership, L.P., its
General Partner

By /s/________________________
   A General Partner

FORSTMANN LITTLE & CO. EQUITY
PARTNERSHIP-VII, L.P.

By: FLC XXXII Partnership, L.P., its General Partner

By /s/__________________________
   A General Partner

12

FORSTMANN LITTLE & CO.
SUBORDINATED DEBT AND EQUITY
MANAGEMENT BUYOUT
PARTNERSHIP-VIII, L.P.

By: FLC XXXIII Partnership, L.P., its
General Partner

By /s/__________________________
   A General Partner

SMARTFORCE PLC

By /s/__________________________
   Its CFO

CAPELLA EDUCATION COMPANY

By /s/ Stephen G. Shank
   -----------------------------
   Its Chairman and CEO

PUTNAM OTC AND EMERGING
GROWTH FUND

By Putnam Investment Management, LLC

By: /s/_________________________
       Name:
       Title:

13

TH LEE, PUTNAM INVESTMENT TRUST -
TH LEE, PUTNAM EMERGING
OPPORTUNITIES PORTFOLIO

By TH Lee, Putnam Capital Management, LLC

By: /s/_________________________
       Name:
       Title:

DRW VENTURE PARTNERS LP

By RBC DAIN RAUSCHER CORP.
Its: General Partner

By: /s/ Mary Zimmer
    ----------------------------
    Mary Zimmer
    Its: Director of Finance and
    Administration,RBC CMS

THINKEQUITY INVESTMENT
PARTNERS LLC

By: ThinkEquity Holdings LLC
Its: Manager

By: /s/ Randy Mason
    ------------------------------------
        Name: Randy Mason
        Its: Representative of the Board
             of Managers

/s/ Joshua Lewis
--------------------------------
JOSHUA LEWIS

/s/ Russell Gullotti
--------------------------------
RUSSELL GULLOTTI

14

/s/ Stephen G. Shank
-----------------------
STEPHEN G. SHANK

/s/ Stephen J. Weiss
-----------------------
STEPHEN J. WEISS

/s/ Elizabeth Rausch
-----------------------
ELIZABETH RAUSCH

/s/ Michael Offerman
-----------------------
MICHAEL OFFERMAN

/s/ Paul Schroeder
-----------------------
PAUL SCHROEDER

/s/ Joseph Gaylord
-----------------------
JOSEPH GAYLORD

USB PIPER JAFFRAY AS CUSTODIAN
FBO STEPHEN J. WEISS IRA
ACCOUNT #82694368

By: /s/ Michael D. Duffy
    ----------------------------
        Michael D. Duffy
        Its: Managing Director

15

USB PIPER JAFFRAY AS CUSTODIAN
FBO JOSEPH GAYLORD IRA
ACCOUNT #36086299

By: /s/ Michael D. Duffy
    ----------------------------
        Michael D. Duffy
        Its: Managing Director

MAVERON EQUITY PARTNERS 2000, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    ----------------------------
        Dan Levitan
        Its: Manager

MAVERON EQUITY PARTNERS 2000-B, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    ----------------------------
        Dan Levitan
        Its: Manager

MEP 2000 ASSOCIATES LLC

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    ----------------------------
        Dan Levitan
        Its: Manager

/s/ David Smith
--------------------------------
DAVID SMITH

16

/s/ Judy Shank
--------------------------------
JUDY SHANK

/s/ Susan Shank
--------------------------------
SUSAN SHANK

/s/ Mary Retzlaff
--------------------------------
MARY RETZLAFF

THE S. JOSHUA AND TERESA D. LEWIS ISSUE
TRUST

By: /s/_________________________

       Its: Trustee

17

SCHEDULE 1

MANAGEMENT INVESTORS

Joshua Lewis

Russell Gullotti

Stephen G. Shank

Stephen J. Weiss

Elizabeth Rausch

Michael Offerman

Paul Schroeder

USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299

USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368

David Smith

The S. Joshua and Teresa D. Lewis Issue Trust


SCHEDULE 6(e)

Stephen Shank

Stephen Weiss

David Gilbert

Paul F. Clifford

Joseph Gaylord

Elizabeth Rausch

Michael Offerman

Paul Schroeder

Judy Lemke

Donald Smithmier


EXHIBIT 4.3

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT is made as of the 16th day of June, 1998, by and between LEARNING VENTURES INTERNATIONAL, INC., a Minnesota corporation (the "Company"), and NATIONAL COMPUTER SYSTEMS, INC. (the "Holder").

RECITALS

WHEREAS, the Company has issued One Million Twenty Two Thousand Two Hundred Twenty Two (1,022,222) of its Class D Convertible Preferred Shares (the "Class D Shares") to Holder; and

WHEREAS, the Class D Shares are initially convertible into a like number of Common Shares of the Company (the "Common Shares").

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

1. Registration of Stock.

1.1. Definitions.

"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.

"Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

"Company" shall mean Learning Ventures International, Inc., a Minnesota corporation.

"Common Shares" shall mean the shares of Common Stock authorized by the Company's Restated Articles of Incorporation and any additional shares of Common Stock which may be authorized in the future by the Company, and any stock into which such Common Shares may hereafter be changed.

"Holder" shall mean National Computer Systems, Inc. and shall be deemed to include all successors of Holder acting jointly for purposes of all rights and obligations hereunder.

"Registrable Securities" shall mean (i) the Common Stock issued to Holder upon conversion of the Class D Shares and (ii) any additional securities issued with respect to the above described securities upon any stock split, stock dividend, recapitalization, or similar event, provided, however, that none of the above described securities shall be treated as Registrable Securities if (a) they have been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (b) they have been sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale.


"Securities Act" shall mean the Securities Act of 1933, as amended.

1.2 Demand Registration. If at any time the Company shall receive a written request therefor from Holder for the registration under the Securities Act of Registrable Securities aggregating not less than Five Million Dollars ($5,000,000) in market value, or all of the Registrable Securities then held by the Holder if the market value of such Registrable Security is estimated to be less than Five Million Dollars ($5,000,000), the Company shall prepare and file as soon as practicable and in any event within 90 days of receipt of such request, a registration statement under the Securities Act covering the number of Registrable Securities which are the subject of such request and shall use its best efforts to cause such registration statement to become effective; provided, however, that the Company shall not be obligated to prepare and file a registration statement pursuant to this Section 1.2 until six (6) months have elapsed from the date that the Company has first registered and sold a class of equity securities on Form S-1 (or any successor form). In the event that Holder determines for any reason not to proceed with a registration at any time before the registration statement has been declared effective by the Commission, and such registration statement, if theretofore filed with the Commission, is withdrawn with respect to the Registrable Securities covered thereby, and Holder agrees to bear its own expenses incurred in connection therewith and to reimburse the Company for the expenses incurred by it attributable to the registration of such Registrable Securities, then Holder shall not be deemed to have exercised its right to require the Company to register Registrable Securities pursuant to this Section at the expense of the Company. If a registration statement filed by the Company at the request of Holder pursuant to this Section is withdrawn at the initiative of the Company, then Holder shall not be deemed to have exercised its right to require the Company to register Registrable Securities pursuant to this Section.

The managing underwriter of an offering registered pursuant to this
Section shall be selected by the Company and shall be reasonably acceptable to Holder. Without the written consent of Holder, neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Registrable Securities or require the exclusion of any portion of the Registrable Securities to be registered. Shares to be excluded from an underwritten public offering shall be selected pro rata among the holders of securities of the Company requesting inclusion in such registration. The Company shall be obligated to effect only two (2) registrations pursuant to this Section 1.2.

1.3. Piggyback Registration. Each time the Company shall determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for money of any of its securities by it or any of its security holders (other than a registration statement on Form S-8 or other limited purpose form), the Company will give written notice of its determination to Holder. Upon the written request of Holder given within 30 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all Registrable Securities, of which Holder has so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Securities to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any registration; provided further,

2

however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the Commission and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of Holder; provided Holder shall either bear all expenses incurred by the Company as the result of such registration after the Company has decided not to proceed or such registration shall be considered a demand registration under Section 1.2. If any registration pursuant to this Section shall be underwritten in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Registrable Securities originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of Common Shares to be included in the underwritten public offering may be reduced in the manner determined by the managing underwriter. Those shares which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 180 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. In the event of any registration of Registrable Securities pursuant to this Section 1.3 in connection with an underwritten public offering, Holder shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter selected by the Company for such offering.

1.4. Short Form Registration.. In addition to the registration rights provided in Sections 1.2 and 1.3, if the Company qualifies for the use of Form S-3 or any similar registration form then in force, the Company shall at its expense at the request of Holder from time to time register the Registrable Securities on behalf of Holder; provided, however, that the Company shall not be required to register less than 100,000 Registrable Securities nor to accommodate more than two of such registrations in any calendar year.

1.5. Registration Procedures. If and whenever the Company is required by the provisions of Sections 1.2, 1.3 or 1.4 to effect the registration of Registrable Securities under the Securities Act, the Company will:

(a) prepare and file with the Commission a registration statement with respect to such securities, and use its best efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed 90 days;

(b) prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed 90 days;

(c) furnish to Holder and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus,

3

final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities;

(d) register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Holder may reasonably request within 20 days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified;

(e) notify Holder promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed;

(f) notify Holder promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information;

(g) prepare and file with the Commission, promptly upon the request of Holder, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Holder (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Securities by Holder;

(h) prepare and promptly file with the Commission and promptly notify Holder of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading;

(i) advise Holder, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;

(j) at the request of Holder, furnish: (i) an opinion, dated the closing date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to Holder, covering such matters as such underwriters and Holder may reasonably request; and (ii) letters, dated as of the effective date of the registration statement and as of the closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to Holder, covering such matters as such underwriters and Holder may reasonably request, in which letters such accountants shall state (without limiting the generality of the foregoing) that

4

they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act.

1.6. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant hereto with respect to the Registrable Securities that Holder shall furnish to the Company such information regarding itself, the Registrable Securities, and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities.

1.7. Expenses. With respect to each inclusion of Registrable Securities in a registration statement pursuant to Section 1.2, 1.3 or 1.4, the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Underwriting discounts and commissions and transfer taxes for Holder and any other expenses incurred by Holder not expressly included above shall be borne by Holder.

1.8. Indemnification.

(a) The Company will indemnify and hold harmless Holder pursuant to the provisions of this Section 1 and any underwriter (as defined in the Securities Act) for Holder, and each person, if any, who controls Holder or such underwriter within the meaning of the Securities Act, from and against any and all loss, damage, liability, cost and expense to which Holder or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses (i) are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any preliminary or final prospectus contained therein or any amendment or supplement thereto, (ii) arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with written information furnished by Holder, such underwriter or such controlling person specifically for use in the preparation thereof; or
(iii) any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934 ("1934 Act"), or any rule or regulation promulgated under the Securities Act or the 1934 Act; provided, however, that the foregoing indemnity, insofar as it relates to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus but eliminated or remedied in the prospectus shall not inure to the benefit of any underwriter (or any employee, agent or affiliate of or any person controlling such underwriter) with respect to any action or claim asserted by a person who purchased any securities from

5

such underwriter unless such person was sent or given a copy of the prospectus with or prior to the written confirmation of the sale involved. The Company will pay to Holder, underwriter or controlling person any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, damage, liability, cost and expense.

(b) Holder will indemnify and hold harmless the Company and any underwriter, and each person, if any, who controls the Company or such underwriter within the meaning of the Securities Act, from and against any and all loss, damage, liability, cost or expense to which the Company or any such underwriter or controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by Holder specifically for use in the preparation thereof. Holder will pay to any person intended to be indemnified pursuant to this paragraph 1.8(b) any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, damage, liability, cost and expense.

(c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or
(b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel

6

satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party.

(d) The obligations of the Company and Holder under this Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement hereunder, and otherwise.

1.9. Market "Stand-Off" Agreement. Holder agrees, in connection with any public offering of the Company's Common Shares that, upon request of the Company or the underwriters managing the underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Common Shares of the Company other than those included in the registration without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not exceeding 180 days) from the effective date of such registration as may be requested by the underwriters; provided, that all other holders of at least 10% of the Company's outstanding voting equity securities (other than holders which have acquired such shares in registered offerings, open market transactions or block trades) and all of the officers and directors of the Company who own stock of the Company also agree to such restrictions; and provided further that such agreement under this paragraph 1.9 shall be applicable only to registration statements of the Company which cover Common Shares or other securities to be sold on its behalf to the public in an underwritten offering during the term of this Agreement.

2. Termination of Registration Rights. The right of Holder to request registration or inclusion in any registration shall terminate on the first to occur of (a) June 30, 2005, or (b) if all Registrable Securities held or entitled to be held upon conversion by Holder may immediately be sold under Rule 144.

3. Reports Under 1934 Act. With a view to making available to Holder the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, after the Company has become obligated to file reports under the 1934 Act the Company agrees to:

(a) make and keep public information available, as those terms are understood and defined in SEC Rule 144;

(b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and

(c) furnish to Holder, so long as Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Act and the 1934 Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be

7

reasonably requested in availing Holder of any rule or regulation of the SEC which permits the offer and sale of any such securities without registration or pursuant to such form.

4. Miscellaneous.

(a) Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

(b) Governing Law. This Agreement shall be governed by and construed under the laws of the State of Minnesota as applied to agreements among Minnesota residents entered into and to be performed entirely within Minnesota.

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

(d) Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

(e) Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties.

(f) Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

(g) Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this subparagraph shall be binding upon the Holder, each future holder of all such Registrable Securities and the Company.

(h) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were excluded and shall be enforceable in accordance with its terms.

8

(i) Aggregation of Securities. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

(j) Entire Agreement: Amendment; Waiver. This Agreement (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.

(The remainder of this page has been left blank intentionally.


Signature page follows.)

9

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph of this Agreement.

LEARNING VENTURES INTERNATIONAL, INC.

By: /s/ Paul C.F. Clifford
    ----------------------------
    Its: Vice President and CFO

Address: 330 Second Avenue South, Suite 550 Minneapolis, MN 55401

HOLDER: NATIONAL COMPUTER SYSTEMS, INC.

By: /s/Russell A. Gullotti
    --------------------------------
    Russell A. Gullotti
    Its: Chairman, President and CEO

Address: 11000 Prairie Lakes Drive Eden Prairie, MN 55344

10

EXHIBIT 4.4

AMENDMENT NO. 1

REGISTRATION RIGHTS AGREEMENT

This agreement is Amendment No. 1 (the "Amendment") to the Registration Rights Agreement, dated as of June 16, 1998, by and among CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company") and NATIONAL COMPUTER SYSTEMS, INC. (the "Holder"), and is entered into as of the 20th day of April, 2000.

RECITALS

WHEREAS, the Holder and the Company are parties to a Registration Rights Agreement dated as of June 16, 1998; and

WHEREAS, the Company proposes to sell and issue up to 2,596,491 shares of its Class E Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement of even date herewith (the "Purchase Agreement"); and

WHEREAS, the purchase of the Class E Convertible Preferred Stock under the Purchase Agreement is conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class E Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Registration Rights Agreement shall be amended as follows:

1. Section 1.1, entitled "Definitions," shall be amended to include the following definitions:

"Class E Registrable Shares" shall mean the shares of the Company's capital stock that are Registrable Shares as defined in that certain Investor Rights Agreement between the Company and the purchasers of the Company's Class E Convertible Preferred Stock of even date herewith."

"Legg Mason Warrant Shares" shall mean the shares of the Company's capital stock that are "warrant securities" as defined in that certain Warrant to purchase common shares of the Company issued to Legg Mason Wood Walker, Incorporated on June 16, 1998, as amended on the date hereof, and as defined in the Warrant to purchase common shares of the Company to be issued to Legg Mason Wood Walker, Incorporated upon the closing of the sale and purchase of the Company's Class E Convertible Preferred Stock."

2. The second sentence of the second paragraph of Section 1.2 shall be revised to read as follows:


"Without the written consent of Holder, neither the Company nor any other holder of securities of the Company, other than holders of Class E Registrable Shares and Legg Mason Warrant Shares, may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Registrable Securities or require the exclusion of any portion of the Registrable Securities to be registered."

3. The following text shall be added as a third paragraph of Section 1.2:

"The Company shall be entitled to (x) postpone the filing of any registration statement otherwise required to be prepared and filed by the Company pursuant to this Section 1.2 (and may suspend the completion of any demand registration which has been initiated so long as the Registration Statement has not yet been declared effective) for a reasonable period of time, but not in excess of 60 days (a "Delay Period") or (y) suspend the use of any effective registration statement under this
Section 1.2 for a reasonable period of time, but not in excess of 60 consecutive days (a "Suspension Period") if (i) such postponement or suspension is required by applicable law arising from events outside of the control of the Company or (ii) the Company determines that in its reasonable good faith judgment the registration and distribution of the Registrable Securities covered or to be covered by such registration statement would interfere with any pending material financing, acquisition, corporate reorganization or business combination, involving the Company or any of its subsidiaries or would require premature disclosure thereof and promptly gives the Holder written notice of such determination (setting forth in reasonable detail the facts and circumstances resulting in such delay where such detail would not otherwise require such premature disclosure), and an approximation of the period of the anticipated delay or suspension; provided, however, that (i) the aggregate number of days included in all Delay Periods or Suspension Periods during any consecutive 12 months shall not exceed 90 days and (ii) the Company may not delay or suspend any registration more than one time an any 12-month period."

4. Section 1.3 shall be amended by replacing the fourth sentence of the section, which begins "If in the good faith judgment...", with the following text:

"If in the good faith judgment of the managing underwriter the registration of all, or part of, the Registrable Securities which the holders have requested to be included would materially and adversely affect such public offering, then the Company shall be required to include in the underwriting only that number of Registrable Securities, if any, which the managing underwriter believes may be sold without causing such material adverse effect. If the number of Registrable Securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of Registrable Securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of Registrable Securities, Class E Registrable Shares and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of such securities included in their respective requests for registration and (B) in the case of a

2

registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of Registrable Securities, Class E Registrable Shares and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration. The Company (in the case of a registration statement whose filing was initiated by a selling stockholder) and any other Company stockholders, other than holders of Class E Registrable Shares and Legg Mason Warrant Shares (in the case of a registration statement whose filing was initiated by the Company or by a selling stockholder), shall have no right to participate in that event without the consent of the holders of at least a majority of the Registrable Securities participating in such offering."

5. The following text shall be added to the end of Section 1.5(h):

"provided that the Company may determine to delay filing of any such amendment or supplement, and request suspension by a selling stockholder of offers and sales pursuant to the prospectus, under the circumstances contemplated by the third paragraph of Section 1.2 hereof;"

6. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Registration Rights Agreement remain unaltered and in full force and effect. This Amendment and the Registration Rights Agreement shall be read and construed as one agreement.

7. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

8. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                       CAPELLA EDUCATION COMPANY

                                               By: /s/ Paul F. Clifford
                                                   -----------------------------
                                               Name: Paul F. Clifford
                                               Title: CFO

HOLDER:                                        NATIONAL COMPUTER SYSTEMS, INC.

                                               By: /s/ Adrienne T. Tietz
                                                   -----------------------------
                                               Name: Adrienne T. Tietz
                                               Title: Vice President

3

EXHIBIT 4.5

AMENDMENT NO. 2

REGISTRATION RIGHTS AGREEMENT

This agreement is Amendment No. 2 (the "Amendment") to the Registration Rights Agreement, dated as of June 16, 1998, as amended by Amendment No. 1 to the Registration Rights Agreement (the "Amendment No. 1") on April 20, 2000 (together, the "Registration Rights Agreement"), by and among CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company") and NCS PEARSON, Inc. (as successor to National Computer Systems, Inc.) (the "Holder"), and is entered into as of the 21st day of February, 2002.

RECITALS

WHEREAS, the Holder and the Company are parties to a Registration Rights Agreement dated as of June 16, 1998, that was amended by Amendment No. 1 on April 20, 2000; and

WHEREAS, the Company proposes to sell and issue up to 1,425,457 shares of its Class F Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement dated as of January 31, 2002 (the "Purchase Agreement"); and

WHEREAS, the purchase of the Class F Convertible Preferred Stock under the Purchase Agreement is conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class F Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Registration Rights Agreement shall be amended as follows:

1. Section 1.1, entitled "Definitions," shall be amended to include the following definition:

"Class F Registrable Shares" shall mean the shares of the Company's Class F Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are Registrable Shares as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock of even date herewith."

2. Section 1.1, entitled "Definitions," shall be amended by replacing the definition of "Legg Mason Warrant Shares" with the following definition:

"Legg Mason Warrant Shares" shall mean the shares of the Company's capital stock that are "warrant securities" as defined in that certain Warrant to purchase common


shares of the Company issued to Legg Mason Wood Walker, Incorporated on June 16, 1998, as amended by Amendment No. 1 on April 20, 2000 and further amended by Amendment No. 2 on the date hereof, and as defined in that certain Warrant to purchase common shares of the Company issued to Legg Mason Wood Walker, Incorporated on May 11, 2000, as amended on the date hereof.

3. Section 1.1, entitled "Definitions," shall be amended by replacing the definition of "Class E Registrable Shares" with the following definition:

"Class E Registrable Shares" shall mean the shares of the Company's Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are Registrable Shares as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock of even date herewith."

4. The second sentence of the second paragraph of Section 1.2 shall be revised to read as follows:

"Without the written consent of Holder, neither the Company nor any other holder of securities of the Company, other than holders of Class F Registrable Shares, Class E Registrable Shares and Legg Mason Warrant Shares, may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Registrable Securities or require the exclusion of any portion of the Registrable Securities to be registered."

5. Section 1.2 shall be amended by replacing the last clause of the third paragraph of Section 1.2, which begins "(ii) the Company may not delay ...", with the following text:

"(ii) the Company may not delay or suspend any registration more than one time in any 12-month period."

6. Section 1.3 shall be amended by replacing the fifth and sixth sentences of the section, which begins "If the number of Registrable Securities ...", with the following text:

"If the number of Registrable Securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of Registrable Securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of Registrable Securities, Class E Registrable Shares, Class F Registrable Shares and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of such securities included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder,

2

Registrable Securities and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration. The Company (in the case of a registration statement whose filing was initiated by a selling stockholder) and any other Company stockholders, other than holders of Class E Registrable Shares, Class F Registrable Shares and Legg Mason Warrant Shares (in the case of a registration statement whose filing was initiated by the Company or by a selling stockholder), shall have no right to participate in that event without the consent of the holders of at least a majority of the Registrable Securities participating in such offering."

7. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Registration Rights Agreement remain unaltered and in full force and effect. This Amendment along with Amendment No. 1 and the Registration Rights Agreement shall be read and construed as one agreement.

8. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

9. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                             CAPELLA EDUCATION COMPANY

                                                     By: /s/ Stephen Shank
                                                         -----------------------
                                                     Name: Stephen Shank
                                                     Title: Chairman and CEO

HOLDER:                                              NCS PEARSON, INC.

                                                     By: /s/ David W. Smith
                                                         -----------------------
                                                     Name: David W. Smith
                                                     Title: CEO

3

EXHIBIT 4.6

AMENDMENT NO. 3

REGISTRATION RIGHTS AGREEMENT

This agreement is Amendment No. 3 (the "Amendment") to the Registration Rights Agreement, dated as of June 16, 1998, as amended by Amendment No. 1 to the Registration Rights Agreement ("Amendment No. 1") on April 20, 2000 and as amended by Amendment No. 2 to the Registration Rights Agreement ("Amendment No. 2") on February 21, 2002 (together, the "Registration Rights Agreement"), by and among CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company") and NCS PEARSON, Inc. (as successor to National Computer Systems, Inc.) (the "Holder"), and is entered into as of the 22nd day of January, 2003.

RECITALS

WHEREAS, the Holder and the Company are parties to a Registration Rights Agreement dated as of June 16, 1998, that was amended by Amendment No. 1 on April 20, 2000 and further amended by Amendment No. 2 on February 21, 2002;

WHEREAS, the Company proposes to sell and issue up to 683,452.20 shares of its Class G Convertible Preferred Stock (the "Class G Preferred Stock") pursuant to that certain Stock Purchase Agreement dated as of January 15, 2003 (the "Purchase Agreement");

WHEREAS, the Company intends to enter into an Exchange Agreement (the "Exchange Agreement") pursuant to which the holders of Class F Convertible Preferred Stock (the "Class F Investors") will agree severally to exchange each of the outstanding shares of Class F Convertible Preferred Stock held by such investor for shares of Class G Preferred Stock (the "Exchange");

WHEREAS, the purchase of the Class G Convertible Preferred Stock under the Purchase Agreement and the Exchange are each conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class G Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Registration Rights Agreement shall be amended as follows:

1. Section 1.1, entitled "Definitions," shall be amended by deleting the definition of "Class F Registrable Shares."

2. Section 1.1, entitled "Definitions," shall be amended by adding the definition of "Class G Registrable Shares" with the following definition:


"Class G Registrable Shares" shall mean the shares of the Company's Class G Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are Registrable Shares as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors listed on Schedule 1 thereto, dated January 22, 2003.

3. Section 1.1, entitled "Definitions," shall be amended by replacing the definition of "Legg Mason Warrant Shares" with the following definition:

"Legg Mason Warrant Shares" shall mean the shares of the Company's capital stock that are "warrant securities" as defined in that certain Warrant to purchase common shares of the Company issued to Legg Mason Wood Walker, Incorporated on June 16, 1998, as amended by Amendment No. 1 on April 20, 2000, further amended by Amendment No. 2 on February 21, 2002 and further amended by Amendment No. 3 on the date hereof, and as defined in that certain Warrant to purchase common shares of the Company issued to Legg Mason Wood Walker, Incorporated on May 11, 2000, as amended by Amendment No. 1 on February 21, 2002 and further amended on January 22, 2003.

4. Section 1.1, entitled "Definitions," shall be amended by replacing the definition of "Class E Registrable Shares" with the following definition:

"Class E Registrable Shares" shall mean the shares of the Company's Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are Registrable Shares as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors listed on Schedule 1 thereto, dated January 22, 2003."

5. The second sentence of the second paragraph of Section 1.2 shall be revised to read as follows:

"Without the written consent of Holder, neither the Company nor any other holder of securities of the Company, other than holders of Class G Registrable Shares, Class E Registrable Shares and Legg Mason Warrant Shares, may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the Registrable Securities or require the exclusion of any portion of the Registrable Securities to be registered."

6. Section 1.3 shall be amended by replacing the fifth and sixth sentences of the section, which begins "If the number of Registrable Securities ...", with the following text:

"If the number of Registrable Securities to be included in the underwriting in

2

accordance with the foregoing is less than the total number of shares which the holders of Registrable Securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and
(y) second among the holders of Registrable Securities, Class E Registrable Shares, Class G Registrable Shares and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of such securities included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of Registrable Securities, Class E Registrable Shares, Class G Registrable Shares and Legg Mason Warrant Shares who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration. The Company (in the case of a registration statement whose filing was initiated by a selling stockholder) and any other Company stockholders, other than holders of Class E Registrable Shares, Class G Registrable Shares and Legg Mason Warrant Shares (in the case of a registration statement whose filing was initiated by the Company or by a selling stockholder), shall have no right to participate in that event without the consent of the holders of at least a majority of the Registrable Securities participating in such offering."

7. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Registration Rights Agreement remain unaltered and in full force and effect. This Amendment along with Amendment No. 1, Amendment No. 2 and the Registration Rights Agreement shall be read and construed as one agreement.

8. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

9. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

3

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                       CAPELLA EDUCATION COMPANY

                                               By: /s/ Stephen G. Shank
                                                   -----------------------------
                                                       Stephen G. Shank
                                                       Chief Executive Officer

HOLDER:                                        NCS PEARSON, INC.

                                               By: /s/ James C. Afdahl
                                                   -----------------------------
                                               Name: James C. Afdahl
                                               Title: Vice President and
                                                      Chief Financial Officer

4

EXHIBIT 4.7

SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

THIS SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is made as of January 22 2003, by and among CAPELLA EDUCATION COMPANY, a Minnesota corporation (the "Company"), JOSEPH GAYLORD, a resident of Minnesota, and the INVESTORS LISTED ON SCHEDULE 1 attached hereto (collectively, the "Investors" and each an "Investor"), and shall supersede and replace that certain Amended and Restated Investor Rights Agreement dated February 21, 2002 by and among the Company, Joseph Gaylord and the Investors listed on Schedule 1 attached thereto
(collectively, the "Prior Investors") (the "Prior Investor Rights Agreement")
and be effective as of the date of this Agreement. The Prior Investor Rights Agreement is hereby cancelled and terminated in its entirety and shall be of no further force and effect.

RECITALS

A. The Company proposes to sell and issue up to 683,452.20 shares (the "Class G Preferred Shares") of its Class G Convertible Preferred Stock (the "Class G Preferred") pursuant to that certain Maveron Class G Convertible Preferred Stock Purchase Agreement dated January 15, 2003 (the "Class G Purchase Agreement") to certain purchasers (the "Class G Purchasers").

B. The Company sold and issued 1,425,457 shares (the "Class F Preferred Shares") of its Class F Preferred Convertible Preferred Stock (the "Class F Preferred") pursuant to that certain Class F Convertible Preferred Stock Purchase Agreement dated January 31, 2002 (the "Class F Purchase Agreement") to certain purchasers.

C. Equity-VII, MBO-VIII, Putnam, Think Equity Investment Partners LLC, DRW Venture Partners LP, Joseph Gaylord, the Management Investors listed on Schedule 1.1 to the Class F Purchase Agreement and the S. Joshua and Teresa D. Lewis Issue Trust (collectively referred to as the "Class F Investors") have entered into an Exchange Agreement (the "Exchange Agreement"), pursuant to which the Class F Investors agree to exchange (the "Exchange") each of the outstanding shares of Class F Preferred held by such investor for shares of Class G Preferred.

D. The Investors which are parties to the Class G Purchase Agreement have requested that the Company grant to them certain rights as set forth below.

E. The execution and delivery of this Agreement by each Investor is a condition to the purchase of the Class G Preferred by the Class G Purchasers and to the Exchange.

F. The Investors desire that the Class G Purchasers consummate the purchase of Class G Preferred contemplated by the Class G Purchase Agreement and that the Class F Investors consummate the Exchange and are willing to enter into this Agreement as an


inducement to the Class G Purchasers to complete the purchase of the Class G Preferred and the Class F Investors to consummate the Exchange.

AGREEMENT

In consideration of the premises hereof, the mutual promises made herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. REGISTRATION RIGHTS.

1.1. Certain Definitions. As used in this Section 1 and elsewhere in this Agreement, the following terms shall have the following respective meanings:

"Board" means the Company's board of directors, as it may exist from time to time.

"Class E Purchase Agreement" means the Class E Convertible Preferred Stock Purchase Agreement, dated as of April 20, 2000, by and among the Company, Equity-VI and SmartForce plc.

"Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act (as defined below).

"Common Stock" means the Company's common stock $.10 par value per share, and any stock or equity security issued in exchange or substitution therefor or into which such Common Stock may change after the date hereof.

"Conversion Shares" means shares of Common Stock issued or issuable upon conversion of the Shares.

"Equity-VI" means Forstmann Little & Co. Equity Partnership-VI, L.P., a Delaware limited partnership.

"Equity-VII" means Forstmann Little & Co. Equity Partnership-VII, L.P., a Delaware limited partnership.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect.

"Forstmann Little Entities" means the collective reference to Equity-VI, Equity-VII and MBO-VIII.

"Initial Public Offering" means the initial public offering by the Company of its Common Stock which is registered with the Commission under the provisions of the Securities Act.

2

"Maveron Entities" means the collective reference to Maveron Equity Partners 2000, L.P., Maveron Equity Partners 2000-B, L.P. and MEP 2000 Associates LLC.

"MBO-VIII" means Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., a Delaware limited partnership.

"Putnam" means the collective reference to those certain funds and accounts managed by affiliates of Putnam Investments, LLC, a Delaware limited liability company, that are listed on Schedule 1 hereto.

"Qualified Public Offering" means the underwritten public offering meeting the requirements for automatic conversion of Class G Preferred set forth in
Section 6(b) of the Certificate of Designation for the Class G Preferred (the "Class G Certificate"), as filed with the Secretary of State of Minnesota.

"Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of securities of the Company (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other similar form, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation).

"Registrable Shares" means (a) any Conversion Shares, (b) any shares of Common Stock acquired by the Stockholders pursuant to any preemptive right they have by virtue of owning the Shares or Conversion Shares, and (c) any other shares of Common Stock issued in respect of the shares of Common Stock described in subparagraphs (a) and (b) above (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares upon any public sale pursuant to a Registration Statement,
Section 4(1) of the Securities Act, or Rule 144 under the Securities Act, or such time as they shall be eligible for sale under Rule 144(k), as to any original Investor hereunder, or, as to any other Stockholder, Rule 144 without limitation as to volume, or any sale or transfer in any manner to a person or entity which, by virtue of Section 1.13 of this Agreement, is not entitled to the rights provided by this Section 1.

"Registration Expenses" means the expenses described in Section 1.6.

"Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect.

"Shares" means the collective reference to the Company's Class E Preferred Stock, par value $.01 per share (the "Class E Preferred"), the Class G Preferred and all shares of capital stock of the Company issued in exchange or substitution for or in respect of the Class E Preferred or the Class G Preferred.

"Stockholders" means the Investors and any persons or entities to whom the rights granted under this Section 1 are transferred pursuant to Section 1.13 hereof.

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1.2. Sale or Transfer of Shares; Legend.

(a) Restriction. The Shares and the Registrable Shares and shares issued in respect of the Shares or the Registrable Shares shall not be sold or transferred unless such sale or transfer is made in accordance with the Third Amended and Restated Co-Sale and Board Representation Agreement of even date herewith to which any Stockholder who proposes to make such transfer is a party (the "Co-Sale Agreement") and either (i) they first shall have been registered under the Securities Act and under any applicable state securities or blue sky laws or sold pursuant to Rule 144 under the Securities Act or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from such registration requirements.

(b) Legend. Each certificate representing the Shares and the Registrable Shares and shares issued in respect of the Shares or the Registrable Shares shall bear a legend substantially in the following form:

"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED."

The foregoing legend shall be removed from the certificates representing any Registrable Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Securities Act.

1.3. Required Registrations.

(a) On Demand. Subject to Section 1.3(d), at any time after the end of the six-month period commencing upon the consummation of the Initial Public Offering pursuant to a Registration Statement, each of (i) Putnam, (ii) Equity-VII and MBO-VIII, (iii) the Maveron Entities, and (iv) a Stockholder or Stockholders holding in the aggregate at least 10% of the Registrable Shares originally issued pursuant to the Class E Purchase Agreement, may request, in writing, that the Company effect the registration on Form S-1 (or any successor form), including by means of a shelf registration pursuant to Rule 415, of Registrable Shares owned by such Stockholder or Stockholders having an aggregate offering price of at least $1 million (based on the then current market price or fair value). If the holder or holders initiating the registration intend to distribute the Registrable Shares by means of an underwriting, such holder or holders shall so advise the Company in their request of such intention and of their selection of an underwriter (which selection shall be made by a majority in interest of the holders initiating the registration and subject to the consent of the Company, which consent shall not be unreasonably withheld). In the event such registration is underwritten, the right of other Stockholders to

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participate shall be conditioned on such Stockholders' participation in such underwriting. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all Stockholders (other than Putnam, in which case the Company will not give such prior notice and as a substitute for such prior notice will either: (a) issue a press release conforming with Rule 135 under Securities Act describing such proposed registration or (b) provide notice upon the initial filing of a registration statement to effect such registration request and, if requested by Putnam within three days after receipt of such notice, agree to amend any registration statement to effect such registration request to include such amount of Registrable Shares as Putnam desires to include in such Registration, subject to
Section 1.3(c) below). Such Stockholders shall have the right, by giving written notice to the Company within 10 days after the Company provides its notice (or, in the case of Putnam, within three days after the issuance of the Company press release or three days after receipt of the notice after filing of the registration statement as described above) to elect to have included in such registration such of their Registrable Shares as they may request in such notice of election. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration of all Registrable Shares which the Company has been requested to so register.

(b) Short Form Registration. Subject to Section 1.3(d), at any time after the Company becomes eligible to file a Registration Statement on Form S-3 (or any successor form relating to secondary offerings), a Stockholder or Stockholders holding in the aggregate (i) at least 15% of the Registrable Shares originally issued pursuant to the Class G Purchase Agreement and the Exchange Agreement, or (ii) at least 10% of the Registrable Shares originally issued pursuant to the Class E Purchase Agreement, may request the Company, in writing, to effect the registration on Form S-3 (or such successor form) including by means of shelf registration pursuant to Rule 415, of Registrable Shares having an aggregate offering price of at least $1 million (based on the current public market price). Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all Stockholders (other than Putnam, in which case the Company will not give such prior notice and as a substitute for such prior notice will either: (a) issue a press release conforming with Rule 135 under Securities Act describing such proposed registration or (b) provide notice upon the initial filing of a registration statement to effect a Registration Request and, if requested by Putnam within three days after receipt of such notice, agree to amend any registration statement to effect such registration request to include such amount of Registrable Shares as Putnam desires to include in such Registration, subject to
Section 1.3(c) below). Such Stockholders shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice (or, in the case of Putnam, within three days after the issuance of the Company press release or three days after receipt of the notice after filing of the registration statement as described above) to elect to have included in such registration such of their Registrable Shares as such Stockholders may request in such notice of election. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration of all Registrable Shares which the Company has been requested to register.

(c) Underwriter's Cut-back. If, in the good faith judgment of the managing underwriter of any underwritten offering undertaken under this Section 1.3, the registration of all of the Registrable Shares which holders have requested to be included in a registration under this Section 1.3 would materially and adversely affect such public offering, then there shall be

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included in the underwriting only that number of Registrable Shares which the underwriter believes may be sold without causing such material adverse effect. If the number of Registrable Shares to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the Stockholders shall be entitled to participate on a pro rata basis based on the number of shares included in the request for registration including shares of the demanding party. The Company and any other Company stockholders that have not expressly been given pari passu or senior rights of participation in accordance with Section 1.11 hereof shall have no right to participate in that event, without the consent of the holders of at least a majority of the Registrable Shares participating in such offering.

(d) Number and Timing Limitations. The Company shall not be required to effect more than: (A) one registration pursuant to clause (i) of the first sentence of Section 1.3(a), (B) one registration pursuant to clause (ii) of the first sentence of Section 1.3(a), (C) one registration pursuant to clause (iii) of the first sentence of Section 1.3(a), (D) two registrations pursuant to clause (iv) of the first sentence of Section 1.3(a), (E) three registrations pursuant to clause (i) of the first sentence of Section 1.3(b) and (F) three registrations pursuant to clause (ii) of the first sentence of Section 1.3(b).

(e) Delay by Company. The Company shall be entitled to (x) postpone the filing of any Registration Statement otherwise required to be prepared and filed by the Company pursuant to this Section 1.3 (and may suspend the completion of any requested registration pursuant to this Section 1.3 which has been initiated so long as the Registration Statement has not yet been declared effective) for a reasonable period of time, but not in excess of 60 consecutive days (a "Delay Period") or (y) suspend the use of any effective Registration Statement under this Section 1.3 for a reasonable period of time, but not in excess of 60 consecutive days (a "Suspension Period") if (i) such postponement or suspension is required by applicable law arising from events outside of the control of the Company or (ii) the Company determines that in its reasonable good faith judgment the registration and distribution of the Registrable Shares covered or to be covered by such Registration Statement would interfere with any pending material financing, acquisition, corporate reorganization or business combination, involving the Company or any of its subsidiaries or would require premature disclosure thereof and promptly gives such Stockholder written notice of such determination (setting forth in reasonable detail the facts and circumstances resulting in such delay where such detail would not otherwise require such premature disclosure), and an approximation of the period of the anticipated delay or suspension; provided, however, that (i) the aggregate number of days included in all Delay Periods or Suspension Periods during any consecutive 12 months shall not exceed 90 days and (ii) the Company may not delay or suspend any registration more than one time in any 12-month period.

(f) Right to Withdraw. In the event that the holders initiating a registration pursuant to Section 1.3 determine for any reason not to proceed with a registration at any time before the Registration Statement has been declared effective by the Commission, and such Registration Statement, if theretofore filed with the Commission, is withdrawn with respect to the Registrable Shares covered thereby, and the holders agree to bear their own expenses incurred in connection therewith and to reimburse the Company for the expenses incurred by it

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attributable to registration of such Registrable Shares, then such holders shall not be deemed to have exercised their right to require the Company to register Registrable Shares pursuant to Section 1.3. If a Registration Statement filed by the Company pursuant to Section 1.3 is withdrawn at the initiative of the Company, then the holders initiating such registration shall not be deemed to have exercised their right to require the Company to register Registrable Shares pursuant to Section 1.3. If a registration is prohibited from becoming or remaining effective so as to permit the sale of Registrable Shares proposed to be sold by any stop order, injunction or other order or requirement of the Commission or any other governmental authority, such registration shall be deemed not to have been effected unless such stop order, injunction or other order shall subsequently have been vacated or otherwise removed.

1.4. Incidental Registration.

(a) Notice by Company. Whenever the Company proposes at any time from time to time to file (including without limitation upon a Qualified Public Offering) a Registration Statement (other than pursuant to Section 1.3) that contemplates the sale of Common Stock, it will, prior to such filing, give written notice to all Stockholders of its intention to do (other than Putnam, in which case the Company will not give such prior notice and as a substitute for such prior notice will either: (a) issue a press release conforming with Rule 135 under Securities Act describing such proposed registration or (b) provide notice upon the initial filing of the Registration Statement and, if requested by Putnam within three days after receipt of such notice, agree to amend any registration statement to effect such registration request to include such amount of Registrable Shares as Putnam desires to include in such registration, subject to Section 1.4(b) below) and, upon the written request of the Stockholders given within 10 days after the Company provides such notice (or, in the case of Putnam, given within three days after the issuance of the Company press release or three days after receipt of the notice after filing of the registration statement as described above) the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Stockholders to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Stockholders; provided, however, that the Company shall have the right to postpone or withdraw any registration proposed pursuant to this subsection 1.4(a) without obligation to any Stockholder.

(b) Underwriter's Cut-back. In connection with any offering under subsection 1.4(a) involving an underwriting, the Company shall not be required to include any Registrable Shares in such underwriting unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company. If in the good faith judgment of the managing underwriter the registration of all, or part of, the Registrable Shares which the holders have requested to be included would materially and adversely affect such public offering, then the Company shall be required to include in the underwriting only that number of Registrable Shares, if any, which the managing underwriter believes may be sold without causing such material adverse effect. If the number of Registrable Shares to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be

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included, then, (A) in the case of a Registration Statement whose filing was initiated by the Company, the Registrable Shares to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the Stockholders who have requested registration on a pro rata basis based on the number of shares included in the request for registration and (B) in the case of a Registration Statement whose filing was initiated by a selling stockholder, the Registrable Shares to be included in such underwriting shall be allocated among the Stockholders who have requested registration on a pro rata basis based on the number of shares included in the request for registration. The Company (in the case of a Registration Statement whose filing was initiated by a selling stockholder) and any other Company stockholders (in the case of a Registration Statement whose filing was initiated by the Company or by a selling stockholder) shall have no right to participate in that event, without the consent of the holders of at least a majority of the Registrable Shares participating in such offering, unless otherwise approved in accordance with
Section 1.11.

1.5. Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to use best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall:

(a) Filing. Prepare and file with the Commission, as promptly as practicable, a Registration Statement with respect to such securities and use its best efforts to cause such Registration Statement to become and remain continuously effective until the earlier to occur of 180 days from the effective date or the distribution described in the Registration Statement has been completed; provided that before filing a Registration Statement or prospectus or any amendments or supplements thereto, the Company shall furnish copies thereof to the holders' counsel and, in an underwritten offering, to counsel for the underwriters. A registration pursuant to Section 1.3 shall be effected pursuant to Rule 415 (or any similar provision then in force) under the Securities Act, to the extent the Company is eligible therefor, if the manner of distribution contemplated by the holders participating in such registration shall include an offering on a delayed or continuous basis and, notwithstanding anything to the contrary in this Section 1.5(a), the Company shall use its best efforts to cause such Registration Statement to become and remain continuously effective until the earlier to occur of 365 days from the effective date or the distribution described in the Registration Statement has been completed;

(b) Amendments. As expeditiously as possible prepare and file with the Commission any amendments and supplements to the Registration Statement and the prospectus included in the Registration Statement as may be necessary to keep the Registration Statement effective as set forth in 1.5(a);

(c) Furnish Copies. As expeditiously as possible furnish to each selling Stockholder and to any underwriters participating in such registration such reasonable numbers of copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the selling Stockholder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Shares owned by the selling Stockholder. The Company shall furnish to each holder participating in such registration drafts of the Registration Statement and the prospectus and each

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amendment thereof or supplement thereto for its timely review prior to the filing thereof with the Commission;

(d) Blue Sky Registration. As expeditiously as possible use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities or blue sky laws of such states as the selling Stockholders shall reasonably request, and do any and all other acts and things that may be necessary or desirable to enable the selling Stockholders to consummate the public sale or other disposition within such states of the Registrable Shares owned by the selling Stockholders; provided, however, that the Company shall not be required in connection with this paragraph (d) to qualify as a foreign corporation in any jurisdiction, execute a general consent to service of process in any jurisdiction, or subject itself to taxation in any jurisdiction;

(e) List on Exchange. Use best efforts to cause the Registrable Shares to be listed on the principal securities exchange on which similar securities of the Company are then listed, if any, if the listing of such shares is then permitted under the rules of such exchange, provide a transfer agent, and register a CUSIP number for all Registrable Shares not later than the effective date of the Registration Statement;

(f) Customary Agreements. Enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Stockholders may reasonably request in order to expedite or facilitate the disposition of such Registrable Shares;

(g) Inspection. Subject to appropriate arrangements concerning confidentiality, make available for inspection by the Stockholders, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company as shall be necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information requested by any such Inspector in connection with such Registration Statement;

(h) Securities Act Compliance. Otherwise comply with all applicable rules and regulations of the Commission, and make available to the Stockholders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;

(i) Road Shows. At the request and expense (if the Company is not otherwise a participant in the offering) of any stockholder or underwriter participating in any disposition pursuant to a Registration Statement, cause its officers to use their reasonable best efforts to support the marketing of the Registrable Shares covered by the Registration Statement (including, without limitation, the participation in "road shows," at the request of the managing underwriter) taking into account the Company's business needs;

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(j) Amendments. Notify each selling Stockholder promptly of any request by the Commission for the amending or supplementing of such Registration Statement or prospectus or for additional information; prepare and file with the Commission, promptly upon the request of any selling Stockholder, any amendments or supplements to such Registration Statement or prospectus which, in the opinion of counsel for such holders (and concurred in by the Company and counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Shares by such holder; and prepare and promptly file with the Commission and promptly notify each selling Stockholder of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. The Company may determine to delay filing of any such amendment or supplement, and request suspension by a selling Stockholder of offers and sales pursuant to the prospectus under the circumstances contemplated by Section 1.3(e) hereof;

(k) Suspension of Effectiveness. Advise each selling Stockholder, promptly after it receives notice or obtains knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;

(l) Compliance. Not file any amendment or supplement to such Registration Statement or prospectus to which a majority in interest of the selling Stockholders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and

(m) Opinions. At the request of any selling Stockholder, furnish:
(i) an opinion, dated as of the closing date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters (in the case of an underwritten offering) or such holder or holders (in the case of an offering that is not underwritten) may reasonably request; and (ii) letters dated as of the effective date of the Registration Statement and as of the closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request.

If the Company has delivered preliminary or final prospectuses to the selling Stockholders and after having done so the prospectus is amended to comply with the requirements of the Securities Act, the Company shall promptly notify the selling Stockholders and, if requested, the selling

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Stockholders shall immediately cease making offers of Registrable Shares and return all prospectuses to the Company. The Company shall promptly provide the selling Stockholders with revised prospectuses and, following receipt of the revised prospectuses and compliance with any related requirements of the Securities Act and any applicable state securities or blue sky laws, the selling Stockholders shall be free to resume making offers of the Registrable Shares.

1.6. Allocation of Expenses. (a) The Company will pay all Registration Expenses of all registrations under this Agreement; provided, however, that if a registration is withdrawn at the request of the Stockholders requesting such registration (other than as a result of information concerning the business or financial condition of the Company which is made known to the Stockholders after the date on which such registration was requested) and if the requesting Stockholders elect not to have such registration counted as a registration requested under Section 1.3, the requesting Stockholders shall pay the Registration Expenses of such registration pro rata in accordance with the number of their Registrable Shares included in such registration. For purposes of this Section 1.6, the term "Registration Expenses" shall mean all expenses incurred by the Company in complying with this Section 1, including, without limitation, all registration and filing fees, exchange listing fees, printing expenses, fees of accountants for the Company, fees and disbursements of counsel for the Company, the fees and expenses of one counsel selected by the selling Stockholders to represent the selling Stockholders (not to exceed $50,000 with respect to any one registration and $200,000 in the aggregate for all registrations pursuant to this Section 1), state securities or blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration, but excluding underwriting discounts, selling commissions or any other brokerage or underwriting fees and expenses, and the fees and expenses of the selling Stockholders' own counsel (other than the one counsel selected to represent all selling Stockholders) or other advisors.

(b) Notwithstanding the foregoing, the provisions of this Section 1.6 shall be deemed amended to the extent necessary to cause these expense provisions to comply with "blue sky" laws of each state or the securities laws of any other jurisdiction in the United States and its territories in which the offering is made.

1.7. Indemnification and Contribution.

(a) By Company. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the seller of such Registrable Shares, and each stockholder of the Company, and each officer, director and partner of such seller and stockholder, each underwriter of such Registrable Shares, and each other person, if any, who controls such seller, stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (each an "Indemnified Person") against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act, the Exchange Act, state securities or blue sky laws, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus, or final prospectus contained in the Registration Statement, or any amendment or supplement to such

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Registration Statement, or arise out of or are based upon the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Company will reimburse such Indemnified Person for any legal or any other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon (i) any untrue statement or omission made in such Registration Statement, preliminary prospectus, or prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Company, in writing, by or on behalf of such Indemnified Person specifically for use in the preparation thereof or (ii) the failure of such Indemnified Person to deliver copies of the prospectus in the manner required by the Securities Act.

(b) By Seller. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Agreement, each seller of Registrable Shares, severally (and not jointly or jointly and severally), will indemnify and hold harmless the Company, each of its directors and officers, each underwriter, if any, each person, if any, who controls the Company or any such underwriter within the meaning of the Securities Act or the Exchange Act, each other such stockholder and each of their officers, directors and partners and each person controlling such stockholder, against any losses, claims, damages or liabilities, joint or several, to which the Company, such directors and officers, underwriter, controlling person or such stockholder may become subject under the Securities Act, Exchange Act, state securities or blue sky laws, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus, or final prospectus contained in the Registration Statement, or any amendment or supplement to the Registration Statement, or arise out of or are based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such seller, specifically for use in connection with the preparation of such Registration Statement, prospectus, amendment, or supplement; provided, however, that the sellers of Registrable Shares will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or prospectus to the extent that prior to the filing of such Registration Statement, preliminary prospectus or final prospectus such seller has furnished to the Company information expressly for use in such Registration Statement or prospectus, or amendment thereof or supplement thereto, which corrected or made not misleading information previously furnished to the Company and provided further that the obligations of a Stockholder hereunder shall be limited to an amount equal to the net proceeds to the Stockholder arising from the sale of Registrable Shares as contemplated herein.

(c) Notice. Each party entitled to indemnification under this
Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") within a reasonable period of time after such Indemnified Party has actual

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knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, but the omission to so notify the Indemnifying Party will not relieve it from any liability which it may have to any Indemnified Party otherwise than hereunder; provided, however, that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be withheld unreasonably). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall pay such expense if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party in the defense of any such claim or litigation shall, except with the prior written consent of each Indemnified Party (which consent shall not be unreasonably withheld), consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall consent to entry of any judgment or settle such claim or litigation without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld).

(d) Contribution. If the indemnification provided for in this
Section 1.7 from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and the Indemnified Party, on the other, in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations, or (ii) if the allocation provided by clause (i) above is not permitted by applicable Law or if the allocation provided in this clause (ii) provides a greater amount to the Indemnified Party than clause (i) above, in such proportion as shall be appropriate to reflect not only the relative fault but also the relative benefits received by the Indemnifying Party and the Indemnified Party from the offering of the securities covered by such Registration Statement as well as any other equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any fees, charges or expenses (including fees, disbursements and other charges of legal counsel) reasonably incurred by such party in connection with any investigation or proceeding.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 1.7(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the

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immediately preceding paragraph. Notwithstanding the provisions of this Section 1.7(d), a holder of Registrable Shares shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such holder in the offering to which such Registration Statement relates exceeds the amount of any damages that such holder has otherwise been required to pay. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person. No person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such person's consent, which consent shall not be unreasonably withheld.

1.8. Indemnification Payments. The indemnification and contribution required by Section 1.7 will be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred; provided, however, that if an Indemnified Party is adjudged to be not entitled to such payments in a final non-appealable judgment of a court of competent jurisdiction, it shall promptly return such payments to the Indemnifying Party.

1.9. Information by Holder. Each Stockholder whose Registrable Shares are included in any registration shall furnish to the Company such information regarding such Stockholder and the distribution proposed by such Stockholder as the Company may reasonably request in writing if it is required in connection with any registration, qualification or compliance referred to in this Section 1.

1.10. "Lock-Up" Agreement. Each Stockholder, if requested by the underwriter, of Common Stock or other securities of the Company, shall agree not to sell or otherwise transfer or dispose of any Registrable Shares or other securities of the Company held by such Stockholder for a specified period of time (not to exceed 180 days) following the effective date of a Registration Statement; provided, however, that:

(a) Application. Such agreement shall only apply to the first Registration Statement filed for an underwritten public offering by the Company;

(b) Others Covered. Such agreement shall only apply if all Stockholders, any holders of more than 5% of the then outstanding Common Stock on an as converted basis, and all officers and directors of the Company, enter into similar agreements; and

(c) Not Apply to Registrable Shares. Such agreement shall not apply to (i) any Registrable Shares (or other securities of the Company) held by such Stockholder if they are to be included in the Registration Statement and (ii) any transfers of Registrable Shares or other securities of the Company by any Maveron Entity, Putnam or any Forstmann Little Entity to their respective partners, limited partners, members, investors or other affiliates (including without limitation affiliated investment funds or accounts), so long as the transferee assumes in writing the obligations of such Stockholder under this Agreement and agrees to be treated as a "Stockholder" for all purposes of this Agreement.

14

Such agreement shall be in writing in a form satisfactory to the Company and such underwriter and shall contain commercially standard terms and exceptions for such underwritten offerings. The Company may impose stop transfer instructions with respect to the Registrable Shares or other securities subject to the foregoing restriction until the end of the lock-up period.

1.11. Limitations on Subsequent Registration Rights; Existing Pari Passu Rights. From and after the date hereof until the first to occur of (i) the third anniversary of such date and (ii) the Qualified Public Offering, the Company shall not, without the prior written consent of the holders of a majority of the Registrable Shares then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder demand or incidental registration rights containing cut-back provisions that are by their terms not subordinate to the registration rights granted in this Section 1. The Investors acknowledge and agree to the pari passu participation with Stockholders hereunder by holders of registration rights granted by the Company to (i) NCS Pearson, Inc. under that certain Registration Rights Agreement dated June 16, 1998, as amended as of April 20, 2000, February 21, 2002 and the date hereof and (ii) Legg Mason Wood Walker, Incorporated under that certain Warrant dated June 16, 1998, and amended as of April 20, 2000, February 21, 2002, and the date hereof and under that certain warrant dated May 11, 2000, as amended as of February 21, 2002 and the date hereof.

1.12. Rule 144 Requirements. After the earliest of (i) the closing of the sale of securities of the Company pursuant to a Registration Statement, or (ii) the registration by the Company of a class of securities under Section 12 of the Exchange Act, the Company agrees to:

(a) Public Information. At all times, make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act;

(b) Reports. File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and

(c) Compliance Statement. Furnish to any holder of Registrable Shares upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days following the closing of the first sale of securities by the Company pursuant to a Registration Statement), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company and not reasonably publicly available as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any such securities without registration.

1.13. Transfer of Registration Rights. The registration rights set forth in this Section 1 may be transferred and assigned by a Stockholder to any transferee of Registrable Shares; provided that the Company is given written notice prior to such transfer, stating the name and address of the transferee and identifying the securities with respect to which such registration rights are being transferred; and provided further the transferee assumes in writing the

15

obligations of such Stockholder under this Agreement and agrees to be treated as a "Stockholder" for all purposes of this Agreement.

1.14. Notice to Putnam. With respect to any Registration Statement that covers Registrable Shares owned by Putnam, the Company shall provide same-day notice to Putnam of (i) the filing of such Registration Statement, (ii) the filing of an amendment to such Registration Statement, and (iii) receipt of notice of a stop order by the Commission suspending the effectiveness of such Registration Statement; provided, however, that the issuance of a same-day press release shall constitute same-day notice to Putnam for purposes of this Section 1.14.

2. PRE-EMPTIVE RIGHT.

2.1. Pre-Emptive Right. The Company hereby grants to each Investor (collectively referred to as the "Pre-Emptive Purchasers") the right to purchase a pro rata portion of New Securities (as defined in Section 2.2) which the Company may, from time to time, propose to sell and issue after the date hereof (the "Pre-Emptive Right"). Such Pre-Emptive Purchaser's pro rata share for purposes of this Pre-Emptive Right is the ratio of the number of shares of Common Stock owned by such Pre-Emptive Purchaser (on an as-converted basis) immediately prior to the issuance of New Securities, to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming full conversion of all securities and full exercise of all outstanding rights, options and warrants to acquire Common Stock of the Company. Each Pre-Emptive Purchaser exercising their portion of the Pre-Emptive Right in full (an "Exercising Pre-Emptive Purchaser") shall have a right of over-allotment such that if any other Pre-Emptive Purchaser fails to exercise its right hereunder to purchase its pro rata share of New Securities (a "Non-Purchasing Pre-Emptive Purchaser"), such Exercising Pre-Emptive Purchaser may purchase such portion, on a pro rata basis, by giving written notice to the Company within ten (10) calendar days from the date that the Company provides written notice of the amount of New Securities such Non-Purchasing Pre-Emptive Purchaser has failed to exercise its Pre-Emptive Right hereunder. This Pre-Emptive Right shall be subject to the following provisions of this Section 2.

2.2. New Securities. "New Securities" shall mean any capital stock of the Company whether now authorized or not and any rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities purchased under the Class G Purchase Agreement or issued pursuant to Exchange Agreement; (ii) securities issuable upon conversion of the securities purchased under the Class G Purchase Agreement, conversion of the securities issued pursuant to the Exchange Agreement or conversion of shares of any other class of preferred stock outstanding at the date of this Agreement to the extent set forth on Schedule 2.4 of the Class G Purchase Agreement; (iii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own more than fifty percent (50%) of the voting power of such business entity or business segment of any such entity;
(iv) any borrowing, direct or indirect, from financial institutions or other persons by the Company, whether or not currently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowing does not have any

16

equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (v) shares of Common Stock awarded, or issued upon the exercise hereafter of options granted, pursuant to employee, director and consultant benefit plans, agreements or arrangements adopted by the Company, and the grant of such options themselves, if either (A) set forth on Schedule 2.4 of the Class G Purchase Agreement or (B) issuance of such securities is approved by affirmative vote of the Board of Directors, or the compensation committee thereof; (vi) securities issued to vendors or customers or to other persons in similar commercial situations with the Company if such issuance is approved by the Board of Directors and not, in the aggregate, in excess of two percent of the outstanding equity of the Company on a fully diluted basis calculated on the date such securities are issued;
(vii) securities issued in a public offering pursuant to a registration under the Securities Act; (viii) securities issued in connection with any stock split, stock dividend or recapitalization of the Company; (ix) shares of Common Stock issued upon exercise of any warrant outstanding at the date of this Agreement to the extent set forth on Schedule 2.4 of the Class G Purchase Agreement; (x) securities issued to the employee stock ownership plan of the Company; provided such contribution is approved by the compensation committee of the Board of Directors of the Company and does not exceed that number of shares the fair market value of which is three percent (3%) of annual compensation (as measured by applicable benefit plan rules); or (xi) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (x) above.

2.3. Notice. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Pre-Emptive Purchaser written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each such Pre-Emptive Purchaser shall have 20 calendar days after any such notice is mailed or delivered to agree to purchase such Pre-Emptive Purchaser's pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. Each such holder shall have a right of over allotment such that if any other holder fails to exercise his, her or its right hereunder to purchase the holder's total pro rata portion of the New Securities, such holder may purchase such portion, on a pro rata basis, by giving written notice to the Company within 10 days after the date that the Company provides written notice to the Exercising Pre-Emptive Purchaser of the amount of New Securities with respect to which the Non-Purchasing Pre-Emptive Purchasers have failed to exercise their rights hereunder.

2.4. Selling Period. In the event any Pre-Emptive Purchaser or Exercising Pre-Emptive Purchaser fails to exercise fully the Pre-Emptive Right within said 20 day period and after the expiration of the 10 day period for the exercise of the over-allotment provisions of Section 2.1, the Company shall have 90 calendar days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within 90 calendar days from the date of said agreement) to sell the New Securities respecting which any Pre-Emptive Purchasers' or Exercising Pre-Emptive Purchasers' Pre-Emptive Right option set forth in this Section 2 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to the Pre-Emptive Purchasers pursuant to Section 2.3. In the event the Company has not sold the New Securities within said 90

17

day period or entered into an agreement to sell the New Securities in accordance with the foregoing within said 90 day period from the date of said agreement, the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Pre-Emptive Purchasers in the manner provided in Section 2.3 above.

2.5. Termination of Pre-Emptive Right. The Pre-Emptive Right granted under this Agreement shall expire upon, and shall not be applicable to, the first sale of securities of the Company to the public effected pursuant to a Qualified Public Offering.

2.6. Transfer of Pre-Emptive Right. The Pre-Emptive Right set forth in this Section 2 may be transferred and assigned (i) by a Pre-Emptive Purchaser to a transferee of not less than 50% of the Conversion Shares or 50% of the Shares or any combination thereof (in each case, as currently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like) held by a Pre-Emptive Purchaser as of the date hereof or (ii) by Putnam, any Maveron Entity or any Forstmann Little Entity to any of their respective affiliated investment funds, provided that in either case the Company is given written notice prior to said transfer, stating the name and address of the transferee and identifying the securities with respect to which such pre-emptive rights are being transferred, and, provided further, that the transferee assumes in writing the obligations of such Stockholder under this Agreement and agrees to be treated as a "Stockholder" for all purposes of this Agreement.

3. REPORTING; INSPECTION; USE OF PROCEEDS.

3.1. Inspection. The Company covenants and agrees that the Company will permit (i) Equity-VI, so long as Equity-VI is the beneficial owner of no less than 5% of the outstanding capital stock of the Company on a fully diluted basis and (ii) each Investor holding not less than 337,230 shares of Class G Preferred (or shares of Common Stock acquired upon conversion thereof) (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) (a "Major Shareholder") and any of its partners, officers or employees, or any outside representatives designated by such Major Shareholder and reasonably satisfactory to the Company, to visit and inspect at such Major Shareholder's expense any of the properties of the Company or its subsidiaries, including their books and records (and to make photocopies thereof or make extracts therefrom), and to discuss their affairs, finances, and accounts with their officers, lawyers and accountants, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times and intervals as such Major Shareholder may reasonably request. For the purposes of determining if Putnam, any Maveron Entity or any Forstmann Little Entity is a Major Shareholder, all shares of capital stock of the Company held by their respective affiliated investment funds shall be aggregated together.

3.2. Preparation and Approval of Budgets. The Company covenants and agrees that at least 15 days prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss projections itemized in such detail as the Board of Directors may reasonably request. Each annual plan shall be modified as often as is necessary in

18

the judgment of the Board of Directors to reflect changes required as a result of operating results and other events that occur, or may be reasonably expected to occur, during the year covered by the annual plan, and copies of each such modification shall be submitted to the Board of Directors. The Company will, simultaneously with the submission thereof to the Board of Directors, deliver a copy of each such annual plan and modification thereof to each Major Shareholder.

3.3. Application of Proceeds. The Company covenants and agrees that, unless otherwise approved by 66 2/3% of the shares of Class G Preferred, the net proceeds received by the Company from the sale of the Class G Preferred Shares and Class F Preferred Shares shall be used as set forth in Schedule 2 hereto. The Company covenants and agrees that, pending use of the proceeds in the business, they shall be invested in accordance with the Company's investment policy. In addition, each Investor consents and agrees that the proceeds of the sale of the Class G Preferred Shares or other funds of the Company may be used in satisfaction of any obligation of the Company to any holder of shares arising under the Minnesota Business Corporation Act, Sections 471 and 473, as a result of the transactions contemplated by the Class G Purchase Agreement and related amendments to the certificate of designation of the Class E Preferred.

4. MISCELLANEOUS.

4.1. Waivers and Amendments. With the written consent of the Company and the record holders of a majority of the Conversion Shares, (i) the obligations of the Company under this Agreement and the rights of the holders of the Conversion Shares under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely) or (ii) this Agreement may be amended, changed, waived, discharged or terminated. Notwithstanding the foregoing, if any amendment or waiver of any provision of this Agreement would uniquely affect any Stockholder, then such amendment or waiver shall require a vote of the holders of a majority of the Conversion Shares, and the Conversion Shares held by the Stockholders that would be so affected. Neither this Agreement nor any provisions hereof may be amended, changed, waived, discharged or terminated orally, but only by a signed statement in writing.

4.2. Confidentiality. Each Stockholder agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information about the Company or Capella University, Inc. (the "School") that such Stockholder obtains from the Company or the School pursuant to this Agreement (including the diligence in connection with, and negotiation of, this Agreement) unless (a) such information is or becomes publicly available other than as a result of a disclosure in breach of this Agreement by the Stockholder or anyone to whom the Stockholder transmitted such confidential information, (b) is or was known by the Stockholder on a non-confidential basis from a source other than the Company or the School who is not known by the Stockholder to be bound by a confidentiality agreement or other obligation of secrecy with respect to such confidential information or (c) is or was available to the Stockholder on a non-confidential basis prior to its disclosure to such Stockholder by the Company or the School. Notwithstanding the foregoing, information that is already in the public domain will not constitute confidential, proprietary or secret information with respect to any Stockholder for purposes of this Agreement. In addition, if, in the Stockholder's good faith

19

judgment, the Stockholder is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand or similar process), or must, in order to defend against or assert a claim in connection with this Agreement or the Transaction Documents (as defined in the Class E Purchase Agreement, the Class F Purchase Agreement, the Class G Purchase Agreement and the Exchange Agreement), disclose any confidential information, the Stockholder agrees to provide the Company with prompt written notice so that the Company may seek, at its expense, a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement and, in the event that such protective order or other remedy is not timely obtained, or that the Company waives compliance with the provisions of this Agreement, the Stockholder may, without liability under this Section 4.2, furnish that portion of the confidential information which is, in the Stockholder's good faith judgment, required for such purpose and will exercise its best efforts, at the Company's expense, to obtain reliable assurance that confidential treatment will be accorded the confidential information. Notwithstanding the foregoing, the Maveron Entities may disclose to their limited partners summary financial information and a narrative description of the Company, provided that any such disclosing Maveron Entity instructs its limited partners that the information is confidential and may not be shared with any third party without the consent of the Maveron Entities and the Company. The Maveron Entities further agree to confer with the Company in good faith regarding the content of the Maveron Entities' updates to their limited partners regarding the Company before such updates are mailed. Each Stockholder acknowledges its responsibilities under federal and state securities laws with respect to trading in securities while aware of material non-public information obtained from the Company and with respect to providing such information to other persons who purchase or sell securities of the Company. The provisions of this Section 4.2 shall survive the termination of this Agreement and shall terminate with respect to any Stockholder on the date which is two years after the date on which such Stockholder no longer holds any shares of capital stock of the Company.

4.3. Governing Law. This Agreement shall be governed in all respects by the laws of the State of Minnesota, without regard to the conflict-of-laws rules and principles of such state.

4.4. Waiver of Jury Trial. Each party irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

4.5. Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects addressed herein.

4.6. Notices. All notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, electronic mail, overnight delivery service, or U.S. mail (in which event it may be mailed by first-class, certified or registered, postage prepaid), addressed (a) if to the Stockholders, at such address as the Stockholders shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such securities who has so furnished an address to the Company, (b) if to Putnam,

20

at Putnam Investment Management, One Post Office Square, Boston, Massachusetts 02109, attention Michael DeFao and Donna Allouise, or such other address as Putnam shall have furnished to the Company in writing, or (c) if to the Company, at 222 South Ninth Street, 20th Floor, Minneapolis, Minnesota 55402-3389, or at such other address as the Company shall have furnished to the each Stockholder in writing. Notwithstanding the foregoing, all notices and communications to addresses outside the United States shall be given by telecopier and confirmed in writing sent by overnight or two-day courier service.

4.7. Titles and Subtitles. The titles of the sections and paragraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

4.8. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

4.9. Assignment. Subject to the limitations set forth in Section 1.13, Section 2.6 and Section 3, this Agreement will bind and inure to the benefit of any subsequent holders of Shares or Conversion Shares (in which event, and upon execution and delivery of this Agreement, a transferee shall be deemed an Investor and/or Stockholder, as the case may be, for purposes of this Agreement) and successors and assigns of the Company.

4.10. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Class G Purchase Agreement).

4.11. Massachusetts Business Trusts. A copy of the Agreement and Declaration of Trust of each Putnam fund or series investment company (each, a "Fund") that is a Massachusetts business trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of such Fund by the Trustees of the relevant Fund as Trustees, and not individually, and that the obligations of this Agreement are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of such Fund.

4.12. Class E Preferred and Class G Preferred Consent and Waiver. The Prior Investors, as parties to the Prior Investor Rights Agreement, hereby consent to the Company's offering, sale and issue of the Class G Preferred Shares pursuant to the Class G Purchase Agreement and the Company's issuance of shares of Class G Preferred in exchange for shares of Class F Preferred pursuant to the Exchange Agreement. The Prior Investors do hereby waive any and all rights to purchase Class G Preferred under section 2 of the Prior Investor Rights Agreement in connection with the Company's offering, sale and issue of the Class G Preferred Shares pursuant to the Class G Purchase Agreement and the Company's issuance of shares of Class G Preferred in exchange for shares of Class F Preferred pursuant to the Exchange Agreement. Equity-VI and SmartForce plc do hereby acknowledge that the aggregate fair market value of the Class F Preferred exchanged for the Class G Preferred in accordance with the Exchange Agreement is $16,692,101.47 (the aggregate amount paid for the Class F Preferred sold pursuant to the Class F Purchase Agreement) for purposes of calculating the reduction in the

21

Class E Conversion Price (as defined in the Class E Convertible Preferred Stock Certificate of Designation) pursuant to Section 6(c)(ii)of the Class E Convertible Preferred Stock Certificate of Designation as a result of the sale of the Class G Preferred under the Class G Purchase Agreement and the issuance of the Class G Preferred under the Exchange Agreement.

4.13. Individual Retirement Accounts. Joseph Gaylord agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 ("Gaylord IRA") and any other party necessary, to perform all of the obligations of Gaylord IRA under this Agreement. Any notice given to Gaylord IRA under this Agreement shall also be given to Joseph Gaylord, c/o Capella Education Company, 222 South Ninth Street, 20th Floor, Minneapolis, Minnesota 55402, telecopy: (612) 852-5930.

Stephen Weiss agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 ("Weiss IRA") and any other party necessary, to perform all of the obligations of Weiss IRA under this Agreement. Any notice given to Weiss IRA under this Agreement shall also be given to: Stephen Weiss, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 852-5930.

[The remainder of this page has been left blank intentionally.


Signature page follows.]

22

IN WITNESS WHEREOF, the parties have executed this Agreement effective the date first above written.

COMPANY:                             CAPELLA EDUCATION COMPANY

                                     By: /s/ Stephen G. Shank
                                         --------------------------------
                                             Its Chairman and CEO

INVESTORS:                           PUTNAM OTC AND EMERGING
                                     GROWTH FUND

                                     By Putnam Investment Management, LLC

                                     By: /s/
                                         --------------------------------
                                              Name:
                                              Title:

                                     TH LEE, PUTNAM INVESTMENT TRUST - TH LEE,
                                     PUTNAM EMERGING OPPORTUNITIES PORTFOLIO

                                     By TH Lee, Putnam Capital Management, LLC

                                     By: /s/
                                         --------------------------------
                                              Name:
                                              Title:

                                     FORSTMANN LITTLE & CO. EQUITY
                                     PARTNERSHIP-VI, L.P.

                                     By: FLC XXXII Partnership, L.P.
                                             its general partner

                                     By: /s/
                                         -------------------------------
                                                A General Partner

                                       23

                                            FORSTMANN LITTLE & CO. EQUITY
                                            PARTNERSHIP-VII, L.P.

                                            By: FLC XXXII Partnership, L.P.
                                                its general partner

                                            By: /s/
                                                --------------------------------
                                                A General Partner

                                            FORSTMANN LITTLE & CO. SUBORDINATED
                                            DEPARTMENT AND EQUITY MANAGEMENT
                                            BUYOUT PARTNERSHIP-VIII, L.P.

                                            By: FLC XXXIII Partnership, L.P.
                                                its general partner

                                            By: /s/
                                                --------------------------------
                                                A General Partner

                                            SMARTFORCE PLC

                                            By: /s/
                                                --------------------------------
                                                Its: CFO

                                            /s/ Joshua Lewis
                                            ------------------------------------
                                            JOSHUA LEWIS

                                            /s/ Russell Gullotti
                                            ------------------------------------
                                            RUSSELL GULLOTTI

                                            /s/ Stephen G. Shank
                                            ------------------------------------
                                            STEPHEN G. SHANK

                                            /s/ Stephen J. Weiss
                                            ------------------------------------
                                            STEPHEN J. WEISS

                                       24

                                            /s/ Elizabeth Rausch
                                            ------------------------------------
                                            ELIZABETH RAUSCH

                                            /s/ Michael Offerman
                                            ------------------------------------
                                            MICHAEL OFFERMAN

                                            /s/ Paul Schroeder
                                            ------------------------------------
                                            PAUL SCHROEDER

                                            /s/ Joseph Gaylord
                                            ------------------------------------
                                            JOSEPH GAYLORD

                                            DRW VENTURE PARTNERS LP

                                            By RBC DAIN RAUSCHER CORP.
                                               Its: General Partner

                                            By: /s/ Mary Zimmer
                                                --------------------------------
                                                    Mary Zimmer
                                                    Its: Director of Finance and
                                                         Administration,
                                                     RBC CMS

                                            THINKEQUITY INVESTMENT
                                            PARTNERS LLC

                                            By: ThinkEquity Holdings LLC
                                                    Its: Manager

                                            By: /s/ Randy Mason
                                                --------------------------------
                                                     Name: Randy Mason
                                                     Its: Representative of the
                                                          Board of Managers

25

EXHIBIT 4.7

USB PIPER JAFFRAY AS CUSTODIAN
FBO STEPHEN J. WEISS IRA
ACCOUNT #82694368

By: Michael D. Duffy

Michael D. Duffy Its: Managing Director

USB PIPER JAFFRAY AS CUSTODIAN
FBO JOSEPH GAYLORD IRA
ACCOUNT #36086299

By: Michael D. Duffy

Michael D. Duffy Its: Managing Director

MAVERON EQUITY PARTNERS 2000, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    --------------------------------
        Dan Levitan
        Its: Manager

MAVERON EQUITY PARTNERS 2000-B, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    --------------------------------
        Dan Levitan
        Its: Manager

MEP 2000 ASSOCIATES LLC

By: /s/ Dan Levitan
    --------------------------------
        Dan Levitan
        Its: Manager

/c/ David Smith
DAVID SMITH

26

SCHEDULE 1

INVESTORS

Forstmann Little & Co. Equity Partnership-VI, L.P. Forstmann Little & Co. Equity Partnership - VII, L.P. Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P.

Putnam OTC and Emerging Growth Fund

TH LEE, Putnam Investment Trust - TH LEE, Putnam Emerging Opportunities Portfolio SmartForce PLC Joshua Lewis Russell Gullotti Stephen G. Shank Stephen J. Weiss Elizabeth Rausch Michael Offerman Paul Schroeder USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 ThinkEquity Investment Partners LLC DRW Venture Partners LP Maveron Equity Partners 2000, L.P.

Maveron Equity Partners 2000-B, L.P.
MEP 2000 Associates LLC
David Smith


SCHEDULE 2

USE OF PROCEEDS

Business development and general corporate purposes $24,292,089.89


EXHIBIT 4.8

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS COVERING SUCH SECURITY OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS SECURITY (SATISFACTORY TO THE COMPANY AND ITS LEGAL COUNSEL) STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, PLEDGE OR DISTRIBUTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ALL APPLICABLE STATE SECURITIES LAWS.

WARRANT
TO PURCHASE
COMMON SHARES
OF
LEARNING VENTURES INTERNATIONAL, INC.

FOR VALUE RECEIVED, Legg Mason Wood Walker, Incorporated, a Maryland corporation, is entitled to subscribe for and purchase from Learning Ventures International, Inc., a Minnesota corporation (the "Company"), up to One Hundred Thirty One Thousand Two Hundred Thirty Eight (131.238) duly authorized, fully paid and nonassessable Common Shares of the Company, $.10 par value per share, or such greater or lesser number of such shares as may be determined by application of the anti-dilution provisions of this warrant, at the price of Five and 40/100 Dollars ($5.40) per share, subject to adjustments as noted below (the "Warrant Exercise Price").

This warrant is subject to the following provisions, terms and conditions:

1. Expiration. This warrant shall expire on June 16, 2005. Subject to the foregoing, this warrant may be exercised, in whole or in part, by the holder hereof at any time or from time to time prior to the expiration hereof.

2. Exercise. The rights represented by this warrant may be exercised by the holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this warrant (properly endorsed if required) at the principal office of the Company and upon payment to it by either (i) cash, certified check or bank draft of the purchase price for the shares to be purchased, or (ii) delivery of certificates for the Company's Common Shares already owned by the holder having a fair market value equal to the purchase price for the shares to be purchased. "Fair market value" per Common Share on any date shall be (A) the average of the daily closing prices of the Common Shares for the thirty (30) consecutive trading days preceding such date on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, (B) if not so listed or admitted, the average of the medians of the highest reported bid and lowest reported asked quotations for the Common shares for each trading day during such period as furnished by the National Association of Securities Dealers, Inc. or its successor, or, (C) if not so listed, admitted or quoted, as determined in good faith by the Company's Board of Directors using customary valuation methods, provided that no


representative, delegate or agent of the holder on the Company's Board of Directors shall be entitled to vote on the determination of such fair market value, and provided further that the Board of Directors shall not be required to retain outside advisors in making its determination. The shares to be purchased shall be deemed to be issued as of the close of business on the date on which this warrant has been exercised by payment to the Company of the Warrant Exercise Price. Certificates for the shares so purchased, bearing the restrictive legend set forth at the beginning of this warrant, shall be delivered to the holder within ten (10) days after the rights represented by this warrant shall have been so exercised, and, unless this warrant has expired, a new warrant representing the number of shares, if any, with respect to which this warrant has not been exercised shall also be delivered to the holder hereof within such time. No fractional shares shall be issued upon the exercise of this warrant, but in lieu of any such fractional share the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the current fair market value per Common Share.

3. Right to Convert Warrant. The holder of this warrant shall have the right to require the Company to convert this warrant (the "Conversion Right"), in whole or in part, at any time prior to its expiration, into the Company's Common Shares as provided for in this Section 3. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Warrant Exercise Price) that number of the Company's Common Shares equal to the quotient obtained by dividing (i) the value of the warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Warrant Exercise Price for the shares subject to the warrant in effect immediately prior to the exercise of the Conversion Right from the aggregate fair market value of the shares subject to the warrant immediately prior to the exercise of the Conversion Right) by (ii) the fair market value of one Common Share of the Company immediately prior to the exercise of the Conversion Right and multiplying the quotient so obtained by a fraction equal to the portion of this Warrant which the holder desires to convert. For purposes hereof, "fair market value" per Common Share shall be determined as provided in Section 2. The Conversion Right may be exercised by the holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this warrant (properly endorsed if required) at the principal office of the Company. The shares to be issued upon exercise of the Conversion Right shall be deemed to be issued as of the close of business on the date on which the Conversion Right has been exercised by written notice and surrender of this warrant to the Company. Certificates for the shares so issued, bearing the restrictive legend set forth at the beginning of this warrant, together with cash in lieu of any fractional share shall be delivered to the holder within ten (10) days after the Conversion Right shall have been so exercised, and, unless this warrant has expired, a new warrant representing the number of shares, if any, with respect to which the Conversion Right has not been exercised shall also be delivered to the holder hereof within such time. No fractional shares shall be issued upon the exercise of the Conversion Right, but in lieu of any such fractional share the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the current fair market value per Common Share.

4. Covenants of the Company. The Company covenants and agrees that all shares that may be issued upon the exercise of the rights represented by this warrant shall, upon issuance, be duly authorized and issued, fully paid and nonassessable shares. The Company further covenants and agrees that during the period within which the rights represented by this warrant may be exercised, the Company will at all times have authorized, and reserved for the

2

purpose of issue or transfer upon exercise of the subscription rights evidenced by this warrant, a sufficient number of its Common Shares to provide for the exercise of the rights represented by this warrant, and will not permit the par value, if any of its Common Shares to exceed the Warrant Exercise Price. If the Company shall list its Common Shares on any securities exchange it will, at its expense, list, or obtain approval for listing upon issuance of, the Common Shares issuable under this warrant. The Company shall similarly list, or obtain approval for listing upon issuance of, any other security issuable under this warrant if such other security has been listed on any securities exchange.

5. Adjustments to Warrant Exercise Price. The Warrant Exercise Price shall be subject to adjustment from time to time as hereinafter provided in this
Section 5:

(a) If the Company at any time divides its outstanding Common Shares into a greater number of shares (whether pursuant to a stock split, stock dividend or otherwise), and conversely, if its outstanding Common Shares are combined into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such division or combination shall be proportionately adjusted to reflect the reduction or increase in the value of each such Common Share.

(b) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of the Company's Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for such Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, the holder of this warrant shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this warrant and in lieu of the Common Shares of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock other securities or assets as would have been issued or delivered to the holder of this warrant if it had exercised this warrant and had received such Common Shares prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holder of this warrant at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase.

(c) Upon each adjustment of the Warrant Exercise Price, the holder of this warrant shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment.

(d) Upon any adjustment of the Warrant Exercise Price, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of

3

this warrant at the address of such holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

6. No Voting Rights. This warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company.

7. Registration Rights. If, at any time commencing after the date hereof, the Company proposes to register any of its securities for money under the Securities Act of 1933 (the "Act"), other than pursuant to Form S-4, Form S-8 or a comparable registration statement and other than in connection with demand registrations initiated by other security holders of the Company whose rights exclude or restrict (to the extent of such restriction) participation by other holders of registration rights, it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement to the holder of this warrant and/or the Common Shares and any other securities issuable upon exercise of this warrant (collectively, the "warrant securities") of its intention to do so. If the holder of this warrant and/or warrant securities notifies the Company within twenty (20) business days after receipt of any such notice of its desire to include any such securities in such proposed registration statement, the Company shall afford the holder of this warrant and/or warrant securities the opportunity to have any such warrant securities registered under such registration statement. Notwithstanding the foregoing sentence, the Company shall have the right at any time after it shall have given the written notice provided (irrespective of whether a written request for inclusion of any such securities shall have been made) to delay or elect not to file any such proposed registration statement or to withdraw the same after the filing but prior to the effective date thereof.. If any registration shall be underwritten in whole or in part, the Company may require that the warrant securities be included in the underwriting on the same .terms and conditions as the securities otherwise being sold through the underwriters If in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the warrant securities covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the securities offered by the Company, the number of warrant securities to be included in the underwritten public offering may be reduced in the manner determined by the managing underwriter. Those warrant securities which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 180 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. In the event of any registration of warrant securities in connection with an underwritten public offering, the holder shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter selected by the Company for such offering. In connection with any registration hereunder, the Company and the holder by acceptance hereof further agree as follows:

(a) the Company shall use its best efforts to cause such registration statement to become effective and shall furnish the holder desiring to sell warrant securities such number of prospectuses as shall reasonably be requested;

4

(b) the Company shall pay all costs (excluding fees and expenses of holder's counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed hereunder including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses;

(c) the Company will take all necessary action which may be required in qualifying or registering the warrant securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the holder, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction;

(d) the Company shall indemnify the holder of the warrant securities to be sold pursuant to any registration statement and each person, if any, who controls such holder within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all losses, claims, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent any such loss, claim, damage, expense or liability arises from information furnished by or on behalf of the holder of this warrant, or its successors or assigns for specific inclusion in such registration statement;

(e) the holder of the warrant securities to be sold pursuant to a registration statement, and its successors and assigns, shall indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all losses, claims, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such holder, or its successors or assigns, for specific inclusion in such registration statement;

(f) nothing contained in this warrant shall be construed as requiring the holder to exercise its warrant prior to the initial filing of any registration statement or the effectiveness thereof;

(g) at the time of the effectiveness of the registration statement the Company shall furnish to each underwriter, if any, for the holder participating in the offering, and if at such time the holder is deemed to be an "affiliate" of the Company under the Act, the Company shall furnish to such holder, a signed counterpart, addressed to such underwriter or holder, as the case may be, of an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and the Company shall furnish to each such underwriter a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration

5

statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities:

(h) the Company shall as soon as practicable after the effective date of the registration statement, and in any event within fifteen (15) months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least twelve (12) consecutive months beginning after the effective date of the registration statement;

(i) the holder shall furnish to the Company such information regarding itself, the warrant securities, the intended method of disposition thereof and such other matters as shall be reasonably requested by the Company in connection with the registration of the warrant securities;

(j) the holder shall in connection with any public offering of the warrant securities, upon request of the Company or the underwriters managing the underwritten offering of the Company's securities, agree not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any warrant securities other than those included in the registration without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not exceeding 180 days) from the effective date of such registration as may be requested by the underwriters; provided, that all other holders of at least 10% of the Company's outstanding voting equity securities (other than holders which have acquired such shares in registered offerings, open market transactions or block trades) and all of the officers and directors of the Company who own stock of the Company also agree to such restrictions; and provided further that such agreement under this paragraph (j) shall be applicable only to registration statements of the Company which cover Common Shares or other securities to be sold on its behalf to the public in an underwritten offering; and

(k) the right of the holder to request registration or inclusion in any registration shall terminate on June 30, 2007.

8. Notice of Certain Events. In case any time:

(a) the Company shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

(b) the Company shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights; or

(c) there shall be any capital reorganization, reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets, to another corporation; or

(d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

6

then, in any one or more of said cases, the Company shall give written notice, by first-class mail, postage prepaid, addressed to the holder of this warrant of the date on which (A) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Company's transfer books are closed in respect thereto.

9. Investment Representations of Holder. The holder of this warrant by acceptance hereof, represents that it is acquiring this warrant for investment for its own account and not with the view to, or for resale in connection with, any distribution or public offering. The holder of this warrant further understands and acknowledges:

(a) that neither this warrant nor the Common Shares of the Company to be issued upon exercise of this warrant has been registered under the Securities Act or any state securities laws by reason of its and their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation;

(b) that neither this warrant nor the Common Shares of the Company to be issued upon exercise of this warrant may be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws, the applicability of which shall be demonstrated by a legal opinion from legal counsel for the holder of this warrant satisfactory to the Company and its legal counsel;

(c) that the holder of this warrant is an accredited corporate investor which has had a reasonable opportunity to make inquiries of the Company and its management and the holder has particular knowledge and information concerning the business and prospects of the Company.

10. Transfer or Assignment; Replacement. This warrant and the Common Shares issuable hereunder are non-transferable except (i) to a successor of Legg Mason Wood Walker, Incorporated or Legg Mason, Inc. by merger, the acquisition of all or substantially all of the assets thereof or any similar transaction,
(ii) to officers of Legg Mason Wood Walker, Incorporated or its successor following the date on which the Common Shares of the Company have first been sold in a registered offering under the Securities Act, provided that such transfer or transfers are exempt from registration under the Securities Act and applicable state securities laws, (iii) to other persons or entities following the date on which the Common Shares of the Company have first been sold in a registered offering under the Securities Act in transactions which satisfy the requirements of Section 9(b) of this warrant, and (iv) otherwise with the prior written consent of the Company. Each holder of this warrant, by taking or holding the same,

7

consents and agrees that the bearer of this warrant, when endorsed, may be treated by the Company and all other persons dealing with this warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this warrant and, in the case of loss, theft or destruction, on delivery of any indemnity agreement or bond reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this warrant, the Company will execute and deliver, in lieu of this warrant, a new warrant of like tenor.

11. Miscellaneous.

(a) This warrant and the terms hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the amendment, change, waiver, discharge or termination is sought.

(b) This warrant shall be governed by and construed under the laws of the State of Minnesota as applied to agreements among Minnesota residents entered into and to be performed entirely within Minnesota.

(c) Any notice under this warrant shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated below:

If to the holder.

Legg Mason Wood Walker, Incorporated 100 Light Street
34th Floor
Baltimore, MD 21202

Attention: James A. Rowan

If to the Company:

Learning Ventures International, Inc. 330 Second Avenue South, Suite 350 Minneapolis, MN 55401

Attention: Stephen G. Shank, President

or at such other address as such party may designate by ten (10) days' advance written notice to the other party.

8

IN WITNESS WHEREOF, the Company has caused this warrant to be signed and delivered by a duly authorized officer as of June 16, 1998.

LEARNING VENTURES INTERNATIONAL, INC.

By: /s/ Stephen Shank
    ---------------------------------------

Its: President and CEO

9

WARRANT EXERCISE OR CONVERSION

(To be signed only upon exercise or conversion of warrant)

The undersigned, the holder of the foregoing warrant, hereby irrevocably elects to:

(a) exercise the purchase right represented by such warrant for, and to purchase thereunder, _____________ of the Common Shares of Learning Ventures International, Inc. to which such warrant relates, and herewith makes payment of $___________, therefor in cash or by certified check or bank draft as the purchase price therefor, or herewith delivers__________________ Common Shares having a fair market value equal to such purchase price, or

(b) convert such warrant to the extent of ________________ Common Shares into such number of Common Shares as are deliverable upon exercise of the Conversion Right under such warrant,

and requests that the certificates for such shares be issued in the name of, and be delivered to __________________________________ whose address is set forth below the signature of the undersigned.

Dated:  _____________________           LEGG MASON WOOD WALKER, INCORPORATED

                                        By:__________________________________

                                        _____________________________________

                                        _____________________________________


[Address]

10

WARRANT ASSIGNMENT

(To be signed only upon transfer of warrant)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________ the purchase right represented by the foregoing warrant to purchase the Common Shares of Learning Ventures International, Inc. to which such warrant relates and appoints __________________ attorney to transfer such purchase right on the books of Learning Ventures International, Inc. with full power of substitution in the premises.

Dated:___________________
LEGG MASON WOOD WALKER, INCORPORATED

By:__________________________________




[Name and Address of Transferee]

11

DRE: Learning Ventures International, Inc. Warrant - Legg Mason Wood Walker, Incorporated August 6, 1998

12

EXHIBIT 4.9

AMENDMENT NO. 1

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

This agreement is Amendment No. 1 (the "Amendment") to the Warrant to purchase Common Shares of CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company"), issued to Legg Mason Wood Walker, Incorporated, a Maryland corporation (the "Holder"), on June 16, 1998 (the "Warrant"). This Amendment is entered into as of the 20th day of April, 2000.

RECITALS

WHEREAS, the Company proposes to sell and issue up to 2,596,491 shares of its Class E Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement of even date herewith (the "Purchase Agreement"); and

WHEREAS, the purchase of the Class E Convertible Preferred Stock under the Purchase Agreement is conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class E Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Warrant shall be amended as follows:

1. Section 7, entitled "Registration Rights," shall be amended by replacing the fifth sentence of the section, which begins "If in the good faith judgment...", with the following text:

"If in the good faith judgment of the managing underwriter the registration of all, or part of, the warrant securities which the holders have requested to be included would materially and adversely affect such public offering, then the Company shall be required to include in the underwriting only that number of warrant securities, if any, which the managing underwriter believes may be sold without causing such material adverse effect. If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities and Class E Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration


statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of warrant securities, Class D Registrable Securities and Class E Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's capital stock that are defined as "Registrable Securities" in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998 as amended as of the date of Amendment No. 1 to this Warrant. "Class E Registrable Securities" means "Registrable Shares" as defined in that certain Investor Rights Agreement between the Company and the purchasers of the Company's Class E Convertible Preferred Stock dated as of the date of Amendment No. 1 to this Warrant."

2. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Warrant remain unaltered and in full force and effect. This Amendment and the Warrant shall be read and construed as one agreement.

3. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                         CAPELLA EDUCATION COMPANY

                                                 By: /s/ Paul F. Clifford
                                                     ---------------------------
                                                 Name:   Paul F. Clifford
                                                 Title:  CFO

HOLDER:                                          LEGG MASON WOOD WALKER,
                                                 INCORPORATED

                                                 By: /s/ Alexander M. Stewart
                                                     ---------------------------
                                                 Name:   Alexander M. Stewart
                                                 Title:  Managing Director

2

EXHIBIT 4.10
AMENDMENT NO. 2

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

This agreement is Amendment No. 2 (the "Amendment") to the Warrant to purchase Common Shares of CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company"), issued to Legg Mason Wood Walker, Incorporated, a Maryland corporation (the "Holder"), on June 16, 1998 (the "Warrant"). This Amendment is entered into as of the 21st day of February, 2002.

RECITALS

WHEREAS, the Warrant was amended by Amendment No. 1 to the Warrant to purchase Common Shares of Capella Education Company (the "Amendment No. 1") effective April 20, 2000.

WHEREAS, the Company proposes to sell and issue up to 1,425,457 shares of its Class F Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement dated as of January 31, 2002 (the "Purchase Agreement"); and

WHEREAS, the purchase of the Class F Convertible Preferred Stock under the Purchase Agreement is conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class F Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Warrant shall be amended as follows:

1. Section 7, entitled "Registration Rights," shall be amended by replacing the sixth, seventh and eighth sentences of the section, which begin "If the number of warrant securities...", with the following text:

"If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class F Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of


warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class F Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's Class D Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Securities" as defined in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998 as amended by Amendment No. 1 to the Registration Rights Agreement as of the date of Amendment No. 1 to this Warrant and further amended by Amendment No. 2 to the Registration Rights Agreement as of the date of Amendment No. 2 to this Warrant. "Class E Registrable Securities" means the Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock dated as of the date of Amendment No. 2 to this Warrant. "Class F Registrable Securities" means the Class F Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock dated as of the date of Amendment No. 2 to this Warrant."

2. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Warrant remain unaltered and in full force and effect. This Amendment along with Amendment No. 1 and the Warrant shall be read and construed as one agreement.

3. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

2

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                  CAPELLA EDUCATION COMPANY

                                          By:  /s/ Stephen Shank
                                               ---------------------------------
                                          Name:  Stephen Shank
                                          Title: Chairman and CEO

HOLDER:                                   LEGG MASON WOOD WALKER,
                                          INCORPORATED

                                          By:  /s/ Richard J. Himelfarb
                                               ---------------------------------
                                          Name:  Richard J. Himelfarb
                                          Title: Senior Executive Vice President

3

EXHIBIT 4.11

AMENDMENT NO. 3

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

This agreement is Amendment No. 3 (the "Amendment") to the Warrant to purchase Common Shares of CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company"), issued to Legg Mason Wood Walker, Incorporated, a Maryland corporation (the "Holder"), on June 16, 1998 (the "Warrant"). This Amendment is entered into as of the 22nd day of January, 2003.

RECITALS

WHEREAS, the Warrant was amended by Amendment No. 1 to the Warrant to purchase Common Shares of Capella Education Company ("Amendment No. 1") effective April 20, 2000 and further amended by Amendment No. 2 to the Warrant to purchase Common Shares of Capella Education Company ("Amendment No. 2") effective February 21, 2002;

WHEREAS, the Company proposes to sell and issue up to 683,452.20 shares of its Class G Convertible Preferred Stock (the "Class G Preferred Stock") pursuant to that certain Stock Purchase Agreement dated as of January 15, 2003 (the "Purchase Agreement");

WHEREAS, the Company intends to enter into an Exchange Agreement (the "Exchange Agreement") pursuant to which the holders of Class F Convertible Preferred Stock (the "Class F Investors") will agree severally to exchange each of the outstanding shares of Class F Convertible Preferred Stock held by such investor for shares of Class G Preferred Stock (the "Exchange");

WHEREAS, the purchase of the Class G Convertible Preferred Stock under the Purchase Agreement and the Exchange are each conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class G Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Warrant shall be amended as follows:

1. Section 7, entitled "Registration Rights," shall be amended by replacing the sixth, seventh, eighth and ninth sentences of the section, which begin "If the number of warrant securities ...", with the following text:


"If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class G Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class G Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's Class D Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Securities" as defined in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998 as amended by Amendment No. 1 to the Registration Rights Agreement as of the date of Amendment No. 1 to this Warrant, further amended by Amendment No. 2 to the Registration Rights Agreement as of the date of Amendment No. 2 to this Warrant and further amended by Amendment No. 3 to the Registration Rights Agreement as of the date of Amendment No. 3 to this Warrant. "Class E Registrable Securities" means the Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors on Schedule 1 thereto, dated as of the date of Amendment No. 3 to this Warrant. "Class G Registrable Securities" means the Class G Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors on Schedule 1 thereto, dated as of the date of Amendment No. 3 to this Warrant."

2. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Warrant remain unaltered and in full force and effect. This Amendment along with Amendment No. 1, Amendment No. 2 and the Warrant shall be read and construed as one agreement.

3. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

[The remainder of this page has been left blank intentionally.


Signature page follows.]

2

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                 CAPELLA EDUCATION COMPANY

                                         By: /s/ Stephen G. Shank
                                             -----------------------------------
                                             Stephen G. Shank
                                             Chief Executive Officer

HOLDER:                                  LEGG MASON WOOD WALKER,
                                         INCORPORATED

                                         By: /s/ Richard J. Homel Parb
                                             -----------------------------------
                                         Name: Richard J. Homel Parb
                                         Title: Senior Executive Vice President

3

EXHIBIT 4.12

WARRANT NO. _____

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 0R ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS COVERING SUCH SECURITY OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS SECURITY (SATISFACTORY TO THE COMPANY AND ITS LEGAL COUNSEL) STATING THAT SUCH SALE. TRANSFER. ASSIGNMENT, PLEDGE OR DISTRIBUTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ALL APPLICABLE STATE SECURITIES LAWS.

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

FOR VALUE RECEIVED, Legg Mason Wood Walker, Incorporated, a Maryland corporation, is entitled to subscribe for and purchase from Capella Education Company, a Minnesota corporation (the "Company"), up to One Hundred Thirty Five Thousand Eighty Eight (135,088) duly authorized, fully paid and nonassessable Common Shares of the Company, $.10 par value per share, or such greater or lesser number of such shares as may be determined by application of the anti-dilution provisions of this warrant, at the price of Seventeen and 10/100 Dollars ($17.10) per share, subject to adjustments as noted below (the "Warrant Exercise Price").

This warrant is subject to the following provisions, terms and conditions:

1. Expiration. This warrant shall expire on the earlier of (i) May 11, 2005, or (ii) the second anniversary of the Company's initial public offering of its Common Shares which is registered with the Securities and Exchange Commission under the provisions of the Securities Act of 1933 (the "Act"). Subject to the foregoing, this warrant may be exercised, in whole or in part, by the holder hereof at any time or from time to time prior to the expiration hereof.

2. Exercise. The rights represented by this warrant may be exercised by the holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this warrant (properly endorsed if required) at the principal office of the Company and upon payment to it by either (i) cash, certified check or bank draft of the purchase price for the shares to be purchased, or (ii) delivery of certificates for the Company's Common Shares already owned by the holder having a fair market value equal to


the purchase price for the shares to be purchased. "Fair market value" per Common Share on any date shall be (A) the average of the daily closing prices of the Common Shares for the thirty (30) consecutive trading days preceding such date on the principal national securities exchange or national securities market on which the Common Shares are listed or admitted to trading or, (B) if not so listed or admitted, the average of the medians of the highest reported bid and lowest reported asked quotations for the Common Shares for each trading day during such period as furnished by the National Association of Securities Dealers, Inc. or its successor, or, (C) if not so listed, admitted or quoted, as determined in good faith by the Company's Board of Directors using customary valuation methods, provided that no representative, delegate or agent of the holder on the Company's Board of Directors shall be entitled to vote on the determination of such fair market value, and provided further that the Board of Directors shall not be required to retain outside advisors in making its determination. The shares to be purchased shall be deemed to be issued as of the close of business on the date on which this warrant has been exercised by payment to the Company of the Warrant Exercise Price. Certificates for the shares so purchased, bearing the restrictive legend set forth at the beginning of this warrant, shall be delivered to the holder within ten (10) days after the rights represented by this warrant shall have been so exercised, and, unless this warrant has expired, a new warrant representing the number of shares, if any, with respect to which this warrant has not been exercised shall also be delivered to the holder hereof within such time. No fractional shares shall be issued upon the exercise of this warrant, but in lieu of any such fractional share the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the current fair market value per Common Share.

3. Right to Convert Warrant. The holder of this warrant shall have the right to require the Company to convert this warrant (the "Conversion Right"), in whole or in part, at any time prior to its expiration, into the Company's Common Shares as provided for in this Section 3. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Warrant Exercise Price) that number of the Company's Common Shares equal to the quotient obtained by dividing (i) the value of the warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Warrant Exercise Price for the shares subject to the warrant in effect immediately prior to the exercise of the Conversion Right from the aggregate fair market value of the shares subject to the warrant immediately prior to the exercise of the Conversion Right) by (ii) the fair market value of one Common Share of the Company immediately prior to the exercise of the Conversion Right and multiplying the quotient so obtained by a fraction equal to the portion of this Warrant which the holder desires to convert. For purposes hereof, "fair market value" per Common Share shall be determined as provided in Section 2. The Conversion Right may be exercised by the holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this warrant (properly endorsed if required) at the principal office of the Company. The shares to be issued upon exercise of the Conversion Right shall be deemed to be issued as of the close of business on the date on which the Conversion Right has been exercised by written notice and surrender of this warrant to the Company. Certificates for the shares so issued, bearing the restrictive legend set forth at the beginning of this warrant, together with cash in lieu of any fractional

-2-

share shall be delivered to the holder within ten (10) days after the Conversion Right shall have been so exercised, and, unless this warrant has expired, a new warrant representing the number of shares, if any, with respect to which the Conversion Right has not been exercised shall also be delivered to the holder hereof within such time. No fractional shares shall be issued upon the exercise of the Conversion Right, but in lieu of any such fractional share the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the current fair market value per Common Share.

4. Covenants of the Company. The Company covenants and agrees that all shares that may be issued upon the exercise of the rights represented by this warrant shall, upon issuance, be duly authorized and issued, fully paid and nonassessable shares. The Company further covenants and agrees that during the period within which the rights represented by this warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this warrant, a sufficient number of its Common Shares to provide for the exercise of the rights represented by this warrant, and will not permit the par value, if any of its Common Shares to exceed the Warrant Exercise Price. If the Company shall list its Common Shares on any securities exchange it will, at its expense, list, or obtain approval for listing upon issuance of, the Common Shares issuable under this warrant. The Company shall similarly list, or obtain approval for listing upon issuance of, any other security issuable under this warrant if such other security has been listed on any securities exchange.

5. Adjustments to Warrant Exercise Price. The Warrant Exercise Price shall be subject to adjustment from time to time as hereinafter provided in this
Section 5:

(a) If the Company at any time divides its outstanding Common Shares into a greater number of shares (whether pursuant to a stock split, stock dividend or otherwise), and conversely, if its outstanding Common Shares are combined into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such division or combination shall be proportionately adjusted to reflect the reduction or increase in the value of each such Common Share.

(b) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of the Company's Common Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for such Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, the holder of this warrant shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this warrant and in lieu of the Common Shares of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock other securities or assets as would have been issued or delivered to the holder of this warrant if it had exercised this warrant and had received such Common Shares prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation

-3-

thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holder of this warrant at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase.

(c) Upon each adjustment of the Warrant Exercise Price, the holder of this warrant shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment.

(d) Upon any adjustment of the Warrant Exercise Price, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this warrant at the address of such holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

6. No Voting_Rights. This warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company.

7. Registration Rights. If, at any time commencing after the date hereof, the Company proposes to register any of its securities for money under the Act, other than pursuant to Form S-4, Form S-8 or a comparable registration statement and other than in connection with demand registrations initiated by other security holders of the Company whose rights exclude or restrict (to the extent of such restriction) participation by other holders of registration rights, it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement to the holder of this warrant and/or the Common Shares and any other securities issuable upon exercise of this warrant (collectively, the "warrant securities") of its intention to do so. If the holder of this warrant and/or warrant securities notifies the Company within twenty (20) business days after receipt of any such notice of its desire to include any such securities in such proposed registration statement, the Company shall afford the holder of this warrant and/or warrant securities the opportunity to have any such warrant securities registered under such registration statement. Notwithstanding the foregoing sentence, the Company shall have the right at any time after it shall have given the written notice provided (irrespective of whether a written request for inclusion of any such securities shall have been made) to delay or elect not to file any such proposed registration statement or to withdraw the same after the filing but prior to the effective date thereof. If any registration shall be underwritten in whole or in part, the Company may require that the warrant securities be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the

-4-

good faith judgment of the managing underwriter the registration of all, or part of, the warrant securities which the holders have requested to be included would materially and adversely affect such public offering, then the Company shall be required to include in the underwriting only that number of warrant securities, if any, which the managing underwriter believes may be sold without causing such material adverse effect. If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities and Class E Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of warrant securities, Class D Registrable Securities and Class E Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's capital stock that are defined as "Registrable Securities" in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998, as amended as of April 20, 2000. "Class E Registrable Securities" means "Registrable Shares" as defined in that certain Investor Rights Agreement between the Company and the purchasers of the Company's Class E Convertible Preferred Stock dated as of April 20, 2000. Those warrant securities which are thus excluded from the underwritten public offering shall be withheld from the market for a period, not to exceed 180 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. In the event of any registration of warrant securities in connection with an underwritten public offering, the holder shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter selected by the Company for such offering. In connection with any registration hereunder, the Company and the holder by acceptance hereof further agree as follows:

(a) the Company shall use its best efforts to cause such registration statement to become effective and shall furnish the holder desiring to sell warrant securities such number of prospectuses as shall reasonably be requested;

(b) the Company shall pay all costs (excluding fees and expenses of holder's counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed hereunder including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses;

(c) the Company will take all necessary action which may be required in qualifying or registering the warrant securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the holder, provided that the Company shall not be obligated to execute or file

-5-

any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction;

(d) the Company shall indemnify the holder of the warrant securities to be sold pursuant to any registration statement and each person, if any, who controls such holder within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all losses, claims, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement, except to the extent any such loss, claim, damage, expense or liability arises from information furnished by or on behalf of the holder of this warrant, or its successors or assigns for specific inclusion in such registration statement;

(e) the holder of the warrant securities to be sold pursuant to a registration statement, and its successors and assigns, shall indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all losses, claims, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such holder, or its successors or assigns, for specific inclusion in such registration statement;

(f) nothing contained in this warrant shall be construed as requiring the holder to exercise its warrant prior to the initial filing of any registration statement or the effectiveness thereof;

(g) at the time of the effectiveness of the registration statement the Company shall furnish to each underwriter, if any, for the holder participating in the offering, and if at such time the holder is deemed to be an "affiliate" of the Company under the Act, the Company shall furnish to such holder, a signed counterpart, addressed to such underwriter or holder, as the case may be, of an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and the Company shall furnish to each such underwriter a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities;

(h) the Company shall as soon as practicable after the effective date of the

-6-

registration statement, and in any event within fifteen (15) months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least twelve (12) consecutive months beginning after the effective date of the registration statement;

(i) the holder shall furnish to the Company such information regarding itself, the warrant securities, the intended method of disposition thereof and such other matters as shall be reasonably requested by the Company in connection with the registration of the warrant securities;

(j) the holder shall in connection with the first underwritten public offering of Common Shares by the Company, and any public offering of the warrant securities, upon request of the Company or the underwriters managing the underwritten offering of the Company's securities, agree not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any warrant securities other than those included in the registration without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not exceeding 180 days) from the effective date of such registration as may be requested by the underwriters; provided, that all other holders of at least 5% of the Company's outstanding voting equity securities (other than holders which have acquired such shares in registered offerings, open market transactions or block trades) and all of the officers and directors of the Company who own stock of the Company also agree to such restrictions; and provided further that such agreement under this paragraph (j) shall be applicable only to registration statements of the Company which cover Common Shares or other securities to be sold on its behalf to the public in an underwritten offering; and

(k) the right of the holder to request registration or inclusion of warrant securities in any registration shall terminate on the earlier to occur of (i) June 30, 2007 or (ii) any public sale of such warrant securities pursuant to a registration statement, Section 4(1) of the Act, or Rule 144 under the Act, or (iii) such time as such warrant securities shall be eligible for sale under Rule 144 without limitations as to volume, or (iv) any sale or transfer in any manner to a person or entity in violation of Section 10 of this warrant.

8. Notice of Certain Events. In case any time:

(a) the Company shall pay any dividend payable in stock upon Common Shares or make any distribution (other than regular cash dividends) to the holders of Common Shares; or

(b) the Company shall offer for subscription pro rata to the holders of Common Shares any additional shares of stock of any class or other rights, or

(c) there shall be any capital reorganization, reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially

-7-

all of its assets, to another corporation; or

(d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give written notice, by first-class mail, postage prepaid, addressed to the holder of this warrant of the date on which (A) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice also shall specify the date as of which the holders of Common Shares of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least thirty (30) days prior to the action in question and not less than thirty (30) days prior to the record date or the date on which the Company's transfer books are closed in respect thereto.

9. Investment Representations of Holder. The holder of this warrant by acceptance hereof, represents that it is acquiring this warrant for investment for its own account and not with the view to, or for resale in connection with, any distribution or public offering. The holder of this warrant further understands and acknowledges:

(a) that neither this warrant nor the Common Shares of the Company to be issued upon exercise of this warrant has been registered under the Securities Act or any state securities laws by reason of its and their contemplated issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation;

(b) that neither this warrant nor the Common Shares of the Company to be issued upon exercise of this warrant may be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws, the applicability of which shall be demonstrated by a legal opinion from legal counsel for the holder of this warrant satisfactory to the Company and its legal counsel;

(c) that the holder of this warrant is an accredited corporate investor which has had a reasonable opportunity to make inquiries of the Company and its management and the holder has particular knowledge and information concerning the business and prospects of the Company.

10. Transfer or Assignment: Replacement. This warrant and the Common Shares issuable hereunder are non-transferable except (i) to a successor of Legg Mason Wood Walker, Incorporated or Legg Mason, Inc. by merger, the acquisition of all or substantially

-8-

all of the assets thereof or any similar transaction, (ii) to officers of Legg Mason Wood Walker, Incorporated or its successor following the date on which the Common Shares of the Company have first been sold in a registered offering under the Act, provided that such transfer or transfers are exempt from registration under the Act and applicable state securities laws, (iii) to other persons or entities following the date on which the Common Shares of the Company have first been sold in a registered offering under the Act in transactions which satisfy the requirements of Section 9(b) of this warrant, and (iv) otherwise with the prior written consent of the Company. Each holder of this warrant, by taking or holding the same, consents and agrees that the bearer of this warrant, when endorsed, may be treated by the Company and all other persons dealing with this warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this warrant and, in the case of loss, theft or destruction, on delivery of any indemnity agreement or bond reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this warrant, the Company will execute and deliver, in lieu of this warrant, a new warrant of like tenor.

11. Miscellaneous.

(a) This warrant and the terms hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the amendment, change, waiver, discharge or termination is sought.

(b) This warrant shall be governed by and construed under the laws of the State of Minnesota as applied to agreements among Minnesota residents entered into and to be performed entirely within Minnesota.

(c) Any notice under this warrant shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated below:

If to the holder:

Legg Mason Wood Walker, Incorporated 100 Light Street
34th Floor
Baltimore, MD 21202

Attention: Director of Investment Banking

-9-

If to the Company:

Capella Education Company
330 Second Avenue South, Suite 550
Minneapolis, MN 55401

Attention: Stephen G. Shank, President

or at such other address as such party may designate by ten (10) days' advance written notice to the other party.

IN WITNESS WHEREOF, the Company has caused this warrant to be signed and delivered by a duly authorized officer as of May 11, 2000.

CAPELLA EDUCATION COMPANY

By:  /s/ Paul F. Clifford
     ------------------------------

Its: CFO, Secretary

-10-

WARRANT EXERCISE OR CONVERSION

(To be signed only upon exercise or conversion of warrant)

The undersigned, the holder of the foregoing warrant, hereby irrevocably elects to:

(a) exercise the purchase right represented by such warrant for, and to purchase thereunder, __________ of the Common Shares of Capella Education Company to which such warrant relates, and herewith makes payment of $________ therefor in cash or by certified check or bank draft as the purchase price therefor, or herewith delivers _____________ Common Shares having a fair market value equal to such purchase price, or

(b) convert such warrant to the extent of ___________ Common Shares into such number of Common Shares as are deliverable upon exercise of the Conversion Right under such warrant,

and requests that the certificates for such shares be issued in the name of, and be delivered to ___________________ whose address is set forth below the signature of the undersigned.

Dated:   ___________________                LEGG MASON WOOD WALKER,
                                               INCORPORATED

                                            By:_________________________________

                                            ____________________________________

                                            ____________________________________


[Address]

-11-

WARRANT ASSIGNMENT

(To be signed only upon transfer of warrant)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _________ the purchase right represented by the foregoing warrant to purchase the Common Shares of Capella Education Company to which such warrant relates and appoints ________________ attorney to transfer such purchase right on the books of Capella Education Company with full power of substitution in the premises.

Dated: ___________________                    LEGG MASON WOOD WALKER,
                                                  INCORPORATED

                                              By:_______________________________

                                              __________________________________

                                              __________________________________


[Name and Address of Transferee]

-12-

EXHIBIT 4.13

AMENDMENT NO. 1

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

This agreement is Amendment No. 1 (the "Amendment") to the Warrant to purchase Common Shares of CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company"), issued to Legg Mason Wood Walker, Incorporated, a Maryland corporation (the "Holder"), on May 11, 2000 (the "Warrant"). This Amendment is entered into as of the 21st day of February, 2002.

RECITALS

WHEREAS, the Company proposes to sell and issue up to 1,425,457 shares of its Class F Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement dated as of January 31, 2002 (the "Purchase Agreement"); and

WHEREAS, the purchase of the Class F Convertible Preferred Stock under the Purchase Agreement is conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class F Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Warrant shall be amended as follows:

1. Section 7, entitled "Registration Rights," shall be amended by replacing the sixth, seventh and eighth sentences of the section, which begins "If the number of warrant securities...", with the following text:

"If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class F Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class F Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's Class D Convertible Preferred


Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Securities" as defined in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998 as amended by Amendment No. 1 to the Registration Rights Agreement as of April 20, 2000 and further amended by Amendment No. 2 to the Registration Rights Agreement as of the date of Amendment No. 1 to this Warrant. "Class E Registrable Securities" means the Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock dated as of the date of Amendment No. 1 to this Warrant. "Class F Registrable Securities" means the Class F Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord, the purchasers of the Company's Class F Convertible Preferred Stock and the purchasers of the Company's Class E Convertible Preferred Stock dated as of the date of Amendment No. 1 to this Warrant."

2. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Warrant remain unaltered and in full force and effect. This Amendment and the Warrant shall be read and construed as one agreement.

3. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                            CAPELLA EDUCATION COMPANY

                                    By: /s/ Stephen Shank
                                        ---------------------------------------
                                    Name:   Stephen Shank
                                    Title:  Chairman and CEO

HOLDER:                             LEGG MASON WOOD WALKER,
                                        INCORPORATED

                                    By: /s/ Richard J. Himelfarb
                                        ---------------------------------------
                                    Name:   Richard J. Himelfarb
                                    Title:  Senior Executive Vice President

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EXHIBIT 4.14

AMENDMENT NO. 2

WARRANT
TO PURCHASE
COMMON SHARES
OF
CAPELLA EDUCATION COMPANY

This agreement is Amendment No. 2 (the "Amendment") to the Warrant to purchase Common Shares of CAPELLA EDUCATION COMPANY (formerly known as Learning Ventures International, Inc.), a Minnesota corporation (the "Company"), issued to Legg Mason Wood Walker, Incorporated, a Maryland corporation (the "Holder"), on May 11, 2000 (the "Warrant"). This Amendment is entered into as of the 22nd day of January, 2003.

RECITALS

WHEREAS, the Warrant was amended by Amendment No. 1 to the Warrant to purchase Common Shares of Capella Education Company ("Amendment No. 1") effective February 21, 2002.

WHEREAS, the Company proposes to sell and issue up to 683,452.20 shares of its Class G Convertible Preferred Stock (the "Class G Preferred Stock") pursuant to that certain Stock Purchase Agreement dated as of January 15, 2003 (the "Purchase Agreement");

WHEREAS, the Company intends to enter into an Exchange Agreement (the "Exchange Agreement") pursuant to which the holders of Class F Convertible Preferred Stock (the "Class F Investors") will agree severally to exchange each of the outstanding shares of Class F Convertible Preferred Stock held by such investor for shares of Class G Preferred Stock (the "Exchange"); and

WHEREAS, the purchase of the Class G Convertible Preferred Stock under the Purchase Agreement and the Exchange are each conditioned upon the Holder and the Company entering into this Amendment; and

WHEREAS, the Holder desires that shares of Class G Convertible Preferred Stock be sold by the Company pursuant to the Purchase Agreement;

NOW, THEREFORE, the parties agree the Warrant shall be amended as follows:

1. Section 7, entitled "Registration Rights," shall be amended by replacing the sixth, seventh, eighth and ninth sentences of the section, which begins "If the number of warrant securities ...", with the following text:

"If the number of warrant securities to be included in the underwriting in accordance with the foregoing is less than the total number of shares which the holders of warrant


securities have requested to be included, then, (A) in the case of a registration statement whose filing was initiated by the Company, the securities to be included in such underwriting shall be allocated (x) first to the Company and (y) second among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class G Registrable Securities who have requested registration, on a pro rata basis based on the number of shares included in their respective requests for registration and (B) in the case of a registration statement whose filing was initiated by a selling stockholder, the securities to be included in such underwriting shall be allocated among the holders of warrant securities, Class D Registrable Securities, Class E Registrable Securities and Class G Registrable Securities who have requested registration on a pro rata basis based on the number of shares included in their respective requests for registration. "Class D Registrable Securities" means shares of the Company's Class D Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Securities" as defined in that certain Registration Rights Agreement between the Company and National Computer Systems, Inc., dated as of June 16, 1998 as amended by Amendment No. 1 to the Registration Rights Agreement as of April 20, 2000, further amended by Amendment No. 2 to the Registration Rights Agreement as of the date of Amendment No. 1 to this Warrant and further amended by Amendment No. 3 to the Registration Rights Agreement as of the date of Amendment No. 2 to this Warrant. "Class E Registrable Securities" means the Class E Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors on Schedule 1 thereto dated as of the date of Amendment No. 2 to this Warrant. "Class G Registrable Securities" means the Class G Convertible Preferred Stock (and shares of Common Stock acquired upon exercise thereof) that are "Registrable Shares" as defined in that certain Second Amended and Restated Investor Rights Agreement between the Company, Joseph Gaylord and the investors on Schedule 1 thereto dated as of the date of Amendment No. 2 to this Warrant."

2. No Other Changes. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Warrant remain unaltered and in full force and effect. This Amendment along with Amendment No. 1 and the Warrant shall be read and construed as one agreement.

3. Effective Time. This Agreement shall become effective at the time of Closing (as defined in the Purchase Agreement).

4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall be deemed but one and the same instrument.

[The remainder of this page has been left blank intentionally.


Signature page follows.]

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IN WITNESS WHEREOF, the parties hereto each has caused this Amendment to be duly executed in its name and on its behalf, all as of the day and year first above written.

COMPANY:                                 CAPELLA EDUCATION COMPANY

                                         By: /s/ Stephen G. Shank
                                             -----------------------------------
                                                 Stephen G. Shank
                                                 Chief Executive Officer

HOLDER:                                  LEGG MASON WOOD WALKER,
                                         INCORPORATED

                                         By: /s/
                                             -----------------------------------
                                         Name:
                                              ----------------------------------
                                         Title:
                                               ---------------------------------


EXHIBIT 4.15

EXCHANGE AGREEMENT

AGREEMENT (this "Agreement"), dated as of January 22, 2003, by and among Capella Education Company, a Minnesota corporation (the "Company"), Forstmann Little & Co. Equity Partnership - VII, L.P., a Delaware limited partnership ("Equity-VII"), Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., a Delaware limited partnership ("MBO-VIII" and, together with Equity-VII, the "Forstmann Little Entities"), the certain funds and accounts managed by affiliates of Putnam Investments, LLC, a Delaware limited liability company, that are listed on Schedule 1.1 (collectively, "Putnam"), DRW Venture Partners LP ("Dain"), ThinkEquity Investment Partners LLC ("Think"), Joseph Gaylord ("Gaylord"), a resident of Minnesota, and the members of Capella's management or board of directors (or accounts under their direction or transferees of such persons) that are listed on Schedule 1.1 ("Management Investors" and, together with MBO-VIII , Equity-VII, Dain, Think and Putnam, the "Class F Investors").

W I T N E S S E T H:

WHEREAS, the Class F Investors (other than the S. Joshua and Teresa D. Lewis Issue Trust) (the "Class F Purchasers") are parties with the Company to that certain Preferred Stock Purchase Agreement dated as of January 31, 2002 (the "Class F Agreement") pursuant to which the Class F Purchasers purchased an aggregate of 1,425,457 shares of Class F Convertible Preferred Stock of the Company (the "Class F Preferred Stock"); and

WHEREAS, Maveron Equity Partners 2000, L.P., Maveron Equity Partners 2000-B LP and MEP 2000 Associates LLC (the "Maveron Entities") and David Smith (who, together with the Maveron Entities, is herein collectively referred to as the "Class G Investors") are parties to that certain Preferred Stock Purchase Agreement dated as of January 15, 2003 (the "Class G Agreement") pursuant to which the Class G Investors have agreed with the Company, subject to the terms and conditions thereof, to purchase, and the Company has agreed to sell, an aggregate of 683,452.20 shares of newly issued Class G Convertible Preferred Stock, par value $.01 per share, of the Company (the "Class G Preferred Stock"), which shares will be initially convertible into the equivalent number of shares of Common Stock, par value $.10 per share, of the Company (the "Common Stock"), and with such other terms as are set forth in the Certificate of Designation for the Class G Preferred Stock in the form of Exhibit A hereto (the "Certificate of Designation"); and

WHEREAS, upon the terms and subject to the conditions contained in this Agreement, the Company wishes to issue to the Class F Investors shares of newly issued Class G Preferred Stock and the Class F Investors wish to transfer all the outstanding shares of Class F Preferred Stock held thereby to the Company in exchange therefor; and

WHEREAS, on or prior to Closing (as hereinafter defined), the parties hereto, the Class G Investors, SmartForce plc ("Smart Force"), NCS Pearson Inc., Cherry Tree Ventures IV and Forstmann Little & Co. Equity Partnership-VI, L.P. ("Equity-VI"), Judy Shank, Susan Shank and Mary Retzlaff intend to enter into a Third Amended and Restated Co-Sale and Board


Representation Agreement (the "Board Representation Agreement") to become effective simultaneously with the Closing; and

WHEREAS, on or prior to the Closing, the Class F Investors, SmartForce, Equity-VI and the Class G Investors intend to enter into a Second Amended and Restated Investor Rights Agreement (the "Investor Rights Agreement") to become effective simultaneously with the Closing.

WHEREAS, on or prior to the Closing, the Company will have amended the Certificate of Designation for the Company's outstanding shares of Class E Convertible Preferred Stock (the "Class E Preferred Stock"), in the form of Exhibit H (the "Amended and Restated Class E Certificate").

NOW THEREFORE, in consideration of the covenants and agreements set forth herein, the parties agree as follows:

SECTION 1. EXCHANGE OF CLASS F PREFERRED STOCK

1.1. The Exchange. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, the Class F Investors and the Company shall exchange each of the outstanding shares of Class F Preferred Stock held by such investor for shares of Class G Preferred Stock (the "Exchange") as set forth on Schedule 1.1 hereto.

1.2. The Closing. The closing of the transactions contemplated by the Exchange (the "Closing") shall take place at the offices of Faegre & Benson LLP, 2200 Wells Fargo Center, Minneapolis, Minnesota, at 10:00 a.m. on January 22, 2003 or, if later, the next business day following the satisfaction (or waiver) of all the conditions set forth in Sections 5 and 6, or at such other time or place or on such other date as the Company and the Class F Investors holding a majority of the Class F Preferred Stock, may mutually determine (such date, the "Closing Date").

1.3. Deliveries at the Closing. At the Closing, the Company shall deliver to each Class F Investor or its custodial designee a certificate or certificates representing the shares of Class G Preferred Stock to be issued to such Class F Investor, registered in the name of such Class F Investor, its custodial designee or its nominee affiliate, against receipt at the Closing by the Company from such Class F Investor of a certificate or certificates for the shares of Class F Preferred Stock to be exchanged by such Class F Investor duly endorsed for delivery by such Class F Investor or accompanied by an assignment separate from the certificate in form satisfactory to the Company and duly executed by such Class F Investor.

1.4. Individual Retirement Accounts. (a) Gaylord agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 (the "Gaylord IRA") and any other party necessary, to perform all of the obligations of Gaylord IRA under this Agreement. Any notice given to the Gaylord IRA under this Agreement shall also be given to: Joseph Gaylord, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 339-8022. For purposes of Section 4 of this Agreement, the term "Class F Investor" shall include Gaylord and Gaylord hereby represents and warrants to the Company on behalf of himself and Gaylord IRA the representations and warranties set forth in Section 4. Notwithstanding anything else in Section 4 to the contrary, the

2

representations and warranties of Gaylord IRA in Sections 4.2 through 4.5, 4.7 and 4.8 are not made by Gaylord IRA, but are made by Gaylord on behalf of Gaylord IRA.

(b) Stephen Weiss ("Weiss") agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 ("Weiss IRA") and any other party necessary, to perform all of the obligations of Weiss IRA under this Agreement. Any notice given to the Weiss IRA under this Agreement shall also be given to: Stephen Weiss, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 339-8022. Weiss hereby represents and warrants to the Company on behalf of himself and Weiss IRA the representations and warranties set forth in Section 4. Notwithstanding anything else in Section 4 to the contrary, the representations and warranties of Weiss IRA in Sections 4.2 through 4.5, 4.7 and 4.8 are not made by Weiss IRA, but are made by Weiss on behalf of Weiss IRA.

1.5. Additional Issuances; Adjustment. (a) In lieu of a claim for indemnification under Section 8.2 of this Agreement arising out of the inaccuracy in the representation and warranty set forth in the last sentence of
Section 3.2, in the event that at any time after the Closing the representation and warranty set forth in the last sentence of Section 3.2 is determined not to have been true as of the Closing, the Company shall issue to the Class F Investors (on a pro rata basis), at no cost to the Class F Investors, and as an adjustment to the purchase price paid by the Class F Investors per share of Class G Preferred Stock, an additional amount of Class G Preferred Stock such that, if such issuance of additional Class G Preferred Stock had been made at the Closing, such representation and warranty would have been true and accurate in all respects at the Closing.

(b) If at the time of any required adjustment pursuant to Section 1.5(a) all shares of Class G Preferred Stock have been converted into shares of Common Stock, the Company shall, to the extent of authorized capital available therefor, promptly issue to the Class F Investors (on a pro rata basis), at no cost to the Class F Investors and as an adjustment to the purchase price paid by the Class F Investors per share of Class G Preferred Stock, an additional amount and kind of Common Stock equal to the amount and kind of Common Stock issuable upon the conversion (based on the conversion ratio in effect at the time the last shares of Class G Preferred Stock were converted into shares of Common Stock) of the amount of Class G Preferred Stock which would have been issued with respect to such adjustment pursuant to Section 1.5(a) if such adjustment had been made immediately prior to the time the last shares of Class G Preferred Stock were converted into shares of Common Stock.

(c) Any additional shares of Class G Preferred Stock and Common Stock issued to the Class F Investors pursuant to this Section 1.5 shall be treated as if they were issued at the Closing and shall reflect any dividends or other distributions which would have accrued or have been payable with respect to, and the application of any anti-dilution, ratable treatment or similar provisions (as set forth in the Articles of Incorporation of the Company (the "Articles of Incorporation"), the Certificate of Designation, applicable Law (as hereinafter defined) or otherwise) which would have been applicable to, such shares of Class G Preferred Stock and Common Stock had they been issued at the Closing.

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(d) In connection with any issuances of stock determined to be required pursuant to this Section 1.5, the Company (i) shall take all action within its control necessary to cause its Articles of Incorporation to be amended to increase the authorized capital of the Company to permit such issuances and (ii) shall reserve a sufficient number of shares of Common Stock for issuance to the Class F Investors upon the conversion of any shares of Class G Preferred Stock so issued. Any shares of Class G Preferred Stock or Common Stock issued to the Class F Investors pursuant to this Section 1.5 shall, when issued, be validly issued and fully paid and nonassessable with no personal liability attaching to the ownership thereof and free and clear of all Encumbrances (as defined in the Class G Agreement).

(e) Notwithstanding anything contained in this Section 1.5, the Company shall not be required to issue any shares of Class G Preferred Stock or Common Stock, as applicable, for any inaccuracy in the representation and warranty set forth in the last sentence of Section 3.2 if (i) the underlying facts or events that caused the inaccuracy also caused an inaccuracy in the representation and warranty set forth in the last sentence of Section 2.4 of the Class F Agreement and (ii) as a result of such inaccuracy the Company is issuing shares of Class G Preferred Stock or Common Stock, as applicable, to the Class F Investors pursuant to Section 1.4 of the Class F Agreement, as such section is amended herein.

SECTION 2. AMENDMENT OF CLASS F AGREEMENT

2.1 Effect on Class F Agreement. Except as set forth in Section 2.2 hereof, the Class F Agreement shall remain in full force and effect without modification.

2.2 Amendment of Class F Agreement. Effective upon Closing, the Class F Agreement shall be amended as follows:

(a) Section 1.4 shall be amended in its entirety to read as follows:

"1.4. Additional Issuances; Adjustments. (a) In lieu of a claim for indemnification under Section 9 of this Agreement arising out of the inaccuracy in the representation and warranty set forth in the last sentence of Section 2.4, in the event that at any time after the Closing the representation and warranty set forth in the last sentence of Section 2.4 is determined not to have been true as of the Closing, the Company shall issue to the Investors (on a pro rata basis), at no cost to the Investors, and as an adjustment to the purchase price paid by the Investors per share of Class F Preferred Stock, an additional amount of Class G Convertible Preferred Stock of the Company (the "Class G Preferred Stock") such that, if an issuance of additional shares of Class F Preferred Stock had been made at the Closing for which such additional amount of Class G Preferred Stock would have been subsequently exchanged (the "Exchange") in accordance with the ratio of exchange reflected in Schedule 1.1 to that certain Exchange Agreement, dated as of January __, 2003, between the Investors and the Company (the "Exchange Agreement"), such representation and warranty would have been true and accurate in all respects at the Closing.

4

(b) If at the time of any required adjustment pursuant to Section 1.4(a) all shares of Class G Preferred Stock have been converted into shares of Common Stock, the Company shall, to the extent of authorized capital available therefor, promptly issue to the Investors (on a pro rata basis), at no cost to the Investors and as an adjustment to the purchase price paid by the Investors per share of Class F Preferred Stock, an additional amount and kind of Common Stock equal to the amount and kind of Common Stock issuable upon the conversion (based on the conversion ratio in effect at the time the last shares of Class G Preferred Stock were converted into shares of Common Stock) of the amount of Class G Preferred Stock which would have been issued with respect to such adjustment pursuant to Section 1.4(a) if such adjustment had been made immediately prior to the time the last shares of Class G Preferred Stock were converted into shares of Common Stock.

(c) Any additional shares of Class G Preferred Stock and Common Stock issued to the Investors pursuant to this Section 1.4 shall be treated as if they were issued in the Exchange for additional shares of Class F Preferred Stock issued at the Closing and shall reflect any dividends or other distributions which would have accrued or have been payable with respect to, and the application of any anti-dilution, ratable treatment or similar provisions (as set forth in the Articles of Incorporation of the Company (the "Articles of Incorporation"), the Certificate of Designation (and following the Exchange, the Certificate of Designation relating to the Class G Preferred Stock), applicable Law (as hereinafter defined) or otherwise) which would have been applicable to, such shares of Class F Preferred Stock and Common Stock had they been issued at the Closing and the Class G Preferred Stock had it been issued in the Exchange for such shares of Class F Preferred Stock.

(d) In connection with any issuances of stock determined to be required pursuant to this Section 1.4, the Company (i) shall take all action within its control necessary to cause its Articles of Incorporation to be amended to increase the authorized capital of the Company to permit such issuances and (ii) shall reserve a sufficient number of shares of Common Stock for issuance to the Investors upon the conversion of any shares of Class G Preferred Stock so issued. Any shares of Class G Preferred Stock or Common Stock issued to the Investors pursuant to this
Section 1.4 shall, when issued, be validly issued and fully paid and nonassessable with no personal liability attaching to the ownership thereof and free and clear of all Encumbrances (as hereinafter defined)."

(b) Section 7.1 shall be amended to insert "Class G" in lieu of each "Class F" and insert "shares of common stock issued upon conversion of the Class G Preferred Stock" in lieu of each "Conversion Stock".

(c) Section 7.2 shall be amended to insert "Class G" in lieu of each "Class F" and insert "shares of common stock issued upon conversion of the Class G Preferred Stock" in lieu of each "Conversion Stock".

5

(d) Section 7.4(a) shall be amended to insert "337,230" in lieu of "320,239" and to insert "Class G" in lieu of each "Class F".

(e) Section 7.4(d) shall be amended to insert "Class G" in lieu of each "Class F".

(f) Section 7.4(e) shall be amended to insert "Class G" in lieu of each "Class F".

(g) Section 9.2(a) shall be amended to insert "Class G Preferred Stock" immediately after any references to "Class F Preferred Stock" and insert "shares of common stock issued upon conversion of the Class G Preferred Stock" in lieu of each "Conversion Stock".

(h) Section 9.4 shall be amended to insert "Class G" in lieu of each "Class F" and insert "shares of common stock issued upon conversion of the Class G Preferred Stock" in lieu of each "Conversion Stock".

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Class F Investors as of the date hereof and as of the Closing as follows (with references to the Company in Sections 3.3(a) and 3.4 being deemed to include references to any subsidiary of the Company):

3.1. Power. The Company has all requisite power and authority (i) to execute and deliver this Agreement, the Investor Rights Agreement, the Board Representation Agreement and all other certificates, instruments and other documents executed and delivered by the Company at the Closing pursuant to
Section 5 hereof (collectively, together with the Certificate of Designation and the Amended and Restated Class E Certificate, the "Transaction Documents") and
(ii) to carry out and perform its obligations hereunder and thereunder. Upon receipt of all requisite approval of the shareholders of the Company, the Company will have all requisite power and authority to execute and file with the Secretary of State of Minnesota the Certificate of Designation and the Amended and Restated Class E Certificate.

3.2. Capitalization. The authorized and outstanding equity capitalization of the Company on the date hereof is as set forth on Schedule 3.2. As of the date hereof and immediately prior to the Closing (except for exercise or conversion of outstanding Stock Rights set forth on Schedule 3.2, assuming no valid exercise of dissenters' rights in connection with the adoption of the Amended and Restated Class E Certificate and assuming the closing of the transactions contemplated by the Class G Agreement have not yet occurred), the capital stock of the Company authorized, outstanding or reserved for issuance consists of (i) 15,000,000 shares of Common Stock, of which 1,548,427 shares are issued and outstanding, (ii) 3,000,000 shares of Class A Convertible Preferred Stock ("Class A Preferred Stock"), of which 2,810,000 shares are issued and outstanding, (iii) 1,180,000 shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), of which 460,000 shares are issued and outstanding,
(iv) 1,022,222 shares of Class D Convertible Preferred Stock ("Class D Preferred Stock"), of which 1,022,222 shares are issued and outstanding, (v) 2,596,491 shares of Class E Preferred Stock of which 2,596,491 shares are issued and outstanding, (vi) 1,425,457 shares of Class F Preferred Stock of which 1,425,457 shares are issued and outstanding (vi) 3,720,901 shares of preferred stock, undesignated as to class or series, (vii) 1,408,893 shares of Common Stock are reserved for

6

issuance pursuant to employee stock options granted pursuant to the Company's stock option plans and 470,464 shares of Common Stock are reserved for issuance for future grants of employee stock options pursuant to the Company's stock option plans, (viii) 331,048 shares of Common Stock are reserved for issuance upon the exercise of any outstanding warrants of the Company and (ix) 8,373,816 shares of Common Stock have been duly reserved for issuance upon conversion of the outstanding shares of convertible preferred stock of the Company. Except as set forth in item 11 on Schedule 3.2, immediately following the Closing and the closing of the transactions contemplated by the Class G Agreement (and prior to the Company filing a certificate of cancellation for the Class F Preferred Certificate of Designation), the capital stock of the Company authorized, outstanding or reserved for issuance will be as set forth in the preceding sentence except that (i) no shares of Class F Preferred Stock will be outstanding, (ii) 2,184,550 shares of Class G Preferred Stock shall be authorized and a total of 2,184,540.49 shares of Class G Preferred Stock (together with the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, the Class E Preferred Stock and the Class F Preferred Stock, collectively the "Preferred Stock") will have been issued and be outstanding,
(iii) a total of 1,536,351 shares of preferred stock will be undesignated as to class or series and (iv) a total of 9,178,109 shares of Common Stock will have been duly reserved for issuance upon conversion of the outstanding shares of Preferred Stock (including an additional 2,184,540 shares of Common Stock that will have been duly reserved for the issuance upon conversion of the Class G Preferred Stock issued pursuant to this Agreement (the "Conversion Stock")). All of the outstanding shares of capital stock of the Company were duly authorized and validly issued and are fully paid and nonassessable.

Except for exercise or conversion of outstanding Stock Rights set forth on Schedule 3.2 and Stock Rights granted pursuant to existing stock option plans, Schedule 3.2 sets forth a list of (i) all holders of equity interests in the Company on the date hereof, including the amount and kind of equity interests held by each such holder, (ii) except as set forth in item 11 on Schedule 3.2, all holders of capital stock of the Company immediately following the Closing, and the number and type of shares to be held by each, and (iii) all outstanding warrants, options, agreements, convertible securities or other Contracts (as defined in the Class G Agreement) pursuant to which the Company is or may become obligated to issue any shares of the capital stock or other securities of or other equity interests in the Company ("Stock Rights") and the holders thereof. Except as set forth in this Section 3.2 or on Schedule 3.2, there are, and immediately following the Closing there will be, no Stock Rights or other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in the Company pursuant to any provision of Law, the Company's organizational documents, any Contract to which the Company is a party or otherwise; and, except as set forth in the Articles of Incorporation, on Schedule 3.2 or as contemplated by the Transaction Documents, the Company is not a party to, and to the Company's knowledge there is not, and immediately after the Closing, there will not be, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Company is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in the Company (whether outstanding or issuable upon conversion or exercise of outstanding securities) or regarding the declaration or payment of dividends or other distributions upon any such shares of capital stock or other equity interests in the Company (whether

7

outstanding or issuable upon conversion or exercise of outstanding securities). Except as set forth on Schedule 3.2, the execution, delivery and performance of this Agreement and the Transaction Documents by the parties hereto and thereto and the consummation of the transactions contemplated hereby and thereby will not trigger any anti-dilution adjustments under the terms of any equity securities disclosed or required to be disclosed pursuant to this Section 3.2. Except as set forth on Schedule 3.2 and other than under the Investor Rights Agreement, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act (as hereinafter defined). Except as set forth in item 11 on Schedule 3.2, immediately following the Closing, the shares of Common Stock issuable upon conversion of the Class G Preferred Stock issued to the Class F Investors under this Agreement will represent, in the aggregate, 11.60% of the outstanding capital stock of the Company on a Fully Diluted Basis (as defined in the Class G Agreement), and the voting power of such issued shares of Class G Preferred Stock will represent, in the aggregate, no less than 11.60% of the total number of votes able to be cast on any matter by any voting securities of the Company on a Fully Diluted Basis.

3.3. Authorization; No Breach (a) Except as set forth on Schedule 3.3, the execution, delivery and performance by the Company of this Agreement, the Class G Agreement and the other Transaction Documents to which the Company is a party, and the consummation by the Company of the transactions contemplated hereby and thereby, including the exchange and issuance of the Class G Preferred Stock pursuant to this Agreement, and the issuance of the Conversion Stock upon conversion of such Class G Preferred Stock, have been duly authorized by all required actions of the Company and its equity holders and will not (i) conflict with, or result in any violation of, any provision of the organizational documents of the Company or any federal, state, local or foreign law, statute, rule or regulation ("Laws") or Orders (as defined in the Class G Agreement) to which the Company is subject, (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any Contract, Company Intellectual Property, Accreditation, License or Permit (each as defined in the Class G Agreement) except for conflicts, defaults, breaches, rights or forfeitures which would not, individually or in the aggregate, have a Material Adverse Effect (as defined in the Class G Agreement) on the Company or (iii) require any consent to be obtained or notice to be given under any Contract, Accreditation, License or Permit except for consents and notices the lack of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

(b) The Transaction Documents to which the Company is a party constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies. The Class G Preferred Stock and the Conversion Stock, when issued in compliance with the provisions of this Agreement and the Certificate of Designation, will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. Subject to applicable law, the terms, designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of the Class G Preferred Stock will be as stated in the Certificate of Designation.

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3.4. Consents. No consent, approval, qualification, order or authorization or acknowledgement ("Governmental Consents") of, or registration, declaration, notification, application, or filing ("Governmental Filings") with, any court, administrative agency or commission, Accrediting Body (as hereinafter defined), State Approval Agency (as hereinafter defined) or other governmental authority or instrumentality ("Governmental Entity") is required to be obtained or made in connection with the valid execution, delivery or performance by the Company of any of the Transaction Documents or the Class G Agreement or the consummation of any of the transactions contemplated thereby.

3.5. Brokers. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

3.6. Offering Exemption. Assuming the accuracy of the representations and warranties made in Section 4 of this Agreement, Section 3 of the Class F Agreement and Section 3 of the Class G Agreement, the offer, sale and issuance of the Class G Preferred Stock as contemplated hereby and by the Class G Agreement are, the issuance of the Common Stock upon the conversion of the Class G Preferred Stock in accordance with the terms of the Certificate of Designation will be, and all prior issuance of securities of the Company were at the time made, exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and otherwise effected in compliance with all applicable federal and state securities Laws.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CLASS F INVESTORS

Subject to the provisions of Section 1.4, each of the Class F Investors severally, and not jointly, represents and warrants to the Company as of the date hereof and as of the Closing as follows:

4.1. Power; Authorization. The execution, delivery and performance of this Agreement and the other Transaction Documents to which such Class F Investor is a party, and the consummation of all transactions contemplated hereby and thereby have been duly authorized by all required actions on the part of the Class F Investor. Each of the Transaction Documents constitutes a valid and binding obligation of such Class F Investor enforceable against such Class F Investor in accordance with its terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies.

4.2. No Breach. The execution, delivery and performance by such Class F Investor of this Agreement and the other Transaction Documents and the consummation by such Class F Investor of the transactions contemplated hereby and thereby will not (i) conflict with, or result in any violation of, any provision of the organizational or formation documents of such Class F Investor or any Law or Order to which such Class F Investor is subject or (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or

9

acceleration, or cause the forfeiture of any right, under, any of its Contracts, Accreditations, Licenses or Permits.

4.3. Investment; Securities Laws. Such Class F Investor is acquiring the Class G Preferred Stock to be acquired under this Agreement for its own account, not as a nominee or agent, for investment and not with a view to the distribution thereof (within the meaning of the Securities Act) except in compliance with all applicable federal and state securities Laws. Such Class F Investor understands that (i) the Class G Preferred Stock has not been, and the Conversion Stock will not be, registered under the Securities Act or any state securities Laws, and (ii) the Class G Preferred Stock and the Conversion Stock may not be sold unless such disposition is registered under the Securities Act and applicable state securities Laws or is exempt from registration thereunder.

4.4. Accredited Investor. Such Class F Investor is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). The state in which such Class F Investor's principal office (or domicile, if such Class F Investor is an individual) is located is set forth in Schedule 4.4. Such Class F Investor has such knowledge and experience in financial and business matters that such Class F Investor is capable of evaluating the merits and risks of the investment to be made hereunder by such Class F Investor. Such Class F Investor has and has had access to all of the Company's material books and records and access to the Company's executive officers has been provided to such Class F Investor or to such Class F Investor's qualified agents. No Investor was formed for the purpose of this investment within the meaning of Rule 501 under the Securities Act.

4.5. Independent Investigation and Counsel. Such Class F Investor acknowledges to the Company and to the other Class F Investors that it has had an opportunity to conduct its own independent due diligence investigation of the Company and no Class F Investor is relying on any other Class F Investor for such Class F Investor's due diligence investigation of the Company. Such Class F Investor acknowledges to the other Class F Investors that it was represented by counsel of its own choosing and no Class F Investor is relying on the counsel of the Company or any other Class F Investors for any purpose whatsoever.

4.6 Title to Class F Preferred Stock. Such Class F Investor is the record owner of, and has, and on the Closing Date will have, record title to the shares of Class F Preferred Stock set forth next to such holder's name on Schedule 1.1 hereto, free and clear of all pledges, liens, encumbrances and adverse claims (other than pursuant to federal and state securities laws, the Board Representation Agreement and the Investor Rights Agreement).

4.7. Investor Qualifications. (a) Since July 1, 1994, no such Class F Investor (i) has exercised Substantial Control (as that term is defined in 34 C.F. R. 668.15(f)(2)) over an institution of higher education that participates in a Title IV program (other than the Company or the School) or Third-Party Servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV program requirement or (ii) owes a liability for a Title IV program violation.

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(b) Since July 1, 1994, no such Class F Investor who will have the ability to direct or cause the direction of the management or policies of the School has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

(c) No such Class F Investor has pled guilty to, pled nolo contendere to or been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or been judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds, including but not limited to, funds disbursed pursuant to the Title IV Programs.

(d) For purposes of this Section 4.7, the term "Class F Investor" shall mean only Equity-VII, MBO-VIII, Dain, Think, Gaylord, the Putnam entities identified in Schedule 1.1 and the Management Investors identified in Schedule
1.1. The term "Class F Investor" shall not mean or extend to general partners, partners, institutions, affiliates or individuals who have ownership interests in or who control, are controlled by or are under common control with Equity-VII, MBO-VIII, Dain, Think or Putnam.

SECTION 5. CONDITIONS TO CLOSING OF THE CLASS F INVESTORS

Each of Dain's, Think's and each Management Investor's obligation to consummate the Exchange at the Closing is subject to each of Putnam and the Forstmann Little Entities simultaneously consummating the Closing. Each of Forstmann Little Entities' and Putnam's obligation to consummate the Exchange at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

5.1. Representations and Warranties Correct. The representations and warranties made by the Company in Section 3 shall be true and correct when made and as of the time of the Closing with the same force and effect as if made at such time, other than such representations and warranties as are expressly stated to be made as of another date, which shall be true and correct as of such date.

5.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company at or prior to the Closing shall have been performed or complied with in all material respects.

5.3. Compliance Certificate. The Company shall have delivered to such Class F Investor a certificate of the Company, executed by the Chief Executive Officer of the Company, dated the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 5.1 and 5.2.

5.4. Opinion of Company's Counsel. Such Class F Investor shall have received from (a) Faegre & Benson LLP, counsel to the Company, an opinion addressed to each of the Class F Investors, dated the Closing Date, in the form set forth in Exhibit B-1 and (b) Drinker, Biddle & Reath LLP, special counsel to the Company, an opinion addressed to each of the Class F Investors, dated the Closing Date, in the form set forth in Exhibit B-2.

5.5. Officer's Certificate. The Company shall have delivered to such Class F Investor a certificate executed by an appropriate officer of the Company dated as of the Closing Date,

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certifying the following matters: (a) the corporate proceedings taken by the Company's Board of Directors (the "Board") and, if required, stockholders approving this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby; (b) the Articles of Incorporation,
(c) the By-laws of the Company and (d) the Certificate of Designation and the Amended and Restated Class E Certificate.

5.6. Second Amended and Restated Investor Rights Agreement. The Investor Rights Agreement shall have been executed by all parties thereto (other than the Forstmann Little Entities, in the case of the Forstmann Little Entities' obligation, and other than Putnam, in the case of Putnam's obligation) in the form attached hereto as Exhibit C.

5.7. Third Amended and Restated Co-Sale and Board Representation Agreement. The Board Representation Agreement shall have been executed in the form attached hereto as Exhibit D by all parties thereto (other than the Forstmann Little Entities, in the case of the Forstmann Little Entities' obligation, and other than Putnam, in the case of Putnam's obligation).

5.8. Registration Rights Amendment. Amendment No. 3 to the Registration Rights Agreement, dated as of June 16, 1998, by and among the Company and NCS Pearson, Inc., as successor to National Computer Systems, Inc. (the "Registration Rights Amendment") shall have been executed by all required parties substantially in the form attached hereto as Exhibit E.

5.9. 1998 Warrant Amendment. Amendment No. 3 to the Warrant to purchase Common Stock of the Company issued on June 16, 1998 to Legg Mason Wood Walker, Incorporated (the "1998 Warrant Amendment") shall have been executed by all required parties substantially in the form attached hereto as Exhibit F.

5.10. 2000 Warrant Amendment. Amendment No. 2 to the Warrant to purchase Common Stock of the Company issued on May 11, 2000 to Legg Mason Wood Walker, Incorporated (the "2000 Warrant Amendment") shall have been executed by all required parties substantially in the form attached hereto as Exhibit G.

5.11 Adoption of the Class G Certificate of Designation. The Certificate of Designation shall have been approved by the Board, approved, as required, by the shareholders of the Company, and filed with the Secretary of State of Minnesota in the form attached hereto as Exhibit A.

5.12 Amendment to the Class E Certificate of Designation. The Amended and Restated Class E Certificate shall have been approved by the Board, approved, as required, by the shareholders of the Company, and filed with the Secretary of State of Minnesota in the form attached hereto as Exhibit H.

5.13. Simultaneous Closing. Putnam, Dain, Think and the Management Investors shall simultaneously be consummating the Closing and the Class G Investors shall simultaneously be consummating the closing contemplated by the Class G Agreement.

5.14 Class G Agreement. None of the provisions, terms or conditions of the Class G Agreement in the form attached hereto as Exhibit I shall have been amended, modified, waived,

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terminated or otherwise altered in any respect without the consent of the Forstmann Little Entities and Putnam.

SECTION 6. CONDITIONS TO CLOSING OF THE COMPANY

The Company's obligation to consummate the Exchange at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

6.1. Representations and Warranties Correct. The representations and warranties made by the Class F Investors in Section 4 of this Agreement shall be true and correct in all material respects as of the time of Closing with the same force and effect as if made as of such time, other than such representations and warranties as are expressly stated to be made as of another date which shall be true and correct in all material respects as of such date.

6.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Class F Investors at or prior to the Closing shall have been performed or complied with in all material respects.

6.3. Intentionally Omitted.

6.4. Consents. The 1998 Warrant Amendment, 2000 Warrant Amendment and the Registration Rights Amendment shall have been executed by all required parties (other than the Company).

6.5. Shareholder Approval. The Certificate of Designation and the Amended and Restated Class E Certificate shall have received all requisite approval of the shareholders of the Company.

6.6 Second Amended and Restated Investor Rights Agreement. The Investor Rights Agreement shall have been executed in the form attached hereto as Exhibit C by the parties thereto (other than the Company).

6.7 Third Amended and Restated Co-Sale and Board Representation Agreement. The Board Representation Agreement shall have been executed in the form attached hereto as Exhibit D by the parties thereto (other than the Company).

6.8 Simultaneous Closing. Each of the Class F Investors shall simultaneously be consummating the Closing and the Class G Investors shall be simultaneously consummating the Closing contemplated by the Class G Agreement.

SECTION 7. TERMINATION

7.1. Termination. This Agreement may be terminated and the Exchange contemplated hereby may be abandoned at any time prior to the Closing Date:

(a) by mutual written consent of Equity-VII, MBO-VIII, Putnam and the Company;

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(b) by any of Equity-VII, MBO-VIII, Putnam or the Company, by giving written notice to the other parties hereto, if any Governmental Entity with jurisdiction over such matters shall have issued an Order restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Order shall have become final and non-appealable; provided, however, that the provisions of this Section 7 shall not be available to the Company, MBO-VIII, Equity-VII or Putnam unless the Company or such investors, as the case may be, shall have used their reasonable best efforts to oppose any such Order or to have such Order vacated or made inapplicable to the transactions contemplated by this Agreement;

(c) by any of Equity-VII, MBO-VIII, Putnam or the Company, by giving written notice to the other parties, if the Closing shall not have occurred on or prior to February 14, 2003, provided that the terminating party is not in material breach of its obligations under this Agreement; or

(d) by Equity-VII, MBO-VIII, Putnam or the Company, by giving written notice to the other parties, if the Class G Agreement is terminated in accordance with its terms.

7.2. Effect on Obligations. Termination of this Agreement pursuant to this
Section 7 shall terminate all obligations of the parties hereunder, except for the obligations under Sections 8.1, 8.2, 8.9 and 8.12; provided, however, that nothing herein shall relieve the defaulting or breaching party from any liability to the other party hereto.

SECTION 8. MISCELLANEOUS

8.1. Survival. All representations and warranties hereunder shall survive the Closing until the end of the 18th month following the Closing, and shall in no way be affected by any knowledge possessed by, or investigation of the subject matter thereof made by or on behalf of, the Class F Investors, provided, however, that the representations and warranties set forth in Sections 3.1, 3.2, 3.3(b), 4.1, 4.3, 4.4 and 4.6 shall survive indefinitely. All statements contained in any Transaction Document shall constitute representations and warranties by the Company under this Agreement. All covenants and agreements contained herein shall survive indefinitely until performed in accordance with their terms.

8.2. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Class F Investor, its affiliates, and each of their respective officers, directors, partners (and the partners of such partners), managing directors, employees, agents, advisors, consultants, representatives, successors and assigns (including any transferee of Class G Preferred Stock or Conversion Stock) from and against all Losses (as hereinafter defined) incurred or suffered by any of the foregoing (whether incurred or suffered directly or indirectly through ownership of Conversion Stock or Class G Preferred Stock) arising out of, relating to or resulting from (i) any breach of any of the representations or warranties made by the Company in this Agreement or in any of the Transaction Documents, and (ii) any breach of any of the covenants or agreements made by the Company in this Agreement or in any of the Transaction Documents. Each Class F Investor shall, severally and not jointly, indemnify, defend and hold harmless the Company, its affiliates, and each of their respective officers, directors, employees, agents, advisors, consultants, representatives, successors and assigns against all Losses arising from the breach of any of the representations, warranties, covenants or agreements made by such Class F Investor in

14

this Agreement or in any of the Transaction Documents or in any certificate or instrument delivered pursuant to Section 6.

(b) For purposes hereof, "Losses" shall mean each and all of the following items: claims, losses, liabilities, obligations, payments, actual and punitive damages, charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation and fees, expenses and disbursements of counsel, consultants and other experts), but excluding consequential damages. Any payment by the Company to any Class F Investor pursuant to this Section 8.2 shall be treated for all income Tax (as defined in the Class G Agreement) purposes as an adjustment to the price paid by such Class F Investor for the Class F Preferred Stock pursuant to the Class F Agreement.

(c) Each of the representations and warranties that contains any "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications shall be deemed to have been given as though there were no "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications for purposes of determining the amount of Losses under this Section 8.2, but not the accuracy of any representation or warranty.

(d) Any claim for indemnification pursuant to this Section 8.2 must be made before the expiration of the survival periods set forth in Section 8.1. No party shall be entitled to indemnification against a Loss arising from the breach of any representations or warranties of any other party unless the party seeking indemnification (the "indemnified party") shall have given to the party from whom indemnification is sought (the "indemnifying party") a claim notice relating to such Loss (a "Claim Notice") prior to expiration of the representation or warranty upon which the claim is based. The written Claim Notice shall be given reasonably promptly after the indemnified party becomes aware of the facts indicating that a claim for indemnification may be warranted, and shall state in reasonable detail (to the extent known) the nature of the claim. The failure of any indemnified party to give a Claim Notice shall not relieve the indemnifying party of its obligations under this Section 8.2, except to the extent that the indemnifying party is actually materially prejudiced by failure to give such Claim Notice. The indemnifying party may, through counsel of its own choosing and reasonably satisfactory to the indemnified party, assume the defense thereof or other indemnification obligation with respect thereto; provided, however, that any indemnified party shall be (a) entitled to participate in any such claim with counsel of its own choice but at its own expense and (b) shall be entitled to participate in any such claim with counsel of its own choice at the expense of the indemnifying party if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct. In any event, if the indemnifying party disputes the claim or otherwise fails to take reasonable steps necessary to defend diligently the action or proceeding within 20 days after receiving notice from such indemnified party, the indemnified party may assume such defense or other indemnification obligation and the fees and expenses of its attorneys will be covered by the indemnity provided for in this Section 8.2 if and upon determination of an indemnifying party's obligation therefor. The indemnifying party shall not, without the written consent of the indemnified party, which shall not be unreasonably withheld or delayed, settle or compromise any pending or threatened Litigation (as defined in the Class G Agreement) or claim in respect of which indemnification may be sought hereunder (whether or

15

not the indemnified party is an actual or potential party to such action or claim) or consent to the entry of any judgment (i) which does not, to the extent that an indemnified party may have any liability with respect to such action or claim, include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such action or claim, (ii) which includes any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, or (iii) in any manner that involves any injunctive relief against the indemnified party or may materially and adversely affect the indemnified party. The indemnified party may not compromise or settle any claim without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), unless the sole relief granted is equitable relief for which the indemnifying party would have no liability or to which the indemnifying party would not be subject.

8.3. Expenses. At the Closing, the Company shall pay, or reimburse the Forstmann Little Entities and Putnam for, all reasonable costs and expenses incurred by such Class F Investors in connection with the negotiation, execution, delivery, performance and consummation of this Agreement, the Prior Agreement (as defined in the Class G Agreement) and the transactions contemplated hereby and thereby. The Company shall pay its own expenses incurred in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby and thereby.

8.4. Delays or Omissions; Remedies. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any shares of Class G Preferred Stock or shares of Conversion Stock upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any shares of Class G Preferred Stock or shares of Conversion Stock with respect to any breach or default under this Agreement, or any waiver on the part of any holder of shares of Class G Preferred Stock or shares of Conversion Stock of any provisions or conditions of this Agreement, must be in writing signed by such holder and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by Law or otherwise afforded to any holder of shares of Class G Preferred Stock or shares of Conversion Stock, shall be cumulative and not alternative, and any person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages by reason of any breach of this Agreement and to exercise all other rights granted by Law, equity or otherwise.

8.5. Further Assurances. At any time or from time to time after the Closing, each party hereto agrees to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as any other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and by the other Transaction Documents and to otherwise carry out the intent of the parties hereunder and thereunder.

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8.6. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and each of the Class F Investors and the respective successors, assigns, heirs and personal representatives of the Company and each of the Class F Investors. The Company may assign its rights or obligations under this Agreement to any successor by merger, purchase, consolidation or otherwise of the Company, provided that such successor becomes a signatory to this Agreement. Prior to the Closing, the Class F Investors may not assign their right or obligation under this Agreement to acquire shares of Class G Preferred Stock. The Company acknowledges that, after the Closing, subject to compliance with applicable securities Laws and the applicable provisions of this Agreement and the other Transaction Documents, any of the Class F Investors may transfer all or part of the securities acquired by it hereunder and may, in its discretion, assign all or part of its rights and obligations under this Agreement to a transferee of such securities.

8.7 Publicity. No public release or announcement or other disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by the Company, without the prior consent of Putnam and Equity-VII and MBO-VIII (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of any securities exchange, in which case the Company shall use its best efforts to give notice to and consult with Putnam and Equity-VII and MBO-VIII in advance of such issuance.

8.8. Entire Agreement. This Agreement, the Class F Agreement and the Transaction Documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements, understandings or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof.

8.9. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy (with a confirmatory copy sent by a different means within three business days of such notice), nationally recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties:

(i) if to the Company, to:

Capella Education Company 222 South Ninth Street, 20th Floor Minneapolis, Minnesota 55402 Telecopy: (612) 339-8022 Attention: Chief Executive Officer

17

with a copy to:

Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402-3901 Telecopy: (612) 766-1600 Attention: David B. Miller, Esq.

and

(ii) if to Forstmann Little Entities, to:

Forstmann Little & Co.

767 Fifth Avenue, 44th Floor
New York, New York 10153
Telecopy: (212) 759-9059
Attention: Gordon A. Holmes

with copies to:

Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-4000
Attention: Robert C. Schwenkel, Esq.

and

(iii) if to Putnam, to:

Putnam Investment Management One Post Office Square Boston, Massachusetts 02109 Telecopy: (617) 292-1625 Attention: Michael DeFao

with copies to:

Ropes & Gray One International Place Boston, MA 02110 Telecopy: (617) 951-7050 Attention: Robert L. Nutt, Esq.

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and

(iv) if to Management Investors, to:

Stephen Shank Capella Education Company 222 South Ninth Street, 20th Floor Minneapolis, MN 55402 Telecopy: (612) 339-8022

and

(v) if to Dain, to:

DRW Venture Partners LP 60 South 6th Street Minneapolis, MN 55402 Attention: Amy Swaim

and

(vi) if to Think, to:

c/o ThinkEquity Holdings LLC 222 South Ninth Street, Suite 2800 Minneapolis, MN 55402 Attn: Board of Managers

and

(vii) if to Gaylord IRA:

USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 800 Nicollet Mall
J10 100 01

Minneapolis, MN 55402
Telecopy: (612) 303-6194
Attn: Gary Petrucci

and

(vii) if to Weiss IRA:

USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 800 Nicollet Mall
J10 100 01

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Minneapolis, MN 55402 Telecopy: (612) 303-6194 Attn: Gary Petrucci

All such notices, requests, consents and other communications shall be deemed to have been given when received.

8.10. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

8.11. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement.

8.12. Governing Law; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the Laws of the State of Minnesota without giving effect to the principles of conflict of laws. Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any and all rights to trial by jury in connection with any Litigation arising out of or relating to this Agreement or the transactions contemplated hereby.

8.13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement.

8.14. Massachusetts Business Trusts. A copy of the Agreement and Declaration of Trust of each Putnam fund or series investment company (each, a "Fund"), that is a Massachusetts business trust is on file with the Secretary of State of the Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of such Fund by the Trustees of the relevant Fund as Trustees, and not individually, and that the obligations of this Agreement are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of such Fund.

8.15. Confidentiality Agreement. Each Class F Investor agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information about the Company or Capella University, Inc. (the "School") that such Class F Investor obtains from the Company or the School pursuant to this Agreement (including the diligence in connection with, and negotiation of, this Agreement) unless (a) such information is or becomes publicly available other than as a result of a disclosure in breach of this Agreement by the Class F Investor or anyone to whom the Class F Investor transmitted such confidential information, (b) is or was known by the Class F Investor on a non-confidential basis from a source other than the Company or the School who is not known by the Class F Investor to be bound by a confidentiality agreement or other obligation of secrecy with respect to such confidential information or (c) is or was available to the Class F Investor on a non-confidential basis prior to its disclosure to such Class F Investor by the Company or the School. Notwithstanding the foregoing, information that is already in the public domain will not constitute confidential,

20

proprietary or secret information with respect to any Investor for purposes of this Agreement. In addition, if, in the Class F Investor's good faith judgment, the Class F Investor is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand or similar process), or must, in order to defend against or assert a claim in connection with this Agreement or the Transaction Documents, disclose any confidential information, the Class F Investor agrees to provide the Company with prompt written notice so that the Company may seek, at its expense, a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement and, in the event that such protective order or other remedy is not timely obtained, or that the Company waives compliance with the provisions of this Agreement, the Class F Investor may, without liability under this Section 8.15, furnish that portion of the confidential information which, in the Class F Investor's good faith judgment, is required for such purpose and will exercise its best efforts, at the Company's expense, to obtain reliable assurance that confidential treatment will be accorded the confidential information. Notwithstanding the foregoing, (A) any Class F Investor that is a legal entity may disclose summary financial information and a narrative description of the Company to its partners, stockholders or members and prospective partners and (B) any Class F Investor may disclose confidential information to its advisors, provided, in each case, that the recipients of such information have agreed to abide by the terms of this provision. Each Class F Investor acknowledges its responsibilities under federal and state securities laws with respect to trading in securities while aware of material non-public information obtained from the Company and with respect to providing such information to other persons who purchase or sell securities of the Company. The provisions of this Section 8.15 shall survive the termination of this Agreement and shall terminate with respect to any Class F Investor on the date which is two years after the date on which such Class F Investor no longer holds any shares of capital stock of the Company.

8.16 Class F Investor Consent. The Class F Investors hereby consent to the creation and issuance of the Class G Preferred Stock, with terms as are set forth in the Certificate of Designation, and the filing of the Certificate of Designation with the Secretary of State of Minnesota.

21

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

CAPELLA EDUCATION COMPANY

By  /s/ Stephen G. Shank
    ----------------------------------------
    Its Chairman and CEO

FORSTMANN LITTLE & CO.
EQUITY PARTNERSHIP-VII, L.P.

By: FLC XXXII PARTNERSHIP, L.P., its General
Partner

By  /s/
    ----------------------------------------
    A General Partner

FORSTMANN LITTLE & CO.
SUBORDINATED DEBT AND EQUITY
MANAGEMENT BUYOUT PARTNERSHIP-VIII, L.P.

By: FLC XXXIII Partnership, L.P., its
General Partner

By  /s/
    ----------------------------------------
    A General Partner

PUTNAM OTC AND EMERGING
GROWTH FUND

By Putnam Investment Management, LLC

By: /s/
    ---------------------------------------
       Name:
       Title:

22

TH LEE, PUTNAM INVESTMENT TRUST - TH LEE,
PUTNAM EMERGING OPPORTUNITIES PORTFOLIO

By TH Lee, Putnam Capital Management, LLC

By: /s/
    ----------------------------------------
       Name:
       Title:

/s/ Joshua Lewis
--------------------------------------------
JOSHUA LEWIS

/s/ Russell Gullotti
--------------------------------------------
RUSSELL GULLOTTI

/s/ Stephen G. Shank
--------------------------------------------
STEPHEN G. SHANK

/s/ Stephen J. Weiss
--------------------------------------------
STEPHEN J. WEISS

/s/ Elizabeth Rausch
--------------------------------------------
ELIZABETH RAUSCH

/s/ Michael Offerman
--------------------------------------------
MICHAEL OFFERMAN

/s/ Paul Schroeder
--------------------------------------------
PAUL SCHROEDER

/s/ Joseph Gaylord
--------------------------------------------
JOSEPH GAYLORD

23

DRW VENTURE PARTNERS LP

By RBC DAIN RAUSCHER CORP.
Its: General Partner

By: /s/ Mary Zimmer
    ----------------------------------------
    Mary Zimmer
    Its: Director of Finance and
         Administration, RBC CMS

THINKEQUITY INVESTMENT
PARTNERS LLC

By: ThinkEquity Holdings LLC
Its: Manager

By: /s/ Randy Mason
    ----------------------------------------
        Name: Randy Mason
        Its: Representative of the Board of
             Managers

USB PIPER JAFFRAY AS CUSTODIAN
FBO STEPHEN J. WEISS IRA
ACCOUNT #82694368

By: /s/ Michael D. Duffy
    ----------------------------------------
        Michael D. Duffy
        Its: Managing Director

USB PIPER JAFFRAY AS CUSTODIAN
FBO JOSEPH GAYLORD IRA
ACCOUNT #36086299

By: /s/ Michael D. Duffy
    ----------------------------------------
        Michael D. Duffy
        Its: Managing Director

24

THE S. JOSHUA AND TERESA D. LEWIS ISSUE
TRUST

By:  /s/
    ----------------------------------------
        Trustee for the S. Joshua and Teresa
        D. Lewis Issue Trust

25

Schedule 1.1

                                                                               SHARES OF
                                                                                CLASS F       SHARES OF CLASS G
                                                                               PREFERRED      PREFERRED STOCK TO
                                                                              STOCK TO BE       BE ISSUED IN
                               INVESTOR                                        EXCHANGED          EXCHANGE
                               --------                                       ------------    -------------------
Forstmann Little & Co. Equity Partnership-VII, L.P.                              400,298           421,536.84

Forstmann Little & Co., Subordinated Debt and Equity Management Buyout
Partnership-VIII, L.P.                                                           240,180           252,923.36

Putnam OTC and Emerging Growth Fund                                              213,493           224,820.42

TH Lee, Putnam Investment Trust - TH Lee, Putnam Emerging                        426,985           449,639.78
Opportunities Portfolio

Joshua Lewis                                                                      34,159            35,971.39

Russell Gullotti                                                                  10,000            10,530.58

Stephen G. Shank                                                                  17,079            17,985.17

USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account
#82694368                                                                          4,270             4,496.56

Stephen J. Weiss                                                                   8,540             8,993.11

Elizabeth Rausch                                                                   4,270             4,496.56

Michael Offerman                                                                   4,270             4,496.56

Paul Schroeder                                                                     6,405             6,744.83

USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299            4,270             4,496.56

DRW Venture Partners LP                                                           21,349            22,481.73

ThinkEquity Investment Partners LLC                                               21,349            22,481.73

The S. Joshua and Teresa D. Lewis Issue Trust                                      8,540             8,993.11
                                                                               ---------         ------------

         Total                                                                 1,425,457         1,501,088.29
                                                                               =========         ============

26

EXHIBIT 4.16

CAPELLA EDUCATION COMPANY


MAVERON CLASS G CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT



TABLE OF CONTENTS

                                                                                                                 Page
SECTION 1.  ISSUANCE AND SALE OF THE CLASS G PREFERRED STOCK.................................................     2
   1.1.     The Purchase.....................................................................................     2
   1.2.     The Closing......................................................................................     2
   1.3.     Deliveries at the Closing........................................................................     2
   1.4.     Additional Issuances; Adjustment.................................................................     3

SECTION 2.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................     4
   2.1.     Organization and Standing........................................................................     4
   2.2.     Power............................................................................................     4
   2.3.     Subsidiaries.....................................................................................     4
   2.4.     Capitalization...................................................................................     5
   2.5.     Authorization; No Breach.........................................................................     7
   2.6.     Material Contracts...............................................................................     7
   2.7.     Litigation.......................................................................................     8
   2.8.     Consents.........................................................................................     8
   2.9.     Title to Properties; Liens and Encumbrances; Assets of the Business..............................     8
   2.10.    Intellectual Property............................................................................     9
   2.11.    Taxes............................................................................................    10
   2.12.    Brokers..........................................................................................    11
   2.13.    Compliance with Laws; Permits; Accreditation and State Regulatory Requirements...................    11
   2.14.    Offering Exemption...............................................................................    15
   2.15.    Employees; Proprietary Information Agreement.....................................................    15
   2.16.    Insurance........................................................................................    16
   2.17.    [Intentionally Omitted]..........................................................................    16
   2.18.    Financial Statements.............................................................................    16
   2.19.    Related Party Transactions.......................................................................    17
   2.20.    Environmental Matters............................................................................    17
   2.21.    Employee Benefit Plans...........................................................................    18
   2.22.    Labor Relations; Employees.......................................................................    20
   2.23.    Absence of Changes...............................................................................    20
   2.24.    Suppliers and Customers..........................................................................    21
   2.25.    Suitability......................................................................................    21
   2.26.    Operations of the Company........................................................................    21
   2.27.    Recruitment; Admissions Procedures; Attendance; Reports..........................................    22
   2.28.    USDOE Demonstration Program......................................................................    22
   2.29.    Disclosure.......................................................................................    23

- i -

SECTION 3.  REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..................................................    23
   3.1.     Power; Authorization.............................................................................    23
   3.2.     No Breach........................................................................................    23
   3.3.     Investment; Securities Laws......................................................................    24
   3.4.     Accredited Investor..............................................................................    24
   3.5.     Rule 144.........................................................................................    24
   3.6.     Availability of Funds............................................................................    24
   3.7.     Brokers..........................................................................................    24
   3.8.     Independent Investigation and Counsel............................................................    24
   3.9.     Investor Qualifications..........................................................................    25

SECTION 4.  CONDITIONS TO CLOSING OF THE INVESTORS...........................................................    25
   4.1.     Representations and Warranties Correct...........................................................    25
   4.2.     Covenants........................................................................................    25
   4.3.     Material Adverse Change..........................................................................    26
   4.4.     Compliance Certificate...........................................................................    26
   4.5.     Opinion of Company's Counsel.....................................................................    26
   4.6.     Officer's Certificate............................................................................    26
   4.7.     Exchange Agreement...............................................................................    26
   4.8.     Second Amended and Restated Investor Rights Agreement............................................    26
   4.9.     Third Amended and Restated Co-Sale and Board Representation Agreement............................    26
   4.10.    Registration Rights Amendment....................................................................    26
   4.11.    1998 Warrant Amendment...........................................................................    26
   4.12.    2000 Warrant Amendment...........................................................................    27
   4.13     Certificate of Designation.......................................................................    27
   4.14     Amendment to the Class E Certificate of Designation..............................................    27

SECTION 5.  CONDITIONS TO CLOSING OF THE COMPANY.............................................................    27
   5.1.     Representations and Warranties Correct...........................................................    27
   5.2.     Covenants........................................................................................    27
   5.3.     Compliance Certificate...........................................................................    27
   5.4.     Consents.........................................................................................    27
   5.5.     Shareholder Approval.............................................................................    28
   5.6.     Second Amended and Restated Investor Rights Agreement............................................    28
   5.7.     Third Amended and Restated Co-Sale and Board Representation Agreement............................    28

SECTION 6.  PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS...........................................    28
   6.1.     Cooperation......................................................................................    28
   6.2.     No Solicitation..................................................................................    29

- ii -

   6.3.     Publicity........................................................................................    29
   6.4.     Conduct of Business Prior to the Closing.........................................................    29

SECTION 7.  POST-CLOSING AND ON-GOING COVENANTS..............................................................    29
   7.1.     Intentionally Omitted............................................................................    29
   7.2.     Intentionally Omitted............................................................................    29
   7.3.     Intentionally Omitted............................................................................    29
   7.4.     Representative...................................................................................    29
   7.5.     Financial Statements and Other Information.......................................................    31
   7.6.     Approval and Notification........................................................................    32
   7.7.     Corporate Existence..............................................................................    32
   7.8.     Conduct of Business..............................................................................    32
   7.9.     Intentionally Omitted............................................................................    33
   7.10.    Intentionally Omitted............................................................................    33
   7.11.    Intentionally Omitted............................................................................    33
   7.12.    Publicity........................................................................................    33

SECTION 8.  TERMINATION......................................................................................    33
   8.1.     Termination......................................................................................    33
   8.2.     Effect on Obligations............................................................................    33

SECTION 9.  MISCELLANEOUS....................................................................................    34
   9.1.     Survival.........................................................................................    34
   9.2.     Indemnification..................................................................................    34
   9.3.     Expenses.........................................................................................    36
   9.4.     Delays or Omissions; Remedies....................................................................    36
   9.5.     Further Assurances...............................................................................    36
   9.6.     Successors and Assigns...........................................................................    37
   9.7.     Entire Agreement.................................................................................    37
   9.8.     Notices..........................................................................................    37
   9.9.     Counterparts.....................................................................................    39
   9.10.    Titles and Subtitles; Definitions................................................................    39
   9.11.    Governing Law; Waiver of Jury Trial..............................................................    40
   9.12.    Severability.....................................................................................    40
   9.13. Confidentiality Agreement...........................................................................    40

- iii -

INDEX OF DEFINED TERMS

Accrediting Body..........................             2.13(k)
Amended and Restated Class E Certificate..            Recitals
Articles of Incorporation.................              1.4(c)
Benefit Plan..............................             2.21(a)
Board.....................................                 4.6
Board Representation Agreement............            Recitals
Certificate of Designation................            Recitals
Claim Notice..............................              9.2(e)
Class A Preferred Stock...................                 2.4
Class B Preferred Stock...................                 2.4
Class C Preferred Stock...................                 2.4
Class D Preferred Stock...................                 2.4
Class F Preferred Stock...................            Recitals
Class G Preferred Stock...................            Recitals
Closing...................................                 1.2
Closing Date..............................                 1.2
Code......................................             2.21(a)
Common Stock..............................            Recitals
Company...................................            Preamble
Company Intellectual Property.............                2.10
Company's Accountants.....................              7.5(b)
Contract..................................                9.10
Conversion Stock..........................                 2.4
designated employee.......................                9.10
Employee..................................             2.21(a)
Employee Agreement........................             2.21(a)
Encumbrances..............................                 2.9
Environmental Law.........................                2.20
Equity-VII................................            Preamble
ERISA.....................................             2.21(a)
Exchange Act..............................                2.19
Exchange Agreement........................            Recitals
Financial Statements......................                2.18
Fully Diluted Basis.......................                 1.1
Governmental Consents.....................                 2.8
Governmental Entity.......................                 2.8
Governmental Filings......................                 2.8
including.................................                9.10
indemnified party.........................              9.2(c)
indemnifying party........................              9.2(c)
Intellectual Property Rights..............                2.10
Investor Rights Agreement.................            Recitals
Investors.................................            Preamble
IRS.......................................             2.21(c)
Laws......................................                 2.5
Litigation................................                 2.7
Losses....................................              9.2(b)
Management Investors......................            Preamble
material..................................                9.10
Material Adverse Effect on the Company....                9.10
Material Contracts........................                 2.6
Orders....................................                 2.7
person....................................                9.10
Preferred Stock...........................                 2.4
Purchase..................................                 1.1
Purchase Price............................                 1.1
School....................................                2.13
Securities Act............................                2.14
State Approval Agency.....................              2.3(e)
Stock Rights..............................                 2.4
Subsidiary................................                9.10
Tax Return................................             2.11(d)
Tax(es)...................................             2.11(d)
Third Party Consents......................                 6.1
Title IV..................................             2.13(e)
to the Company's knowledge................                9.10
Transaction Documents.....................                 2.2
USDOE.....................................             2.13(e)

- iv -

LIST OF EXHIBITS

Exhibits                                                                                     Section
--------                                                                                     -------
A        Certificate of Designation of Class G Convertible Preferred Stock...............    Recitals
B        Exchange Agreement..............................................................    Recitals
C        People included in definition of "the Company's knowledge" and
         "designated employees"..........................................................        9.10
D-1      Opinion of Faegre & Benson, LLP.................................................         4.5
D-2      Opinion of Drinker, Biddle & Reath LLP..........................................         4.5
E        Amended and Restated Investor Rights Agreement..................................         4.9
F        Amended and Restated Board Representation Agreement.............................        4.10
G        Registration Rights Amendment...................................................        4.11
H        1998 Warrant Amendment..........................................................        4.12
I        2000 Warrant Amendment..........................................................        4.13
J        Amended and Restated Certificate of Designation of Class E
         Convertible Preferred Stock.....................................................    Recitals

- v -

CAPELLA EDUCATION COMPANY

PREFERRED STOCK PURCHASE AGREEMENT

THIS AGREEMENT, dated as of January 15, 2003, by and among Capella Education Company, a Minnesota corporation (the "Company"), Maveron Equity Partners 2000, L.P., a Delaware limited partnership, Maveron Equity Partners 2000-B, L.P., a Delaware limited partnership, MEP 2000 Associates LLC, a Delaware limited liability company, (collectively the "Maveron Entities") and David Smith, a resident of Minnesota ("Smith" and together with the Maveron Entities, collectively the "Investors") shall supersede and replace that certain Maveron Class F Convertible Preferred Stock Purchase Agreement, dated as of September 25, 2002, by and among the Investors and the Company, as amended (the "Prior Agreement"). The Prior Agreement is hereby cancelled and terminated in its entirety and shall be of no further force and effect.

W I T N E S S E T H:

WHEREAS, on February 21, 2002, the Company sold Forstmann Little & Co. Equity Partnership-VII, L.P. ("Equity-VII"), Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P. ("MBO-VIII"), Putnam OTC Emerging Growth Fund ("Putnam OTC"), TH LEE, Putnam Investment Trust-TH LEE, Putnam Emerging Opportunities Portfolio ("Putnam TH LEE", and, together with Putnam OTC, collectively "Putnam"), ThinkEquity Investment Partners LLC ("ThinkEquity"), DRW Venture Partners LLP ("Dain") and the members of Capella's management or board of directors (or accounts under their direction) that are listed on Schedule 1.1 thereto (the "Management Investors"), pursuant to the Class F Convertible Preferred Stock Purchase Agreement dated January 31, 2002 (the "Class F Purchase Agreement"), 1,425,457 shares of Class F Convertible Preferred Stock of the Company (the "Class F Preferred Stock"); and

WHEREAS, upon the terms and subject to the conditions contained in this Agreement, the Company wishes to sell to the Investors and the Investors wish to purchase from the Company shares of newly issued Class G Convertible Preferred Stock, par value $.01 per share, of the Company (the "Class G Preferred Stock"), which shares will be initially convertible into the equivalent number of shares of Common Stock, par value $.10 per share, of the Company (the "Common Stock"), and will have such other terms as are to be set forth in the Certificate of Designation for the Class G Preferred Stock, in the form of Exhibit A (the "Certificate of Designation"); and

WHEREAS, on or prior to the Closing, Equity-VII, MBO-VIII, Putnam, ThinkEquity, Dain, Joseph Gaylord ("Gaylord"), the Management Investors and the S. Joshua and Teresa D. Lewis Issue Trust (collectively referred to as the "Class F Investors") intend to enter into an Exchange Agreement, in the form of Exhibit B (the "Exchange Agreement") pursuant to which the Class F Investors will agree severally to

- 1 -

exchange each of the outstanding shares of Class F Preferred Stock held by such investor for shares of Class G Preferred Stock (the "Exchange"); and

WHEREAS, on or prior to Closing (as hereinafter defined), the parties hereto, SmartForce plc ("Smart Force"), NCS Pearson, Inc. ("Pearson"), Cherry Tree Ventures IV ("Cherry Tree"), Forstmann Little & Co. Equity Partnership-VI, L.P. ("Equity-VI" and, together with Equity-VII and MBO-VIII, collectively the "Forstmann Little Entities"), Equity-VII, MBO-VIII, Putnam, ThinkEquity, Dain, Gaylord, the Management Investors, Judy Shank, Susan Shank, Mary Retzlaff and the S. Joshua and Teresa D. Lewis Issue Trust intend to enter into a Third Amended and Restated Co-Sale and Board Representation Agreement (the "Board Representation Agreement") to become effective simultaneously with the Closing; and

WHEREAS, on or prior to the Closing, the parties hereto, the Forstmann Entities, Putnam, SmartForce, the Management Investors, ThinkEquity, Dain and Gaylord intend to enter into a Second Amended and Restated Investor Rights Agreement (the "Investor Rights Agreement") to become effective simultaneously with the Closing; and

WHEREAS, on or prior to the Closing, the Company will have amended the Certificate of Designation for the Class E Convertible Preferred Stock of the Company (the "Class E Preferred Stock"), in the form of Exhibit J (the "Amended and Restated Class E Certificate").

NOW THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

SECTION 1. ISSUANCE AND SALE OF THE CLASS G PREFERRED STOCK.

1.1. The Purchase. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, the Investors shall purchase from the Company, and the Company shall sell to the Investors (as set forth on Schedule 1.1), an aggregate of 683,452.20 shares of Class G Preferred Stock (the "Purchase") at a purchase price of $11.12 per share and an aggregate purchase price of $7,599,988.42 (the "Purchase Price"). Immediately following the Closing, and assuming no valid exercise of dissenters' rights in connection with the adoption of the Amended and Restated Class E Certificate and assuming the Exchange occurs, the Investors in the aggregate shall own 5.28% of the equity of the Company on a fully diluted basis (i.e., Common Stock and assuming the exercise of all 12,936,941.80 outstanding stock options and other outstanding Stock Rights (as hereinafter defined), including the conversion of the Preferred Stock (as hereinafter defined), and the issuance of all shares of Common Stock reserved for issuance upon the future grant of 470,464 employee options and other

- 2 -

Common Stock-based awards, but excluding future contributions under the Company's Employee Stock Ownership Plan), all as of the Closing and as more fully described and set forth in Schedule 2.4 to this Agreement ("Fully Diluted Basis").

1.2. The Closing. The closing of the transactions contemplated by the Purchase (the "Closing") shall take place at the offices of Faegre & Benson LLP, 2200 Wells Fargo Center, Minneapolis, Minnesota, at 10:00 a.m. on or about January 22, 2003 or at such other time or place or on such other date as the Company and the Investors may mutually determine (such date, the "Closing Date").

1.3. Deliveries at the Closing. At the Closing, the Company shall deliver to each Investor a certificate or certificates representing the shares of Class G Preferred Stock purchased by such Investor, registered in the name of such Investor or its nominee affiliate, against receipt at the Closing by the Company from such Investor of its portion of the Purchase Price, which shall be paid by wire transfer to an account designated at least two business days prior to the Closing Date by the Company.

1.4. Additional Issuances; Adjustment. (a) In lieu of a claim for indemnification under Section 9 of this Agreement arising out of the inaccuracy in the representation and warranty set forth in the last sentence of Section 2.4, in the event that at any time after the Closing the representation and warranty set forth in the last sentence of Section 2.4 is determined not to have been true as of the Closing, the Company shall issue to the Investors (on a pro rata basis), at no cost to the Investors, and as an adjustment to the purchase price paid by the Investors per share of Class G Preferred Stock, an additional amount of Class G Preferred Stock such that, if such issuance of additional Class G Preferred Stock had been made at the Closing, such representation and warranty would have been true and accurate in all respects at the Closing.

(b) If at the time of any required adjustment pursuant to Section 1.4(a) all shares of Class G Preferred Stock have been converted into shares of Common Stock, the Company shall, to the extent of authorized capital available therefor, promptly issue to the Investors (on a pro rata basis), at no cost to the Investors and as an adjustment to the purchase price paid by the Investors per share of Class G Preferred Stock, an additional amount and kind of Common Stock equal to the amount and kind of Common Stock issuable upon the conversion (based on the conversion ratio in effect at the time the last shares of Class G Preferred Stock were converted into shares of Common Stock) of the amount of Class G Preferred Stock which would have been issued with respect to such adjustment pursuant to Section 1.4(a) if such adjustment had been made immediately prior to the time the last shares of Class G Preferred Stock were converted into shares of Common Stock.

(c) Any additional shares of Class G Preferred Stock and Common Stock issued to the Investors pursuant to this Section 1.4 shall be treated as if they were

- 3 -

issued at the Closing and shall reflect any dividends or other distributions which would have accrued or have been payable with respect to, and the application of any anti-dilution, ratable treatment or similar provisions (as set forth in the Articles of Incorporation of the Company (the "Articles of Incorporation"), the Certificate of Designation, applicable Law (as hereinafter defined) or otherwise) which would have been applicable to, such shares of Class G Preferred Stock and Common Stock had they been issued at the Closing.

(d) In connection with any issuances of stock determined to be required pursuant to this Section 1.4, the Company (i) shall take all action within its control necessary to cause its Articles of Incorporation to be amended to increase the authorized capital of the Company to permit such issuances and (ii) shall reserve a sufficient number of shares of Common Stock for issuance to the Investors upon the conversion of any shares of Class G Preferred Stock so issued. Any shares of Class G Preferred Stock or Common Stock issued to the Investors pursuant to this Section 1.4 shall, when issued, be validly issued and fully paid and nonassessable with no personal liability attaching to the ownership thereof and free and clear of all Encumbrances (as hereinafter defined).

SECTION 2. Representations and Warranties of the Company.

The Company represents and warrants to the Investors as of the date hereof and as of the Closing as follows (with all references to the Company in this
Section 2 (other than Sections 2.2, 2.4 and 2.5(b)) being deemed to include references to the Subsidiaries (as hereinafter defined)):

2.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as currently conducted. Except as set forth on Schedule 2.1, the Company is duly qualified to transact business as a foreign entity in, and is in good standing under the Laws of, each jurisdiction where the failure to be so qualified would, individually or in the aggregate, have a Material Adverse Effect on the Company (as hereinafter defined). The Company has made available to the Investors true and complete copies of the organization and governance documents of the Company.

2.2. Power. The Company has all requisite power and authority (i) to execute and deliver this Agreement, the Investor Rights Agreement, the Board Representation Agreement, the Schedules to this Agreement and all other certificates, instruments and other documents executed and delivered by the Company at the Closing pursuant to Section 4 hereof (collectively, together with the Certificate of Designation and the Amended and Restated Class E Certificate, the "Transaction Documents") (ii) to execute and deliver Amendment No. 3 to the Registration Rights Agreement, dated as of June 16, 1998, by and among the Company and NCS Pearson, Inc., as successor to

- 4 -

National Computer Systems, Inc. (the "Registration Rights Amendment"), Amendment No. 2 to the Warrant to purchase Common Shares of the Company issued on May 11, 2000 to Legg Mason Wood Walker, Incorporated (the "2000 Warrant Amendment"), Amendment No. 3 to the Warrant to purchase Common Shares of the Company issued on June 16, 1998 to Legg Mason Wood Walker, Incorporated (the "1998 Warrant Amendment") and the Exchange Agreement, and (iii) to carry out and perform its obligations hereunder and thereunder. Upon receipt of all requisite approval of the shareholders of the Company, the Company will have all requisite power and authority to execute and file with the Secretary of State of Minnesota the Certificate of Designation and the Amended and Restated Class E Certificate.

2.3. Subsidiaries. (a) Except as set forth on Schedule 2.3, the Company has no Subsidiaries and does not own, hold or control, directly or indirectly, any rights to acquire any shares of stock or any other debt or equity interest in any person (as hereinafter defined).

(b) Schedule 2.3 sets forth the authorized and outstanding equity capitalization of each of the Subsidiaries, including the amount and kind of equity interests held by the Company in the Subsidiary and the percentage interest represented thereby. All of the outstanding shares of capital stock of each of the Subsidiaries have been validly issued and are fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and are owned by the Company free and clear of all Encumbrances. There are no outstanding warrants, options, agreements, convertible securities or other Contracts (as hereinafter defined) pursuant to which either of the Subsidiaries is or may become obligated to issue any shares of the capital stock of or other equity interests in such Subsidiary, and there are no other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in any of the Subsidiaries pursuant to any provision of Law, the Subsidiary's organizational documents, any Contract to which the Subsidiary is a party or otherwise; and none of the Subsidiaries is a party to, and to the Company's knowledge there is not, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Subsidiary is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in any of the Subsidiaries (whether outstanding or issuable upon conversion or exercise of outstanding securities).

2.4. Capitalization. The authorized and outstanding equity capitalization of the Company on the date hereof is as set forth on Schedule
2.4. As of the date hereof and immediately prior to the Closing (except for exercise or conversion of outstanding Stock Rights set forth on Schedule 2.4, assuming no valid exercise of dissenters' rights in connection with the adoption of the Amended and Restated Class E Certificate and

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assuming the Exchange has not yet occurred), the capital stock of the Company authorized, outstanding or reserved for issuance consists of (i) 15,000,000 shares of Common Stock, of which 1,548,427 shares are issued and outstanding,
(ii) 3,000,000 shares of Class A Convertible Preferred Stock ("Class A Preferred Stock"), of which 2,810,000 shares are issued and outstanding, (iii) 1,180,000 shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), of which 460,000 shares are issued and outstanding, (iv) 1,022,222 shares of Class D Convertible Preferred Stock ("Class D Preferred Stock", and together with the Class A Preferred Stock, Class B Preferred Stock, the Class E Preferred Stock, the Class F Preferred Stock and the Class G Preferred Stock, collectively the "Preferred Stock"), of which 1,022,222 shares are issued and outstanding, (v) 2,596,491 shares of Class E Preferred Stock of which 2,596,491 shares are issued and outstanding, (vi) 1,425,457 shares of Class F Preferred Stock of which 1,425,457 shares are issued and outstanding (vi) 3,720,901 shares of preferred stock, undesignated as to class or series, (vii) 1,408,893 shares of Common Stock are reserved for issuance pursuant to employee stock options granted pursuant to the Company's stock option plans and 470,464 shares of Common Stock are reserved for issuance for future grants of employee stock options pursuant to the Company's stock option plans, (viii) 331,048 shares of Common Stock are reserved for issuance upon the exercise of any outstanding warrants of the Company and (ix) 8,373,816 shares of Common Stock have been duly reserved for issuance upon conversion of the outstanding shares of convertible preferred stock of the Company. Except as set forth in item 11 on Schedule 2.4, immediately following the Closing and the Exchange (and prior to the Company filing a certificate of cancellation for the Class F Preferred Certificate of Designation), the capital stock of the Company authorized, outstanding or reserved for issuance will be as set forth in the preceding sentence except that
(i) no shares of Class F Preferred Stock will be outstanding, (ii) 2,184,550 shares of Class G Preferred Stock shall be authorized and a total of 2,184,540.49 shares of Class G Preferred Stock will have been issued and be outstanding, (iii) a total of 1,536,351 shares of preferred stock will be undesignated as to class or series and (iv) a total of 9,178,109 shares of Common Stock will have been duly reserved for issuance upon conversion of the outstanding shares of Preferred Stock (including an additional 2,184,540 shares of Common Stock that will have been duly reserved for the issuance upon conversion of the Class G Preferred Stock issued pursuant to this Agreement (the "Conversion Stock")). All of the outstanding shares of capital stock of the Company were duly authorized and validly issued and are fully paid and nonassessable.

Except for exercise or conversion of outstanding Stock Rights set forth on Schedule 2.4 and Stock Rights granted pursuant to existing stock option plans, Schedule 2.4 sets forth a list of (i) all holders of equity interests in the Company on the date hereof, including the amount and kind of equity interests held by each such holder, (ii) except as set forth in item 11 on Schedule 2.4, all holders of capital stock of the Company immediately following the Closing, and the number and type of shares to be held by each, and (iii) all outstanding warrants, options, agreements, convertible securities or other Contracts

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pursuant to which the Company is or may become obligated to issue any shares of the capital stock or other securities of or other equity interests in the Company ("Stock Rights") and the holders thereof. Except as set forth in this
Section 2.4 or on Schedule 2.4, there are, and immediately following the Closing there will be, no Stock Rights or other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in the Company pursuant to any provision of Law, the Company's organizational documents, any Contract to which the Company is a party or otherwise; and, except as set forth in the Articles of Incorporation, on Schedule 2.4 or as contemplated by the Transaction Documents, the Company is not a party to, and to the Company's knowledge there is not, and immediately after the Closing, there will not be, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Company is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in the Company (whether outstanding or issuable upon conversion or exercise of outstanding securities) or regarding the declaration or payment of dividends or other distributions upon any such shares of capital stock or other equity interests in the Company (whether outstanding or issuable upon conversion or exercise of outstanding securities). Except as set forth in item 12 on Schedule 2.4, the execution, delivery and performance of this Agreement and the Transaction Documents by the parties hereto and thereto and the consummation of the transactions contemplated hereby and thereby will not trigger any anti-dilution adjustments under the terms of any equity securities disclosed or required to be disclosed pursuant to this Section 2.4. Except as set forth on Schedule 2.4 and other than under the Investor Rights Agreement, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act (as hereinafter defined). Except as set forth in item 11 on Schedule 2.4, immediately following the Closing, the shares of Common Stock issuable upon conversion of the Class G Preferred Stock issued to the Investors under this Agreement will represent, in the aggregate, 5.28% of the outstanding capital stock of the Company on a Fully Diluted Basis, and the voting power of such issued shares of Class G Preferred Stock will represent, in the aggregate, no less than 5.28% of the total number of votes able to be cast on any matter by any voting securities of the Company on a Fully Diluted Basis.

2.5. Authorization; No Breach. (a) Except as set forth on Schedule 2.5, the execution, delivery and performance by the Company of this Agreement, the other Transaction Documents to which the Company is a party and the Exchange Agreement, and the consummation by the Company of the transactions contemplated hereby and thereby, including the offer, sale and issuance of the Class G Preferred Stock pursuant to this Agreement, and the issuance of the Conversion Stock upon conversion of such Class G Preferred Stock, have been duly authorized by all required actions of the Company and its equity holders and will not (i) conflict with, or result in any violation of, any provision

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of the organizational documents of the Company or any federal, state, local or foreign law, statute, rule or regulation ("Laws") or Orders (as hereinafter defined) to which the Company is subject, (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any Contract, Company Intellectual Property, Accreditation, License or Permit (each as hereinafter defined), except for conflicts, defaults, breaches, rights or forfeitures which would not, individually or in the aggregate, have a Material Adverse Effect on the Company or (iii) require any consent to be obtained or notice to be given under any Contract, Accreditation, License or Permit except for consents and notices the lack of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

(b) The Transaction Documents to which the Company is a party and the Exchange Agreement constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies. The Class G Preferred Stock and the Conversion Stock, when issued in compliance with the provisions of this Agreement, will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. Subject to applicable law, the terms, designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of the Class G Preferred Stock will be as stated in the Certificate of Designation.

2.6. Material Contracts. Copies (or, where oral, a written description) of the mortgages, indentures, leases and other Contracts to which the Company is a party or by which it is bound and which involve current obligations of, or payments to, the Company in excess of $100,000 or are otherwise material to the Company (the "Material Contracts") have been delivered or made available to the Investors. The Material Contracts are listed on Schedule 2.6. All of the Material Contracts are valid and binding agreements of the Company and in full force and effect and enforceable against and, to the Company's knowledge, by the Company in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies, except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Except as set forth on Schedule 2.6, the Company is not in default or breach under any of the Material Contracts and, to the Company's knowledge, no other party to any of the Material Contracts is in default or breach thereunder.

2.7. Litigation. Except as set forth on Schedule 2.7, there are no actions, suits, proceedings, or governmental investigations, inquiries or audits
(other than education audits in the ordinary course of business) ("Litigation") pending, or, to the Company's knowledge threatened, to which the Company is a party or its property,

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including without limitation any Company Intellectual Property, is subject or against any officer, director or employee of the Company in connection with such person's relationship with or actions taken on behalf of the Company. None of the matters identified in item 11 of Schedule 2.7 has had, or will have, individually or in the aggregate, a Material Adverse Effect on the Company. The Company is not subject to any outstanding judgment, order, writ, injunction, stipulation, ruling, decree or award ("Orders").

2.8. Consents. Schedule 2.8 sets forth each consent, approval, qualification, order or authorization or acknowledgement ("Governmental Consents") of, or registration, declaration, notification, application, or filing ("Governmental Filings") with, any court, administrative agency or commission, Accrediting Body (as hereinafter defined), State Approval Agency (as hereinafter defined) or other governmental authority or instrumentality ("Governmental Entity") that is required to be obtained or made in connection with the valid execution, delivery or performance by the Company of any of the Transaction Documents or the Exchange Agreement or the consummation of any of the transactions contemplated thereby.

2.9. Title to Properties; Liens and Encumbrances; Assets of the Business. (a) Except as set forth on Schedule 2.9 or the Financial Statements or as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company has good and marketable title to all of the assets and properties which it purports to own, and, with respect to the assets and properties leased by the Company, holds valid and subsisting leasehold interests therein, free and clear of any mortgages, judgments, claims, liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever ("Encumbrances") except Encumbrances for taxes not yet due and payable. Except as set forth on Schedule 2.9, the assets and properties owned by, or leased to, the Company are sufficient for the conduct of the business and operation of the Company as currently conducted.

(b) The business of the Company is conducted exclusively by the Company and the Subsidiaries. All assets used or held for use in the conduct of such business are owned by the Company and/or the Subsidiaries or the rights to use such assets are held by the Company and/or the Subsidiaries pursuant to valid and binding Contracts, leases, agreements or other rights.

2.10. Intellectual Property. The term "Intellectual Property Rights" shall mean (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, revisions, divisions, extensions and reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, trade names, domain names and corporate names, and including all goodwill associated therewith, and all applications, registrations and renewals in connection

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therewith, (iii) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith, (iv) all mask works and all applications, registrations and renewals in connection therewith, (v) all trade secrets and confidential business information (including but not limited to research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, flowcharts, block diagrams, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (vi) all computer software (including data, website content and related documentation), (vii) all copies and tangible embodiments of any of the foregoing (in whatever form or medium) and (viii) all licenses, sublicenses, permissions or Contracts in connection with any of the foregoing. The term "Company Intellectual Property" shall mean all Intellectual Property Rights which are used in connection with the conduct of the business of the Company as currently conducted.

Other than off-the-shelf software and work for hire agreements, each item of Company Intellectual Property which is material to the Company's business and is a patent, patent application, trademark, trademark application, service mark, service mark application, trade name, domain name, corporate name, copyright registration, copyright application, mask work registration, mask work application or license, sublicense, agreement, or permission, is set forth on Schedule 2.10. Except as set forth on Schedule 2.10:

(a) except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company either (i) is the sole and exclusive owner of and possesses all right, title and interest in and to (free and clear of any Encumbrances), all Company Intellectual Property (including but not limited to the Intellectual Property Rights set forth on Schedule 2.10),
(ii) has rights to use in the United States and in the manner presently used by the Company all Company Intellectual Property pursuant to license, sublicense, Contract, or permission (and is not contractually obligated to grant any rights to any third party in respect thereof) or (iii) has the right to require the applicant of any Company Intellectual Property which constitutes an application for registration, including, but not limited to, all patent applications, trademark applications, service mark applications, copyright applications and mask work applications, to transfer to the Company all right, title and interest in the application and of the registration once it issues;

(b) all Company Intellectual Property which are registrations, including, but not limited to, all registered patents, trademarks, service marks, domain names, copyrights and mask works, are valid and subsisting and in full force and effect except where the failure to be valid, subsisting and in full force and effect would not have a Material Adverse Effect on the Company;

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(c) to the Company's knowledge, no third party, including any employee or former employee of the Company, has interfered with, infringed upon, diluted, misappropriated, come into conflict with or used without authorization any Company Intellectual Property;

(d) to the Company's knowledge, the Company has not infringed on, interfered with or misappropriated, and the continued operation of the Company's business as currently conducted, will not infringe on, interfere with, dilute, misappropriate or otherwise come into conflict with, any Intellectual Property Right of any other person. None of the matters identified under the heading "2.10(d) Infringement, Interference or Misappropriation" on Schedule 2.10 has had, or will have, individually or in the aggregate, a Material Adverse Effect on the Company;

(e) to the Company's knowledge, no claim of infringement, interference or misappropriation of any Intellectual Property Right of any other person or other claim otherwise contesting the validity, enforceability, use or ownership of any Company Intellectual Property (other than claims made by a Governmental Entity during the examination of an application for registration of such Company Intellectual Property) has been asserted or, to the Company's knowledge, is threatened by any person (including any claim that the Company must license or refrain from using any Intellectual Property Rights of any third party);

(f) the Company is not currently licensing or sublicensing its rights in any material Company Intellectual Property to any third party other than nonexclusive licenses in the ordinary course of business; and

(g) the School and/or the Company owns the copyright in the course design (namely the course structure, the course outline and the course syllabus) of all courses offered on the School's or the Company's website(s), except where the failure to own the copyright would not have a Material Adverse Effect on the Company.

2.11. Taxes. (a) Except as set forth on Schedule 2.11, (i) the Company has timely filed in accordance with all applicable Laws (taking into account valid extensions) all Tax Returns (as hereinafter defined) required to be filed by it, and all such Tax Returns are true, correct and complete in all material respects, (ii) all Taxes (as hereinafter defined) which are due and payable by the Company, including any Taxes levied upon any of its properties, assets, income or franchises, have been timely paid, (iii) all amounts required to be collected or withheld by the Company have been collected or withheld and any such amounts that are required to be remitted to any taxing authority have been duly and timely remitted by the Company, (iv) no examination, claim, assessment, deficiency or other Litigation is pending or, to the Company's knowledge, threatened, with regard to any Taxes or Tax Returns of the Company and (v) the

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Company is not (nor has it ever been) a party to or bound by any Tax sharing or Tax allocation or similar Contract.

(b) Schedule 2.11 sets forth the method of accounting used by the Company for federal, state, local and foreign Tax purposes, and such method has been used by the Company at all times since the date of its organization, except as set forth in Schedule 2.11.

(c) For purposes of this Agreement, "Tax" or "Taxes" means any taxes, assessment, duties, fees, levies, imposts, deductions, or withholdings, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever, imposed by any taxing authority of any government or country or political subdivision of any country, and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon and includes any liability for Taxes of another person by Contract, as a transferee or successor, under Treasury Regulation 1.1502-6 or analogous state, local or foreign law provision or otherwise, and "Tax Return" means any report, return, statement, estimate, declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes.

2.12. Brokers. Except as set forth on Schedule 2.12, the Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

2.13. Compliance with Laws; Permits; Accreditation and State Regulatory Requirements. Except as set forth on Schedule 2.13, the Company and Capella University Inc. (the "School") (a) have complied in all material respects with all Laws applicable to them and their business and that pertain to the operation of the School (b) have all licenses, accreditations, certificates, permits, consents, franchises, approvals, authorizations, and other approvals of federal, state and local governments or regulatory bodies, State Approval Agencies and of Accrediting Bodies (the "Accreditations, Licenses and Permits") material to and necessary in the conduct of the education, learning or training business and operations of the Company and the School as currently conducted. Schedule 2.13 contains a complete and correct list and summary description of all Accreditations, Licenses and Permits. Except for instances that would not, individually or in the aggregate, have a Material Adverse Effect on the Company,
(i) all of the Accreditations, Licenses and Permits of each of the Company and the School are in full force and effect, (ii) the Company and the School are in compliance with the terms and conditions of such Accreditations, Licenses and Permits and have received no notices

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that the Company or the School are in violation of any of the terms or conditions of such Accreditations, Licenses and Permits or alleging the failure to hold or obtain any Accreditation, License or Permit and (iii) no Litigation, hearing or other proceeding is pending or, to the Company's knowledge, threatened to revoke or limit the use of any of its Accreditations, Licenses or Permits. Neither the Company nor the School has received notice that any of the Accreditations, Licenses or Permits will not be renewed and to the Company's knowledge, there is no reasonable basis for nonrenewal. In addition, and without limiting the foregoing:

(a) Schedule 2.13 contains a complete and correct description of the accreditation granted to the School, the date that accreditation was last granted, and the current term of accreditation. Neither the School nor the educational and training programs offered by the School are on probation or warning, have been directed to show cause why accreditation should not be revoked, or are subject to an action by an Accrediting Body to withdraw or deny accreditation. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such actions by an Accrediting Body.

(b) The Company and the School have complied in all material respects with all stipulations, conditions and other requirements imposed by the School's Accrediting Bodies and State Approval Agencies at the time of, or since, the last grant of accreditation or approval, including but not limited to the timely filing of all required reports and responses.

(c) The Company and the School have secured all requisite approvals from their institutional accrediting bodies for the educational and training programs currently offered.

(d) Except as set forth in Schedule 2.13, the Company and the School have secured all requisite licenses to operate from the respective State Approval Agencies in the states in which the School is located or in those states that a State Approval Agency has formally determined that the School has a physical presence that requires the School to obtain such a license (including without limitation all such states in which the School offers residency programs, residency courses or residency seminars) and the Company has similarly secured all requisite approvals from State Approval Agencies for the educational and training programs currently offered. There are no proceedings pending to revoke or withdraw such licenses and approvals. To the Company's knowledge, there are no facts, circumstances or omissions concerning the School that would reasonably be expected to lead to such action.

(e) Schedule 2.13 contains a complete and correct description of the United States Department of Education ("USDOE") certification and eligibility status for the School, including the date that certification was last granted and the current term of

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certification. The School is certified by the USDOE to participate in the student financial assistance programs authorized by Title IV of the Higher Education Act of 1965, as amended ("Title IV"), and is a party to, and is in compliance with, a valid and effective Program Participation Agreement with the USDOE, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. The School is not subject to limitation, suspension or termination proceedings, or subject to any other investigation, action or proceeding by the USDOE or any guaranty agency that could result in the loss of certification or eligibility or a material liability or fine. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such an action by the USDOE or any guaranty agency.

(f) The School is in compliance in all material respects with all rules, regulations and requirements established by the USDOE pertaining to the School's eligibility to participate, and participation, in the programs authorized by Title IV and other federal student financial aid funding programs including without limitation those set forth at 34 C.F.R. Parts 600, 668, and
682. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would be expected to result in a finding of material non-compliance with regard to such rules, regulations and requirements of Law. Without limiting the foregoing:

(i) Each educational or training program offered by the School is an eligible program in accordance with the requirements of 34 C.F.R. Section 668.8.

(ii) For each of the past three (3) fiscal years ending after October 7, 1998, the School has received no greater than ninety percent (90%) of its revenues from programs authorized by Title IV and satisfies the requirements regarding Title IV program funds established by the USDOE as set forth at 34 C.F.R. Section 600.5. The attached Compliance Schedule contains a correct statement of the School's percentage of revenue from Title IV program funds for such years.

(iii) The School has timely filed all compliance audits and audited financial statements required by 34 C.F.R. Section 668.23.

(iv) The School meets the USDOE standards of financial responsibility set forth at 34 C.F.R. Sections 668.171-668.175 and for the fiscal years ended December 31, 1998, December 31, 1999, December 31, 2000 and December 31, 2001 achieved a composite score of 1.5 or higher under the financial ratios set forth at 34 C.F.R. Section 668.172.

(g) USDOE program review and compliance audits conducted at the School since the date of the School's last recertification have not materially adversely affected the Company or the School, nor has any program review or compliance audit resulted in the imposition of any liability, financial or otherwise, adversely affecting the

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Company or the School. The Company and the School have complied with all the findings and conditions arising from the program reviews and compliance audits. To the extent that any program review or audit remains pending or unresolved, there are no issues or findings of non-compliance of which the Company has notice which could result in the loss of certification or eligibility or a material liability or fine.

(h)(i) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School (the term "Substantial Control" being defined in 34 C.F.R. 668.15(f)(2)), nor any member of such person's family (as the term "family" is defined in 34 C.F.R. 668.15(f)(3)), alone or together, (a) exercises or exercised Substantial Control over another institution or third-party servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV program requirement, or (b) owes a liability for a Title IV program violation.

(ii) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, or who will have the power to direct or cause the direction of the management or policies of the Company or the School, has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

(iii) Neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, nor any person or entity which is an owner of the School, has pled guilty to, has pled nolo contendere to or has been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or has been judicially determined to have committed fraud involving funds under the Title IV programs.

(iv) To the Company's knowledge, neither the Company nor the School has employed any individual or entity in a capacity that involves the administration or receipt of funds under the Title IV programs, or contracted with any institution or third-party servicer, which has been terminated from the Title IV programs for a reason involving the acquisition, use, or expenditure of federal, state or local government funds, or has been convicted of, or has pled nolo contendere or guilty to, a crime involving the acquisition, use or expenditure or federal, state, or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds.

(i) Since July 1, 1994, the Company and the School have complied with all requirements or standards of the USDOE, any State Approval Agency or any Accrediting Body that pertain to the provision of commissions, bonuses or other incentive payments to admissions representatives, agents and other persons engaged in

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student recruiting or admissions activities or in making decisions regarding the awarding of Title IV program funds for or on behalf of the Company or School.

(j) The transactions contemplated hereby and the transactions contemplated by the Exchange Agreement will not (i) result in a change of ownership resulting in a change in control of the School for purposes of Title IV and the USDOE regulations thereunder, or (ii) adversely affect the School's eligibility to participate in Title IV programs. In connection with the transactions contemplated by this Agreement and the transactions contemplated the Exchange Agreement, to the knowledge of the Company, there exist no facts or circumstances attributable to the Company or the School that would (x) reasonably be expected to require any authorization or consent or similar approval by any State Approval Agency or Accrediting Body, or (y) to the extent any authorization, consent or similar approval were required, as set forth in Schedule 2.8, cause any State Approval Agency or Accrediting Body to refuse to deliver any such authorization, consent or similar approval.

(k) For purposes of this Agreement, "Accrediting Body" means any entity or organization which engages in granting or withholding accreditation or similar approval for the School and its educational programs, in accordance with standards relating to the performance, operation, financial condition and/or educational quality of such schools and programs.

(l) For purposes of this Agreement, "State Approval Agency" means any authority, whether governmental or quasi-governmental, in any state in which the School is located, or in any state in which a state approval agency has formally determined that the School has a physical presence that requires the School to obtain an approval, license or permit from such state approval agency (including, but not limited to, all such states in which the School offers residency programs, courses or seminars) and that engages in the granting or withholding of approvals, licenses or permits for and regulates private postsecondary schools and educational programs in accordance with standards relating to the operation, financial condition, or academic standards of such schools or programs or regulates the provision of financial assistance.

2.14. Offering Exemption. Assuming the accuracy of the representations and warranties made by the Investors in Section 3 of this Agreement, Section 3 of the Class F Purchase Agreement and Section 4 of the Exchange Agreement, the offer, sale and issuance of the Class G Preferred Stock as contemplated hereby and by the Exchange Agreement are, the issuance of the Conversion Stock upon the conversion of the Class G Preferred Stock in accordance with the terms of the Certificate of Designation will be, and all prior issuance of securities of the Company were at the time made, exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and otherwise effected in compliance with all applicable federal and state securities Laws.

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2.15. Employees; Proprietary Information Agreement. To the Company's knowledge, no officer or designated employee (as hereinafter defined) of the Company, and except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, no independent contractor utilized by the Company or any other person who performs services for or on behalf of the Company (including any employee of the Company) is in violation of any term of any employment Contract, patent disclosure agreement or any other Contract or Order relating to the relationship of such person with the Company or any other party because of the nature of the business conducted by the Company. To the Company's knowledge, none of its officers or designated employees has any obligations under any Contract or Order that would interfere with such person's exercising his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted.

2.16. Insurance. The Company has procured, and maintains insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, errors and omissions coverage), on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as the Company believes is customary in the case of similarly situated entities engaged in the same or a similar business. Schedule 2.16 sets forth a list of all insurance policies maintained by the Company, including the name of the insurer and the nature and amount of coverage. Except as set forth on Schedule 2.16, the Company has not received any notice of increase in premiums with respect to, or cancellation or non-renewal of, any of its insurance policies, and the Company has not made any claim against an insurance policy as to which the insurer is denying coverage or defending the claim under a reservation of rights. Each insurance policy maintained by the Company is in full force and effect, except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company is not in default in any material respect under any insurance policy maintained by it.

2.17. [Intentionally Omitted]

2.18. Financial Statements. Schedule 2.18 sets forth (a) the balance sheet of the Company at December 31, 2001, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the fiscal year ended December 31, 2001 audited by Ernst & Young LLP (the "Annual Financial Statements"), (b) the unaudited consolidated balance sheet of the Company as of September 30, 2002 and the related unaudited consolidated statements of operations, changes in shareholders' equity and cash flows for the nine months ended September 30, 2002 (the "Quarterly Financial Statements", and together with the Annual Financial Statements, collectively referred to as the "Financial Statements"), and (c) the unaudited consolidated balance sheets of the Company as of October 31, 2002 and November 30, 2002 and the related unaudited consolidated statements of operations, changes in shareholders' equity and

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cash flows for the months ended October 31, 2002 and November 30, 2002 (the "Monthly Financial Statements"). The Annual Financial Statements are complete in all material respects, are in accord with the books and records of the Company and have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") consistently applied. The Quarterly Financial Statements are complete in all material respects, are in accord with the books and records of the Company and have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") consistently applied, but do not contain all footnotes required by U.S. GAAP and are subject to normal year-end audit adjustments. The Monthly Financial Statements are prepared consistent with the Company's normal processes and procedures for the preparation of monthly financial statements. The Annual Financial Statements and Quarterly Financial Statements fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates and for the respective periods indicated therein. Except as disclosed on Schedule 2.18, the Company has no liabilities or obligations, contingent or otherwise (and whether or not the subject of any other representation or warranty hereunder), other than (a) liabilities or obligations reserved against or otherwise disclosed in the Financial Statements and (b) liabilities or obligations which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company maintains and will continue to maintain accounting methods, practices and procedures and maintains and will continue to maintain accounting systems and controls which permit financial statements to be prepared in accordance with U.S. GAAP. The books and records of the Company are in all material respects true and complete, are maintained in accordance with good business practice and all applicable Laws, and accurately present and reflect in all material respects all of the transactions that are or should be therein described. The Company agrees to use commercially reasonable efforts to deliver to Investors before Closing, or as soon as practicable thereafter, the unaudited consolidated balance sheet of the Company as of December 31, 2002 and the related unaudited consolidated statements of operations, changes in shareholders' equity and cash flows for the twelve months ended December 31, 2002 (the "Year-End Financial Statements"). The Year-End Financial Statements will be complete in all material respects, will be in accord with the books and records of the Company and will have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") consistently applied, but will not contain all footnotes required by U.S. GAAP and will be subject to normal year-end audit adjustments.

2.19. Related Party Transactions. (a) Schedule 2.19 sets forth a list of all obligations and transactions, other than compensation in the ordinary course of business, (i) between the Company and any of the Company's affiliates, (ii) between the Company and any of the Company's officers, directors, equityholders or employees, or any of their affiliates or associates (each term as defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) and (iii) between any of the Company's affiliates and any of the Company's officers, directors or employees, or any of their affiliates or

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associates, directly pertaining to the Company. Except as set forth on Schedule 2.19, no officer or director of the Company or person who owns at least ten percent of the outstanding equity of the Company (nor any parent, child or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) any interest or involvement in any entity which furnished or sold, or furnishes or sells, services or products which the Company furnishes or sells, or proposes to furnish or sell or (ii) any interest or involvement in any entity which purchases from or sells or furnishes to, the Company, any goods or services; provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation shall not be deemed an interest in any entity for purposes of this Section 2.19.

(b) Each transaction set forth on Schedule 2.19 is on terms that are
(i) consistent with past practice of the Company and (ii) no less favorable to the Company as would be available with independent third parties dealing at arms' length.

2.20. Environmental Matters. The Company is in compliance in all material respects with all applicable Environmental Laws (as hereinafter defined). There are no past or present conditions, events, circumstances or facts that would reasonably be expected to form the basis of any claim or Litigation against or involving the Company based on or related to any violation of any Environmental Law that could, individually or in the aggregate, have a Material Adverse Effect on the Company. For purposes of this Agreement, the term "Environmental Law" shall mean any Law relating to human health, employee safety or the protection of the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and the Occupational Safety and Health Act.

2.21. Employee Benefit Plans. (a) Schedule 2.21 sets forth a list of
(i) each plan, program, policy or Contract providing for incentive compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits of any kind, whether formal or informal, funded or unfunded, written or oral, and whether or not legally binding, which is now or previously has been sponsored, maintained, contributed to or required to be contributed to by the Company or any of its subsidiaries and pursuant to which the Company or any of its subsidiaries has or may have any liability, contingent or otherwise, including any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each a "Benefit Plan"), (ii) each management, bonus, option, equity (or equity related), severance, non-compete, confidentiality or similar Contract between the Company and any current, former or retired employee, officer, consultant, independent contractor, agent or director of the Company (an "Employee") under which the Company has or may have any liability and (iii) each employment or consulting Contract between the Company and an Employee (each Contract in clauses (ii) and (iii), an "Employee Agreement"). The Company

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currently does not sponsor, maintain, contribute to, and is not required to contribute to, nor has the Company ever sponsored, maintained, contributed to or been required to contribute to, or incurred any liability with respect to,
(i) any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any material liability to provide, life insurance, medical, severance or other employee welfare benefits to any Employee upon his or her retirement or termination of employment, except as required by Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code") or any similar state law regarding continuation of coverage. Except as set forth on Schedule 2.21, to the Company's knowledge, the Company has not committed to establish any new employee benefit plan, program or arrangement or to modify or terminate any Benefit Plan which, individually or in the aggregate, would materially increase the obligation of the Company to any or all of its employees.

(b) The Company has no liability, contingent or otherwise, with respect to any employee benefit plan maintained by or contributed to by any ERISA Affiliate. For this purpose, an ERISA affiliate is any entity (other than any current subsidiary of the Company) that is or ever has been (i) a member of a "controlled group of corporations," under "common control" or an "affiliated service group" within the meaning of Sections 414(b), (c) or (m) of the Code,
(ii) required to be aggregated under Section 414(o) of the Code or (iii) under "common control," within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections, in any such case with the Company.

(c) The Company has made available to the Investors true and complete copies of all documents embodying or relating to each Benefit Plan and each Employee Agreement, including all amendments thereto, trust or funding agreements relating thereto (if any), the two most recent annual reports (Series 5500 and related schedules) required under ERISA (if any), the two most recent annual actuarial valuations (if any), the most recent determination letter received from the Internal Revenue Service (the "IRS") (if any) and the most recent summary plan description (with all material modifications) (if any) relating to any Benefit Plan or Employee Agreement required to be listed on Schedule 2.21.

(d) Each Benefit Plan and Employee Agreement has been established and maintained in accordance with its terms and in compliance in all material respects with all applicable Laws, including but not limited to ERISA and the Code, and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified.

(e) (i) To the knowledge of the Company, no "prohibited transaction," within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Benefit Plan, (ii) there is no Litigation pending, or to the Company's

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knowledge, threatened (other than routine claims for benefits) with respect to any Benefit Plan or Employee Agreement, (iii) to the Company's knowledge, no Employee has been hired by the Company in violation of any restrictive covenant or any non-compete Contract with any other Person, (iv) no liability under any Benefit Plan has been funded, nor has any such obligation been satisfied, with the purchase of a contract from an insurance company as to which the Company has received notice that such insurance company is insolvent or is in rehabilitation or any similar proceeding, (v) the Company has not received notice that any Benefit Plan is under audit or investigation by the IRS, the Department of Labor or the Pension Benefit Guaranty Corporation, and, to the Company's knowledge, no such audit or investigation is threatened and (vi) with respect to each Benefit Plan which provides medical benefits or long-term disability benefits, all claims incurred by the Company under such Benefit Plan are either insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims or covered under a contract with a health maintenance organization pursuant to which such health maintenance organization bears the liability for such claims.

(f) The execution and delivery of, and performance of the transactions contemplated by, this Agreement, the other Transaction Documents and the Exchange Agreement will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Benefit Plan or Employee Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee or (ii) result in the triggering or imposition of any restrictions or limitations on the right of the Company to amend or terminate any Benefit Plan, or upon the right, upon any such amendment or termination, to receive the full amount of any excess assets remaining or resulting from such amendment or termination. No payment or benefit which will or may be made by the Company or any of its affiliates with respect to any Employee will be characterized as an "excess parachute payment," within the meaning of Section 280G(b)(1) of the Code.

2.22. Labor Relations; Employees. Except as set forth on Schedule 2.22, (a) the Company is in compliance in all material respects with all applicable Laws respecting employment, employment practices, labor, terms and conditions of employment and wages and hours, (b) the Company is not a party to any Contract with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company, (c) there is no labor strike, dispute, slowdown or stoppage pending, or, to the Company's knowledge, threatened against or involving the Company, (d) the Company is not involved in or, to the Company's knowledge, threatened with any Litigation relating to labor matters (including discrimination complaints and charges of unfair labor practices) and
(e) to the Company's knowledge, no officer of the Company or employee whose annual compensation is in excess of $70,000 has any plans to terminate his or her

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employment with the Company. The Company has not received notice of any worker's compensation claims.

2.23. Absence of Changes. Except as set forth on Schedule 2.23 or as contemplated by this Agreement or the other Transaction Documents or reflected in the Financial Statements, since September 30, 2002, the Company has conducted its business in the ordinary course, consistent with past practice, and there has not been (a) any event or condition which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, (b) any waiver of any material right, claim or debt held by the Company, (c) any payment or declaration of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities of or other equity interest in the Company, (d) any issuance of any securities of or other equity interest in the Company other than pursuant to the exercise of the previously outstanding options set forth on Schedule 2.4, (e) any sale, assignment or transfer of any tangible or intangible assets of the Company, except (i) in the ordinary course of business and (ii) assets for which the book value does not exceed $100,000 and which are not, individually or in the aggregate, material, (f) any loan by the Company to any officer, director, employee, consultant or equityholder of the Company (other than advances to such persons in the ordinary course of business in connection with travel and travel-related expenses, advances against payroll provided to non-officer employees to help with short-term cash flow issues and advances to employees for moving expenses, which advances, in the aggregate, did not exceed $50,000 outstanding at any one time), (g) any damage, destruction or loss (whether or not covered by insurance) which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, (h) other than in the ordinary course of business, any increase, direct or indirect, in the compensation paid or payable to any officer or director of the Company, or to any other employee, consultant or agent of the Company, (i) any change in the accounting or Tax methods, practices or policies or in any Tax election of the Company, (j) any indebtedness incurred for borrowed money other than in the ordinary course of business or pursuant to a Contract set forth on Schedule 2.23, (k) any amendment to or termination of any Material Contract, (l) any changes with respect to the regulation, accreditation or approval of the Company or its products and services by any Governmental Entity, Accrediting Body or State Approval Agency which would, individually or in the aggregate, have a Material Adverse Effect on the Company, (m) any material change in the manner of business or operations of the Company or (n) any commitment by the Company (contingent or otherwise) to do any of the foregoing.

2.24. Suppliers and Customers. Except as set forth in Schedule 2.24, since September 30, 2002, there has been no termination, cancellation or, to the Company's knowledge, threatened termination or cancellation or any material modification or change in, or any material dissatisfaction with, the business relationship between the Company

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and any supplier, vendor, customer or client of the Company which would reasonably be expected to have a Material Adverse Effect on the Company.

2.25. Suitability. Neither the Company nor, to its knowledge, any of its directors or officers (a) has ever been indicted for or convicted of any felony or any crime involving fraud or misrepresentation, (b) is subject to any Order barring, suspending or otherwise limiting the right of the Company or such person to engage in any activity conducted by the Company, (c) has ever been the subject of any bankruptcy or similar proceeding or (d) to the Company's knowledge, has ever been denied any Accreditation, License or Permit affecting the Company's or such person's ability to conduct any activity conducted by the Company, nor, to the Company's knowledge, is there any basis upon which such Accreditation, License or Permit would reasonably be expected to be denied.

2.26. Operations of the Company. Schedule 2.26 sets forth a list of the Company's domain names (each, a "Domain Name"). The Company has registered each Domain Name listed on Schedule 2.26 for the periods set forth on Schedule
2.26. The Company's web site (www.capellauniversity.edu) (the "Web Site") is commercially operational, and has performed, for the six-month period prior to the date of this Agreement. The Company has used commercially reasonable efforts to ensure that customers or clients of the Company will not be adversely affected by a failure or disruption of any of the computer networks or the Web Site of the Company.

2.27. Recruitment; Admissions Procedures; Attendance; Reports

(a) The operations of the Company and the School have been conducted in accordance with all policy manuals and other statements of procedures or instructions relating to (i) recruitment of students for the School, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (ii) admissions procedures, including any descriptions of procedures for insuring compliance with federal, state and accreditation requirements applicable to such procedures; and (iii) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion, except where the failure to do so would not have a Material Adverse Effect on the Company, and all relevant standards and requirements imposed by applicable Accrediting Bodies or State Approval Agencies, and other agencies administering state or federal governmental financial assistance programs in which the Company or the School participate, and other applicable legal requirements.

(b) The Company has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Company and the School to all agencies or other entities with which such filings are required related to its compliance with (i) applicable accreditation standards and State Approval

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Agency requirements, (ii) legal requirements governing programs pursuant to which the School or its students receive student financial assistance funding, and (iii) all articulation agreements between the School and other institutions of higher education in effect as of the date hereof except for any such reports, audits and other information the failure to file would not have a Material Adverse Effect on the Company.

(c) All student financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and state requirements, except where the failure to do so would not have a Material Adverse Effect on the Company, and there are no material deficiencies in respect thereto. Except as set forth on Schedule 2.27, and except where the failure to do so would not have a Material Adverse Effect on the Company and except as previously disclosed in prior audits or compliance reviews by the USDOE or other relevant state agency, no student at the School has been funded prior to the date for which such student was eligible for funding or for any amount other than the amount such student was eligible to receive, and such student's records conform in form and substance to all relevant regulatory requirements.

2.28. USDOE Demonstration Program. The School is authorized by the USDOE to participate in the Distance Education Demonstration Program ("Demonstration Program") authorized under section 486 of the Higher Education Act of 1965, as amended. The School is in compliance with all terms and conditions of the February 21, 2000 agreement with the USDOE amending the School's Program Participation Agreement to permit the School's participation in the Demonstration Program, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. To the Company's knowledge, there exists no fact or circumstances that would reasonably be expected to cause the USDOE to revoke or limit the School's authorization to participate in the Demonstration Program.

2.29. Disclosure. (a) Neither this Agreement, any of the Transaction Documents nor the Exchange Agreement contains any untrue statement by or on behalf of the Company of a material fact or omits to state a material fact necessary in order to make the statements by or on behalf of the Company contained herein and therein, in light of the circumstances under which they were made, not misleading.

(b) The projections set forth on Schedule 2.29 (a) have been prepared by management of the Company in good faith, (b) are based on assumptions believed by management of the Company to be reasonable and (c) represent good faith estimates by management of the Company as to the financial performance of the Company for the periods indicated, but do not represent any guarantee or assurance of the future financial results of the Company. The Investors acknowledge that unanticipated future events and circumstances may occur, that the Company's business, financial condition and results of operations are subject to risks and uncertainties, and that actual results achieved during

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any future period may vary from the projections and the variations may be material and adverse.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

Each of the Investors severally, and not jointly, represents and warrants to the Company as of the date hereof and as of the Closing as follows:

3.1. Power; Authorization. The execution, delivery and performance of this Agreement and the other Transaction Documents to which such Investor is a party, and the consummation of all transactions contemplated hereby and thereby have been duly authorized by all required actions on the part of the Investor. Each of the Transaction Documents constitutes a valid and binding obligation of such Investor enforceable against such Investor in accordance with its terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies.

3.2. No Breach. The execution, delivery and performance by such Investor of this Agreement and the other Transaction Documents and the consummation by such Investor of the transactions contemplated hereby and thereby will not (i) conflict with, or result in any violation of, any provision of the organizational or formation documents of such Investor or any Law or Order to which such Investor is subject or (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any of its Contracts, Accreditations, Licenses or Permits.

3.3. Investment; Securities Laws. Such Investor is acquiring the Class G Preferred Stock to be purchased under this Agreement for its own account, not as a nominee or agent, for investment and not with a view to the distribution thereof (within the meaning of the Securities Act) except in compliance with all applicable federal and state securities Laws. Such Investor understands that (i) the Class G Preferred Stock has not been, and the Conversion Stock will not be (except as set forth in the Investor Rights Agreement), registered under the Securities Act or any state securities Laws, and (ii) the Class G Preferred Stock and the Conversion Stock may not be sold unless such disposition is registered under the Securities Act and applicable state securities Laws or is exempt from registration thereunder.

3.4. Accredited Investor. Such Investor is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). The state in which such Investor's principal office (or domicile, if such Investor is an individual) is located is set forth in Schedule 3.4. Such Investor has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment to be made hereunder by such Investor. Such Investor has and has had access

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to all of the Company's material books and records and access to the Company's executive officers has been provided to such Investor or to such Investor's qualified agents. No Investor was formed for the purpose of this investment within the meaning of Rule 501 under the Securities Act.

3.5. Rule 144. Such Investor acknowledges that the exemption from registration afforded by Rule 144 promulgated under the Securities Act (the provisions of which Rule are known to the Investor) depends on the satisfaction of various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts.

3.6. Availability of Funds. Such Investor has available sufficient funds or available capital commitments to pay its portion of the Purchase Price.

3.7. Brokers. Such Investor has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

3.8. Independent Investigation and Counsel. Such Investor acknowledges to the Company and to the other Investors that it has had an opportunity to conduct its own independent due diligence investigation of the Company and no Investor is relying on any other Investor for such Investor's due diligence investigation of the Company. Such Investor acknowledges to the other Investors that it was represented by counsel of its own choosing and no Investor is relying on the counsel of the Company or any other Investors for any purpose whatsoever.

3.9. Investor Qualifications. (a) Since July 1, 1994, no such Investor (i) has exercised Substantial Control (as that term is defined in 34 C.F. R. 668.15(f)(2)) over an institution of higher education that participates in a Title IV program (other than the Company or the School) or Third-Party Servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV program requirement or (ii) owes a liability for a Title IV program violation.

(b) Since July 1, 1994, no such Investor who will have the ability to direct or cause the direction of the management or policies of the School has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

(c) No such Investor has pled guilty to, pled nolo contendere to or been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or been judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds, including but not limited to, funds disbursed pursuant to the Title IV Programs.

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(d) For purposes of this Section 3.9, the term "Investor" shall mean only the Maveron Entities and Smith. The term "Investor" shall not mean or extend to general partners, partners, institutions, affiliates or individuals who have ownership interests in or who control, are controlled by or are under common control with the Maveron Entities.

SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.

Smith's obligation to purchase the Class G Preferred Stock at the Closing is subject to each of the Maveron Entities consummating the Closing. The Maveron Entities' obligation to purchase the Class G Preferred Stock at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

4.1. Representations and Warranties Correct. The representations and warranties made by the Company in Section 2 shall be true and correct in all material respects when made and as of the time of the Closing with the same force and effect as if made at such time, other than such representations and warranties as are expressly stated to be made as of another date, which shall be true and correct as of such date.

4.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company at or prior to the Closing shall have been performed or complied with in all material respects.

4.3. Material Adverse Change. Since the date of this Agreement, no event or change shall have occurred which, individually or in the aggregate, has had, or would reasonably be expected to have, a Material Adverse Effect on the Company.

4.4. Compliance Certificate. The Company shall have delivered to such Investor a certificate of the Company, executed by the Chief Executive Officer of the Company, dated the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 4.1, 4.2, 4.3 and 4.13.

4.5. Opinion of Company's Counsel. Such Investor shall have received from (a) Faegre & Benson LLP, counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-1 and (b) Drinker, Biddle & Reath LLP, special counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-2.

4.6. Officer's Certificate. The Company shall have delivered to such Investor a certificate executed by an appropriate officer of the Company dated as of the Closing Date, certifying the following matters: (a) the corporate proceedings taken by the Company's Board of Directors (the "Board") and, if required, shareholders approving this Agreement, the other Transaction Documents and the Exchange Agreement and the transactions contemplated hereby and thereby;
(b) the Articles of Incorporation, (c) the By-laws of the Company and (d) the Certificate of Designation.

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4.7. Exchange Agreement. The Exchange Agreement shall have been executed in the form attached hereto as Exhibit B by the Company and each party thereto and a copy thereof delivered at Closing and the Exchange shall occur contemporaneously with the Closing.

4.8. Second Amended and Restated Investor Rights Agreement. The Investor Rights Agreement shall have been executed and delivered at Closing in the form attached hereto as Exhibit E by the Company and each party thereto (other than the Maveron Entities).

4.9. Third Amended and Restated Co-Sale and Board Representation Agreement. The Board Representation Agreement shall have been executed in the form attached hereto as Exhibit F by the Company and each party thereto (other than the Maveron Entities) and delivered at Closing.

4.10. Registration Rights Amendment. The Registration Rights Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit G and delivered at Closing.

4.11. 1998 Warrant Amendment. The 1998 Warrant Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit H and delivered at Closing.

4.12. 2000 Warrant Amendment. The 2000 Warrant Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit I and delivered at Closing.

4.13. Certificate of Designation. The Certificate of Designation shall have been approved by the Board, approved, as required, by the shareholders of the Company and filed with the Secretary of State of Minnesota in the form attached hereto as Exhibit A.

4.14. Amendment to the Class E Certificate of Designation. The Amended and Restated Class E Certificate shall have been approved by the Board, approved, as required, by the shareholders of the Company and filed with the Secretary of State of Minnesota in the form attached hereto as Exhibit J.

SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.

The Company's obligation to sell the Class G Preferred Stock to Smith at the Closing is subject to Smith fulfilling at or prior to the Closing the same conditions as the Maveron Entities in this Section 5 and is also subject to each of the Maveron Entities meeting the conditions of this Section 5. The Company's obligation to sell the Class G

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Preferred Stock to the Maveron Entities at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

5.1. Representations and Warranties Correct. The representations and warranties made by the Maveron Entities in Section 3 of this Agreement shall be true and correct in all material respects as of the time of Closi ng with the same force and effect as if made as of such time, other than such representations and warranties as are expressly stated to be made as of another date which shall be true and correct in all material respects as of such date.

5.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Maveron Entities at or prior to the Closing shall have been performed or complied with in all material respects.

5.3. Intentionally Omitted.

5.4. Consents. The 1998 Warrant Amendment, 2000 Warrant Amendment and the Registration Rights Amendment shall have been executed by all required parties (other than the Company).

5.5. Shareholder Approval. The Certificate of Designation and the Amended and Restated Class E Certificate shall have received all requisite approval of the shareholders of the Company.

5.6. Second Amended and Restated Investor Rights Agreement. The Investor Rights Agreement shall have been executed in the form attached hereto as Exhibit E by the parties thereto (other than the Company).

5.7. Third Amended and Restated Co-Sale and Board Representation Agreement. The Board Representation Agreement shall have been executed in the form attached hereto as Exhibit F by the parties thereto (other than the Company).

5.8. Exchange Agreement The Exchange Agreement shall have been executed in the form attached hereto as Exhibit B by the parties thereto (other than the Company) and the Exchange shall occur contemporaneously with the Closing.

SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.

6.1. Cooperation. From the date hereof and prior to the Closing, each of the parties shall use its best efforts to make all Governmental Filings required to be made by it, and to obtain all Governmental Consents and all necessary consents from other third parties ("Third Party Consents") as shall be required to be obtained by it, for the consummation of the transactions contemplated hereby and by the other Transaction Documents, all as set forth in Schedule 2.8, and shall otherwise use its best efforts and

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cooperate with the other parties to cause the consummation of such transactions in accordance with the terms and conditions hereof and thereof.

The Maveron Entities and the Company agree that, if a shareholder of the Company notifies the Company before Closing that the shareholder intends to exercise dissenters' rights to which the shareholder may be entitled by virtue of the transactions contemplated hereby, then the Company and the Maveron Entities shall cooperate in good faith to consider revisions to the terms of the transactions contemplated hereby, pursuant to which the shareholder would not have dissenters' rights or would agree not to exercise such rights; provided, however, that any failure for any reason to so revise the terms of the transactions contemplated hereby shall not excuse the Company or the Maveron Entities from any of their obligations hereunder, including, without limitation, their respective obligations to close the transactions contemplated hereby, subject to the terms and conditions hereof, without regard to whether dissenters' rights arise or may be exercised with respect to such transactions.

6.2. No Solicitation. Except as set forth on Schedule 6.2, from the date hereof and until the Closing, other than in connection with the transactions contemplated hereby and in connection with the Company's preparation for its initial public offering of securities of the Company, the Company shall not solicit, propose or facilitate (including by way of providing information regarding the Company or its business to any person or providing access to any person), directly or indirectly, any inquiries, discussions or proposals regarding, continue or enter into negotiations looking toward, or enter into or consummate any agreement or understanding in connection with any proposal regarding, any purchase or other acquisition of all or any portion of the Company (other than the ordinary course of business sale of products or services or replacement of assets) or any equity securities (whether newly issued or currently outstanding, but excluding Common Stock issued upon the exercise of currently outstanding options) of the Company, any merger, business combination or recapitalization involving the Company, the liquidation, dissolution or reorganization of the Company, or any similar transaction. If any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, the Company or any of its representatives, then the Company shall promptly notify the Investors of the nature and terms of any of the foregoing and the identity of the parties involved.

6.3. Publicity. Prior to the Closing, no public release or announcement or other public disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by any party, without the prior consent of the Company and the Maveron Entities (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of any securities exchange, in which case the party

- 30 -

required to make the release or announcement shall give notice to and consult with the other parties hereto in advance of such issuance.

6.4. Conduct of Business Prior to the Closing. The Company covenants and agrees that, except as set forth in Schedule 6.4, between the date hereof and the Closing, neither the Company nor any of the Subsidiaries shall conduct its business other than in the ordinary course and consistent with prior practice. Without limiting the generality of the foregoing, except as set forth in Schedule 6.4, between the date hereof and the Closing, the Company shall, and shall cause each Subsidiary and otherwise use commercially reasonable efforts to, (a) preserve intact the business organization of the business, (b) keep available the services of the Employees, (c) continue in full force and effect without material modification all existing policies or binders of insurance presently maintained in respect of the business, (d) preserve its current relationships with its customers, suppliers and other persons with which it has significant business relationships; and (e) not engage in any practice, take any action, embark on any course of inaction or enter into any transaction which could result in any misrepresentation or breach of any warranty or covenant made by the Company in this Agreement or in any Transaction Document.

SECTION 7. POST-CLOSING AND ON-GOING COVENANTS.

7.1. Intentionally Omitted.

7.2. Intentionally Omitted.

7.3. Intentionally Omitted.

7.4. Representative. (a) From and after the Closing and so long as the Maveron Entities hold more than 337,230 shares (subject to appropriate adjustments for stock dividends, stock splits, combinations, recapitalizations or the like) of Class G Preferred Stock (or Common Stock acquired upon conversion thereof) (treating the Maveron Entities and their respective affiliated investment funds as one holder for purposes of this Section 7.4(a)) (a "Qualified Investor"), such Qualified Investor shall be entitled to designate one representative (the "Representative") to observe Board meetings and all committees thereof; provided, however, that no such Investor shall be entitled to designate a Representative pursuant to this Section 7.4 during such time that such Investor is entitled to appoint a representative to observe Board meetings pursuant to any other agreement with the Company. The Company shall, after receiving notice from the Qualified Investor as to the identity of the Investor's Representative and a confidentiality agreement that is reasonably acceptable to the Company and is executed by the Representative, except to the extent necessary to preserve attorney-client privilege, (i) permit the Representative to attend all Board meetings and all committees thereof, (ii) provide the Representative advance notice of each such meeting, including such meeting's time and place, at the same time and in the same manner as such notice is

- 31 -

provided to the members of the Board (or such committee thereof) and copies of all materials distributed to the members of the Board (or such committee thereof) at the same time as such materials are distributed to the Board (or such committee thereof) and shall permit the Representative to have the same access to information concerning the business and operations of the Company as the directors (or committee members) have, (iii) permit the Representative to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the Board, without voting, and (iv) reimburse the Qualified Investor for its Representative's reasonable costs in attending Board meetings. The Board (or any committee thereof) and the Company's management shall give due consideration to the advice given and any proposals made by a Representative.

In addition, the Maveron Entities shall have the right to consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with a representative of the Maveron Entities at the Company's facilities at mutually agreeable times for such consultation and advice, including to review progress in achieving said plans. The Company shall give the Maveron Entities reasonable advance written notice of any significant new initiatives or material changes to existing operating plans and shall afford the Maveron Entities adequate time to meet with management to consult on such initiatives or changes prior to implementation. The Company shall furnish the Maveron Entities with such financial and operating data and other information with respect to the business and the properties of the Company as the Maveron Entities may request, except to the extent necessary to preserve attorney-client privilege. The Company shall permit the Maveron Entities to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the principal officers of the Company, except to the extent necessary to preserve attorney-client privilege. The Company shall give due consideration to the advice given and any proposals made by the Maveron Entities.

(b) The rights set forth in this Section 7.4 are, in part, intended to satisfy any applicable requirement of contractual management rights for purposes of qualifying the ownership interests of the Maveron Entities in the Company as venture capital investments for purposes of the Department of Labor's "plan assets" regulations ("Contractual Management Rights"), and in the event such rights are not satisfactory for such purpose, the Company and the Maveron Entities shall reasonably cooperate in good faith to agree upon mutually satisfactory Contractual Management Rights which satisfy such regulations.

(c) The rights of the Maveron Entities set forth in this Section 7.4 shall terminate automatically upon effectiveness of a registration statement filed with the Securities and Exchange Commission for the Company's initial public offering of equity securities of the Company; provided, however, the Maveron Entities' rights set forth in

- 32 -

Section 7.4 shall be reinstated if such registration statement is withdrawn after being declared effective but prior to consummation of such initial public offering.

(d) The rights set forth in Section 7.4 may not be transferred unless (i) such transfer is made by a Maveron Entity to an affiliated investment fund, (ii) in connection with the transfer of shares of Class G Preferred Stock (or Common Stock acquired upon conversion thereof) and (iii) the transferee assumes in writing the rights and obligations of such transferor under this Agreement.

(e) If at any time after the Closing Date, any of the Maveron Entities holds any shares of Class G Preferred Stock (or Common Stock acquired upon conversion thereof) and does not have Contractual Management Rights, the Company and the Maveron Entities shall reasonably cooperate in good faith and shall agree upon mutually satisfactory Contractual Management Rights as necessary for that particular holder.

7.5. Financial Statements and Other Information. From and after the Closing, so long as an Investor is a Qualified Investor and subject to Section 7.5(g) below, the Company shall furnish to such Investor the following:

(a) as soon as available but in any event within 30 days after the end of the first, second and third quarterly accounting periods in each fiscal year, (i) unaudited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarterly period and consolidated balance sheet of the Company and its subsidiaries as of the end of such quarterly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, all prepared in accordance with U.S. GAAP consistently applied (subject to normal year-end audit adjustments), plus (ii) a statement certified by the Chief Financial Officer of the Company, certifying that the financial statements referred to in subparagraph (i) are presented fairly and have been prepared in accordance with U.S. GAAP consistently applied (subject to normal year-end audit adjustments);

(b) as soon as practicable and in any event within 90 days after the end of each fiscal year, audited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such fiscal year, and consolidated balance sheet of the Company and its subsidiaries as of the end of such fiscal year, all prepared in accordance with U.S. GAAP consistently applied, and accompanied by an audit opinion, without qualification or reservation, by Ernst & Young or another "Big-4" public accounting firm selected by the Company (the "Company's Accountants");

(c) promptly upon receipt thereof, a copy of the annual management letter of the Company's Accountants to the Board and any additional written reports or management letters concerning material aspects of the Company's operations and

- 33 -

financial affairs delivered by the Company's Accountants to the audit committee (and not otherwise contained in other materials provided hereunder);

(d) at least 15 days prior to the end of each fiscal year, an annual operating budget prepared on a monthly basis for the Company for the succeeding fiscal year (displaying anticipated statements of income and cash flows, changes in financial position and balance sheets), an annual budget for capital expenditures of the Company for the succeeding fiscal year, and a strategic plan for the succeeding fiscal year, which budgets and strategic plan shall have been approved by the Board, and promptly upon preparation thereof any other significant budgets which the Company prepares, and any revisions of such annual or other budgets or strategic plan;

(e) as soon as available, copies of any independent accountants' reports prepared for federal or state educational regulatory purposes, together with any related reports prepared by the Company; and

(f) with reasonable promptness, such other information and financial data concerning the Company as such Investor may reasonably request.

(g) The Maveron Entities' rights set forth in Section 7.5 shall terminate automatically upon effectiveness of a registration statement filed with the Securities and Exchange Commission for the Company's initial public offering of equity securities of the Company; provided, however, the Maveron Entities' rights set forth in Section 7.5 shall be reinstated if such registration statement is withdrawn after being declared effective but prior to consummation of such initial public offering.

7.6. Approval and Notification. The Company shall timely make all required Governmental Filings with State Approval Agencies and Accrediting Bodies that are required to be made as a result of this transaction as set forth in Schedule 2.8.

7.7. Corporate Existence. The Company shall, and shall cause each Subsidiary to, maintain the corporate existence in good standing of each such entity unless otherwise explicitly approved by a majority of the Board.

7.8. Conduct of Business. The Company shall conduct its business and operations in the ordinary course of business substantially consistent with the Company's year 2003 plan (attached hereto as Schedule 9.10) unless otherwise explicitly approved by a majority of the Board.

7.9. Intentionally Omitted.

7.10. Intentionally Omitted.

7.11. Intentionally Omitted.

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7.12. Publicity. No public release or announcement or other disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by the Company, without the prior consent of the Maveron Entities (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of any securities exchange, in which case the Company shall use its best efforts to give notice to and consult with the Maveron Entities in advance of such issuance.

SECTION 8. TERMINATION.

8.1. Termination. This Agreement may be terminated and the transaction contemplated hereby may be abandoned at any time prior to the Closing Date:

(a) by mutual written consent of the Maveron Entities and the Company;

(b) by either the Maveron Entities or the Company, by giving written notice to the other parties hereto, if any Governmental Entity with jurisdiction over such matters shall have issued an Order restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Order shall have become final and non-appealable; provided, however, that the provisions of this Section 8 shall not be available to the Company, or the Maveron Entities unless the Company or such investors, as the case may be, shall have complied with their respective obligations under Section 6.1 and 6.2, or otherwise used their reasonable best efforts to oppose any such Order or to have such Order vacated or made inapplicable to the transactions contemplated by this Agreement; or

(c) by either the Maveron Entities or the Company, by giving written notice to the other parties, if (i) the Closing shall not have occurred on or prior to February 14, 2002, provided that the terminating party is not in material breach of its obligations under this Agreement, or (ii) the Exchange Agreement is terminated in accordance with its terms.

8.2. Effect on Obligations. Termination of this Agreement pursuant to this Section 8 shall terminate all obligations of the parties hereunder, except for the obligations under Sections 9.1, 9.2, 9.8 and 9.11; provided, however, that nothing herein shall relieve the defaulting or breaching party from any liability to the other party hereto.

SECTION 9. MISCELLANEOUS.

9.1. Survival. All representations and warranties hereunder shall survive the Closing until the end of the 18th month following the Closing, and shall in no way be affected by any knowledge possessed by, or investigation of the subject matter thereof made by or on behalf of, the Investors, provided, however, that the representations and

- 35 -

warranties set forth in Sections 2.2, 2.4, 2.5(b), 2.19, 3.1, 3.3 and 3.4 shall survive indefinitely. All statements contained in any Transaction Document shall constitute representations and warranties by the Company under this Agreement. All covenants and agreements contained herein shall survive indefinitely until performed in accordance with their terms.

9.2. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Investor, its affiliates, and each of their respective officers, directors, partners (and the partners of such partners), managing directors, employees, agents, advisors, consultants, representatives, successors and assigns (including any transferee of Class G Preferred Stock or Conversion Stock) from and against all Losses (as hereinafter defined) incurred or suffered by any of the foregoing (whether incurred or suffered directly or indirectly through ownership of Conversion Stock or Class G Preferred Stock) arising out of, relating to or resulting from (i) any breach of any of the representations or warranties made by the Company in this Agreement or in any of the Transaction Documents, and (ii) any breach of any of the covenants or agreements made by the Company in this Agreement or in any of the Transaction Documents. Each Investor shall, severally and not jointly, indemnify, defend and hold harmless the Company, its affiliates, and each of their respective officers, directors, employees, agents, advisors, consultants, representatives, successors and assigns against all Losses arising from the breach of any of the representations, warranties, covenants or agreements made by such Investor in this Agreement or in any of the Transaction Documents or in any certificate or instrument delivered pursuant to Section 5.

(b) For purposes hereof, "Losses" shall mean each and all of the following items: claims, losses, liabilities, obligations, payments, actual and punitive damages, charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation and fees, expenses and disbursements of counsel, consultants and other experts), but excluding consequential damages. Any payment by the Company to any Investor pursuant to this Section 9.2 shall be treated for all income Tax purposes as an adjustment to the price paid by such Investor for the Class G Preferred Stock pursuant to this Agreement.

(c) Each of the representations and warranties that contains any "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications shall be deemed to have been given as though there were no "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications for purposes of determining the amount of Losses under this Section 9.2, but not the accuracy of any representation or warranty.

(d) Any claim for indemnification pursuant to this Section 9.2 must be made before the expiration of the survival periods set forth in Section 9.1. No party shall

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be entitled to indemnification against a Loss arising from the breach of any representations or warranties of any other party unless the party seeking indemnification (the "indemnified party") shall have given to the party from whom indemnification is sought (the "indemnifying party") a claim notice relating to such Loss (a "Claim Notice") prior to expiration of the representation or warranty upon which the claim is based. The written Claim Notice shall be given reasonably promptly after the indemnified party becomes aware of the facts indicating that a claim for indemnification may be warranted, and shall state in reasonable detail (to the extent known) the nature of the claim. The failure of any indemnified party to give a Claim Notice shall not relieve the indemnifying party of its obligations under this Section 9.2, except to the extent that the indemnifying party is actually materially prejudiced by failure to give such Claim Notice. The indemnifying party may, through counsel of its own choosing and reasonably satisfactory to the indemnified party, assume the defense thereof or other indemnification obligation with respect thereto; provided, however, that any indemnified party shall be (a) entitled to participate in any such claim with counsel of its own choice but at its own expense and (b) shall be entitled to participate in any such claim with counsel of its own choice at the expense of the indemnifying party if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct. In any event, if the indemnifying party disputes the claim or otherwise fails to take reasonable steps necessary to defend diligently the action or proceeding within 20 days after receiving notice from such indemnified party, the indemnified party may assume such defense or other indemnification obligation and the fees and expenses of its attorneys will be covered by the indemnity provided for in this Section 9.2 if and upon determination of an indemnifying party's obligation therefor. The indemnifying party shall not, without the written consent of the indemnified party, which shall not be unreasonably withheld or delayed, settle or compromise any pending or threatened Litigation or claim in respect of which indemnification may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) or consent to the entry of any judgment (i) which does not, to the extent that an indemnified party may have any liability with respect to such action or claim, include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such action or claim, (ii) which includes any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, or (iii) in any manner that involves any injunctive relief against the indemnified party or may materially and adversely affect the indemnified party. The indemnified party may not compromise or settle any claim without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), unless the sole relief granted is equitable relief for which the indemnifying party would have no liability or to which the indemnifying party would not be subject.

9.3. Expenses. At the Closing, the Company shall pay, or reimburse the Maveron Entities for, all reasonable costs and expenses incurred by the Maveron Entities in connection with the negotiation, execution, delivery, performance and consummation

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of this Agreement and the transactions contemplated hereby; but in no event shall the Company pay or reimburse the Maveron Entities for such costs and expenses in an amount in excess of $35,000. The Company shall pay its own expenses incurred in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby.

9.4. Delays or Omissions; Remedies. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any shares of Class G Preferred Stock or shares of Conversion Stock upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any shares of Class G Preferred Stock or shares of Conversion Stock with respect to any breach or default under this Agreement, or any waiver on the part of any holder of shares of Class G Preferred Stock or shares of Conversion Stock of any provisions or conditions of this Agreement, must be in writing signed by such holder and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by Law or otherwise afforded to any holder of shares of Class G Preferred Stock or shares of Conversion Stock, shall be cumulative and not alternative, and any person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages by reason of any breach of this Agreement and to exercise all other rights granted by Law, equity or otherwise.

9.5. Further Assurances. At any time or from time to time after the Closing, each party hereto agrees to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as any other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and by the other Transaction Documents and to otherwise carry out the intent of the parties hereunder and thereunder.

9.6. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and each of the Investors and the respective successors, assigns, heirs and personal representatives of the Company and each of the Investors. The Company may assign its rights or obligations under this Agreement to any successor by merger, purchase, consolidation or otherwise of the Company, provided that such successor becomes a signatory to this Agreement. Prior to the Closing, the Investors may not assign their right or obligation under this Agreement to purchase shares of Class G Preferred Stock. The Company acknowledges that, after the Closing, subject to compliance with applicable securities Laws and the applicable provisions of this

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Agreement and the other Transaction Documents, any of the Investors may transfer all or part of the securities acquired by it hereunder and may, in its discretion, assign all or part of its rights and obligations under this Agreement to a transferee of such securities.

9.7. Entire Agreement. This Agreement and the Transaction Documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements, understandings or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof.

9.8. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy (with a confirmatory copy sent by a different means within three business days of such notice), nationally recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties:

(i) if to the Company, to:

Capella Education Company 222 South Ninth Street, 20th Floor Minneapolis, Minnesota 55402 Telecopy: (612) 852-5930 Attention: Chief Executive Officer

with a copy to:

Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402-3901 Telecopy: (612) 766-1600 Attention: David B. Miller, Esq.

and

(ii) if to the Maveron Entities, to:

Maveron LLC
505 Fifth Avenue South, Suite 600 Seattle, WA 98104

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Telecopy: (206) 288-1777 Attention: Dan Levitan

with copies to:

Perkins Coie LLP 1201 Third Avenue Suite 4800 Seattle, WA 98101 Telecopy: (206) 583-5800 Attention: David F. McShea, Esq.

and

(iii) if to Smith, to:

David Smith
5601 Green Valley Drive Bloomington, MN 55437 Telecopy: (952) 681-3161

All such notices, requests, consents and other communications shall be deemed to have been given when received.

9.9. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

9.10. Titles and Subtitles; Definitions. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. The term "including" shall mean including without limitation, whether or not so stated, and is meant to be by way of example rather than limitation. The term "Material Adverse Effect on the Company" shall mean a material adverse effect on the Company and the Subsidiaries, taken as a whole, and the term "material" (including when used in the foregoing phrase or in the phrase "in all material respects") shall mean material to the business, assets, liabilities, prospects, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries taken as a whole; provided, that, the Company and the Investors agree that Material Adverse Effect shall not include any such effect primarily attributable to or resulting from (a) changes in general economic or business conditions, the securities markets (public or private) or the Internet or education industries generally as they may affect the Company, (b) the announcement to employees, customers, suppliers or others of the transactions contemplated hereby, (c) the incurrence of liabilities, obligations and losses in the ordinary course of business substantially consistent with the Company's year 2003

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plan (attached hereto as Schedule 9.10), (d) the taking of any action required by this Agreement or the other Transaction Documents and (e) any changes in U.S. GAAP. The term "Contract" shall mean any agreement, contract, understanding or arrangement, whether written or oral, and including all amendments thereto. The term "to the Company's knowledge" shall mean the knowledge of any of the persons set forth in Exhibit C, after reasonable inquiry. The term "person" shall mean any individual, corporation, association, partnership, trust or other entity or organization, including a Governmental Entity. The term "designated employee" shall mean the persons listed as such on Exhibit C. The term "Subsidiary" shall mean each corporation or other person of which shares of capital stock or other equity interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation or other person are at the time owned, directly or indirectly, or the management of which is otherwise controlled, directly or indirectly, or both, by the Company.

9.11. Governing Law; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the Laws of the State of Minnesota without giving effect to the principles of conflict of laws. Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any and all rights to trial by jury in connection with any Litigation arising out of or relating to this Agreement or the transactions contemplated hereby.

9.12. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement.

9.13. Confidentiality Agreement. Each Investor agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information about the Company or Capella University, Inc. (the "School") that such Investor obtains from the Company or the School pursuant to this Agreement (including the diligence in connection with, and negotiation of, this Agreement) unless (a) such information is or becomes publicly available other than as a result of a disclosure in breach of this Agreement by the Investor or anyone to whom the Investor transmitted such confidential information, (b) is or was known by the Investor on a non-confidential basis from a source other than the Company or the School who is not known by the Investor to be bound by a confidentiality agreement or other obligation of secrecy with respect to such confidential information or (c) is or was available to the Investor on a non-confidential basis prior to its disclosure to such Investor by the Company or the School. Notwithstanding the foregoing, information that is already in the public domain will not constitute confidential, proprietary or secret information with respect to any Investor for purposes of this Agreement. In addition, if, in the Investor's good faith judgment, the Investor is requested or becomes legally compelled (by oral questions,

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interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand or similar process), or must, in order to defend against or assert a claim in connection with this Agreement or the Transaction Documents, disclose any confidential information, the Investor agrees to provide the Company with prompt written notice so that the Company may seek, at its expense, a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement and, in the event that such protective order or other remedy is not timely obtained, or that the Company waives compliance with the provisions of this Agreement, the Investor may, without liability under this Section 9.13, furnish that portion of the confidential information which, in the Investors's good faith judgment, is required for such purpose and will exercise its best efforts, at the Company's expense, to obtain reliable assurance that confidential treatment will be accorded the confidential information. Notwithstanding the foregoing, the Maveron Entities may disclose to their limited partners summary financial information and a narrative description of the Company, provided that any such disclosing Maveron Entity instructs its limited partners that the information is confidential and may not be shared with any third party without the consent of the Maveron Entities and the Company. The Maveron Entities further agree to confer with the Company in good faith regarding the content of the Maveron Entities' updates to their limited partners regarding the Company before such updates are mailed. Each Investor acknowledges its responsibilities under federal and state securities laws with respect to trading in securities while aware of material non-public information obtained from the Company and with respect to providing such information to other persons who purchase or sell securities of the Company. The provisions of this Section 9.13 shall survive the termination of this Agreement and shall terminate with respect to any Investor on the date which is two years after the date on which such Investor no longer holds any shares of capital stock of the Company.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

CAPELLA EDUCATION COMPANY

By  /s/ Stephen Shank
    -----------------------------------
    Stephen Shank
    Its: Chief Executive Officer

MAVERON EQUITY PARTNERS 2000, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    -----------------------------------
         Dan Levitan
         Its: Manager

MAVERON EQUITY PARTNERS 2000-B, L.P.

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    -----------------------------------
         Dan Levitan
         Its: Manager

MEP 2000 ASSOCIATES LLC

By: MAVERON GENERAL PARTNER 2000 LLC

By: /s/ Dan Levitan
    -----------------------------------
         Dan Levitan
         Its: Manager

/s/ David Smith
---------------------------------------
DAVID SMITH

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Schedule 1.1

           INVESTOR                           SHARES           PURCHASE PRICE
           --------                           ------          ----------------
Maveron Equity Partners 2000, L.P.           573,025.72       $   6,372,046.01

Maveron Equity Partners 2000-B, L.P.          22,086.22       $     245,598.74

MEP 2000 Associates LLC                       79,348.26       $     882,352.63
                                             ----------       ----------------
Maveron Entities (total)                     674,460.20       $   7,499,997.38

David Smith                                    8,992.00       $      99,991.04

         Total                               683,452.20       $   7,599,988.42
                                             ==========       ================

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Exhibit C

Stephen Shank

Stephen Weiss

David Gilbert

Paul F. Clifford

Joseph Gaylord

Elizabeth Rausch

Michael Offerman

Paul Schroeder

Judy Lemke

Donald Smithmier

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EXHIBIT 4.17

CAPELLA EDUCATION COMPANY


CLASS F CONVERTIBLE PREFERRED STOCK
STOCK PURCHASE AGREEMENT



TABLE OF CONTENTS

                                                                                Page
SECTION 1.    ISSUANCE AND SALE OF THE CLASS F PREFERRED STOCK................    2
   1.1.   The Purchase........................................................    2
   1.2.   The Closing.........................................................    2
   1.3.   Deliveries at the Closing...........................................    2
   1.4.   Additional Issuances; Adjustment....................................    2
   1.5.   Signing.............................................................    3
   1.6.   Individual Retirement Accounts......................................    4

SECTION 2.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................    5
   2.1.   Organization and Standing...........................................    5
   2.2.   Power...............................................................    5
   2.3.   Subsidiaries........................................................    5
   2.4.   Capitalization......................................................    6
   2.5.   Authorization; No Breach............................................    8
   2.6.   Material Contracts..................................................    8
   2.7.   Litigation..........................................................    9
   2.8.   Consents............................................................    9
   2.9.   Title to Properties; Liens and Encumbrances; Assets of the
             Business.........................................................    9
   2.10.  Intellectual Property...............................................   10
   2.11.  Taxes...............................................................   12
   2.12.  Brokers.............................................................   12
   2.13.  Compliance with Laws; Permits; Accreditation and State Regulatory
            Requirements......................................................   13
   2.14.  Offering Exemption..................................................   17
   2.15.  Employees; Proprietary Information Agreement........................   17
   2.16.  Insurance...........................................................   17
   2.17.  [Intentionally Omitted].............................................   18
   2.18.  Financial Statements................................................   18
   2.19.  Related Party Transactions..........................................   18
   2.20.  Environmental Matters...............................................   19
   2.21.  Employee Benefit Plans..............................................   19
   2.22.  Labor Relations; Employees..........................................   21
   2.23.  Absence of Changes..................................................   22
   2.24.  Suppliers and Customers.............................................   23
   2.25.  Suitability.........................................................   23
   2.26.  Operations of the Company...........................................   23
   2.27.  Recruitment; Admissions Procedures; Attendance; Reports.............   23

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   2.28.  USDOE Demonstration Program.........................................   24
   2.29.  Disclosure..........................................................   25

SECTION 3.    REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.................   25
   3.1.   Power; Authorization................................................   25
   3.2.   No Breach...........................................................   25
   3.3.   Investment; Securities Laws.........................................   26
   3.4.   Accredited Investor.................................................   26
   3.5.   Rule 144............................................................   26
   3.6.   Availability of Funds...............................................   26
   3.7.   Brokers.............................................................   26
   3.8.   Independent Investigation and Counsel...............................   26
   3.9.   Investor Qualifications.............................................   27
   3.10.  Compliance..........................................................   27

SECTION 4.    CONDITIONS TO CLOSING OF THE INVESTORS..........................   27
   4.1.   Representations and Warranties Correct..............................   28
   4.2.   Covenants...........................................................   28
   4.3.   Material Adverse Change.............................................   28
   4.4.   Compliance Certificate..............................................   28
   4.5.   Opinion of Company's Counsel........................................   28
   4.6.   Officer's Certificate...............................................   28
   4.7.   Board Membership....................................................   28
   4.8.   Amended and Restated Investor Rights Agreement......................   28
   4.9.   Second Amended and Restated Co-Sale and Board Representation
             Agreement........................................................   28
   4.10.  Registration Rights Amendment.......................................   29
   4.11.  1998 Warrant Amendment..............................................   29
   4.12.  2000 Warrant Amendment..............................................   29
   4.13.  Simultaneous Closing................................................   29

SECTION 5.    CONDITIONS TO CLOSING OF THE COMPANY............................   29
   5.1.   Representations and Warranties Correct..............................   29
   5.2.   Covenants...........................................................   29
   5.3.   Compliance Certificate..............................................   29
   5.4.   Consents............................................................   30

SECTION 6.    PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS..........   30
   6.1.   Cooperation.........................................................   30
   6.2.   No Solicitation.....................................................   30
   6.3.   Publicity...........................................................   30
   6.4.   Conduct of Business Prior to the Closing............................   31

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SECTION 7.    POST-CLOSING AND ON-GOING COVENANTS.............................   31
   7.1.   Directors...........................................................   31
   7.2.   Reimbursement of Directors..........................................   31
   7.3.   Indemnification of Directors........................................   31
   7.4.   Representative......................................................   32
   7.5.   Financial Statements and Other Information..........................   34
   7.6.   Approval and Notification...........................................   35
   7.7.   Corporate Existence.................................................   37
   7.8.   Conduct of Business.................................................   37
   7.9.   Board Meetings......................................................   37
   7.10.  Insurance...........................................................   37
   7.11.  Non-disclosure and Invention Agreements.............................   37
   7.12.  Publicity...........................................................   38

SECTION 8.    TERMINATION.....................................................   38
   8.1.   Termination.........................................................   38
   8.2.   Effect on Obligations...............................................   39

SECTION 9.    MISCELLANEOUS...................................................   39
   9.1.   Survival............................................................   39
   9.2.   Indemnification.....................................................   39
   9.3.   Expenses............................................................   41
   9.4.   Delays or Omissions; Remedies.......................................   41
   9.5.   Further Assurances..................................................   42
   9.6.   Successors and Assigns..............................................   42
   9.7.   Entire Agreement....................................................   42
   9.8.   Notices.............................................................   42
   9.9.   Counterparts........................................................   45
   9.10.  Titles and Subtitles; Definitions...................................   45
   9.11.  Governing Law; Waiver of Jury Trial.................................   46
   9.12.  Severability........................................................   46
   9.13.  Massachusetts Business Trusts.......................................   46

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INDEX OF DEFINED TERMS

Accrediting Body .........................    2.13(k)
Articles of Incorporation ................     1.4(c)
Benefit Plan .............................    2.21(a)
Board ....................................        4.6
Board Representation Agreement ...........   Recitals
Certificate of Designation ...............   Recitals
Claim Notice .............................     9.2(e)
Class A Preferred Stock ..................        2.4
Class B Preferred Stock ..................        2.4
Class C Preferred Stock ..................        2.4
Class D Preferred Stock ..................        2.4
Class F Preferred Stock ..................   Recitals
Closing ..................................        1.2
Closing Date .............................        1.2
Code .....................................    2.21(a)
Common Stock .............................   Recitals
Company ..................................   Preamble
Company Intellectual Property ............       2.10
Company's Accountants ....................     7.5(b)
Contract .................................       9.10
Conversion Stock .........................        2.4
designated employee ......................       9.10
Employee .................................    2.21(a)
Employee Agreement .......................    2.21(a)
Encumbrances .............................        2.9
Environmental Law ........................       2.20
Equity-VII ...............................   Preamble
ERISA ....................................    2.21(a)
Exchange Act .............................       2.19
Financial Statements .....................       2.18
Fully Diluted Basis ......................        1.1
Governmental Consents ....................        2.8
Governmental Entity ......................        2.8
Governmental Filings .....................        2.8
including ................................       9.10
indemnified party ........................     9.2(c)
indemnifying party .......................     9.2(c)
Intellectual Property Rights .............       2.10
Investor Rights Agreement ................   Recitals
Investors ................................   Preamble
IRS ......................................    2.21(c)
Laws .....................................        2.5
Litigation ...............................        2.7
Losses ...................................     9.2(b)
Management Investors .....................   Preamble
material .................................       9.10
Material Adverse Effect on the Company ...       9.10
Material Contracts .......................        2.6
Orders ...................................        2.7
person ...................................       9.10
Preferred Stock ..........................        2.4
Purchase .................................        1.1
Purchase Price ...........................        1.1
Securities Act ...........................       2.14
State Approval Agency ....................     2.3(e)
Stock Rights .............................        2.4
Subsidiary ...............................       9.10
Tax Return ...............................    2.11(d)
Tax(es) ..................................    2.11(d)
Third Party Consents .....................        6.1
Title IV .................................    2.13(e)
to the Company's knowledge ...............       9.10
Transaction Documents ....................        2.2
USDOE ....................................    2.13(e)

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LIST OF EXHIBITS

Exhibits                                                               Section
--------                                                               -------
A    Certificate of Designation of Class F Convertible
     Preferred Stock ...............................................   Recitals
B    Board Membership ..............................................        4.8
C    People included in definition of "the Company's
     knowledge" and "designated employees" .........................       9.10
D-1  Opinion of Faegre & Benson, LLP ...............................        4.5
D-2  Opinion of Drinker, Biddle & Reath LLP ........................        4.5
E    Amended and Restated Investor Rights Agreement ................        4.9
F    Amended and Restated Board Representation Agreement ...........       4.10
G    Registration Rights Amendment .................................       4.11
H    1998 Warrant Amendment ........................................       4.12
I    2000 Warrant Amendment ........................................       4.13

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CAPELLA EDUCATION COMPANY

PREFERRED STOCK PURCHASE AGREEMENT

AGREEMENT, dated as of January 31, 2002, by and among Capella Education Company, a Minnesota corporation (the "Company"), Forstmann Little & Co. Equity Partnership - VII, L.P., a Delaware limited partnership ("Equity-VII"), Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., a Delaware limited partnership ("MBO-VIII" and, together with Equity-VII, the "Forstmann Little Entities"), the certain funds and accounts managed by affiliates of Putnam Investments, LLC, a Delaware limited liability company, that are listed on Schedule 1.1 (collectively, "Putnam"), DRW Venture Partners LP ("Dain"), ThinkEquity Investment Partners LLC ("Think"), Joseph Gaylord ("Gaylord"), a resident of Minnesota, and the members of Capella's management or board of directors (or accounts under their direction) that are listed on Schedule 1.1 ("Management Investors" and, together with MBO-VIII , Equity-VII, Dain, Think and Putnam, the "Investors").

W I T N E S S E T H:

WHEREAS, the Forstmann Little Entities, Dain, Think, Gaylord and the Management Investors have executed this Agreement and it is binding on each of them as of the date hereof. It is contemplated that Putnam shall sign this Agreement on the Closing Date and become a party hereto; and

WHEREAS, upon the terms and subject to the conditions contained in this Agreement, the Company wishes to sell to the Investors and the Investors wish to purchase from the Company shares of newly issued Class F Convertible Preferred Stock, par value $.01 per share, of the Company (the "Class F Preferred Stock"), which shares will be initially convertible into the equivalent number of shares of Common Stock, par value $.10 per share, of the Company (the "Common Stock"), and will have such other terms as are to be set forth in the Certificate of Designation for the Class F Preferred Stock in the form of Exhibit A (the "Certificate of Designation"); and

WHEREAS, on or prior to Closing (as hereinafter defined), the parties hereto, SmartForce plc, NCS Pearson, Inc., Cherry Tree Ventures IV, Forstmann Little & Co. Equity Partnership-VI, L.P. ("Equity-VI") and Stephen Shank intend to enter into a Second Amended and Restated Co-Sale and Board Representation Agreement (the "Board Representation Agreement") to become effective simultaneously with the Closing; and

WHEREAS, on or prior to the Closing, the parties hereto intend to enter into an Amended and Restated Investor Rights Agreement (the "Investor Rights Agreement") to become effective simultaneously with the Closing.

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NOW THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

SECTION 1. ISSUANCE AND SALE OF THE CLASS F PREFERRED STOCK.

1.1. The Purchase. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, the Investors shall purchase from the Company, and the Company shall sell to the Investors (as set forth on Schedule 1.1), an aggregate of 1,425,457 shares of Class F Preferred Stock (the "Purchase") at a purchase price of $11.71 per share and an aggregate purchase price of $16,692,101.47 (the "Purchase Price"). Immediately following the Closing, the Investors in the aggregate shall own 11.78% of the equity of the Company on a fully diluted basis (i.e., assuming the exercise of all 12,100,275 outstanding stock options and other outstanding Stock Rights (as hereinafter defined) (including the conversion of the Class F Preferred Stock, and the issuance of all shares of Common Stock reserved for issuance upon the future grant of 706,492 employee options and other Common Stock-based awards, but excluding future contributions under the Company's Employee Stock Ownership Plan), all as of the Closing and as more fully described and set forth in Schedule 2.4 to this Agreement ("Fully Diluted Basis").

1.2. The Closing. The closing of the transactions contemplated by the Purchase (the "Closing") shall take place at the offices of Faegre & Benson LLP, 2200 Wells Fargo Center, Minneapolis, Minnesota, at 10:00 a.m. on the next business day following the satisfaction (or waiver) of all the conditions set forth in Sections 4 and 5 (but no earlier than the 30th calendar day after the date hereof) or at such other time or place or on such other date as the Company and the Investors may mutually determine (such date, the "Closing Date").

1.3. Deliveries at the Closing. At the Closing, the Company shall deliver to each Investor a certificate or certificates representing the shares of Class F Preferred Stock purchased by such Investor, registered in the name of such Investor or its nominee affiliate, against receipt at the Closing by the Company from such Investor of its portion of the Purchase Price, which shall be paid by wire transfer to an account designated at least two business days prior to the Closing Date by the Company.

1.4. Additional Issuances; Adjustment. (a) In lieu of a claim for indemnification under Section 9 of this Agreement arising out of the inaccuracy in the representation and warranty set forth in the last sentence of Section 2.4, in the event that at any time after the Closing the representation and warranty set forth in the last sentence of Section 2.4 is determined not to have been true as of the Closing, the Company shall issue to the Investors (on a pro rata basis), at no cost to the Investors, and as an

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adjustment to the purchase price paid by the Investors per share of Class F Preferred Stock, an additional amount of Class F Preferred Stock such that, if such issuance of additional Class F Preferred Stock had been made at the Closing, such representation and warranty would have been true and accurate in all respects at the Closing.

(b) If at the time of any required adjustment pursuant to Section 1.4(a) all shares of Class F Preferred Stock have been converted into shares of Common Stock, the Company shall, to the extent of authorized capital available therefor, promptly issue to the Investors (on a pro rata basis), at no cost to the Investors and as an adjustment to the purchase price paid by the Investors per share of Class F Preferred Stock, an additional amount and kind of Common Stock equal to the amount and kind of Common Stock issuable upon the conversion (based on the conversion ratio in effect at the time the last shares of Class F Preferred Stock were converted into shares of Common Stock) of the amount of Class F Preferred Stock which would have been issued with respect to such adjustment pursuant to Section 1.4(a) if such adjustment had been made immediately prior to the time the last shares of Class F Preferred Stock were converted into shares of Common Stock.

(c) Any additional shares of Class F Preferred Stock and Common Stock issued to the Investors pursuant to this Section 1.4 shall be treated as if they were issued at the Closing and shall reflect any dividends or other distributions which would have accrued or have been payable with respect to, and the application of any anti-dilution, ratable treatment or similar provisions (as set forth in the Articles of Incorporation of the Company (the "Articles of Incorporation", the Certificate of Designation, applicable Law (as hereinafter defined) or otherwise) which would have been applicable to, such shares of Class F Preferred Stock and Common Stock had they been issued at the Closing.

(d) In connection with any issuances of stock determined to be required pursuant to this Section 1.4, the Company (i) shall take all action within its control necessary to cause its Articles of Incorporation to be amended to increase the authorized capital of the Company to permit such issuances and (ii) shall reserve a sufficient number of shares of Common Stock for issuance to the Investors upon the conversion of any shares of Class F Preferred Stock so issued. Any shares of Class F Preferred Stock or Common Stock issued to the Investors pursuant to this Section 1.4 shall, when issued, be validly issued and fully paid and nonassessable with no personal liability attaching to the ownership thereof and free and clear of all Encumbrances (as hereinafter defined).

1.5. Signing. (a) This Agreement is binding upon each of the Forstmann Little Entities, Dain, Think, Gaylord and the Management Investors as of the date hereof. The obligations to consummate the purchase and sale of the shares of Class F Preferred

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Stock of the Forstmann Little Entities hereunder are conditioned upon Putnam signing this Agreement and the conditions in Section 4 of this Agreement.

(b) Upon their signing of this Agreement, this Agreement shall be binding upon Putnam as of the date of this Agreement. Upon signing this Agreement, Putnam OTC and Emerging Growth Fund and TH Lee, Putnam Investment Trust - TH Lee, Putnam Emerging Opportunities Portfolio shall be "Putnam" under this agreement and shall be subject to all of the rights and obligations of "Putnam" under this Agreement.

1.6. Individual Retirement Accounts. Gaylord agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 (the "Gaylord IRA") and any other party necessary, to perform all of the obligations of Gaylord IRA under this Agreement. Any notice given to the Gaylord IRA under this Agreement shall also be given to: Joseph Gaylord, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 852-5930. For purposes of Section 3 of this Agreement, the term "Investor" shall include Gaylord and Gaylord hereby represents and warrants to the Company on behalf of himself and Gaylord IRA the representations and warranties set forth in Section 3. Notwithstanding anything else in Section 3 to the contrary, the representations and warranties of Gaylord IRA in Sections 3.2 through 3.9 are not made by Gaylord IRA, but are made by Gaylord on behalf of Gaylord IRA.

Stephen Weiss ("Weiss") agrees, and agrees to cause USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #86294368 ("Weiss IRA") and any other party necessary, to perform all of the obligations of Weiss IRA under this Agreement. Any notice given to the Weiss IRA under this Agreement shall also be given to: Stephen Weiss, c/o Capella Education Company 222 South Ninth Street, 20th Floor, Minneapolis, MN 55402, telecopy: (612) 852-5930. Weiss hereby represents and warrants to the Company on behalf of himself and Weiss IRA the representations and warranties set forth in Section 3. Notwithstanding anything else in Section 3 to the contrary, the representations and warranties of Weiss IRA in Sections 3.2 through 3.9 are not made by Weiss IRA, but are made by Weiss on behalf of Weiss IRA.

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SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to the Investors as of the date hereof and as of the Closing as follows (with all references to the Company in this
Section 2 (other than Sections 2.2, 2.4 and 2.5(b)) being deemed to include references to the Subsidiaries (as hereinafter defined)):

2.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as currently conducted. Except as set forth on Schedule 2.1, the Company is duly qualified to transact business as a foreign entity in, and is in good standing under the Laws of, each jurisdiction where the failure to be so qualified would, individually or in the aggregate, have a Material Adverse Effect on the Company (as hereinafter defined). The Company has made available to the Investors true and complete copies of the organization and governance documents of the Company.

2.2. Power. The Company has all requisite power and authority (i) to execute and deliver this Agreement; the Investor Rights Agreement; the Certificate of Designation; the Board Representation Agreement; the Schedules to this Agreement and all other certificates, instruments and other documents executed and delivered at the Closing pursuant to Section 4 hereof (collectively with this Agreement, the "Transaction Documents") (ii) to execute and deliver Amendment No. 2 to the Registration Rights Agreement, dated as of June 16, 1998, by and among the Company and NCS Pearson, Inc., as successor to National Computer Systems, Inc. (the "Registration Rights Amendment"), Amendment No. 1 to the Warrant to purchase Common Shares of the Company issued on May 11, 2000 to Legg Mason Wood Walker, Incorporated (the "2000 Warrant Amendment") and Amendment No. 2 to the Warrant to purchase Common Shares of the Company issued on June 16, 1998 to Legg Mason Wood Walker, Incorporated (the "1998 Warrant Amendment"), and (iii) to carry out and perform its obligations hereunder and thereunder.

2.3. Subsidiaries. (a) Except as set forth on Schedule 2.3, the Company has no Subsidiaries and does not own, hold or control, directly or indirectly, any rights to acquire any shares of stock or any other debt or equity interest in any person (as hereinafter defined).

(b) Schedule 2.3 sets forth the authorized and outstanding equity capitalization of each of the Subsidiaries, including the amount and kind of equity interests held by the Company in the Subsidiary and the percentage interest represented thereby. All of the outstanding shares of capital stock of each of the Subsidiaries have

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been validly issued and are fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and are owned by the Company free and clear of all Encumbrances. There are no outstanding warrants, options, agreements, convertible securities or other Contracts (as hereinafter defined) pursuant to which either of the Subsidiaries is or may become obligated to issue any shares of the capital stock of or other equity interests in such Subsidiary, and there are no other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in any of the Subsidiaries pursuant to any provision of Law, the Subsidiary's organizational documents, any Contract to which the Subsidiary is a party or otherwise; and none of the Subsidiaries is a party to, and to the Company's knowledge there is not, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Subsidiary is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in any of the Subsidiaries (whether outstanding or issuable upon conversion or exercise of outstanding securities).

2.4. Capitalization. The authorized and outstanding equity capitalization of the Company on the date hereof is as set forth on Schedule
2.4. As of the date hereof and immediately prior to the Closing (except for exercise or conversion of outstanding Stock Rights set forth in Schedule 2.4), capital stock of the Company authorized, outstanding or reserved for issuance consists of (i) 15,000,000 shares of Common Stock, of which 1,501,629 shares are issued and outstanding, (ii) 3,000,000 shares of Class A Convertible Preferred Stock ("Class A Preferred Stock"), of which 2,810,000 shares are issued and outstanding, (iii) 1,180,000 shares of Class B Convertible Preferred Stock ("Class B Preferred Stock"), of which 460,000 shares are issued and outstanding,
(iv) 1,022,222 shares of Class D Convertible Preferred Stock ("Class D Preferred Stock"), of which 1,022,222 shares are issued and outstanding, (v) 2,596,491 shares of Class E Convertible Preferred Stock ("Class E Preferred Stock", and, together with the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, the "Preferred Stock"), of which 2,596,491 shares are issued and outstanding, (vi) 5,146,358 shares of preferred stock, undesignated as to class or series, (vii) 1,184,290 shares of Common Stock are reserved for issuance pursuant to employee stock options granted pursuant to the Company's stock option plans and 706,492 shares of Common Stock are reserved for issuance for future grants of employee stock options pursuant to the Company's stock option plans, (viii) 334,048 shares of Common Stock are reserved for issuance upon the exercise of any outstanding warrants of the Company and (ix) 6,948,359 shares of Common Stock have been duly reserved for issuance upon conversion of the outstanding shares of convertible Preferred Stock. Immediately following the Closing, the capital stock of the Company authorized, outstanding or

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reserved for issuance will be as set forth in the preceding sentence except that
(i) 1,425,457 shares of Class F Preferred Stock will have been issued and be outstanding, and (ii) 1,425,457 shares of Common Stock will be reserved for issuance upon conversion of the shares of Class F Preferred Stock (the "Conversion Stock"). All of the outstanding shares of capital stock of the Company were duly authorized and validly issued and are fully paid and nonassessable.

Except for exercise or conversion of outstanding Stock Rights set forth in Schedule 2.4 and Stock Rights granted pursuant to existing stock option plans, Schedule 2.4 sets forth a list of (i) all holders of equity interests in the Company on the date hereof, including the amount and kind of equity interests held by each such holder, (ii) all holders of capital stock of the Company immediately following the Closing, and the number and type of shares to be held by each, and (iii) all outstanding warrants, options, agreements, convertible securities or other Contracts pursuant to which the Company is or may become obligated to issue any shares of the capital stock or other securities of or other equity interests in the Company ("Stock Rights") and the holders thereof. Except as set forth in this Section 2.4 or on Schedule 2.4, there are, and immediately following the Closing there will be, no Stock Rights or other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in the Company pursuant to any provision of Law, the Company's organizational documents, any Contract to which the Company is a party or otherwise; and, except as set forth on Schedule 2.4 or as contemplated by the Transaction Documents, the Company is not a party to, and to the Company's knowledge there is not, and immediately after the Closing, there will not be, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Company is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in the Company (whether outstanding or issuable upon conversion or exercise of outstanding securities). Except as set forth on Schedule 2.4, the execution, delivery and performance of this Agreement and the Transaction Documents by the parties hereto and thereto and the consummation of the transactions contemplated hereby and thereby will not trigger any anti-dilution adjustments under the terms of any equity securities disclosed or required to be disclosed pursuant to this
Section 2.4. Except as set forth on Schedule 2.4 and other than under the Investor Rights Agreement, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act (as hereinafter defined). Immediately following the Closing, the shares of Common Stock issuable upon conversion of the Class F Preferred Stock issued to the Investors under this Agreement will represent, in the aggregate, 11.78% of the outstanding capital stock of the Company on a Fully Diluted Basis, and the voting power of such issued shares of Class F Preferred Stock will

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represent, in the aggregate, no less than 11.78% of the total number of votes able to be cast on any matter by any voting securities of the Company on a Fully Diluted Basis.

2.5. Authorization; No Breach. (a) The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which the Company is a party, and the consummation by the Company of the transactions contemplated hereby and thereby, including the offer, sale and issuance of the Class F Preferred Stock pursuant to this Agreement, and the issuance of the Conversion Stock upon conversion of the Class F Preferred Stock, have been duly authorized by all required actions of the Company and its equity holders and, except as set forth on Schedule 2.5, will not (i) conflict with, or result in any violation of, any provision of the organizational documents of the Company or any federal, state, local or foreign law, statute, rule or regulation ("Laws") or Orders (as hereinafter defined) to which the Company is subject,
(ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any Contract, Company Intellectual Property, Accreditation, License or Permit (each as hereinafter defined), except for conflicts, defaults, breaches, rights or forfeitures which would not, individually or in the aggregate, have a Material Adverse Effect on the Company or (iii) require any consent to be obtained or notice to be given under any Contract, Accreditation, License or Permit except for consents and notices the lack of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

(b) The Transaction Documents to which the Company is a party constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies. The Class F Preferred Stock and the Conversion Stock, when issued in compliance with the provisions of this Agreement, will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. Subject to applicable law, the terms, designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of the Class F Preferred Stock will be as stated in the Certificate of Designation.

2.6. Material Contracts. Copies (or, where oral, a written description) of the mortgages, indentures, leases and other Contracts to which the Company is a party or by which it is bound and which involve current obligations of, or payments to, the Company in excess of $100,000 or are otherwise material to the Company (the "Material Contracts") have been delivered or made available to the Investors. The Material Contracts are listed on Schedule 2.6. All of the Material Contracts are valid and binding

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agreements of the Company and in full force and effect and enforceable against and, to the Company's knowledge, by the Company in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies, except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Except as set forth on Schedule 2.6, the Company is not in default or breach under any of the Material Contracts and, to the Company's knowledge, no other party to any of the Material Contracts is in default or breach thereunder.

2.7. Litigation. Except as set forth on Schedule 2.7, there are no actions, suits, proceedings, or governmental investigations, inquiries or audits ("Litigation") pending, or, to the Company's knowledge threatened, to which the Company is a party or its property, including without limitation any Company Intellectual Property, is subject or against any officer, director or employee of the Company in connection with such person's relationship with or actions taken on behalf of the Company. None of the matters identified in item 11 of Schedule 2.7 has had, or will have, individually or in the aggregate, a Material Adverse Effect on the Company. The Company is not subject to any outstanding judgment, order, writ, injunction, stipulation, ruling, decree or award ("Orders").

2.8. Consents. Schedule 2.8 sets forth each consent, approval, qualification, order or authorization or acknowledgement ("Governmental Consents") of, or registration, declaration, notification, application, or filing ("Governmental Filings") with, any court, administrative agency or commission, Accrediting Body (as hereinafter defined), State Approval Agency (as hereinafter defined) or other governmental authority or instrumentality ("Governmental Entity") that is required to be obtained or made in connection with the valid execution, delivery or performance by the Company of any of the Transaction Documents or the consummation of any of the transactions contemplated thereby.

2.9. Title to Properties; Liens and Encumbrances; Assets of the Business. (a) Except as set forth on Schedule 2.9 or the Financial Statements or as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company has good and marketable title to all of the assets and properties which it purports to own, and, with respect to the assets and properties leased by the Company, holds valid and subsisting leasehold interests therein, free and clear of any mortgages, judgments, claims, liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever ("Encumbrances") except Encumbrances for taxes not yet due and payable. Except as set forth on Schedule 2.9, the assets and properties owned by, or leased to, the Company are sufficient for the conduct of the business and operation of the Company as currently conducted.

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(b) The business of the Company is conducted exclusively by the Company and the Subsidiaries. All assets used or held for use in the conduct of such business are owned by the Company and/or the Subsidiaries or the rights to use such assets are held by the Company and/or the Subsidiaries pursuant to valid and binding Contracts, leases, agreements or other rights.

2.10. Intellectual Property. The term "Intellectual Property Rights" shall mean (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, revisions, divisions, extensions and reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, trade names, domain names and corporate names, and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (iii) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith, (iv) all mask works and all applications, registrations and renewals in connection therewith, (v) all trade secrets and confidential business information (including but not limited to research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, flowcharts, block diagrams, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (vi) all computer software (including data, website content and related documentation), (vii) all copies and tangible embodiments of any of the foregoing (in whatever form or medium) and (viii) all licenses, sublicenses, permissions or Contracts in connection with any of the foregoing. The term "Company Intellectual Property" shall mean all Intellectual Property Rights which are used in connection with the conduct of the business of the Company as currently conducted.

Other than off-the-shelf software and work for hire agreements, each item of Company Intellectual Property which is material to the Company's business and is a patent, patent application, trademark, trademark application, service mark, service mark application, trade name, domain name, corporate name, copyright registration, copyright application, mask work registration, mask work application or license, sublicense, agreement, or permission, is set forth on Schedule 2.10. Except as set forth on Schedule 2.10:

(a) except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company either (i) is the sole and exclusive owner of and possesses all right, title and interest in and to (free and clear of any Encumbrances), all Company Intellectual Property (including but not limited to the Intellectual Property Rights set forth on Schedule 2.10),
(ii) has rights to use in the United States and in the manner presently used by the Company all Company Intellectual

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Property pursuant to license, sublicense, Contract, or permission (and is not contractually obligated to grant any rights to any third party in respect thereof) or (iii) has the right to require the applicant of any Company Intellectual Property which constitutes an application for registration, including, but not limited to, all patent applications, trademark applications, service mark applications, copyright applications and mask work applications, to transfer to the Company all right, title and interest in the application and of the registration once it issues;

(b) all Company Intellectual Property which are registrations, including, but not limited to, all registered patents, trademarks, service marks, domain names, copyrights and mask works, are valid and subsisting and in full force and effect except where the failure to be valid, subsisting and in full force and effect would not have a Material Adverse Effect on the Company;

(c) to the Company's knowledge, no third party, including any employee or former employee of the Company, has interfered with, infringed upon, diluted, misappropriated, come into conflict with or used without authorization any Company Intellectual Property;

(d) to the Company's knowledge, the Company has not infringed on, interfered with or misappropriated, and the continued operation of the Company's business as currently conducted, will not infringe on, interfere with, dilute, misappropriate or otherwise come into conflict with, any Intellectual Property Right of any other person. None of the matters identified under the heading "2.10(d) Infringement, Interference or Misappropriation" on Schedule 2.10 has had, or will have, individually or in the aggregate, a Material Adverse Effect on the Company;

(e) to the Company's knowledge, no claim of infringement, interference or misappropriation of any Intellectual Property Right of any other person or other claim otherwise contesting the validity, enforceability, use or ownership of any Company Intellectual Property (other than claims made by a Governmental Entity during the examination of an application for registration of such Company Intellectual Property) has been asserted or, to the Company's knowledge, is threatened by any person (including any claim that the Company must license or refrain from using any Intellectual Property Rights of any third party);

(f) the Company is not currently licensing or sublicensing its rights in any material Company Intellectual Property to any third party other than nonexclusive licenses in the ordinary course of business; and

(g) the School and/or the Company owns the copyright in the course design (namely the course structure, the course outline and the course syllabus) of all

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courses offered on the School's or the Company's website(s), except where the failure to own the copyright would not have a Material Adverse Effect on the Company.

2.11. Taxes. (a) Except as set forth on Schedule 2.11, (i) the Company has timely filed in accordance with all applicable Laws (taking into account valid extensions) all Tax Returns (as hereinafter defined) required to be filed by it, and all such Tax Returns are true, correct and complete in all material respects, (ii) all Taxes (as hereinafter defined) which are due and payable by the Company, including any Taxes levied upon any of its properties, assets, income or franchises, have been timely paid, (iii) all amounts required to be collected or withheld by the Company have been collected or withheld and any such amounts that are required to be remitted to any taxing authority have been duly and timely remitted by the Company, (iv) no examination, claim, assessment, deficiency or other Litigation is pending or, to the Company's knowledge, threatened, with regard to any Taxes or Tax Returns of the Company and (v) the Company is not (nor has it ever been) a party to or bound by any Tax sharing or Tax allocation or similar Contract.

(b) Schedule 2.11 sets forth the method of accounting used by the Company for federal, state, local and foreign Tax purposes, and such method has been used by the Company at all times since the date of its organization, except as set forth in Schedule 2.11.

(c) For purposes of this Agreement, "Tax" or "Taxes" means any taxes, assessment, duties, fees, levies, imposts, deductions, or withholdings, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever, imposed by any taxing authority of any government or country or political subdivision of any country, and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon and includes any liability for Taxes of another person by Contract, as a transferee or successor, under Treasury Regulation 1.1502-6 or analogous state, local or foreign law provision or otherwise, and "Tax Return" means any report, return, statement, estimate, declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes.

2.12. Brokers. Except as set forth on Schedule 2.12, the Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

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2.13. Compliance with Laws; Permits; Accreditation and State Regulatory Requirements. Except as set forth on Schedule 2.13, the Company and Capella University Inc. (the "School") (a) have complied in all material respects with all Laws applicable to them and their business and that pertain to the operation of the School (b) have all licenses, accreditations, certificates, permits, consents, franchises, approvals, authorizations, and other approvals of federal, state and local governments or regulatory bodies, State Approval Agencies and of Accrediting Bodies (the "Accreditations, Licenses and Permits") material to and necessary in the conduct of the education, learning or training business and operations of the Company and the School as currently conducted. Schedule 2.13 contains a complete and correct list and summary description of all Accreditations, Licenses and Permits. Except for instances that would not, individually or in the aggregate, have a Material Adverse Effect on the Company,
(i) all of the Accreditations, Licenses and Permits of each of the Company and the School are in full force and effect, (ii) the Company and the School are in compliance with the terms and conditions of such Accreditations, Licenses and Permits and have received no notices that the Company or the School are in violation of any of the terms or conditions of such Accreditations, Licenses and Permits or alleging the failure to hold or obtain any Accreditation, License or Permit and (iii) no Litigation, hearing or other proceeding is pending or, to the Company's knowledge, threatened to revoke or limit the use of any of its Accreditations, Licenses or Permits. Neither the Company nor the School has received notice that any of the Accreditations, Licenses or Permits will not be renewed and to the Company's knowledge, there is no reasonable basis for nonrenewal. In addition, and without limiting the foregoing:

(a) Schedule 2.13 contains a complete and correct description of the accreditation granted to the School, the date that accreditation was last granted, and the current term of accreditation. Neither the School nor the educational and training programs offered by the School are on probation or warning, have been directed to show cause why accreditation should not be revoked, or are subject to an action by an Accrediting Body to withdraw or deny accreditation. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such actions by an Accrediting Body.

(b) The Company and the School have complied in all material respects with all stipulations, conditions and other requirements imposed by the School's Accrediting Bodies and State Approval Agencies at the time of, or since, the last grant of accreditation or approval, including but not limited to the timely filing of all required reports and responses.

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(c) The Company and the School have secured all requisite approvals from their institutional accrediting bodies for the educational and training programs currently offered.

(d) The Company and the School have secured all requisite licenses to operate from the respective State Approval Agencies in the states in which the School is located or in those states that a State Approval Agency has formally determined that the School has a physical presence that requires the School to obtain such a license (including without limitation all such states in which the School offers residency programs, residency courses or residency seminars) and the Company has similarly secured all requisite approvals from State Approval Agencies for the educational and training programs currently offered. There are no proceedings pending to revoke or withdraw such licenses and approvals. To the Company's knowledge, there are no facts, circumstances or omissions concerning the School that would reasonably be expected to lead to such action.

(e) Schedule 2.13 contains a complete and correct description of the United States Department of Education ("USDOE") certification and eligibility status for the School, including the date that certification was last granted and the current term of certification. The School is certified by the USDOE to participate in the student financial assistance programs authorized by Title IV of the Higher Education Act of 1965, as amended ("Title IV"), and is a party to, and is in compliance with, a valid and effective Program Participation Agreement with the USDOE, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. The School is not subject to limitation, suspension or termination proceedings, or subject to any other investigation, action or proceeding by the USDOE that could result in the loss of certification or eligibility or a material liability or fine. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such an action by the USDOE.

(f) The School is in compliance in all material respects with all rules, regulations and requirements established by the USDOE pertaining to the School's eligibility to participate in the programs authorized by Title IV and other federal student financial aid funding programs as set forth at 34 C.F.R. Sections 600 et. seq. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would be expected to result in a finding of material non-compliance with regard to such rules, regulations and requirements of Law. Without limiting the foregoing:

(i) Each educational or training program offered by the School is an eligible program in accordance with the requirements of 34 C.F.R.
Section 668.8.

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(ii) For each of the past three (3) fiscal years ending after October 7, 1998, the School has received no greater than ninety percent (90%) of its revenues from programs authorized by Title IV and satisfies the requirements regarding Title IV program funds established by the USDOE as set forth at 34 C.F.R. Section 600.5. The attached Compliance Schedule contains a correct statement of the School's percentage of revenue from Title IV program funds for such years.

(iii) The School has timely filed all compliance audits and audited financial statements required by 34 C.F.R. Section 668.23.

(iv) The School meets the USDOE standards of financial responsibility set forth at 34 C.F.R. Sections 668.171-668.175 and for the fiscal years ended December 31, 1998, December 31, 1999, December 31, 2000 and December 31, 2001 achieved a composite score of 1.5 or higher under the financial ratios set forth at 34 C.F.R. Section 668.172.

(g) USDOE program review and compliance audits conducted at the School since the date of the School's last recertification have not materially adversely affected the Company or the School, nor has any program review or compliance audit resulted in the imposition of any liability, financial or otherwise, adversely affecting the Company or the School. The Company and the School have complied with all the findings and conditions arising from the program reviews and compliance audits. To the extent that any program review or audit remains pending or unresolved, there are no issues or findings of non-compliance of which the Company has notice which could result in the loss of certification or eligibility or a material liability or fine.

(h) (i) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School (the term "Substantial Control" being defined in 34 C.F.R. 668.15(f)(2)), nor any member of such person's family (as the term "family" is defined in 34 C.F.R. 668.15(f)(3)), alone or together, (a) exercises or exercised Substantial Control over another institution or third-party servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV program requirement, or (b) owes a liability for a Title IV program violation.

(ii) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, or who will have the power to direct or cause the direction of the management or policies of the Company or the School, has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

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(iii) Neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, nor any person or entity which is an owner of the School, has pled guilty to, has pled nolo contendere to or has been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or has been judicially determined to have committed fraud involving funds under the Title IV programs.

(iv) To the Company's knowledge, neither the Company nor the School has employed any individual or entity in a capacity that involves the administration or receipt of funds under the Title IV programs, or contracted with any institution or third-party servicer, which has been terminated from the Title IV programs for a reason involving the acquisition, use, or expenditure of federal, state or local government funds, or has been convicted of, or has pled nolo contendere or guilty to, a crime involving the acquisition, use or expenditure or federal, state, or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds.

(i) Since July 1, 1994, the Company and the School have complied with all requirements or standards of the USDOE, any State Approval Agency or any Accrediting Body that pertain to the provision of commissions, bonuses or other incentive payments to admissions representatives, agents and other persons engaged in student recruiting or admissions activities or in making decisions regarding the awarding of Title IV program funds for or on behalf of the Company or School.

(j) To the knowledge of the Company, there exist no facts or circumstances attributable to the Company or the School that would reasonably be expected to cause any State Approval Agency whose authorization or consent or similar approval is required in connection with the transactions contemplated by this Agreement, as set forth in Schedule 2.8, to refuse to deliver such authorization, consent or similar approval.

(k) For purposes of this Agreement, "Accrediting Body" means any entity or organization which engages in granting or withholding accreditation or similar approval for the School and its educational programs, in accordance with standards relating to the performance, operation, financial condition and/or educational quality of such schools and programs.

(l) For purposes of this Agreement, "State Approval Agency" means any authority, whether governmental or quasi-governmental, in any state in which the School is located, or in any state in which a state approval agency has formally determined that the School has a physical presence that requires the School to obtain an approval, license or permit from such state approval agency (including, but not limited to,

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all such states in which the School offers residency programs, courses or seminars) and that engages in the granting or withholding of approvals, licenses or permits for and regulates private postsecondary schools and educational programs in accordance with standards relating to the operation, financial condition, or academic standards of such schools or programs or regulates the provision of the provision of financial assistance.

2.14. Offering Exemption. Assuming the accuracy of the representations and warranties made by the Investors in Section 3 of this Agreement, the offer, sale and issuance of the Class F Preferred Stock as contemplated hereby are, the issuance of the Conversion Stock upon the conversion of the Class F Preferred Stock in accordance with the terms of the Certificate of Designation will be, and all prior issuances of securities of the Company were at the time made, exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), and otherwise effected in compliance with all applicable federal and state securities Laws.

2.15. Employees; Proprietary Information Agreement. To the Company's knowledge, no officer or designated employee (as hereinafter defined) of the Company, and except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, no independent contractor utilized by the Company or any other person who performs services for or on behalf of the Company (including any employee of the Company) is in violation of any term of any employment Contract, patent disclosure agreement or any other Contract or Order relating to the relationship of such person with the Company or any other party because of the nature of the business conducted by the Company. To the Company's knowledge, none of its officers or designated employees has any obligations under any Contract or Order that would interfere with such person's exercising his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted.

2.16. Insurance. The Company has procured, and maintains insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, errors and omissions coverage), on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as the Company believes is customary in the case of similarly situated entities engaged in the same or a similar business. Schedule 2.16 sets forth a list of all insurance policies maintained by the Company, including the name of the insurer and the nature and amount of coverage. The Company has not received any notice of increase in premiums with respect to, or cancellation or non-renewal of, any of its insurance policies, and the Company has not made any claim against an insurance policy as to which the insurer is denying coverage or defending the claim under a reservation of rights. Each insurance policy maintained by the Company is in full force and effect, except as would not, individually or in the aggregate, have a

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Material Adverse Effect on the Company. The Company is not in default in any material respect under any insurance policy maintained by it.

2.17. [Intentionally Omitted]

2.18. Financial Statements. Schedule 2.18 sets forth (a) the balance sheet of the Company at December 31, 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the fiscal year ended December 31, 2000 audited by Ernst & Young LLP and (b) the unaudited consolidated balance sheet of the Company as of December 31, 2001 and the related unaudited consolidated statements of operations, changes in shareholders' equity and cash flows for the fiscal year ended December 31, 2001 (the "Financial Statements"). The Financial Statements are complete in all material respects, are in accord with the books and records of the Company and have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except that the December 31, 2001 Financial Statements do not contain all footnotes required by generally accepted accounting principles and are subject to normal year-end audit adjustments). The Financial Statements fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates and for the respective periods indicated therein. Except as disclosed on Schedule 2.18 or any other Schedule to this Agreement, the Company has no liabilities or obligations, contingent or otherwise (and whether or not the subject of any other representation or warranty hereunder), other than (a) liabilities or obligations reserved against or otherwise disclosed in the Financial Statements and (b) liabilities or obligations which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company maintains and will continue to maintain accounting methods, practices and procedures and maintains and will continue to maintain accounting systems and controls which permit financial statements to be prepared in accordance with generally accepted accounting principles. The books and records of the Company are in all material respects true and complete, are maintained in accordance with good business practice and all applicable Laws, and accurately present and reflect in all material respects all of the transactions that are or should be therein described.

2.19. Related Party Transactions. (a) Schedule 2.19 sets forth a list of all obligations and transactions, other than compensation in the ordinary course of business, (i) between the Company and any of the Company's affiliates, (ii) between the Company and any of the Company's officers, directors, equityholders or employees, or any of their affiliates or associates (each term as defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act")) and (iii) between any of the Company's affiliates and any of the Company's officers, directors or employees, or any of their affiliates or associates, directly pertaining to the Company. Except as set forth on Schedule 2.19, no

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officer or director of the Company or person who owns at least ten percent of the outstanding equity of the Company (nor any parent, child or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) any interest or involvement in any entity which furnished or sold, or furnishes or sells, services or products which the Company furnishes or sells, or proposes to furnish or sell or (ii) any interest or involvement in any entity which purchases from or sells or furnishes to, the Company, any goods or services; provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation shall not be deemed an interest in any entity for purposes of this Section 2.19.

(b) Each transaction set forth on Schedule 2.19 is on terms that are
(i) consistent with past practice of the Company and (ii) no less favorable to the Company as would be available with independent third parties dealing at arms' length.

2.20. Environmental Matters. The Company is in compliance in all material respects with all applicable Environmental Laws (as hereinafter defined). There are no past or present conditions, events, circumstances or facts that would reasonably be expected to form the basis of any claim or Litigation against or involving the Company based on or related to any violation of any Environmental Law that could, individually or in the aggregate, have a Material Adverse Effect on the Company. For purposes of this Agreement, the term "Environmental Law" shall mean any Law relating to human health, employee safety or the protection of the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and the Occupational Safety and Health Act.

2.21. Employee Benefit Plans. (a) Schedule 2.21 sets forth a list of
(i) each plan, program, policy or Contract providing for incentive compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits of any kind, whether formal or informal, funded or unfunded, written or oral, and whether or not legally binding, which is now or previously has been sponsored, maintained, contributed to or required to be contributed to by the Company or any of its subsidiaries and pursuant to which the Company or any of its subsidiaries has or may have any liability, contingent or otherwise, including any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each a "Benefit Plan"), (ii) each management, bonus, option, equity (or equity related), severance, non-compete, confidentiality or similar Contract between the Company and any current, former or retired employee, officer, consultant, independent contractor, agent or director of the Company (an "Employee") under which the Company has or may have any liability and (iii) each employment or consulting Contract between the Company and an Employee

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(each Contract in clauses (ii) and (iii), an "Employee Agreement"). The Company currently does not sponsor, maintain, contribute to, and is not required to contribute to, nor has the Company ever sponsored, maintained, contributed to or been required to contribute to, or incurred any liability with respect to, (i) any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any material liability to provide, life insurance, medical, severance or other employee welfare benefits to any Employee upon his or her retirement or termination of employment, except as required by Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code") or any similar state law regarding continuation of coverage. Except as set forth on Schedule 2.21, to the Company's knowledge, the Company has not committed to establish any new employee benefit plan, program or arrangement or to modify or terminate any Benefit Plan which, individually or in the aggregate, would materially increase the obligation of the Company to any or all of its employees.

(b) The Company has no liability, contingent or otherwise, with respect to any employee benefit plan maintained by or contributed to by any ERISA Affiliate. For this purpose, an ERISA affiliate is any entity (other than any current subsidiary of the Company) that is or ever has been (i) a member of a "controlled group of corporations," under "common control" or an "affiliated service group" within the meaning of Sections 414(b), (c) or (m) of the Code,
(ii) required to be aggregated under Section 414(o) of the Code or (iii) under "common control," within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections, in any such case with the Company.

(c) The Company has made available to the Investors true and complete copies of all documents embodying or relating to each Benefit Plan and each Employee Agreement, including all amendments thereto, trust or funding agreements relating thereto (if any), the two most recent annual reports (Series 5500 and related schedules) required under ERISA (if any), the two most recent annual actuarial valuations (if any), the most recent determination letter received from the Internal Revenue Service (the "IRS") (if any) and the most recent summary plan description (with all material modifications) (if any) relating to any Benefit Plan or Employee Agreement required to be listed on Schedule 2.21.

(d) Each Benefit Plan and Employee Agreement has been established and maintained in accordance with its terms and in compliance in all material respects with all applicable Laws, including but not limited to ERISA and the Code, and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified.

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(e) (i) To the knowledge of the Company, no "prohibited transaction," within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Benefit Plan, (ii) there is no Litigation pending, or to the Company's knowledge, threatened (other than routine claims for benefits) with respect to any Benefit Plan or Employee Agreement, (iii) to the Company's knowledge, no Employee has been hired by the Company in violation of any restrictive covenant or any non-compete Contract with any other Person, (iv) no liability under any Benefit Plan has been funded, nor has any such obligation been satisfied, with the purchase of a contract from an insurance company as to which the Company has received notice that such insurance company is insolvent or is in rehabilitation or any similar proceeding, (v) the Company has not receive notice that any Benefit Plan is under audit or investigation by the IRS, the Department of Labor or the Pension Benefit Guaranty Corporation, and, to the Company's knowledge, no such audit or investigation is threatened and (vi) with respect to each Benefit Plan which provides medical benefits or long-term disability benefits, all claims incurred by the Company under such Benefit Plan are either insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims or covered under a contract with a health maintenance organization pursuant to which such health maintenance organization bears the liability for such claims.

(f) The execution and delivery of, and performance of the transactions contemplated by, this Agreement and the other Transaction Documents will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Benefit Plan or Employee Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee or (ii) result in the triggering or imposition of any restrictions or limitations on the right of the Company to amend or terminate any Benefit Plan, or upon the right, upon any such amendment or termination, to receive the full amount of any excess assets remaining or resulting from such amendment or termination. No payment or benefit which will or may be made by the Company or any of its affiliates with respect to any Employee will be characterized as an "excess parachute payment," within the meaning of Section 280G(b)(1) of the Code.

2.22. Labor Relations; Employees. Except as set forth on Schedule 2.22, (a) the Company is in compliance in all material respects with all applicable Laws respecting employment, employment practices, labor, terms and conditions of employment and wages and hours, (b) the Company is not a party to any Contract with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company, (c) there is no labor strike, dispute, slowdown or stoppage pending, or, to the Company's

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knowledge, threatened against or involving the Company, (d) the Company is not involved in or, to the Company's knowledge, threatened with any Litigation relating to labor matters (including discrimination complaints and charges of unfair labor practices) and (e) to the Company's knowledge, no officer of the Company or employee whose annual compensation is in excess of $70,000 has any plans to terminate his or her employment with the Company. The Company has not received notice of any worker's compensation claims.

2.23. Absence of Changes. Except as set forth on Schedule 2.23 or as contemplated by this Agreement or the other Transaction Documents or reflected in the Financial Statements, since December 31, 2000, or in the case of item
(k), since September 30, 2001, the Company has conducted its business in the ordinary course, consistent with past practice, and there has not been (a) any event or condition which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, (b) any waiver of any material right, claim or debt held by the Company, (c) any payment or declaration of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities of or other equity interest in the Company, (d) any issuance of any securities of or other equity interest in the Company other than pursuant to the exercise of the previously outstanding options set forth on Schedule 2.4, (e) any sale, assignment or transfer of any tangible or intangible assets of the Company, except (i) in the ordinary course of business and (ii) assets for which the book value does not exceed $100,000 and which are not, individually or in the aggregate, material, (f) any loan by the Company to any officer, director, employee, consultant or equityholder of the Company (other than advances to such persons in the ordinary course of business in connection with travel and travel-related expenses, advances against payroll provided to non-officer employees to help with short-term cash flow issues and advances to employees for moving expenses, which advances, in the aggregate, did not exceed $50,000 outstanding at any one time), (g) any damage, destruction or loss (whether or not covered by insurance) which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, (h) other than in the ordinary course of business, any increase, direct or indirect, in the compensation paid or payable to any officer or director of the Company, or to any other employee, consultant or agent of the Company, (i) any change in the accounting or Tax methods, practices or policies or in any Tax election of the Company, (j) any indebtedness incurred for borrowed money other than in the ordinary course of business or pursuant to a Contract set forth on Schedule 2.23, (k) any amendment to or termination of any Material Contract, (l) any changes with respect to the regulation, accreditation or approval of the Company or its products and services by any Governmental Entity, Accrediting Body or State Approval Agency which would, individually or in the aggregate, have a Material Adverse Effect on the Company, (m) any material change in the manner of business or operations of the Company or

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(n) any commitment by the Company (contingent or otherwise) to do any of the foregoing.

2.24. Suppliers and Customers. Except as set forth in Schedule 2.24, since December 31, 2001, there has been no termination, cancellation or, to the Company's knowledge, threatened termination or cancellation or any material modification or change in, or any material dissatisfaction with, the business relationship between the Company and any supplier, vendor, customer or client of the Company which would reasonably be expected to have a Material Adverse Effect on the Company.

2.25. Suitability. Neither the Company nor, to its knowledge, any of its directors or officers (a) has ever been indicted for or convicted of any felony or any crime involving fraud or misrepresentation, (b) is subject to any Order barring, suspending or otherwise limiting the right of the Company or such person to engage in any activity conducted by the Company, (c) has ever been the subject of any bankruptcy or similar proceeding or (d) to the Company's knowledge, has ever been denied any Accreditation, License or Permit affecting the Company's or such person's ability to conduct any activity conducted by the Company, nor, to the Company's knowledge, is there any basis upon which such Accreditation, License or Permit would reasonably be expected to be denied.

2.26. Operations of the Company. Schedule 2.26 sets forth a list of the Company's domain names (each, a "Domain Name"). The Company has registered each Domain Name listed on Schedule 2.26 for the periods set forth on Schedule
2.26. The Company's web site (www.capellauniversity.edu) (the "Web Site") is commercially operational, and has performed, for the six-month period prior to the date of this Agreement. The Company has used commercially reasonable efforts to ensure that customers or clients of the Company will not be adversely affected by a failure or disruption of any of the computer networks or the Web Site of the Company.

2.27. Recruitment; Admissions Procedures; Attendance; Reports.

(a) Schedule 2.27 contains a complete and correct list of all policy manuals and other statements of procedures or instructions relating to (i) recruitment of students for the School, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (ii) admissions procedures, including any descriptions of procedures for insuring compliance with federal, state and accreditation requirements applicable to such procedures; and (iii) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion (collectively, the "Policy Guidelines"). The Company has made available to the Investors true and complete copies of all Policy Guidelines.

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(b) The operations of the Company and the School have been conducted in accordance with the Policy Guidelines, except where the failure to do so would not have a Material Adverse Effect on the Company, and all relevant standards and requirements imposed by applicable Accrediting Bodies or State Approval Agencies, and other agencies administering state or federal governmental financial assistance programs in which the Company or the School participate, and other applicable legal requirements.

(c) The Company has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Company and the School to all agencies or other entities with which such filings are required related to its compliance with (i) applicable accreditation standards and State Approval Agency requirements, (ii) legal requirements governing programs pursuant to which the School or its students receive student financial assistance funding, and (iii) all articulation agreements between the School and other institutions of higher education in effect as of the date hereof except for any such reports, audits and other information the failure to file would not have a Material Adverse Effect on the Company.

(d) All student financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and state requirements, except where the failure to do so would not have a Material Adverse Effect on the Company, and there are no material deficiencies in respect thereto. Except as set forth on Schedule 2.27, and except where the failure to do so would not have a Material Adverse Effect on the Company and except as previously disclosed in prior audits or compliance reviews by the USDOE, no student at the School has been funded prior to the date for which such student was eligible for funding or for any amount other than the amount such student was eligible to receive, and such student's records conform in form and substance to all relevant regulatory requirements.

2.28. USDOE Demonstration Program. The School is authorized by the USDOE to participate in the Distance Education Demonstration Program ("Demonstration Program") authorized under section 486 of the Higher Education Act of 1965, as amended. The School is in compliance with all terms and conditions of the February 21, 2000 agreement with the USDOE amending the School's Program Participation Agreement to permit the School's participation in the Demonstration Program, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. To the Company's knowledge, there exists no fact or circumstances that would reasonably be expected to cause the USDOE to revoke or limit the School's authorization to participate in the Demonstration Program.

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2.29. Disclosure. (a) Neither this Agreement nor any of the Transaction Documents contains any untrue statement by or on behalf of the Company of a material fact or omits to state a material fact necessary in order to make the statements by or on behalf of the Company contained herein and therein, in light of the circumstances under which they were made, not misleading.

(b) The projections set forth on Schedule 2.29 (a) have been prepared by management of the Company in good faith, (b) are based on assumptions believed by management of the Company to be reasonable and (c) represent good faith estimates by management of the Company as to the financial performance of the Company for the periods indicated, but do not represent any guarantee or assurance of the future financial results of the Company. The Investors acknowledge that unanticipated future events and circumstances may occur, that the Company's business, financial condition and results of operations are subject to risks and uncertainties, and that actual results achieved during any future period may vary from the projections and the variations may be material and adverse.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

Subject to the provisions of Section 1.6, each of the Investors severally, and not jointly, represents and warrants to the Company as of the date hereof and as of the Closing as follows:

3.1. Power; Authorization. The execution, delivery and performance of this Agreement and the other Transaction Documents to which such Investor is a party, and the consummation of all transactions contemplated hereby and thereby have been duly authorized by all required actions on the part of the Investor. Each of the Transaction Documents constitutes a valid and binding obligation of such Investor enforceable against such Investor in accordance with its terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies.

3.2. No Breach. The execution, delivery and performance by such Investor of this Agreement and the other Transaction Documents and the consummation by such Investor of the transactions contemplated hereby and thereby will not (i) conflict with, or result in any violation of, any provision of the organizational or formation documents of such Investor or any Law or Order to which such Investor is subject or (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any of its Contracts, Accreditations, Licenses or Permits.

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3.3. Investment; Securities Laws. Such Investor is acquiring the Class F Preferred Stock to be purchased under this Agreement for its own account, not as a nominee or agent, for investment and not with a view to the distribution thereof (within the meaning of the Securities Act) except in compliance with all applicable federal and state securities Laws. Such Investor understands that (i) the Class F Preferred Stock has not been, and the Conversion Stock will not be, registered under the Securities Act or any state securities Laws, and (ii) the Class F Preferred Stock and the Conversion Stock may not be sold unless such disposition is registered under the Securities Act and applicable state securities Laws or is exempt from registration thereunder.

3.4. Accredited Investor. (a) Such Investor is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). The state in which such Investor's principal office (or domicile, if such Investor is an individual) is located is set forth in Schedule 3.4. Such Investor has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment to be made hereunder by such Investor. Such Investor has and has had access to all of the Company's material books and records and access to the Company's executive officers has been provided to such Investor or to such Investor's qualified agents. Other than Think, no Investor was formed for the purpose of this investment within the meaning of Rule 501 under the Securities Act.

(b) Think and each of the equity holders of Think is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). Think shall cause each of the equity holders of Think to provide to the Company prior to Closing a manually signed representation that such equity holder is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act).

3.5. Rule 144. Such Investor acknowledges that the exemption from registration afforded by Rule 144 promulgated under the Securities Act (the provisions of which Rule are known to the Investor) depends on the satisfaction of various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts.

3.6. Availability of Funds. Such Investor has available sufficient funds or available capital commitments to pay its portion of the Purchase Price.

3.7. Brokers. Such Investor has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

3.8. Independent Investigation and Counsel. Such Investor acknowledges to the Company and to the other Investors that it has had an opportunity to

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conduct its own independent due diligence investigation of the Company and no Investor is relying on any other Investor for such Investor's due diligence investigation of the Company. Such Investor acknowledges to the other Investors that it was represented by counsel of its own choosing and no Investor is relying on the counsel of the Company or any other Investors for any purpose whatsoever.

3.9. Investor Qualifications. (a) Since July 1, 1994, no such Investor (i) has exercised Substantial Control (as that term is defined in 34 C.F. R. 668.15(f)(2)) over an institution of higher education that participates in a Title IV program (other than the Company or the School) or Third-Party Servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV program requirement or (ii) owes a liability for a Title IV program violation.

(b) Since July 1, 1994, no such Investor who will have the ability to direct or cause the direction of the management or policies of the School has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

(c) No such Investor has pled guilty to, pled nolo contendere to or been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or been judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds, including but not limited to, funds disbursed pursuant to the Title IV Programs.

(d) For purposes of this Section 3.9, the term "Investor" shall mean only Equity VII, MBO-VIII, Dain, Think, Gaylord, the Putnam entities identified in Schedule 1.1 and the Management Investors identified in Schedule
1.1. The term "Investor" shall not mean or extend to general partners, partners, institutions, affiliates or individuals who have ownership interests in or who control, are controlled by or are under common control with Equity VII, MBO-VIII, Dain, Think or Putnam.

3.10. Compliance. The representations and warranties made by Putnam in this Agreement shall be deemed made as of Closing with full force and effect as if made as of such time.

SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.

Each of Dain's, Think's and each Management Investor's obligation to purchase the Class F Preferred Stock at the Closing is subject to each of Putnam and the Forstmann Little Entities simultaneously consummating the Closing. The Forstmann Entities' obligation to purchase the Class F Preferred Stock at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

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4.1. Representations and Warranties Correct. The representations and warranties made by the Company in Section 2 shall be true and correct when made and as of the time of the Closing with the same force and effect as if made at such time, other than such representations and warranties as are expressly stated to be made as of another date, which shall be true and correct as of such date.

4.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company at or prior to the Closing shall have been performed or complied with in all material respects.

4.3. Material Adverse Change. Since the date of this Agreement, no event or change shall have occurred which, individually or in the aggregate, has had, or would reasonably be expected to have, a Material Adverse Effect on the Company.

4.4. Compliance Certificate. The Company shall have delivered to such Investor a certificate of the Company, executed by the Chief Executive Officer of the Company, dated the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 4.1, 4.2, 4.3, 4.7 and 4.8.

4.5. Opinion of Company's Counsel. Such Investor shall have received from (a) Faegre & Benson LLP, counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-1 and (b) Drinker, Biddle & Reath LLP, special counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-2.

4.6. Officer's Certificate. The Company shall have delivered to such Investor a certificate executed by an appropriate officer of the Company dated as of the Closing Date, certifying the following matters: (a) the corporate proceedings taken by the Company's Board of Directors (the "Board") and, if required, stockholders approving this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby; (b) the Articles of Incorporation, (c) the By-laws of the Company and (d) the Certificate of Designation.

4.7. Board Membership. The seven people listed on Exhibit B shall have been elected to, and shall comprise, the Board.

4.8. Amended and Restated Investor Rights Agreement. The Investor Rights Agreement shall have been executed in the form attached hereto as Exhibit E.

4.9. Second Amended and Restated Co-Sale and Board Representation Agreement. The Board Representation Agreement shall have been amended and restated in the form attached hereto as Exhibit F.

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4.10. Registration Rights Amendment. The Registration Rights Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit G.

4.11. 1998 Warrant Amendment. The 1998 Warrant Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit H.

4.12. 2000 Warrant Amendment. The 2000 Warrant Amendment shall have been executed by all required parties substantially in the form attached hereto as Exhibit I.

4.13. Simultaneous Closing. Putnam, Dain, Think and the Management Investors shall simultaneously be consummating the Closing.

4.14. Bankruptcy Event.Neither Equity-VII nor MBO-VIII shall have filed for relief in bankruptcy or shall have had entered against it an order for relief in bankruptcy.

SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.

The Company's obligation to sell the Class F Preferred Stock to the Investors at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

5.1. Representations and Warranties Correct. The representations and warranties made by the Investors in Section 3 of this Agreement shall be true and correct in all material respects as of the time of Closing with the same force and effect as if made as of such time, other than such representations and warranties as are expressly stated to be made as of another date which shall be true and correct in all material respects as of such date.

5.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Investors at or prior to the Closing shall have been performed or complied with in all material respects.

5.3. Compliance Certificate. The Investors, except for Putnam, shall have delivered to the Company a certificate executed by the Investors, dated as of the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 5.1 and 5.2.

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5.4. Consents. The 1998 Warrant Amendment, 2000 Warrant Amendment and the Registration Rights Amendment shall have been executed by all required parties (other than the Company).

SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.

6.1. Cooperation. From the date hereof and prior to the Closing, each of the parties shall use its best efforts to make all Governmental Filings required to be made by it, and to obtain all Governmental Consents and all necessary consents from other third parties ("Third Party Consents") as shall be required to be obtained by it, for the consummation of the transactions contemplated hereby and by the other Transaction Documents, all as set forth in Schedule 2.8, and shall otherwise use its best efforts and cooperate with the other parties to cause the consummation of such transactions in accordance with the terms and conditions hereof and thereof.

6.2. No Solicitation. Except as set forth on Schedule 6.2, from the date hereof and until the Closing, other than in connection with the transactions contemplated hereby and in connection with the Company's preparation for its initial public offering of securities of the Company, the Company shall not solicit, propose or facilitate (including by way of providing information regarding the Company or its business to any person or providing access to any person), directly or indirectly, any inquiries, discussions or proposals regarding, continue or enter into negotiations looking toward, or enter into or consummate any agreement or understanding in connection with any proposal regarding, any purchase or other acquisition of all or any portion of the Company (other than the ordinary course of business sale of products or services or replacement of assets) or any equity securities (whether newly issued or currently outstanding, but excluding Common Stock issued upon the exercise of currently outstanding options) of the Company, any merger, business combination or recapitalization involving the Company, the liquidation, dissolution or reorganization of the Company, or any similar transaction. If any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, the Company or any of its representatives, then the Company shall promptly notify the Investors of the nature and terms of any of the foregoing and the identity of the parties involved.

6.3. Publicity. Prior to the Closing, no public release or announcement or other disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by any party, without the prior consent of the other parties hereto (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law

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or the rules or regulations of any securities exchange, in which case the party required to make the release or announcement shall give notice to and consult with the other parties hereto in advance of such issuance.

6.4. Conduct of Business Prior to the Closing. The Company covenants and agrees that, except as set forth in Schedule 6.4, between the date hereof and the Closing, neither the Company nor any of the Subsidiaries shall conduct its business other than in the ordinary course and consistent with prior practice. Without limiting the generality of the foregoing, except as set forth in Schedule 6.4, between the date hereof and the Closing, the Company shall, and shall cause each Subsidiary and otherwise use commercially reasonable efforts to, (a) preserve intact the business organization of the business, (b) keep available the services of the Employees, (c) continue in full force and effect without material modification all existing policies or binders of insurance presently maintained in respect of the business, (d) preserve its current relationships with its customers, suppliers and other persons with which it has significant business relationships; and (e) not engage in any practice, take any action, embark on any course of inaction or enter into any transaction which could result in any misrepresentation or breach of any warranty or covenant made by the Company in this Agreement or in any Transaction Document.

SECTION 7 POST-CLOSING AND ON-GOING COVENANTS.

7.1. Directors. Effective at the Closing, the holders of shares of Class F Preferred Stock and Conversion Stock shall have the right to designate a director of the Company in accordance with the provisions of Section 3 of the Board Representation Agreement, who shall initially be Russell Gullotti.

7.2. Reimbursement of Directors. The Company shall reimburse each director designated by the holders of the shares of Class F Preferred Stock and Conversion Stock for all reasonable costs and expenses associated with attending meetings of the Board or any committee thereof.

7.3. Indemnification of Directors. (a) The Company shall indemnify, defend and hold harmless each person who serves as a member of the Board or committee thereof from and against all losses, claims, damages and expenses (including reasonable attorneys' fees and expenses) to the fullest extent permitted from time to time under applicable Law.

(b) To the fullest extent permitted from time to time under applicable Law, the Company shall pay, on an as-incurred basis, the reasonable fees and expenses of the directors (including reasonable attorneys' fees and expenses) in advance of the final disposition of any Litigation that is the subject of the right to indemnification.

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(c) In the event of any Litigation, subject to the provisions of any insurance policy the director shall be entitled to control the defense thereof with counsel of the director's own choosing reasonably acceptable to the Company and the Company shall cooperate in the defense thereof; provided, that, such director shall have no power to settle or compromise any Litigation for which indemnification is being sought without the prior written consent of the Company which shall not be unreasonably withheld.

(d) The Articles of Incorporation and By-Laws of the Company shall contain provisions for the indemnification and exculpation of directors to the maximum extent permitted under applicable Law, and shall be amended as and when necessary to effectuate the foregoing.

(e) The Company shall cause to be maintained in effect, with financially sound insurers, a policy of directors' and officers' liability insurance on terms and amounts substantially similar to the directors' and officers' liability insurance maintained as of the date hereof. Upon the Company's initial public offering, the Company shall expand such directors' and officers' liability insurance to that it shall be on such terms and in such amounts as are customary for similarly situated public companies.

7.4. Representative. (a) From and after the Closing and so long as an Investor holds more than 320,239 shares (subject to appropriate adjustments for stock dividends, stock splits, combinations, recapitalizations or the like) of Class F Preferred Stock (or Common Stock acquired upon conversion thereof) (treating (i) Putnam and their respective affiliated investment funds as one holder for purposes of this Section 7.4(a); and (ii) the Forstmann Little Entities and their respective affiliated investment funds as one holder for purposes of counting the number of shares held by any Forstmann Little Entity under this Section 7.4(a),) (a "Qualified Investor"), such Qualified Investor shall be entitled to designate one representative (the "Representative") to observe Board meetings and all committees thereof; provided, however, that no such Investor shall be entitled to designate a Representative pursuant to this
Section 7.4 during such time that such Investor is entitled to designate (without the consent of other Investors) a director under the Board Representation Agreement or is entitled to appoint a representative to observe Board meetings pursuant to any other agreement with the Company. For the avoidance of doubt and subject to the limitations set forth in the previous sentence when such entity is entitled to designate a director, (i) so long as Putnam collectively hold at least 320,239 shares (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) of Class F Preferred (or Common Stock

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acquired upon conversion thereof), Putnam shall collectively be entitled to one Representative; and (ii) so long as the Forstmann Little Entities collectively hold at least 320,239 shares (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) of Class F Preferred (or Common Stock acquired upon conversion thereof), each such Forstmann Little Entity holding shares of Capital Stock shall be entitled to designate one Representative. The Representative for each of the Forstmann Little Entities shall initially be Gordon A. Holmes. The Company shall, after receiving notice from the Qualified Investor as to the identity of the Investor's Representative and a confidentiality agreement that is reasonably acceptable to the Company and is executed by the Representative, except to the extent necessary to preserve attorney-client privilege, (i) permit the Representative to attend all Board meetings and all committees thereof, (ii) provide the Representative advance notice of each such meeting, including such meeting's time and place, at the same time and in the same manner as such notice is provided to the members of the Board (or such committee thereof) and copies of all materials distributed to the members of the Board (or such committee thereof) at the same time as such materials are distributed to the Board (or such committee thereof) and shall permit the Representative to have the same access to information concerning the business and operations of the Company as the directors (or committee members) have, (iii) permit the Representative to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the Board, without voting, and (iv) reimburse the Qualified Investor for its Representative's reasonable costs in attending Board meetings. The Board (or any committee thereof) and the Company's management shall give due consideration to the advice given and any proposals made by a Representative. In addition, Putnam and each Forstmann Little Entity shall have the right to consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with a representative of Putnam and each Forstmann Little Entity at the Company's facilities at mutually agreeable times for such consultation and advice, including to review progress in achieving said plans. The Company shall give Putnam and each Forstmann Little Entity reasonable advance written notice of any significant new initiatives or material changes to existing operating plans and shall afford Putnam and each Forstmann Little Entity adequate time to meet with management to consult on such initiatives or changes prior to implementation. The Company shall furnish Putnam and each Forstmann Little Entity with such financial and operating data and other information with respect to the Business and the properties of the Company as Putnam or such Forstmann Little Entity may request, except to the extent necessary to preserve attorney-client privilege. The Company shall permit Putnam and each Forstmann Little Entity to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the principal officers of the Company, except to the extent necessary to preserve attorney-client privilege. The Company shall give due consideration to the advice given and any proposals made by Putnam or any Forstmann Little Entity.

(b) The rights set forth in Sections 7.1 and 7.4 are, in part, intended to satisfy the requirement of contractual management rights for purposes of qualifying the

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ownership interests of Equity VII and MBO-VIII in the Company as venture capital investments for purposes of the Department of Labor's "plan assets" regulations ("Contractual Management Rights"), and in the event such rights are not satisfactory for such purpose, the Company, Equity VII and MBO-VIII shall reasonably cooperate in good faith to agree upon mutually satisfactory Contractual Management Rights which satisfy such regulations.

(c) The rights of Putnam set forth in this Section 7.4 shall terminate automatically upon effectiveness of a registration statement filed with the Securities and Exchange Commission for the Company's initial public offering of Capital Stock; provided, however, Putnam's rights set forth in
Section 7.4 shall be reinstated if such registration statement is withdrawn prior to being declared effective.

(d) The rights set forth in Section 7.4 may not be transferred unless (i) such transfer is made by a Forstmann Little Entity to an affiliated investment fund, (ii) in connection with the transfer of shares of Class F Preferred (or Common Stock acquired upon conversion thereof) and (iii) the transferee assumes in writing the rights and obligations of such transferor under this Agreement.

(e) If at any time after the Closing Date, Equity-VII or MBO-VIII hold any shares of Class F Preferred (or Common Stock acquired upon conversion thereof) and do not have Contractual Management Rights, the Company and Equity-VII or MBO-VIII, as applicable, shall reasonably cooperate in good faith and shall agree upon mutually satisfactory Contractual Management Rights as necessary for that particular holder.

7.5. Financial Statements and Other Information. From and after the Closing, so long as an Investor is a Qualified Investor and subject to
Section 7.5(g) below, the Company shall furnish to such Investor the following:

(a) as soon as available but in any event within 30 days after the end of the first, second and third quarterly accounting periods in each fiscal year, (i) unaudited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarterly period and consolidated balance sheet of the Company and its subsidiaries as of the end of such quarterly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, all prepared in accordance with generally accepted accounting principles consistently applied (subject to normal year-end audit adjustments), plus (ii) a statement certified by the Chief Financial Officer of the Company, certifying that the financial statements referred to in subparagraph (i) are presented fairly and have been prepared in

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accordance with generally accepted accounting principles consistently applied (subject to normal year-end audit adjustments);

(b) as soon as practicable and in any event within 90 days after the end of each fiscal year, audited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such fiscal year, and consolidated balance sheet of the Company and its subsidiaries as of the end of such fiscal year, all prepared in accordance with generally accepted accounting principles consistently applied, and accompanied by an audit opinion, without qualification or reservation, by Ernst & Young or another "Big-5" public accounting firm selected by the Company (the "Company's Accountants");

(c) promptly upon receipt thereof, a copy of the annual management letter of the Company's Accountants to the Board and any additional written reports or management letters concerning material aspects of the Company's operations and financial affairs delivered by the Company's Accountants to the audit committee (and not otherwise contained in other materials provided hereunder);

(d) at least 15 days prior to the end of each fiscal year, an annual operating budget prepared on a monthly basis for the Company for the succeeding fiscal year (displaying anticipated statements of income and cash flows, changes in financial position and balance sheets), an annual budget for capital expenditures of the Company for the succeeding fiscal year, and a strategic plan for the succeeding fiscal year, which budgets and strategic plan shall have been approved by the Board, and promptly upon preparation thereof any other significant budgets which the Company prepares, and any revisions of such annual or other budgets or strategic plan;

(e) as soon as available, copies of any independent accountants' reports prepared for federal or state educational regulatory purposes, together with any related reports prepared by the Company; and

(f) with reasonable promptness, such other information and financial data concerning the Company as such Investor may reasonably request.

(g) Putnam's rights set forth in Section 7.5 shall terminate automatically upon effectiveness of a registration statement filed with the Securities and Exchange Commission for the Company's initial public offering of Capital Stock; provided, however, Putnam's rights set forth in Section 7.5 shall be reinstated if such registration statement is withdrawn prior to being declared effective.

7.6. Approval and Notification.(a) The Company and the Investors hereby acknowledge and agree that the transactions contemplated hereby are subject to

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the usual and customary conditions relating to the change of ownership resulting in a change of control of postsecondary educational institutions certified as eligible to participate in the student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended, and that the Company shall promptly seek to have the USDOE issue (i) a temporary Provisional Program Participation Agreement extending the School's certification to participate in Title IV funding programs immediately following Closing and (ii) a new Provisional Program Participation Agreement permitting the School to maintain participation in Title IV funding upon expiration of the temporary Provisional Program Participation Agreement.

(b) The Company shall ensure that a materially complete application for approval of the change of ownership (the "Application") is filed with USDOE no later than ten (10) business days following Closing. For purposes of this Agreement, a materially complete Application consists of a completed application form for approval to participate in federal student financial aid programs and the following: (i) a copy of the School's current authorization from the State of Minnesota Higher Education Services Office ("MHESO"); (ii) documentation from the Higher Learning Commission of the North Central Association of Colleges and Schools (the "Higher Learning Commission") demonstrating that the School is currently accredited and that the accrediting agency has approved all non-degree programs offered by the School; (iii) audited financial statements of the School's two most recently completed fiscal years that are prepared in accordance with GAAP and audited in accordance with Generally Accepted Government Auditing Standards ("GAGAS") published by the Governmental Accounting Standards Board; and (iv) if required by the USDOE, (1) audited financial statements of the Investors' two most recently completed fiscal years (or the period since such Investors' formation, whichever is shorter) that are prepared in accordance with GAAP and, if also required by the USDOE (and in which case the Company shall reimburse the Investor for the additional cost of auditing such statements in accordance with GAGAS if such statements are not already prepared), audited in accordance with GAGAS (collectively, with statements prepared in accordance with GAAP, the "Audited Financial Statements") or (2) such other equivalent financial information of the Investors that is acceptable to the USDOE, (it being understood that the Investors shall provide the Company with the information described in this clause (iv) for purposes of the Application but that the Investors shall not be required to provide information, financial or otherwise, more extensive or detailed than the Audited Financial Statements). The Company shall ensure that the following are filed with USDOE by the last day of the month following the month in which the Closing occurred: (i) a balance sheet showing the financial position of the School, as of the date of the Closing, that is prepared in accordance with GAAP and audited in accordance with GAGAS; (ii) approval of the transaction from MHESO or, alternatively, a letter from MHESO stating that approval of the transaction is not required under its rules and regulations; and
(iii) approval of the transaction from the

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Higher Learning Commission or, alternatively, a letter from the Higher Learning Commission stating that approval of the transaction is not required under its standards and processes.

(c) The Company shall timely make all required Governmental Filings with State Approval Agencies and Accrediting Bodies that are required to be made as a result of this transaction as set forth in Schedule 2.8.

7.7. Corporate Existence. The Company shall, and shall cause each Subsidiary to, maintain the corporate existence in good standing of each such entity unless otherwise explicitly approved by a majority of the Board.

7.8. Conduct of Business. The Company shall conduct its business and operations in the ordinary course of business substantially consistent with the Company's year 2002 plan (attached hereto as Schedule 9.10) unless otherwise explicitly approved by a majority of the Board.

7.9. Board Meetings. The Company agrees, as a general practice, to hold meetings of its Board of Directors periodically, and in any case not less than once every calendar quarter, and to hold meetings of the committees of its Board of Directors as frequently as is necessary or appropriate.

7.10. Insurance. The Company will procure and maintain insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, errors and omissions coverage), on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as the Company believes is customary in the case of similarly situated entities engaged in the same or similar business and all such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws.

7.11. Non-disclosure and Invention Agreements. The Company shall cause all Key Employees currently employed or hereafter hired by the Company to execute the Company's Statement of Policy and Employee Responsibilities (which includes non-disclosure and invention assignment provisions) in a form that is determined by the executive officers of the Company to reasonably protect the proprietary information of the Company. "Key Employee" shall mean any executive

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officer and any officer having policy-making functions, including, without limitation, the persons set forth on Schedule 7.11.

7.12. Publicity. No public release or announcement or other disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by the Company, without the prior consent of Putnam and Equity-VII and MBO-VIII (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of any securities exchange, in which case the Company shall use its best efforts to give notice to and consult with Putnam and Equity-VII and MBO-VIII in advance of such issuance.

SECTION 8. TERMINATION.

8.1. Termination. This Agreement may be terminated and the transaction contemplated hereby may be abandoned at any time prior to the Closing Date:

(a) by mutual written consent of Equity VII, MBO-VIII and the Company;

(b) by any of Equity VII, MBO-VIII or the Company, by giving written notice to the other parties hereto, if any Governmental Entity with jurisdiction over such matters shall have issued an Order restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Order shall have become final and non-appealable; provided, however, that the provisions of this Section 8 shall not be available to the Company, MBO-VIII or Equity VII unless the Company or such investors, as the case may be, shall have complied with their respective obligations under Section 6.1 and 6.2, or otherwise used their reasonable best efforts to oppose any such Order or to have such Order vacated or made inapplicable to the transactions contemplated by this Agreement; or

(c) by any of Equity VII, MBO-VIII or the Company, by giving written notice to the other parties, if the Closing shall not have occurred on or prior to March 15, 2002, provided that the terminating party is not in material breach of its obligations under this Agreement.

(d) by Equity-VII, MBO-VIII or the Company, by giving written notice to the other parties, if Putnam shall have informed Equity-VII, MBO-VIII or the Company in writing of its intention not to execute this Agreement or purchase the Series F Preferred Stock.

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8.2. Effect on Obligations. Termination of this Agreement pursuant to this Section 8 shall terminate all obligations of the parties hereunder, except for the obligations under Sections 9.1, 9.2, 9.8 and 9.11; provided, however, that nothing herein shall relieve the defaulting or breaching party from any liability to the other party hereto.

SECTION 9. MISCELLANEOUS.

9.1. Survival. All representations and warranties hereunder shall survive the Closing until the end of the 18th month following the Closing, and shall in no way be affected by any knowledge possessed by, or investigation of the subject matter thereof made by or on behalf of, the Investors, provided, however, that the representations and warranties set forth in Sections 2.2, 2.4, 2.5(b), 2.19, 3.1, 3.3 and 3.4 shall survive indefinitely. All statements contained in any Transaction Document shall constitute representations and warranties by the Company under this Agreement. All covenants and agreements contained herein shall survive indefinitely until performed in accordance with their terms.

9.2. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Investor, its affiliates, and each of their respective officers, directors, partners (and the partners of such partners), managing directors, employees, agents, advisors, consultants, representatives, successors and assigns (including any transferee of Class F Preferred Stock or Conversion Stock) from and against all Losses (as hereinafter defined) incurred or suffered by any of the foregoing (whether incurred or suffered directly or indirectly through ownership of Conversion Stock or Class F Preferred Stock) arising out of, relating to or resulting from (i) any breach of any of the representations or warranties made by the Company in this Agreement or in any of the Transaction Documents, and (ii) any breach of any of the covenants or agreements made by the Company in this Agreement or in any of the Transaction Documents. Each Investor shall, severally and not jointly, indemnify, defend and hold harmless the Company, its affiliates, and each of their respective officers, directors, employees, agents, advisors, consultants, representatives, successors and assigns against all Losses arising from the breach of any of the representations, warranties, covenants or agreements made by such Investor in this Agreement or in any of the Transaction Documents or in any certificate or instrument delivered pursuant to Section 5.

(b) For purposes hereof, "Losses" shall mean each and all of the following items: claims, losses, liabilities, obligations, payments, actual and punitive damages, charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation and fees, expenses and disbursements of counsel, consultants and other experts), but excluding consequential damages. Any

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payment by the Company to any Investor pursuant to this Section 9.2 shall be treated for all income Tax purposes as an adjustment to the price paid by such Investor for the Class F Preferred Stock pursuant to this Agreement.

(c) Each of the representations and warranties that contains any "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications shall be deemed to have been given as though there were no "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications for purposes of determining the amount of Losses under this Section 9.2, but not the accuracy of any representation or warranty.

(d) Any claim for indemnification pursuant to this Section 9.2 must be made before the expiration of the survival periods set forth in Section
9.1. No party shall be entitled to indemnification against a Loss arising from the breach of any representations or warranties of any other party unless the party seeking indemnification (the "indemnified party") shall have given to the party from whom indemnification is sought (the "indemnifying party") a claim notice relating to such Loss (a "Claim Notice") prior to expiration of the representation or warranty upon which the claim is based. The written Claim Notice shall be given reasonably promptly after the indemnified party becomes aware of the facts indicating that a claim for indemnification may be warranted, and shall state in reasonable detail (to the extent known) the nature of the claim. The failure of any indemnified party to give a Claim Notice shall not relieve the indemnifying party of its obligations under this Section 9.2, except to the extent that the indemnifying party is actually materially prejudiced by failure to give such Claim Notice. The indemnifying party may, through counsel of its own choosing and reasonably satisfactory to the indemnified party, assume the defense thereof or other indemnification obligation with respect thereto; provided, however, that any indemnified party shall be (a) entitled to participate in any such claim with counsel of its own choice but at its own expense and (b) shall be entitled to participate in any such claim with counsel of its own choice at the expense of the indemnifying party if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct. In any event, if the indemnifying party disputes the claim or otherwise fails to take reasonable steps necessary to defend diligently the action or proceeding within 20 days after receiving notice from such indemnified party, the indemnified party may assume such defense or other indemnification obligation and the fees and expenses of its attorneys will be covered by the indemnity provided for in this Section 9.2 if and upon determination of an indemnifying party's obligation therefor. The indemnifying party shall not, without the written consent of the indemnified party, which shall not be unreasonably withheld or delayed, settle or compromise any pending or threatened Litigation or claim in respect of which indemnification may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) or consent to the entry of any

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judgment (i) which does not, to the extent that an indemnified party may have any liability with respect to such action or claim, include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such action or claim, (ii) which includes any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, or (iii) in any manner that involves any injunctive relief against the indemnified party or may materially and adversely affect the indemnified party. The indemnified party may not compromise or settle any claim without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), unless the sole relief granted is equitable relief for which the indemnifying party would have no liability or to which the indemnifying party would not be subject.

9.3. Expenses. At the Closing, the Company shall pay, or reimburse the Forstmann Little Entities and Putnam for, all reasonable costs and expenses incurred by such Investors in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby; but in no event shall the Company pay or reimburse the Forstmann Little Entities for such costs and expenses in an amount in excess of $150,000. The Company shall pay its own expenses incurred in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby.

9.4. Delays or Omissions; Remedies. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any shares of Class F Preferred Stock or shares of Conversion Stock upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any shares of Class F Preferred Stock or shares of Conversion Stock with respect to any breach or default under this Agreement, or any waiver on the part of any holder of shares of Class F Preferred Stock or shares of Conversion Stock of any provisions or conditions of this Agreement, must be in writing signed by such holder and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by Law or otherwise afforded to any holder of shares of Class F Preferred Stock or shares of Conversion Stock, shall be cumulative and not alternative, and any person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages by reason of any breach of this Agreement and to exercise all other rights granted by Law, equity or otherwise.

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9.5. Further Assurances. At any time or from time to time after the Closing, each party hereto agrees to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as any other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and by the other Transaction Documents and to otherwise carry out the intent of the parties hereunder and thereunder.

9.6. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and each of the Investors and the respective successors, assigns, heirs and personal representatives of the Company and each of the Investors. The Company may assign its rights or obligations under this Agreement to any successor by merger, purchase, consolidation or otherwise of the Company, provided that such successor becomes a signatory to this Agreement. Prior to the Closing, the Investors may not assign their right or obligation under this Agreement to purchase shares of Class F Preferred Stock. The Company acknowledges that, after the Closing, subject to compliance with applicable securities Laws and the applicable provisions of this Agreement and the other Transaction Documents, any of the Investors may transfer all or part of the securities acquired by it hereunder and may, in its discretion, assign all or part of its rights and obligations under this Agreement to a transferee of such securities.

9.7. Entire Agreement. This Agreement and the Transaction Documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements, understandings or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof.

9.8. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy (with a confirmatory copy sent by a different means within three business days of such notice), nationally recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties:

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(i) if to the Company, to:

Capella Education Company 222 South Ninth Street, 20th Floor Minneapolis, Minnesota 55402 Telecopy: (612) 852-5930 Attention: Chief Executive Officer

with a copy to:

Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402-3901 Telecopy: (612) 766-1600 Attention: David B. Miller, Esq.

and

(ii) if to Forstmann Little Entities, to:

Forstmann Little & Co.

767 Fifth Avenue, 44th Floor
New York, New York 10153
Telecopy: (212) 759-9059
Attention: Gordon A. Holmes

with copies to:

Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-4000
Attention: Robert C. Schwenkel, Esq.

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and

(iii) if to Putnam, to:

Putnam Investment Management One Post Office Square Boston, Massachusetts 02109 Telecopy: (617) 292-1625 Attention: Michael DeFao

with copies to:

Ropes & Gray One International Place Boston, MA 02110 Telecopy: (617) 951-7050 Attention: Robert L. Nutt, Esq.

and

(iv) if to Management Investors, to:

Stephen Shank Capella Education Company 222 South Ninth Street, 20th Floor Minneapolis, MN 55402 Telecopy: (612) 852-5930

and

(v) if to Dain, to:

DRW Venture Partners LP 60 South 6th Street Minneapolis, MN 55402 Attention: Amy Swaim

and

(vi) if to Think, to:

c/o ThinkEquity Holdings LLC 222 South Ninth Street, Suite 2800

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Minneapolis, MN 55402 Attn: Board of Managers

and

(vii) if to Gaylord IRA:

USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299 800 Nicollet Mall
J10 100 01

Minneapolis, MN 55402
Telecopy: (612) 303-6194
Attn: Gary Petrucci

and

(vii) if to Weiss IRA:

USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account #82694368 800 Nicollet Mall
J10 100 01

Minneapolis, MN 55402
Telecopy: (612) 303-6194
Attn: Gary Petrucci

All such notices, requests, consents and other communications shall be deemed to have been given when received.

9.9. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

9.10. Titles and Subtitles; Definitions. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. The term "including" shall mean including without limitation, whether or not so stated, and is meant to be by way of example rather than limitation. The term "Material Adverse Effect on the Company" shall mean a material adverse effect on the Company and the Subsidiaries, taken as a whole, and the term "material" (including when used in the foregoing phrase or in the phrase "in all material respects") shall mean material to the business, assets, liabilities, prospects, condition

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(financial or otherwise) or results of operations of the Company and the Subsidiaries taken as a whole; provided, that, the Company and the Investors agree that Material Adverse Effect shall not include any such effect primarily attributable to or resulting from (a) changes in general economic or business conditions, the securities markets (public or private) or the Internet or education industries generally as they may affect the Company, (b) the announcement to employees, customers, suppliers or others of the transactions contemplated hereby, (c) the incurrence of liabilities, obligations and losses in the ordinary course of business substantially consistent with the Company's year 2002 plan (attached hereto as Schedule 9.10), (d) the taking of any action required by this Agreement or the other Transaction Documents and (e) any changes in generally accepted accounting principles. The term "Contract" shall mean any agreement, contract, understanding or arrangement, whether written or oral, and including all amendments thereto. The term "to the Company's knowledge" shall mean the knowledge of any of the persons set forth in Exhibit C, after reasonable inquiry. The term "person" shall mean any individual, corporation, association, partnership, trust or other entity or organization, including a Governmental Entity. The term "designated employee" shall mean the persons listed as such on Exhibit C. The term "Subsidiary" shall mean each corporation or other person of which shares of capital stock or other equity interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation or other person are at the time owned, directly or indirectly, or the management of which is otherwise controlled, directly or indirectly, or both, by the Company.

9.11. Governing Law; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the Laws of the State of Minnesota without giving effect to the principles of conflict of laws. Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any and all rights to trial by jury in connection with any Litigation arising out of or relating to this Agreement or the transactions contemplated hereby.

9.12. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement.

9.13. Massachusetts Business Trusts. A copy of the Agreement and Declaration of Trust of each Putnam fund or series investment company (each, a "Fund"), that is a Massachusetts business trust is on file with the Secretary of State of the Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of such Fund by the Trustees of the relevant Fund as Trustees, and not

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individually, and that the obligations of this Agreement are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of such Fund.

9.14. Confidentiality Agreement.Each Investor agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information about the Company or Capella University, Inc. (the "School") that such Investor obtains from the Company or the School pursuant to this Agreement (including the diligence in connection with, and negotiation of, this Agreement) unless (a) such information is or becomes publicly available other than as a result of a disclosure in breach of this Agreement by the Investor or anyone to whom the Investor transmitted such confidential information, (b) is or was known by the Investor on a non-confidential basis from a source other than the Company or the School who is not known by the Investor to be bound by a confidentiality agreement or other obligation of secrecy with respect to such confidential information or (c) is or was available to the Investor on a non-confidential basis prior to its disclosure to such Investor by the Company or the School. Notwithstanding the foregoing, information that is already in the public domain will not constitute confidential, proprietary or secret information with respect to any Investor for purposes of this Agreement. In addition, if, in the Investor's good faith judgment, the Investor is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand or similar process), or must, in order to defend against or assert a claim in connection with this Agreement or the Transaction Documents, disclose any confidential information, the Investor agrees to provide the Company with prompt written notice so that the Company may seek, at its expense, a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement and, in the event that such protective order or other remedy is not timely obtained, or that the Company waives compliance with the provisions of this Agreement, the Investor may, without liability under this Section 9.14, furnish that portion of the confidential information which, in the Stockholder's good faith judgment, is required for such purpose and will exercise its best efforts, at the Company's expense, to obtain reliable assurance that confidential treatment will be accorded the confidential information. Notwithstanding the foregoing, (A) any Investor that is a legal entity may disclose summary financial information and a narrative description of the Company to its partners, stockholders or members and prospective partners and (B) any Investor may disclose confidential information to its advisors, provided, in each case, that the recipients of such information have agreed to abide by the terms of this provision. Each Investor acknowledges its responsibilities under federal and state securities laws with respect to trading in securities while aware of material non-public information obtained from the Company and with respect to providing such information to other persons who purchase or sell securities of the Company. The provisions of this Section 9.14 shall survive the

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termination of this Agreement and shall terminate with respect to any Stockholder on the date which is two years after the date on which such Stockholder no longer holds any shares of Capital Stock.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

CAPELLA EDUCATION COMPANY

By /s/ Stephen G. Shank
   ----------------------------------
   Its Chairman and CEO

FORSTMANN LITTLE & CO.
EQUITY PARTNERSHIP-VII, L.P.

By: FLC XXXII PARTNERSHIP, L.P.,
its General Partner

By  /s/
    ---------------------------------
    A General Partner

FORSTMANN LITTLE & CO.
SUBORDINATED DEBT AND EQUITY
MANAGEMENT BUYOUT
PARTNERSHIP-VIII, L.P.

By: FLC XXXIII Partnership, L.P.,
its General Partner

By  /s/
    ---------------------------------
    A General Partner

PUTNAM OTC AND EMERGING
GROWTH FUND

By: Putnam Investment Management, LLC

By: /s/ John R. Verani
    ---------------------------------
        Name: John R. Verani
        Title: Senior Vice President

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TH LEE, PUTNAM INVESTMENT TRUST
-TH LEE, PUTNAM EMERGING
OPPORTUNITIES PORTFOLIO

By TH Lee, Putnam Capital
Management, LLC

By: /s/ John R. Verani
    -------------------------------
      Name: John R. Verani
      Title: Senior Vice President

/s/ Joshua Lewis
-----------------------------------
JOSHUA LEWIS

/s/ Russell Gullotti
-----------------------------------
RUSSELL GULLOTTI

/s/ Stephen G. Shank
-----------------------------------
STEPHEN G. SHANK

/s/ Stephen J. Weiss
-----------------------------------
STEPHEN J. WEISS

/s/ Elizabeth Rausch
-----------------------------------
ELIZABETH RAUSCH

/s/ Michael Offerman
-----------------------------------
MICHAEL OFFERMAN

/s/ Paul Schroeder
-----------------------------------
PAUL SCHROEDER

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/s/ Joseph Gaylord
-----------------------------------
JOSEPH GAYLORD

DRW VENTURE PARTNERS LP

By RBC DAIN RAUSCHER CORP.
Its: General Partner

By: /s/ Mary Zimmer
   --------------------------------
   Mary Zimmer
   Its: Director of Finance and
        Administration, RBC CMS

THINKEQUITY INVESTMENT
PARTNERS LLC

By: ThinkEquity Holdings LLC
Its: Manager

By /s/ Brad Baker
  ---------------------------------
       Name: Brad Baker
       Its: Representative of the
            Board of Managers

USB PIPER JAFFRAY AS CUSTODIAN
FBO STEPHEN J. WEISS IRA
ACCOUNT #82694368

By: /s/ Michael D. Duffy
    -------------------------------
         Michael D. Duffy
         Its: Managing Director

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USB PIPER JAFFRAY AS CUSTODIAN
FBO JOSEPH GAYLORD IRA
ACCOUNT #36086299

By: /s/ Michael D. Duffy
    -------------------------------
        Michael D. Duffy
        Its: Managing Director

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Schedule 1.1

                               INVESTOR                                        SHARES               PURCHASE PRICE
                               --------                                       ---------            ----------------
Forstmann Little & Co. Equity Partnership-VII, L.P.                             400,298            $   4,687,489.58

Forstmann Little & Co., Subordinated Debt and Equity Management Buyout
Partnership-VIII, L.P.                                                          240,180            $   2,812,507.80

Putnam OTC and Emerging Growth Fund                                             213,493            $   2,500,003.03

TH Lee, Putnam Investment Trust - TH Lee, Putnam Emerging
Opportunities Portfolio                                                         426,985            $   4,999,994.35

Joshua Lewis                                                                     42,699            $     500,005.29

Russell Gullotti                                                                 10,000            $     117,100.00

Stephen G. Shank                                                                 17,079            $     199,995.09

USB Piper Jaffray as Custodian FBO Stephen J. Weiss IRA Account
#82694368                                                                         4,270            $      50,001.70

Stephen J. Weiss                                                                  8,540            $     100,003.40

Elizabeth Rausch                                                                  4,270            $      50,001.70

Michael Offerman                                                                  4,270            $      50,001.70

Paul Schroeder                                                                    6,405            $      75,002.55

USB Piper Jaffray as Custodian FBO Joseph Gaylord IRA Account #36086299           4,270            $      50,001.70

DRW Venture Partners LP                                                          21,349            $     249,996.79

ThinkEquity Investment Partners LLC                                              21,349            $     249,996.79
                                                                              ---------            ----------------
         Total                                                                1,425,457            $  16,692,101.47
                                                                              =========            ================

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Exhibit B

Board of Directors

Stephen Shank

Joshua Lewis

James Mitchell

David Smith

Tony Christianson

Gordon Holmes

Russell Gullotti


Exhibit C

Stephen Shank

Paul Schroeder

Joseph Gaylord

Paul Clifford

Elizabeth Rausch

Don Smithmier

Stephen Weiss

Michael Offerman

William Schiefelbein


EXHIBIT 4.18

CAPELLA EDUCATION COMPANY


CLASS E CONVERTIBLE PREFERRED STOCK
STOCK PURCHASE AGREEMENT



TABLE OF CONTENTS

                                                                                                              PAGE
SECTION 1. ISSUANCE AND SALE OF THE CLASS E PREFERRED STOCK............................................         2
     1.1.     The Purchase..............................................................................        2
     1.2.     The Closing...............................................................................        2
     1.3.     Deliveries at the Closing.................................................................        2
     1.4.     Additional Issuances; Adjustment..........................................................        2

SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................         4
     2.1.     Organization and Standing.................................................................        4
     2.2.     Power.....................................................................................        4
     2.3.     Subsidiaries..............................................................................        4
     2.4.     Capitalization............................................................................        5
     2.5.     Authorization; No Breach..................................................................        7
     2.6.     Material Contracts........................................................................        8
     2.7.     Litigation................................................................................        8
     2.8.     Consents; Title IV Recertification; HSR...................................................        8
     2.9.     Title to Properties; Liens and Encumbrances; Assets of the Business.......................        9
     2.10.    Intellectual Property.....................................................................        9
     2.11.    Taxes.....................................................................................       11
     2.12.    Brokers...................................................................................       12
     2.13.    Compliance with Laws; Permits; Accreditation and State Regulatory Requirements............       12
     2.14.    Offering Exemption........................................................................       16
     2.15.    Employees; Proprietary Information Agreement..............................................       17
     2.16.    Insurance.................................................................................       17
     2.17.    [Intentionally Omitted]...................................................................       17
     2.18.    Financial Statements......................................................................       17
     2.19.    Related Party Transactions................................................................       18
     2.20.    Environmental Matters.....................................................................       19
     2.21.    Employee Benefit Plans....................................................................       19
     2.22.    Labor Relations; Employees................................................................       21
     2.23.    Absence of Changes........................................................................       22
     2.24.    Suppliers and Customers...................................................................       22
     2.25.    Suitability...............................................................................       23
     2.26.    Operations of the Company.................................................................       23

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     2.27     Recruitment; Admissions Procedures; Attendance; Reports...................................       23
     2.28     USDOE Demonstration Program...............................................................       24
     2.29.    Disclosure................................................................................       24

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..............................................       25
     3.1.     Power; Authorization......................................................................       25
     3.2.     No Breach.................................................................................       25
     3.3.     Investment; Securities Laws...............................................................       26
     3.4.     Accredited Investor.......................................................................       26
     3.5.     Rule 144..................................................................................       26
     3.6.     Availability of Funds.....................................................................       26
     3.7.     Brokers...................................................................................       26
     3.8.     Independent Investigation and Counsel.....................................................       26

SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.......................................................       27
     4.1.     Representations and Warranties Correct....................................................       27
     4.2.     Covenants.................................................................................       27
     4.3.     Material Adverse Change...................................................................       27
     4.4.     Compliance Certificate....................................................................       28
     4.5.     Opinion of Company's Counsel..............................................................       28
     4.6.     Officer's Certificate.....................................................................       28
     4.7.     Governmental and Other Authorizations, etc................................................       28
     4.8.     Board Membership..........................................................................       28

SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.........................................................       28
     5.1.     Representations and Warranties Correct....................................................       28
     5.2.     Covenants.................................................................................       29
     5.3.     Compliance Certificate....................................................................       29
     5.4.     Governmental Authorizations, etc..........................................................       29

SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.......................................       29
     6.1.     Cooperation...............................................................................       29
     6.2.     No Solicitation...........................................................................       29
     6.3.     Publicity.................................................................................       30
     6.4.     Conduct of Business Prior to the Closing..................................................       30
     6.5.     Directors and Officers Liability Insurance................................................       30

SECTION 7. POST-CLOSING AND ON-GOING COVENANTS..........................................................       31
     7.1.     Directors.................................................................................       31
     7.2.     Reimbursement of Directors................................................................       31
     7.3.     Indemnification of Directors..............................................................       31
     7.4.     Representative............................................................................       32
     7.5.     Financial Statements and Other Information................................................       33

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SECTION 8. TERMINATION..................................................................................       34
     8.1.     Termination...............................................................................       34
     8.2.     Effect on Obligations.....................................................................       35

SECTION 9. MISCELLANEOUS................................................................................       35
     9.1.     Survival..................................................................................       35
     9.2.     Indemnification...........................................................................       35
     9.3.     Expenses..................................................................................       37
     9.4.     Delays or Omissions; Remedies.............................................................       37
     9.5.     Further Assurances........................................................................       38
     9.6.     Successors and Assigns....................................................................       38
     9.7.     Entire Agreement..........................................................................       38
     9.8.     Notices...................................................................................       39
     9.9.     Counterparts..............................................................................       40
     9.10.    Titles and Subtitles; Definitions.........................................................       40
     9.11.    Governing Law; Consent to Jurisdiction; Waiver of Jury Trial..............................       41
     9.12.    Severability..............................................................................       41

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INDEX OF DEFINED TERMS

Articles of Incorporation......................     1.4(c)
Benefit Plan...................................    2.21(a)
Board..........................................        4.6
Board Representation Agreement.................   Recitals
Certificate of Designation.....................   Recitals
Claim Notice...................................     9.2(e)
Class A Preferred Stock........................        2.4
Class B Preferred Stock........................        2.4
Class C Preferred Stock........................        2.4
Class D Preferred Stock........................        2.4
Class E Preferred Stock........................   Recitals
Closing........................................        1.2
Closing Date ..................................        1.2
Code...........................................    2.21(a)
Common Stock...................................   Recitals
Company........................................   Preamble
Company Intellectual Property..................       2.10
Company's Accountants..........................     7.5(b)
Contract.......................................       9.10
Conversion Stock...............................        2.4
designated employee............................       9.10
Employee.......................................    2.21(a)
Employee Agreement.............................    2.21(a)
Encumbrances...................................        2.9
Environmental Law..............................       2.20
Equity VI......................................   Preamble
ERISA..........................................    2.21(a)
Exchange Act...................................       2.19
Financial Statements...........................       2.18
Fully Diluted Basis............................        1.1
Governmental Consents..........................        2.8
Governmental Entity............................        2.8
Governmental Filings...........................        2.8
including......................................       9.10
indemnified party..............................     9.2(c)
indemnifying party.............................     9.2(c)
Intellectual Property Rights...................       2.10
Investor Rights Agreement......................   Recitals
Investors......................................   Preamble
IRS............................................    2.21(c)
Laws...........................................        2.5
Litigation.....................................        2.7
Losses.........................................     9.2(b)
material.......................................       9.10
Material Adverse Effect on the Company.........       9.10
Material Contracts.............................        2.6
Orders.........................................        2.7
person.........................................       9.10
Preferred Stock................................        2.4
Purchase.......................................        1.1
Purchase Price.................................        1.1
Securities Act.................................       2.14
SmartForce.....................................   Preamble
Stock Rights...................................        2.4
Subsidiary.....................................       9.10
Tax Return.....................................    2.11(d)
Tax(es)........................................    2.11(d)
Third Party Consents...........................        6.1
to the Company's knowledge.....................       9.10
Transaction Documents..........................        2.2

-iv-

LIST OF EXHIBITS

Exhibits                                                                 Section
--------                                                                 --------
A    Certificate of Designation of Class E Convertible
     Preferred Stock..........................................          Recitals
B    Board Membership.........................................               4.8
C    People included in definition of "the
     Company's knowledge" and "designated employees"..........              9.10
D-1  Opinion of Faegre & Benson, LLP..........................               4.5
D-2  Opinion of Dow, Lohnes & Albertson, PLLC.................               4.5

-v-

CAPELLA EDUCATION COMPANY

PREFERRED STOCK PURCHASE AGREEMENT

AGREEMENT, dated as of April 20, 2000, by and among CAPELLA EDUCATION COMPANY, a Minnesota corporation (the "Company"), and FORSTMANN LITTLE & CO. EQUITY PARTNERSHIP - VI, L.P., a Delaware limited partnership ("EQUITY VI"), and SmartForce plc, a corporation organized under the laws of Ireland ("SMARTFORCE" and, together with Equity VI, the "INVESTORS" ).

W I T N E S S E T H:

WHEREAS, upon the terms and subject to the conditions contained in this Agreement, the Company wishes to sell to the Investors and the Investors wish to purchase from the Company shares of newly issued Class E Convertible Preferred Stock, par value $.01 per share, of the Company (the "CLASS E PREFERRED STOCK"), which shares will be initially convertible into the equivalent number of shares of Common Stock, par value $.10 per share, of the Company (the "COMMON STOCK"), and will have such other terms as are to be set forth in the Certificate of Designation for the Class E Preferred Stock in the form of Exhibit A (the "CERTIFICATE OF DESIGNATION"); and

WHEREAS, concurrently with the execution hereof, the parties hereto, National Computer Systems, Inc., Cherry Tree Ventures IV and Stephen Shank are entering into an Amended and Restated Co-Sale and Board Representation Agreement (the "BOARD REPRESENTATION AGREEMENT") to become effective simultaneously with the Closing (as hereinafter defined); and

WHEREAS, concurrently with the execution hereof, the parties hereto are entering into an Investor Rights Agreement (the "INVESTOR RIGHTS AGREEMENT") to become effective simultaneously with the Closing.

NOW THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

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SECTION 1. ISSUANCE AND SALE OF THE CLASS E PREFERRED STOCK.

1.1. The Purchase. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, the Investors shall purchase from the Company, and the Company shall sell to the Investors (as set forth on Schedule 1.1), an aggregate of 2,596,491 shares of Class E Preferred Stock (the "PURCHASE") at a purchase price of $14.25 per share and an aggregate purchase price of $36,999,996.75 (the "PURCHASE PRICE"). Immediately following the Closing, the Investors in the aggregate shall own 26.3384% of the equity of the Company on a fully diluted basis (i.e., assuming the exercise of all 5,356,999 outstanding stock options and other outstanding Stock Rights (as hereinafter defined) (including 135,088 warrants (the "Legg Mason Warrants") to be issued to Legg Mason, the conversion of the Class E Preferred Stock, and the issuance of all shares of Common Stock reserved for issuance upon the future grant of 533,137 employee options and other Common Stock-based awards, but excluding future contributions under the Company's Employee Stock Ownership Plan), all as of the Closing and as more fully described and set forth in Schedule 2.4 to this Agreement ("FULLY DILUTED BASIS"); it being understood that the Class C Preferred Stock shall not be taken into account for purposes of calculating the foregoing percentage of the outstanding equity of the Company on a Fully Diluted Basis.

1.2. The Closing. The closing of the transactions contemplated by the Purchase (the "CLOSING") shall take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York, at 10:00
a.m. on the next business day following the satisfaction (or waiver) of all the conditions set forth in Sections 4 and 5 (but no earlier than the 15th business day after the date hereof) or at such other time or place or on such other date as the Company and the Investors may mutually determine (such date, the "CLOSING DATE").

1.3. Deliveries at the Closing. At the Closing, the Company shall deliver to each Investor a certificate or certificates representing the shares of Class E Preferred Stock purchased by such Investor, registered in the name of such Investor or its nominee affiliate, against receipt at the Closing by the Company from such Investor of its portion of the Purchase Price, which shall be paid by wire transfer to an account designated at least two business days prior to the Closing Date by the Company.

1.4. Additional Issuances; Adjustment. (a) In lieu of a claim for indemnification under Section 9 of this Agreement arising out of the same inaccuracy in such representation or warranty, in the event that at any time after the Closing the representation and warranty set forth in the last sentence of Section 2.4 is determined not

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to have been true as of the Closing, the Company shall issue to the Investors (on a pro rata basis), at no cost to the Investors, and as an adjustment to the purchase price paid by the Investors per share of Class E Preferred Stock, an additional amount of Class E Preferred Stock such that, if such issuance of additional Class E Preferred Stock had been made at the Closing, such representation and warranty would have been true and accurate in all respects at the Closing.

(b) If at the time of any required adjustment pursuant to Section 1.4(a) all shares of Class E Preferred Stock have been converted into shares of Common Stock, the Company shall, to the extent of authorized capital available therefor, promptly issue to the Investors (on a pro rata basis), at no cost to the Investors and as an adjustment to the purchase price paid by the Investors per share of Class E Preferred Stock, an additional amount and kind of Common Stock equal to the amount and kind of Common Stock issuable upon the conversion (based on the conversion ratio in effect at the time the last shares of Class E Preferred Stock were converted into shares of Common Stock) of the amount of Class E Preferred Stock which would have been issued with respect to such adjustment pursuant to Section 1.4(a) if such adjustment had been made immediately prior to the time the last shares of Class E Preferred Stock were converted into shares of Common Stock.

(c) Any additional shares of Class E Preferred Stock and Common Stock issued to the Investors pursuant to this Section 1.4 shall be treated as if they were issued at the Closing and shall reflect any dividends or other distributions which would have accrued or have been payable with respect to, and the application of any anti-dilution, ratable treatment or similar provisions (as set forth in the Articles of Incorporation of the Company (the "ARTICLES OF INCORPORATION", the Certificate of Designation, applicable Law (as hereinafter defined) or otherwise) which would have been applicable to, such shares of Class E Preferred Stock and Common Stock had they been issued at the Closing.

(d) In connection with any issuances of stock determined to be required pursuant to this Section 1.4, the Company (i) shall take all action within its control necessary to cause its Articles of Incorporation to be amended to increase the authorized capital of the Company to permit such issuances and (ii) shall reserve a sufficient number of shares of Common Stock for issuance to the Investors upon the conversion of any shares of Class E Preferred Stock so issued. Any shares of Class E Preferred Stock or Common Stock issued to the Investors pursuant to this Section 1.4 shall, when issued, be validly issued and fully paid and nonassessable with no personal liability attaching to the ownership thereof and free and clear of all Encumbrances (as hereinafter defined).

-3-

SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to the Investors as of the date hereof and as of the Closing to the extent set forth in Section 4.1 hereof (except that the representations and warranties contained in Sections 2.6, 2.9, 2.10, 2.11, 2.15, 2.20. 2.21 and 2.22 are only made as of the date hereof, except with respect to the representations and warranties contained in Section 2.21 which are made as of the date hereof and as of the Closing to the extent that such representations and warranties relate in any way to ERISA) as follows (with all references to the Company in this Section 2 (other than Sections 2.2, 2.4 and 2.5(b)) being deemed to include references to the Subsidiaries (as hereinafter defined)):

2.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as currently conducted. Except as set forth on Schedule 2.1, the Company is duly qualified to transact business as a foreign entity in, and is in good standing under the Laws of, each jurisdiction where the failure to be so qualified would, individually or in the aggregate, have a Material Adverse Effect on the Company (as hereinafter defined). The Company has made available to the Investors true and complete copies of the organization and governance documents of the Company.

2.2. Power. The Company has all requisite power and authority (i) to execute and deliver this Agreement; the Investor Rights Agreement; the Certificate of Designation; the Board Representation Agreement; Amendment No. I to the Registration Rights Agreement, dated as of June 16, 1998, by and among the Company and National Computer Systems, Inc., Amendment No. 1 to the Warrant to purchase Common Shares of the Company issued on June 16, 1998 to Legg Mason Wood Walker, Incorporated; the Schedules to this Agreement and all other certificates, instruments and other documents executed and delivered at the Closing pursuant to Section 4 hereof (collectively with this Agreement, the "TRANSACTION DOCUMENTS") and (ii) to carry out and perform its obligations hereunder and thereunder.

2.3. Subsidiaries. (a) Except as set forth on Schedule 2.3, the Company has no Subsidiaries and does not own, hold or control, directly or indirectly, any rights to

-4-

acquire any shares of stock or any other debt or equity interest in any person (as hereinafter defined).

(b) Schedule 2.3 sets forth the authorized and outstanding equity capitalization of each of the Subsidiaries, including the amount and kind of equity interests held by the Company in the Subsidiary and the percentage interest represented thereby. All of the outstanding shares of capital stock of each of the Subsidiaries have been validly issued and are fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and are owned by the Company free and clear of all Encumbrances. There are no outstanding warrants, options, agreements, convertible securities or other Contracts (as hereinafter defined) pursuant to which either of the Subsidiaries is or may become obligated to issue any shares of the capital stock of or other equity interests in such Subsidiary, and there are no other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in either of the Subsidiaries pursuant to any provision of Law, the Subsidiary's organizational documents, any Contract to which the Subsidiary is a party or otherwise; and neither of the Subsidiaries is a party to, and to the Company's knowledge there is not, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Subsidiary is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in either of the Subsidiaries (whether outstanding or issuable upon conversion or exercise of outstanding securities).

2.4. Capitalization. The authorized and outstanding equity capitalization of the Company on the date hereof is as set forth on Schedule 2.4. As of the date hereof and immediately prior to the Closing (except for exercise or conversion of outstanding Stock Rights set forth in Schedule 2.4), capital stock of the Company authorized, outstanding or reserved for issuance consists of (i) 10,000,000 shares of Common Stock, of which 1,371,565 shares are issued and outstanding, (ii) 3,000,000 shares of Class A Convertible Preferred Stock ("CLASS A PREFERRED STOCK"), of which 2,810,000 shares are issued and outstanding, (iii) 1,180,000 shares of Class B Convertible Preferred Stock ("CLASS B PREFERRED STOCK"), of which 460,000 shares are issued and outstanding,
(iv) 55,000 shares of Class C Preferred Stock ("CLASS C PREFERRED STOCK"), of which 54,929 shares are issued and outstanding, (v) 1,022,222 shares of Class D Convertible Preferred Stock ("CLASS D PREFERRED STOCK", and, together with the Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock, the "PREFERRED STOCK"), of which 1,022,222 shares are issued and outstanding, (vi)

-5-

7,742,778 shares of preferred stock, undesignated as to class or series, (vii) 730,729 shares of Common Stock are reserved for issuance pursuant to employee stock options granted pursuant to the Company's stock option plans and 533,137 shares of Common Stock are reserved for issuance for future grants of employee stock options pursuant to the Company's stock option plans, (viii) 198,960 shares of Common Stock are reserved for issuance upon the exercise of any outstanding warrants of the Company and (ix) 4,292,222 shares of Common Stock have been duly reserved for issuance upon conversion of the outstanding shares of convertible Preferred Stock. Immediately following the Closing, the capital stock of the Company authorized, outstanding or reserved for issuance will be as set forth in the preceding sentence except that (i) 2,596,491 shares of Class E Preferred Stock will have been issued and be outstanding, (ii) 2,596,491 shares of Common Stock will be reserved for issuance upon conversion of the shares of Class E Preferred Stock (the "CONVERSION STOCK") and (iii) 135,088 shares of Common Stock will be reserved for issuance upon exercise of the Legg Mason Warrant. All of the outstanding shares of capital stock of the Company were duly authorized and validly issued and are fully paid and nonassessable.

Except for exercise or conversion of outstanding Stock Rights set forth in Schedule 2.4 and Stock Rights granted pursuant to existing stock option plans, Schedule 2.4 sets forth a list of (i) all holders of equity interests in the Company on the date hereof, including the amount and kind of equity interests held by each such holder, (ii) all holders of capital stock of the Company immediately following the Closing, and the number and type of shares to be held by each, and (iii) all outstanding warrants, options, agreements, convertible securities or other Contracts pursuant to which the Company is or may become obligated to issue any shares of the capital stock or other securities of or other equity interests in the Company ("STOCK RIGHTS") and the holders thereof. Except as set forth in this Section 2.4 or on Schedule 2.4, there are, and immediately following the Closing there will be, no Stock Rights or other rights, including preemptive or similar rights, to purchase or otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any issued or unissued shares of the capital stock of or other equity interests in the Company pursuant to any provision of Law, the Company's organizational documents, any Contract to which the Company is a party or otherwise; and, except as set forth on Schedule 2.4 or as contemplated by the Transaction Documents, the Company is not a party to, and to the Company's knowledge there is not, and immediately after the Closing, there will not be, any Contract or Encumbrance (including a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, or shareholders agreement, whether or not the Company is a party thereto) with respect to the purchase, sale or voting of any shares of capital stock of or any other equity interests in the Company (whether outstanding or

-6-

issuable upon conversion or exercise of outstanding securities). The execution, delivery and performance of this Agreement and the Transaction Documents by the parties hereto and thereto and the consummation of the transactions contemplated hereby and thereby will not trigger any anti-dilution adjustments under the terms of any equity securities disclosed or required to be disclosed pursuant to this Section 2.4. Except as set forth on Schedule 2.4 and other than under the Investor Rights Agreement, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act (as defined hereinafter). Immediately following the Closing, the shares of Common Stock issuable upon conversion of the Class E Preferred Stock issued to the Investors under this Agreement will represent, in the aggregate, 26.3384% of the outstanding capital stock of the Company on a Fully Diluted Basis, and the voting power of such issued shares of Class E Preferred Stock will represent, in the aggregate, no less than 26.3384% of the total number of votes able to be cast on any matter by any voting securities of the Company on a Fully Diluted Basis.

2.5. Authorization; No Breach. (a) The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which the Company is a party, and the consummation by the Company of the transactions contemplated hereby and thereby, including the offer, sale and issuance of the Class E Preferred Stock pursuant to this Agreement, and the issuance of the Conversion Stock upon conversion of the Class E Preferred Stock, have been duly authorized by all required actions of the Company and its equityholders and, except as set forth on Schedule 2.5, will not (i) conflict with, or result in any violation of, any provision of the organizational documents of the Company or any federal, state, local or foreign law, statute, rule or regulation ("LAWS") or Orders (as hereinafter defined) to which the Company is subject,
(ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any Contract, Company Intellectual Property, Accreditation, License or Permit (as hereinafter defined), except for conflicts, defaults, breaches, rights or forfeitures which would not, individually or in the aggregate, have a Material Adverse Effect on the Company or (iii) require any consent to be obtained or notice to be given under any Contract, Accreditation, License or Permit except for consents and notices the lack of which would not, individually or in the aggregate, have a Material Adverse Effect on the Company.

(b) The Transaction Documents to which the Company is a party constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive

-7-

relief or other equitable remedies. The Class E Preferred Stock and the Conversion Stock, when issued in compliance with the provisions of this Agreement, will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. Subject to applicable law, the terms, designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of the Class E Preferred Stock will be as stated in the Certificate of Designation.

2.6. Material Contracts. Copies (or, where oral, a written description) of the mortgages, indentures, leases and other Contracts to which the Company is a party or by which it is bound and which involve current obligations of, or payments to, the Company in excess of $50,000 or are otherwise, material to the Company (the "MATERIAL CONTRACTS") have been delivered or made available to the Investors. The Material Contracts are listed on Schedule 2.6. All of the Material Contracts are valid and binding agreements of the Company and in full force and effect and enforceable against and, to the Company's knowledge, by the Company in accordance with their respective terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies, except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Except as set forth on Schedule 2.6, the Company is not in default or breach under any of the Material Contracts and, to the Company's knowledge, no other party to any of the Material Contracts is in default or breach thereunder.

2.7. Litigation. Except as set forth on Schedule 2.7, there are no actions, suits, proceedings, or governmental investigations, inquiries or audits ("LITIGATION") pending, or, to the Company's knowledge threatened, to which the Company is a party or its property, including without limitation any Company Intellectual Property, is subject or against any officer, director or employee of the Company in connection with such person's relationship with or actions taken on behalf of the Company. The Company is not subject to any outstanding judgment, order, writ, injunction, stipulation, ruling, decree or award ("ORDERS").

2.8. Consents; Title IV Recertification; HSR. (a) Except as set forth on Schedule 2.8, no consent, approval, qualification, order or authorization or acknowledgement ("GOVERNMENTAL CONSENTS") of, or registration, declaration, notification, application, or filing ("GOVERNMENTAL FILINGS") with, any court, administrative agency or commission, Accrediting Body, State Approval Agency or other governmental authority or instrumentality ("GOVERNMENTAL ENTITY") is required to be obtained or made in connection with the valid execution, delivery or performance by

-8-

the Company of any of the Transaction Documents or the consummation of any of the transactions contemplated thereby.

(b) No application for recertification of eligibility to participate in Title IV programs is required to be made to the United States Department of Education ("USDOE") in order to continue the School's eligibility to participate in Title IV upon consummation of the transactions contemplated hereby.

(c) The Company is the "ultimate parent entity" as defined under the rules and regulations promulgated under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"). The total assets and annual net sales of the Company and all entities it controls, determined at the time of the Closing in accordance with the HSR Act, are each less than $10 million.

2.9. Title to Properties; Liens and Encumbrances; Assets of the Business.

(a) Except as set forth on Schedule 2.9 or the Financial Statements or as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company has good and marketable title to all of the assets and properties which it purports to own, and, with respect to the assets and properties leased by the Company, holds valid and subsisting leasehold interests therein, free and clear of any mortgages, judgments, claims, liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever ("ENCUMBRANCES") except (i) Encumbrances for taxes not yet due and payable, and (ii) Encumbrances for taxes and charges and other claims, the validity of which the Company is contesting in good faith by appropriate proceedings and which are disclosed in Schedule 2.9. Except as set forth on Schedule 2.9, the assets and properties owned by, or leased to, the Company are sufficient for the conduct of the business and operation of the Company as currently conducted.

(b) The business of the Company is conducted exclusively by the Company and the Subsidiaries. All assets used or held for use in the conduct of such business are owned by the Company and/or the Subsidiaries or the rights to use such assets are held by the Company and/or the Subsidiaries pursuant to valid and binding contracts, leases, agreements or other rights.

2.10. Intellectual Property. The term "INTELLECTUAL PROPERTY RIGHTS" shall mean (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, revisions, divisions, extensions and reexaminations thereof, (b) all trademarks, service marks, trade

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dress, logos, trade names, domain names and corporate names, and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith,
(e) all trade secrets and confidential business information (including but not limited to research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, flowcharts, block diagrams, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all copies and tangible embodiments of any of the foregoing (in whatever form or medium) and (h) all licenses, sublicenses, permissions or Contracts in connection with any of the foregoing. The term "COMPANY INTELLECTUAL PROPERTY" shall mean all Intellectual Property Rights which are used in connection with the conduct of the business of the Company as currently conducted.

Other than off-the-shelf software and work for hire agreements, each item of Company Intellectual Property which is material to the Company's business and is a patent, patent application, trademark, trademark application, service mark, service mark application, trade name, domain name, corporate name, copyright registration, copyright application, mask work registration, mask work application or license, sublicense, agreement, or permission, is set forth on Schedule 2.10. Except as set forth on Schedule 2.10:

(a) except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, the Company either (i) is the sole and exclusive owner of and possesses all right, title and interest in and to (free and clear of any Encumbrances), all Company Intellectual Property (including but not limited to the Intellectual Property Rights set forth on Schedule 2.10),
(ii) has rights to the use of all Company Intellectual Property pursuant to license, sublicense, Contract, or permission (and is not contractually obligated to grant any rights to any third party in respect thereof) or (iii) has the right to require the applicant of any Company Intellectual Property which constitutes an application for registration, including, but not limited to, all patent applications, trademark applications, service mark applications, copyright applications and mask work applications, to transfer ownership to the Company of the application and of the registration once it issues;

(b) all Company Intellectual Property which are registrations, including, but not limited to, all registered patents, trademarks, service marks, copyrights

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and mask works, are valid and subsisting and in full force and effect except where the failure to be valid, subsisting and in full force and effect would not have a Material Adverse Effect on the Company;

(c) to the Company's knowledge, no third party, including any employee or former employee of the Company, has interfered with, infringed upon, misappropriated, come into conflict with or used without authorization any Company Intellectual Property; and

(d) to the Company's knowledge, the Company has not infringed on, interfered with or misappropriated, and the continued operation of the Company's business as currently conducted, will not infringe on, interfere with, misappropriate or otherwise come into conflict with, any Intellectual Property Right of any other person, and no such claim has been asserted or, to the Company's knowledge, is threatened by any person (including any claim that the Company must license or refrain from using any Intellectual Property Rights of any third party).

2.11. Taxes. (a) Except as set forth on Schedule 2.11, (i) the Company has timely filed in accordance with all applicable Laws (taking into account valid extensions) all Tax Returns (as hereinafter defined) required to be filed by it, and all such Tax Returns are true, correct and complete in all material respects, (ii) all Taxes (as hereinafter defined) which are due and payable by the Company, including any Taxes levied upon any of its properties, assets, income or franchises, have been timely paid, (iii) all amounts required to be collected or withheld by the Company have been collected or withheld and any such amounts that are required to be remitted to any taxing authority have been duly and timely remitted by the Company, (iv) no examination, claim, assessment, deficiency or other Litigation is pending or, to the Company's knowledge, threatened, with regard to any Taxes or Tax Returns of the Company and (v) the Company is not (nor has it ever been) a party to or bound by any Tax sharing or Tax allocation or similar Contract.

(b) Schedule 2.11 sets forth the method of accounting used by the Company for federal, state, local and foreign Tax purposes, and such method has been used by the Company at all times since the date of its organization.

(c) For purposes of this Agreement, "TAX" or "TAXES" means any taxes, assessment, duties, fees, levies, imposts, deductions, or withholdings, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility,

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severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever, imposed by any taxing authority of any government or country or political subdivision of any country, and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon and includes any liability for Taxes of another person by Contract, as a transferee or successor, under Treasury Regulation 1.1502-6 or analogous state, local or foreign law provision or otherwise, and "TAX RETURN" means any report, return, statement, estimate, declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes.

2.12. Brokers. Except as set forth on Schedule 2.12, the Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

2.13. Compliance with Laws; Permits; Accreditation and State Regulatory Requirements. Except as set forth on Schedule 2.13, the Company and Capella University Inc. (the "SCHOOL") (a) have complied in all material respects with all Laws applicable to them and their business and that pertain to the operation of the School (b) have all licenses, accreditations, certificates, permits, consents, franchises, approvals, authorizations, and other approvals of federal, state and local governments or regulatory bodies, State Approval Agencies and of Accrediting Bodies (the "ACCREDITATIONS, LICENSES AND PERMITS") material to and necessary in the conduct of the education, learning or training business and operations of the Company and the School as currently conducted. Schedule 2.13 contains a complete and correct list and summary description of all Accreditations, Licenses and Permits. Except for instances that would not, individually or in the aggregate, have a Material Adverse Effect on the Company,
(i) all of the Accreditations, Licenses and Permits of each of the Company and the School are in full force and effect, (ii) the Company and the School are in compliance with the terms and conditions of such Accreditations, Licenses and Permits and have received no notices that the Company or the School are in violation of any of the terms or conditions of such Accreditations, Licenses and Permits or alleging the failure to hold or obtain any accreditation, permit, license, franchise, certificate, approval or authorization and (iii) no Litigation, hearing or other proceeding is pending or, to the Company's knowledge, threatened to revoke or limit the use of any of its Accreditations, Licenses and Permits. Neither the Company nor the School has received notice that any of the Accreditations, Licenses and Permits will not be renewed and to the Company's knowledge, there is no reasonable basis for nonrenewal. In addition, and without limiting the foregoing:

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(a) Schedule 2.13 contains a complete and correct description of the accreditation granted to the School, the date that accreditation was last granted, and the current term of accreditation. Neither the School nor the educational and training programs offered by the School are on probation or warning, have been directed to show cause why accreditation should not be revoked, or are subject to an action by an Accrediting Body to withdraw or deny accreditation. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such actions by an Accrediting Body.

(b) The Company and the School have complied in all material respects with all stipulations, conditions and other requirements imposed by the School's Accrediting Bodies and State Approval Agencies at the time of, or since, the last grant of accreditation or approval, including but not limited to the timely filing of all required reports and responses.

(c) The Company and the School have secured all requisite approvals from their institutional accrediting bodies for the educational and training programs currently offered.

(d) The Company and the School have secured all requisite licenses to operate from the respective State Approval Agencies in the states in which the School is located or has a presence that requires the School to obtain such a license (including without limitation all such states in which the School offers residency programs, residency courses or residency seminars) and the Company has similarly secured all requisite approvals from State Approval Agencies for the educational and training programs currently offered. There are no proceedings pending to revoke or withdraw such licenses and approvals. To the Company's knowledge, there are no facts, circumstances or omissions concerning the School that would reasonably be expected to lead to such action.

(e) Schedule 2.13 contains a complete and correct description of the USDOE certification and eligibility status for the School, including the date that certification was last granted and the current term of certification. The School is certified by the USDOE to participate in the student financial assistance programs authorized by Title IV of the Higher Education Act of 1965, as amended ("TITLE IV"), and is a party to, and is in compliance with, a valid and effective Program Participation Agreement with the USDOE, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. The School is not subject to limitation, suspension or termination proceedings, or subject to any other investigation, action or proceeding by

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the USDOE that could result in the loss of certification or eligibility or a material liability or fine. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would reasonably be expected to lead to such an action by the USDOE.

(f) The School is in compliance in all material respects with all rules, regulations and requirements established by the USDOE pertaining to the School's eligibility to participate in the programs authorized by Title IV and other federal student financial aid funding programs as set forth at 34 C.F.R. Sections 600 et. seq. To the Company's knowledge, there are no facts, circumstances, or omissions concerning the School that would be expected to result in a finding of material non-compliance with regard to such rules, regulations and requirements of Law. Without limiting the foregoing:

(i) Each educational or training program offered by the School is an eligible program in accordance with the requirements of 34 C.F.R. Section 668.8.

(ii) For each of the past (2) fiscal years ending after October 7, 1998, the School has received no greater than ninety percent (90%) of its revenues from programs authorized by Title IV and satisfies the requirements regarding Title IV program funds established by the USDOE as set forth at 34 C.F.R. Section 600.5. The attached Compliance Schedule contains a correct statement of the School's percentage of revenue from Title IV program funds for such years.

(iii) The School has timely filed all compliance audits and audited financial statements required by 34 C.F.R. Section 668.23.

(iv) The School meets the USDOE standards of financial responsibility set forth at 34 C.F.R. Sections 668.171-668.175 and for the fiscal years ended December 31, 1998 and December 31, 1999 achieved a composite score of 1.5 or higher under the financial ratios set forth at 34 C.F.R. Section 668.172.

(g) USDOE program review and compliance audits conducted at the School since the date of the School's last recertification have not materially adversely affected the Company or the School, nor has any program review or compliance audit resulted in the imposition of any liability, financial or otherwise, adversely affecting the Company or the School. The Company and the School have complied with all the findings and conditions arising from the program reviews and compliance audits. To the extent that any program review or audit remains pending or unresolved, there are no

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issues or findings of non-compliance of which the Company has notice which could result in the loss of certification or eligibility or a material liability or fine.

(h)(i) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School (the term "Substantial Control" being defined in 34 C.F.R. 668.15(f)(2)), nor member of such person's family (as the term "family" is defined in 34 C.F.R. 668.15(f)(3)), alone or together, (A) exercises or exercised Substantial Control over another institution or third-party servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for a violation of a Title IV, HEA program requirement, or (B) owes a liability for a Title IV, HEA program violation.

(ii) Since July 1, 1994, neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, or who will have the power to direct or cause the direction of the management or policies of the Company or the School, has filed for relief in bankruptcy or has had entered against it an order for relief in bankruptcy.

(iii) Neither the Company, nor, to the Company's knowledge, any person or entity that exercises Substantial Control over the Company or the School, nor any person or entity which is an owner of the School, has pled guilty to, has pled nolo contendere to or has been found guilty of, a crime involving the acquisition, use or expenditure of funds under the Title IV programs or has been judicially determined to have committed fraud involving funds under the Title IV programs.

(iv) To the Company's knowledge, neither the Company nor, the School has employed any individual or entity in a capacity that involves the administration or receipt of funds under the Title IV programs, or contracted with any institution or third-party servicer, which has been terminated from the Title IV programs for a reason involving the acquisition, use, or expenditure of federal, state or local government funds, or has been convicted of, or has pled nolo contendere or guilty to, a crime involving the acquisition, use or expenditure or federal, state, or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving federal, state or local government funds.

(i) Since July 1, 1994, the Company and the School have complied with all requirements or standards of the USDOE, any State Approval Agency or any Accrediting Body that pertain to the provision of commissions, bonuses or other incentive payments to admissions representatives, agents and other persons engaged in

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student recruiting or admissions activities or in making decisions regarding the awarding of Title IV program funds for or on behalf of the Company or School.

(j) To the knowledge of the Company, there exists no facts or circumstances attributable to the Company or the School that would reasonably be expected to cause any State Approval Agency whose authorization or consent or similar approval is required in connection with the transactions contemplated by this Agreement, as set forth in schedule 7.5(g)(i), to refuse to deliver such authorization, consent or similar approval.

(k) For purposes of this Agreement, "ACCREDITING BODY" means any entity or organization which engages in granting or withholding accreditation or similar approval for the School and its educational programs, in accordance with standards relating to the performance, operation, financial condition and/or educational quality of such schools and programs.

(l) For purposes of this Agreement, "STATE APPROVAL AGENCY" means any authority, whether governmental or quasi-governmental, in any state in which the School is located, or operates or has a presence that requires the School to obtain an approval license or permit from such state approval agency (including, but not limited to, all such states in which the School offers residency programs, courses or seminars) and that engages in the granting or withholding of approvals, licenses or permits for and regulates private postsecondary schools and educational programs in accordance with standards relating to the operation, financial condition, or academic standards of such schools or programs or regulates the provision of the provision of financial assistance including, without limitation, the Minnesota Higher Education Services Office, Minnesota Department of Children, Families and Learning, Arizona State Board for Private Postsecondary Education, California Bureau for Private Postsecondary and Vocational Education, Connecticut Department of Higher Education, Colorado Commission on Higher Education, Florida State Board of Independent Colleges and Universities, New Mexico Commission on Higher Education, and Washington State Higher Education Coordinating Board Degree Authorization Agency.

2.14. Offering Exemption. Assuming the accuracy of the representations and warranties made by the Investors in Section 3 of this Agreement, the offer, sale and issuance of the Class E Preferred Stock as contemplated hereby are, the issuance of the Conversion Stock upon the conversion of the Class E Preferred Stock in accordance with the terms of the Certificate of Designation will be, and all prior issuances of securities of the Company were at the time made, exempt from registration under the Securities Act

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of 1933, as amended (the "SECURITIES ACT"), and otherwise effected in compliance with all applicable federal and state securities Laws.

2.15. Employees; Proprietary Information Agreement. To the Company's knowledge, no officer or designated employee (as hereinafter defined) of the Company, and except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, no independent contractor utilized by the Company or any other person who performs services for or on behalf of the Company (including any employee of the Company) is in violation of any term of any employment Contract, patent disclosure agreement or any other Contract or Order relating to the relationship of such person with the Company or any other party because of the nature of the business conducted by the Company. To the Company's knowledge, none of its officers or designated employees has any obligations under any Contract or Order that would interfere with such person's exercising his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted.

2.16. Insurance. The Company has procured, and maintains insurance with respect to its properties and business against such casualties and contingencies, of such types (including, without limitation, errors and omissions coverage), on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as the Company believes is customary in the case of similarly situated entities engaged in the same or a similar business. Schedule 2.16 sets forth a list of all insurance policies maintained by the Company, including the name of the insurer and the nature and amount of coverage. The Company has not received any notice of increase in premiums with respect to, or cancellation or nonrenewal of, any of its insurance policies, and the Company has not made any claim against an insurance policy as to which the insurer is denying coverage or defending the claim under a reservation of rights. Each insurance policy maintained by the Company is in full force and effect, except as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company is not in default in any material respect under any insurance policy maintained by it.

2.17. [Intentionally Omitted]

2.18. Financial Statements. Schedule 2.18 sets forth (a) the balance sheet of the Company at December 31, 1999, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the fiscal year ended December 31, 1999 audited by Ernst & Young LLP and (b) the unaudited consolidated balance sheet of the Company as of March 31, 2000 and the related unaudited consolidated statements of operations, changes in shareholders' equity and cash flows for the three months ended

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March 31, 2000 (the "FINANCIAL STATEMENTS"). The Financial Statements are complete in all material respects, are in accord with the books and records of the Company and have been prepared in accordance with generally accepted accounting principles consistently applied (except that the March 31, 2000 Financial Statements do not contain all footnotes required by generally accepted accounting principles and are subject to normal year-end audit adjustments). The Financial Statements fairly present the financial condition, results of operations and cash flows of the Company as of the respective dates and for the respective periods indicated therein. Except as disclosed on Schedule 2.18 or any other Schedule to this Agreement, the Company has no liabilities or obligations, contingent or otherwise (and whether or not the subject of any other representation or warranty hereunder), other than (a) liabilities or obligations reserved against or otherwise disclosed in the Financial Statements and (b) liabilities or obligations which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company maintains and will continue to maintain accounting methods, practices and procedures and maintains and will continue to maintain accounting systems and controls which permit financial statements to be prepared in accordance with generally accepted accounting principles. The books and records of the Company are in all material respects true and complete, are maintained in accordance with good business practice and all applicable Laws, and accurately present and reflect in all material respects all of the transactions that are or should be therein described.

2.19. Related Party Transactions. (a) Schedule 2.19 sets forth a list of all obligations and transactions, other than compensation in the ordinary course of business, (i) between the Company and any of the Company's affiliates, (ii) between the Company and any of the Company's officers, directors, equityholders or employees, or any of their affiliates or associates (each term as defined in the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) and (iii) between any of the Company's affiliates and any of the Company's officers, directors or employees, or any of their affiliates or associates, directly pertaining to the Company. Except as set forth on Schedule 2.19, no officer or director of the Company or person who owns at least ten percent of the outstanding equity of the Company (nor any parent, child or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) any interest or involvement in any entity which furnished or sold, or furnishes or sells, services or products which the Company furnishes or sells, or proposes to furnish or sell or (ii) any interest or involvement in any entity which purchases from or sells or furnishes to, the Company, any goods or services; provided, that ownership of no more than one percent of the

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outstanding voting stock of a publicly traded corporation shall not be deemed an interest in any entity for purposes of this Section 2.19.

(b) Each transaction set forth on Schedule 2.19 is on terms that are
(i) consistent with past practice of the Company and (ii) no less favorable to the Company as would be available with independent third parties dealing at arms' length.

2.20. Environmental Matters. The Company is in compliance in all material respects with all applicable Environmental Laws (as hereinafter defined). There are no past or present conditions, events, circumstances or facts that would reasonably be expected to form the basis of any claim or Litigation against or involving the Company based on or related to any violation of any Environmental Law that could, individually or in the aggregate, have a Material Adverse Effect on the Company. For purposes of this Agreement, the term "ENVIRONMENTAL LAW" shall mean any Law relating to human health, employee safety or the protection of the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and the Occupational Safety and Health Act.

2.21. Employee Benefit Plans. (a) Schedule 2.21 sets forth a list of (i) each plan, program, policy or Contract providing for incentive compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits of any kind, whether formal or informal, funded or unfunded, written or oral, and whether or not legally binding, which is now or previously has been sponsored, maintained, contributed to or required to be contributed to by the Company or any of its subsidiaries and pursuant to which the Company or any of its subsidiaries has or may have any liability, contingent or otherwise, including any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each a "BENEFIT PLAN"), (ii) each management, bonus, option, equity (or equity related), severance, non-compete, confidentiality or similar Contract between the Company and any current, former or retired employee, officer, consultant, independent contractor, agent or director of the Company (an "EMPLOYEE") under which the Company has or may have any liability and (iii) each employment or consulting Contract between the Company and an Employee (each Contract in clauses (ii) and (iii), an "EMPLOYEE AGREEMENT"). The Company currently does not sponsor, maintain, contribute to, and is not required to contribute to, nor has the Company ever sponsored, maintained, contributed to or been required to contribute to, or incurred any liability with respect to,
(i) any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any material liability to provide, life insurance, medical, severance or other employee welfare benefits to any Employee upon

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his or her retirement or termination of employment, except as required by
Section 4980B of the Internal Revenue Code of 1986, as amended (the "CODE") or any similar state law regarding continuation of coverage. Except as set forth on Schedule 2.21, to the Company's knowledge, the Company has not committed to establish any new employee benefit plan, program or arrangement or to modify or terminate any Benefit Plan which, individually or in the aggregate, would materially increase the obligation of the Company to any or all of its employees.

(b) The Company has no liability, contingent or otherwise, with respect to any employee benefit plan maintained by or contributed to by any ERISA Affiliate. For this purpose, an ERISA affiliate is any entity (other than any current subsidiary of the Company) that is or ever has been (i) a member of a "controlled group of corporations," under "common control" or an "affiliated service group" within the meaning of Sections 414(b), (c) or (m) of the Code,
(ii) required to be aggregated under Section 414(o) of the Code or (iii) under "common control," within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections, in any such case with the Company.

(c) The Company has made available to the Investors true and complete copies of all documents embodying or relating to each Benefit Plan and each Employee Agreement, including all amendments thereto, trust or funding agreements relating thereto (if any), the two most recent annual reports (Series 5500 and related schedules) required under ERISA (if any), the two most recent annual actuarial valuations (if any), the most recent determination letter received from the Internal Revenue Service (the "IRS") (if any) and the most recent summary plan description (with all material modifications) (if any) relating to any Benefit Plan or Employee Agreement required to be listed on Schedule 2.21.

(d) Each Benefit Plan and Employee Agreement has been established and maintained in accordance with its terms and in compliance in all material respects with all applicable Laws, including but not limited to ERISA and the Code, and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified.

(e) (i) To the knowledge of the Company, no "prohibited transaction," within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Benefit Plan, (ii) there is no Litigation pending, or to the Company's knowledge, threatened (other than routine claims for benefits) with respect to any Benefit Plan or Employee Agreement, (iii) to the Company's knowledge, no Employee has been hired by the Company in violation of any restrictive covenant or any non-

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compete Contract with any other Person, (iv) no liability under any Benefit Plan has been funded, nor has any such obligation been satisfied, with the purchase of a contract from an insurance company as to which the Company has received notice that such insurance company is insolvent or is in rehabilitation or any similar proceeding, (v) the Company has not receive notice that any Benefit Plan is under audit or investigation by the IRS, the Department of Labor or the Pension Benefit Guaranty Corporation, and, to the Company's knowledge, no such audit or investigation is threatened and (vi) with respect to each Benefit Plan which provides medical benefits or long-term disability benefits, all claims incurred by the Company under such Benefit Plan are either insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims or covered under a contract with a health maintenance organization pursuant to which such health maintenance organization bears the liability for such claims.

(f) The execution and delivery of, and performance of the transactions contemplated by, this Agreement and the other Transaction Documents will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Benefit Plan or Employee Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee or (ii) result in the triggering or imposition of any restrictions or limitations on the right of the Company to amend or terminate any Benefit Plan, or upon the right, upon any such amendment or termination, to receive the full amount of any excess assets remaining or resulting from such amendment or termination. No payment or benefit which will or may be made by the Company or any of its affiliates with respect to any Employee will be characterized as an "excess parachute payment," within the meaning of Section 280G(b)(1) of the Code.

2.22. Labor Relations; Employees. Except as set forth on Schedule 2.22,
(a) the Company is in compliance in all material respects with all applicable Laws respecting employment, employment practices, labor, terms and conditions of employment and wages and hours, (b) the Company is not a party to any Contract with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company, (c) there is no labor strike, dispute, slowdown or stoppage pending, or, to the Company's knowledge, threatened against or involving the Company, (d) the Company is not involved in or, to the Company's knowledge, threatened with any Litigation relating to labor matters (including discrimination complaints and charges of unfair labor practices) and (e) to the Company's knowledge, no officer of the Company or employee whose annual

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compensation is in excess of $70,000 has any plans to terminate his or her employment with the Company. The Company has not received notice of any worker's compensation claims.

2.23. Absence of Changes. Except as set forth on Schedule 2.23 or as contemplated by this Agreement or the other Transaction Documents or reflected in the Financial Statements, since December 31, 1999, the Company has conducted its business in the ordinary course, consistent with past practice, and there has not been (a) any event or condition which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, (b) any waiver of any material right, claim or debt held by the Company, (c) any payment or declaration of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities of or other equity interest in the Company, (d) any issuance of any securities of or other equity interest in the Company other than pursuant to the exercise of the previously outstanding options set forth on Schedule 2.4, (e) any sale, assignment or transfer of any tangible or intangible assets of the Company, except (i) in the ordinary course of business and (ii) assets for which the book value does not exceed $50,000 and which are not, individually or in the aggregate, material, (f) any loan by the Company to any officer, director, employee, consultant or equityholder of the Company (other than advances to such persons in the ordinary course of business in connection with travel and travel-related expenses), (g) any damage, destruction or loss (whether or not covered by insurance) which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, (h) any increase, direct or indirect, in the compensation paid or payable to any officer or director of the Company, or, other than in the ordinary course of business, to any other employee, consultant or agent of the Company, (i) any change in the accounting or Tax methods, practices or policies or in any Tax election of the Company, (j) any indebtedness incurred for borrowed money other than in the ordinary course of business or pursuant to a Contract set forth on Schedule 2.23, (k) any amendment to or termination of any Material Contract, (1) any changes with respect to the regulation of the Company or its products and services by any Governmental Entity which would, individually or in the aggregate, have a Material Adverse Effect on the Company, (m) any material change in the manner of business or operations of the Company, (n) any transaction except in the ordinary course of business or as otherwise contemplated hereby or (o) any commitment by the Company (contingent or otherwise) to do any of the foregoing.

2.24. Suppliers and Customers. Since December 31, 1999, there has been no termination, cancellation or, to the Company's knowledge, threatened termination or cancellation or any material modification or change in, or any material dissatisfaction

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with, the business relationship between the Company and any supplier, vendor, customer or client of the Company which would reasonably be expected to have a Material Adverse Effect on the Company.

2.25. Suitability. Neither the Company nor, to its knowledge, any of its directors or officers (a) has ever been indicted for or convicted of any felony or any crime involving fraud or misrepresentation, (b) is subject to any Order barring, suspending or otherwise limiting the right of the Company or such person to engage in any activity conducted by the Company, (c) has ever been the subject of any bankruptcy or similar proceeding or (d) to the Company's knowledge, has ever been denied any Accreditation, License or Permit affecting the Company's or such person's ability to conduct any activity conducted by the Company, nor, to the Company's knowledge, is there any basis upon which such Accreditation, License or Permit would reasonably be expected to be denied.

2.26. Operations of the Company. Schedule 2.26 sets forth a list of the Company's uniform resource locators (each, a "URL"). The Company has registered each URL listed on Schedule 2.26 for the periods set forth on Schedule 2.26. The Company's web site (www.capellauniversity.edu) (the "WEB SITE") is commercially operational, and has performed, for the six-month period prior to the date of this Agreement. The Company has used commercially reasonable efforts to ensure that customers or clients of the Company will not be adversely affected by a failure or disruption of any of the computer networks or the Web Site of the Company.

2.27. Recruitment; Admissions Procedures; Attendance; Reports

(a) Schedule 2.27 contains a complete and correct list of all policy manuals and other statements of procedures or instructions relating to (i) recruitment of students for the School, including procedures for assisting in the application by prospective students for direct or indirect state or federal financial assistance; (ii) admissions procedures, including any descriptions of procedures for insuring compliance with federal, state and accreditation requirements applicable to such procedures; and (iii) procedures for encouraging and verifying attendance, minimum required attendance policies, and other relevant criteria relating to course performance requirements and completion (collectively, the "POLICY GUIDELINES"). The Company has made available to the Investors true and complete copies of all Policy Guidelines.

(b) The operations of the Company and the School have been conducted in accordance with the Policy Guidelines, except where the failure to do so would not have a Material Adverse Effect on the Company, and all relevant standards

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and requirements imposed by applicable Accrediting Bodies or State Approval Agencies, and other agencies administering state or federal governmental financial assistance programs in which the Company or the School participate, and other applicable legal requirements.

(c) The Company has submitted all reports, audits, and other information, whether periodic in nature or pursuant to specific requests, for the Company and the School to all agencies or other entities with which such filings are required related to its compliance with (i) applicable accreditation standards and State Approval Agency requirements, (ii) legal requirements governing programs pursuant to which the School or its students receive student financial assistance funding, and (iii) all articulation agreements between the School and other institutions of higher education in effect as of the date hereof except for any such reports, audits and other information the failure to file would not have a Material Adverse Effect on the Company.

(d) All student financial aid grants and loans, disbursements and record keeping relating thereto have been completed in compliance with all federal and state requirements, except where the failure to do so would not have a Material Adverse Effect on the Company, and there are no material deficiencies in respect thereto. Except as set forth on Schedule 2.27, except where the failure to do so would not have a Material Adverse Effect on the Company and except as previously disclosed in prior audits or compliance reviews by the USDOE, no student at the School has been funded prior to the date for which such student was eligible for funding or any amount other than the amount such student was eligible to receive, and such student's records conform in form and substance to all relevant regulatory requirements.

2.28. USDOE Demonstration Program. The School is authorized by the USDOE to participate in the Distance Education Demonstration Program ("DEMONSTRATION PROGRAM") authorized under section 486 of the Higher Education Act of 1965, as amended. The School is in compliance with all terms and conditions of the February 21, 2000 agreement with the USDOE amending the School's Program Participation Agreement to permit the School's participation in the Demonstration Program, except for any instances of non-compliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company. To the Company's knowledge, there exists no fact or circumstances that would reasonably be expected to cause the USDOE to revoke or limit the School's authorization to participate in the Demonstration Program.

2.29. Disclosure. (a) Neither this Agreement nor any of the Transaction Documents contains any untrue statement by or on behalf of the Company of a material

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fact or omits to state a material fact necessary in order to make the statements by or on behalf of the Company contained herein and therein, in light of the circumstances under which they were made, not misleading.

(b) The projections set forth on Schedule 2.29 (a) have been prepared by management of the Company in good faith, (b) are based on assumptions believed by management of the Company to be reasonable and (c) represent good faith estimates by management of the Company as to the financial performance of the Company for the periods indicated, but do not represent any guarantee or assurance of the future financial results of the Company. The Investors acknowledge that unanticipated future events and circumstances may occur, that the Company's business, financial condition and results of operations are subject to risks and uncertainties, and that actual results achieved during any future period may vary from the projections and the variations may be material and adverse.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

Each of the Investors severally, and not jointly, represents and warrants to the Company as of the date hereof and as of the Closing as follows:

3.1. Power; Authorization. The execution, delivery and performance of this Agreement and the other Transaction Documents to which such Investor is a party, and the consummation of all transactions contemplated hereby and thereby have been duly authorized by all required actions on the part of the Investor. Each of the Transaction Documents constitutes a valid and binding obligation of such Investor enforceable against such Investor in accordance with its terms, subject to Laws of general application relating to bankruptcy, insolvency and the relief of debtors and Laws governing specific performance, injunctive relief or other equitable remedies.

3.2. No Breach. The execution, delivery and performance by such Investor of this Agreement and the other Transaction Documents and the consummation by such Investor of the transactions contemplated hereby and thereby will not (i) conflict with, or result in any violation of, any provision of the organizational or formation documents of such Investor or any Law or Order to which such Investor is subject or (ii) conflict with, or result in any default or breach, or give rise to a right of termination, cancellation, modification or acceleration, or cause the forfeiture of any right, under, any of its Contracts, Accreditations, Licenses or Permits.

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3.3. Investment; Securities Laws. Such Investor is acquiring the Class E Preferred Stock to be purchased under this Agreement for its own account, not as a nominee or agent, for investment and not with a view to the distribution thereof (within the meaning of the Securities Act) except in compliance with all applicable federal and state securities Laws. Such Investor understands that (i) the Class E Preferred Stock has not been, and the Conversion Stock will not be, registered under the Securities Act or any state securities Laws, and (ii) the Class E Preferred Stock and the Conversion Stock may not be sold unless such disposition is registered under the Securities Act and applicable state securities Laws or is exempt from registration thereunder.

3.4. Accredited Investor. Such Investor is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). The state in which such Investor's principal office is located is set forth in Schedule 3.4 Such Investor has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment to be made hereunder by such Investor. Such Investor has and has had access to all of the Company's material books and records and access to the Company's executive officers has been provided to such Investor or to such Investor's qualified agents. No Investor was formed for the purpose of this investment within the meaning of Rule 501 under the Securities Act.

3.5. Rule 144. Such Investor acknowledges that the exemption from registration afforded by Rule 144 promulgated under the Securities Act (the provisions of which Rule are known to the Investor) depends on the satisfaction of various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts.

3.6. Availability of Funds. Such Investor has available sufficient funds or available capital commitments to pay its portion of the Purchase Price.

3.7. Brokers. Such Investor has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the transactions contemplated by this Agreement and the other Transaction Documents.

3.8. Independent Investigation and Counsel. Such Investor acknowledges to the Company and to the other Investor that it has had an opportunity to conduct its own independent due diligence investigation of the Company and no Investor is relying on any other Investor for such Investor's due diligence investigation of the Company. Such Investor acknowledges to the other Investor that it was represented by counsel of its own

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choosing and no Investor is relying on the counsel of the Company or the other Investor for any purpose whatsoever.

SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.

Each Investor's obligation to purchase the Class E Preferred Stock at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

4.1. Representations and Warranties Correct. The representations and warranties made by the Company in (a) Sections 2.6, 2.9, 2.10, 2.11, 2.15, 2.20,
2.21 (other than with respect to ERISA matters) and 2.22 shall have been true and correct in all material respects when made, other than such representations and warranties as are expressly stated to be made as of another date, which shall have been true and correct in all material respects as of such date, (b) Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.8, 2.12, 2.14 and 2.21 (with respect to ERISA matters) shall be true and correct in all material respects when made and as of the time of the Closing with the same force and effect as if made at such time, other than such representations and warranties as are expressly stated to be made as of another date, which shall be true and correct in all material respects as of such date and (c) Sections 2.7, 2.13, 2.16, 2.18, 2.19, 2.23, 2.24, 2.25, 2.26, 2.27, 2.28 and 2.29 shall be true and correct when made and as of the time of the Closing with the same force and effect as if made at such time, other than such representations and warranties as are expressly stated to be made as of another date, which shall be true and correct as of such date, except, in the case of this clause (c) only, for failures to be true and correct which individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect on the Company. For purposes of determining whether the foregoing condition has been satisfied, all references in such representations and warranties to "material," "material adverse change," "Material Adverse Effect," "in all material respects" and words of similar import or similar expressions shall be disregarded.

4.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company at or prior to the Closing shall have been performed or complied with in all material respects.

4.3. Material Adverse Change. Since the date of this Agreement, there shall have been no change which has had, or would reasonably be expected to have, a Material Adverse Effect on the Company.

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4.4. Compliance Certificate. The Company shall have delivered to such Investor a certificate of the Company, executed by the Chief Executive Officer of the Company, dated the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 4.1, 4.2, 4.3, 4.7 and 4.8.

4.5. Opinion of Company's Counsel. Such Investor shall have received from
(a) Faegre & Benson LLP, counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-1 and
(b) Dow, Lohnes & Albertson, PLLC, special counsel to the Company, an opinion addressed to each of the Investors, dated the Closing Date, in the form set forth in Exhibit D-2.

4.6. Officer's Certificate. The Company shall have delivered to such Investor a certificate executed by an appropriate officer of the Company dated as of the Closing Date, certifying the following matters: (a) the corporate proceedings taken by the Company's Board of Directors (the "BOARD") and, if required, stockholders approving this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby; (b) the Articles of Incorporation, (c) the By-laws of the Company and (d) the Certificate of Designation.

4.7. Governmental and Other Authorizations, etc. The Governmental Filings required to have been made by the Company set forth on Schedule 4.7 shall have been made; the Governmental Consents required to have been obtained by the Company or any of the Investors set forth on Schedule 4.7 shall have been obtained; the Third-Party Consents (as hereinafter defined) the lack of which would., individually or in the aggregate, have a Material Adverse Effect on the Company, and which are set forth on Schedule 4.7 shall have been obtained.

4.8. Board Membership. The five people listed on Exhibit B shall have been elected to, and shall comprise, the Board.

SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.

The Company's obligation to sell the Class E Preferred Stock to the Investors at the Closing is subject to the fulfillment at or prior to the Closing of the following conditions:

5.1. Representations and Warranties Correct. The representations and warranties made by the Investors in Section 3 of this Agreement shall be true and correct

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in all material respects as of the time of Closing with the same force and effect as if made as of such time, other than such representations and warranties as are expressly stated to be made as of another date which shall be true and correct in all material respects as of such date.

5.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Investors at or prior to the Closing shall have been performed or complied with in all material respects.

5.3. Compliance Certificate. The Investors shall have delivered to the Company a certificate executed by the Investors, dated the Closing Date, and certifying as to the fulfillment of the conditions specified in Sections 5.1 and 5.2.

5.4. Governmental Authorizations, etc. The Governmental Filings required to have been made by the Investors and set forth in Schedule 4.7 shall have been made, and all Governmental Consents required to have been obtained by the Company or the Investors and set forth in Schedule 4.7 shall have been obtained and shall be in full force and effect on the Closing Date.

SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.

6.1. Cooperation. From the date hereof and prior to the Closing, each of the parties shall use its best efforts to make all Governmental Filings required to be made by it, and to obtain all Governmental Consents and all necessary consents from other third parties ("THIRD PARTY CONSENTS") as shall be required to be obtained by it, for the consummation of the transactions contemplated hereby and by the other Transaction Documents, all as set forth in Schedule 4.7, and shall otherwise use its best efforts and cooperate with the other parties to cause the consummation of such transactions in accordance with the terms and conditions hereof and thereof

6.2. No Solicitation. Except as set forth on Schedule 6.2, from the date hereof and until the Closing, other than in connection with the transactions contemplated hereby and in connection with the Company's preparation for its initial public offering of securities of the Company, the Company shall not solicit, propose or facilitate (including by way of providing information regarding the Company or its business to any person or providing access to any person), directly or indirectly, any inquiries, discussions or proposals regarding, continue or enter into negotiations looking toward, or enter into or

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consummate any agreement or understanding in connection with any proposal regarding, any purchase or other acquisition of all or any portion of the Company (other than the ordinary course of business sale of products or services or replacement of assets) or any equity securities (whether newly issued or currently outstanding) of the Company, any merger, business combination or recapitalization involving the Company, the liquidation, dissolution or reorganization of the Company, or any similar transaction. If any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, the Company or any of its representatives, then the Company shall promptly notify the Investors of the nature and terms of any of the foregoing and the identity of the parties involved.

6.3. Publicity. Prior to the Closing, no public release or announcement or other disclosure concerning the transactions contemplated hereby and by the Transaction Documents or the terms hereof and thereof shall be made by any party, without the prior consent of the other party (which consent shall not be unreasonably withheld), except as such release or announcement may be required by Law or the rules or regulations of any securities exchange, in which case the party required to make the release or announcement shall give notice to and consult with the other party in advance of such issuance.

6.4. Conduct of Business Prior to the Closing. The Company covenants and agrees that, except as set forth in Schedule 6.4, between the date hereof and the Closing, neither the Company nor any of the Subsidiaries shall conduct its business other than in the ordinary course and consistent with prior practice. Without limiting the generality of the foregoing, except as set forth in Schedule 6.4, between the date hereof and the Closing, the Company shall, and shall cause each Subsidiary and otherwise use commercially reasonable efforts to, (A) preserve intact the business organization of the business, (B) keep available the services of the Employees, (C) continue in full force and effect without material modification all existing policies or binders of insurance presently maintained in respect of the business, (D) preserve its current relationships with its customers, suppliers and other persons with which it has significant business relationships; and (E) not engage in any practice, take any action, embark on any course of inaction or enter into any transaction which could result in any misrepresentation or breach of any warranty or covenant made by the Company in this Agreement or in any Transaction Document.

6.5. Directors and Officers Liability Insurance. Prior to the Closing, the Company shall use commercially reasonable efforts to obtain directors and officers

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liability insurance with coverage, deductibles and other terms as are customary for companies of similar size and engaging in a similar line of business.

SECTION 7. POST-CLOSING AND ON-GOING COVENANTS.

7.1. Directors. Effective at the Closing, the holders of shares of Class E Preferred Stock and Conversion Stock shall have the right to designate directors of the Company in accordance with the provisions of Section 3 of the Board Representation Agreement.

7.2. Reimbursement of Directors. The Company shall reimburse each director designated by the holders of the shares of Class E Preferred Stock and Conversion Stock for all reasonable costs and expenses associated with attending meetings of the Board or any committee thereof.

7.3. Indemnification of Directors. (a) The Company shall indemnify, defend and hold harmless each person who serves as a member of the Board or committee thereof from and against all losses, claims, damages and expenses (including reasonable attorneys' fees and expenses) to the fullest extent permitted from time to time under applicable Law.

(b) To the fullest extent permitted from time to time under applicable Law, the Company shall pay, on an as-incurred basis, the reasonable fees and expenses of the directors (including reasonable attorneys' fees and expenses) in advance of the final disposition of any Litigation that is the subject of the right to indemnification.

(c) In the event of any Litigation, subject to the provisions of any insurance policy the director shall be entitled to control the defense thereof with counsel of the director's own choosing reasonably acceptable to the Company and the Company shall cooperate in the defense thereof; provided, that, such director shall have no power to settle or compromise any Litigation for which indemnification is being sought without the prior written consent of the Company which shall not be unreasonably withheld.

(d) The Articles of Incorporation and By-Laws of the Company shall contain provisions for the indemnification and exculpation of directors to the maximum extent permitted under applicable Law, and shall be amended as and when necessary to effectuate the foregoing.

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7.4. Representative. (a) From and after the Closing and so long as it holds any shares of Class E Preferred Stock or Conversion Stock, if Equity VI is no longer entitled to designate a director under the Investor Rights Agreement, Equity VI shall be entitled to designate one representative (the "REPRESENTATIVE") to observe Board meetings and all committees thereof. The Company shall, after receiving notice from Equity VI as to the identity of the Representative, except to the extent necessary to preserve attorney-client privilege, (i) permit the Representative to attend all Board meetings and all committees thereof, (ii) provide the Representative advance notice of each such meeting, including such meeting's time and place, at the same time and in the same manner as such notice is provided to the members of the Board (or such committee thereof) and copies of all materials distributed to the members of the Board (or such committee thereof) at the same time as such materials are distributed to the Board (or such committee thereof) and shall permit the Representative to have the same access to information concerning the business and operations of the Company as the directors (or committee members) have, and
(iii) permit the Representative to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the Board, without voting. The Board (or any committee thereof) and the Company's management shall give due consideration to the advice given and any proposals made by the Representative. In addition, Equity VI shall have the right to consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with a representative of Equity VI at the Company's facilities at mutually agreeable times for such consultation and advice, including to review progress in achieving said plans. The Company shall give Equity VI reasonable advance written notice of any significant new initiatives or material changes to existing operating plans and shall afford Equity VI adequate time to meet with management to consult on such initiatives or changes prior to implementation. The Company shall furnish Equity VI with such financial and operating data and other information with respect to the Business and the properties of the Company as the Representative may request, except to the extent necessary to preserve attorney-client privilege. The Company shall permit Equity VI to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the principal officers of the Company, except to the extent necessary to preserve attorney-client privilege. The Company shall give due consideration to the advice given and any proposals made by Equity VI.

(b) The rights set forth in Sections 7.1 and 7.4 are intended to satisfy the requirement of contractual management rights for purposes of qualifying the ownership interests of Equity VI in the Company as venture capital investments for purposes of the Department of Labor's "plan assets" regulations, and in the event such

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rights are not satisfactory for such purpose, the Company and Equity VI shall reasonably cooperate in good faith to agree upon mutually satisfactory management rights which satisfy such regulations.

7.5. Financial Statements and Other Information. From and after the Closing, so long as an Investor holds not fewer than 500,000 shares of Class E Preferred Stock, or 50,000 shares of Class E Preferred Stock with respect to the covenants set forth in (a) and (b) below (adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like), the Company shall furnish to such Investor the following:

(a) as soon as available but in any event within 30 days after the end of the first, second and third quarterly accounting periods in each fiscal year, (i) unaudited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarterly period and consolidated balance sheet of the Company and its subsidiaries as of the end of such quarterly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, all prepared in accordance with generally accepted accounting principles consistently applied (subject to normal year-end audit adjustments), plus (ii) a statement certified by the Chief Financial Officer of the Company, certifying that the financial statements referred to in subparagraph (i) are presented fairly and have been prepared in accordance with generally accepted accounting principles consistently applied (subject to normal year-end audit adjustments);

(b) as soon as practicable and in any event within 90 days after the end of each fiscal year, audited consolidated statements of income, stockholders' equity and cash flows of the Company and its subsidiaries for such fiscal year, and consolidated balance sheet of the Company and its subsidiaries as of the end of such fiscal year, all prepared in accordance with generally accepted accounting principles consistently applied, and accompanied by an audit opinion, without qualification or reservation, by a nationally recognized public accounting firm selected by the Company (the "COMPANY'S ACCOUNTANTS");

(c) promptly upon receipt thereof, a copy of the annual management letter of the Company's Accountants to the Board and any additional written reports or management letters concerning material aspects of the Company's operations and financial affairs delivered by the Company's Accountants to the audit committee (and not otherwise contained in other materials provided hereunder);

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(d) at least 15 days prior to the end of each fiscal year, an annual operating budget prepared on a monthly basis for the Company for the succeeding fiscal year (displaying anticipated statements of income and cash flows, changes in financial position and balance sheets), an annual budget for capital expenditures of the Company for the succeeding fiscal year, and a strategic plan for the succeeding fiscal year, which budgets and strategic plan shall have been approved by the Board, and promptly upon preparation thereof any other significant budgets which the Company prepares, and any revisions of such annual or other budgets or strategic plan;

(e) as soon as available, copies of any independent accountants' reports prepared for federal or state educational regulatory purposes, together with any related reports prepared by the Company;

(f) with reasonable promptness, such other information and financial data concerning the Company as such Investor may reasonably request and;

(g) the School shall timely make all required notifications or applications to the USDOE, State Approval Agencies and Accrediting Bodies that are required as a result of this transaction and, if necessary, timely make all applications for and obtain all required approvals of the transaction from such State Approval Agencies that were not required to be made or obtained, as the case may be, prior to Closing, all as set forth on Schedule 7.5 (g).

SECTION 8. TERMINATION.

8.1. Termination. This Agreement may be terminated and the transaction contemplated hereby may be abandoned at any time prior to the Closing Date:

(a) by mutual written consent of Equity VI and the Company;

(b) by either Equity VI or the Company, by giving written notice to the other party, if any Governmental Entity with jurisdiction over such matters shall have issued an Order restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Order shall have become final and nonappealable; provided, however, that the provisions of this Section 8 shall not be available to the Company or Equity VI unless the Company or the Investors, as the case may be, shall have complied with their respective obligations under Section 6.1 and 6.2, or otherwise used their reasonable best efforts to oppose any such Order or to have such

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Order vacated or made inapplicable to the transactions contemplated by this Agreement; or

(c) by either Equity VI or the Company, by giving written notice to the other party, if the Closing shall not have occurred on or prior to May 18, 2000 after the date hereof, provided that the terminating party is not in material breach of its obligations under this Agreement.

8.2. Effect on Obligations. Termination of this Agreement pursuant to this
Section 8 shall terminate all obligations of the parties hereunder, except for the obligations under Sections 9.1, 9.2, 9.8 and 9.11; provided, however, that nothing herein shall relieve the defaulting or breaching party from any liability to the other party hereto.

SECTION 9. MISCELLANEOUS.

9.1. Survival. All representations and warranties hereunder shall survive the Closing until the end of the 18th month following the Closing, and shall in no way be affected by any knowledge possessed by, or investigation of the subject matter thereof made by or on behalf of, the Investors, provided, however, that the representations and warranties set forth in Sections 2.2, 2.4, 2.5(b), 2.19, 3.1, 3.3 and 3.4 shall survive indefinitely. All statements contained in any Transaction Document shall constitute representations and warranties by the Company under this Agreement. All covenants and agreements contained herein shall survive indefinitely until performed in accordance with their terms.

9.2. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Investor, its affiliates, and each of their respective officers, directors, partners (and the partners of such partners), managing directors, employees, agents, advisors, consultants, representatives, successors and assigns (including any transferee of Class E Preferred Stock) from and against all Losses (as hereinafter defined) incurred or suffered by any of the foregoing (whether incurred or suffered directly or indirectly through ownership of Conversion Stock or Class E Preferred Stock) arising out of, relating to or resulting from (i) any breach of any of the representations or warranties made by the Company in this Agreement or in any of the Transaction Documents, and
(ii) any breach of any of the covenants or agreements made by the Company in this Agreement or in any of the Transaction Documents. The Investors shall each, severally and not jointly, indemnify, defend and hold harmless the Company, its affiliates, and each of their respective officers, directors, employees, agents, advisors, consultants,

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representatives, successors and assigns against all Losses arising from the breach of any of the representations, warranties, covenants or agreements made by such Investor in this Agreement or in any of the Transaction Documents or in any certificate or instrument delivered pursuant to Section 5.

(b) For purposes hereof, "LOSSES" shall mean each and all of the following items: claims, losses, liabilities, obligations, payments, actual and punitive damages, charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation and fees, expenses and disbursements of counsel, consultants and other experts), but excluding consequential damages. Any payment by the Company to any Investor pursuant to this Section 9.2 shall be treated for all income Tax purposes as an adjustment to the price paid by such Investor for the Class E Preferred Stock pursuant to this Agreement.

(c) Each of the representations and warranties that contains any "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications shall be deemed to have been given as though there were no "Material Adverse Effect," "in all material respects," or other materiality (or correlative meaning) qualifications for purposes of determining the amount of Losses under this Section 9.2, but not the accuracy of any representation or warranty.

(d) Any claim for indemnification pursuant to this Section 9.2 must be made before the expiration of the survival periods set forth in Section 9.1. No party shall be entitled to indemnification against a Loss arising from the breach of any representations or warranties of any other party unless the party seeking indemnification (the "INDEMNIFIED PARTY") shall have given to the party from whom indemnification is sought (the "INDEMNIFYING PARTY") a claim notice relating to such Loss (a "CLAIM NOTICE") prior to expiration of the representation or warranty upon which the claim is based. The written Claim Notice shall be given reasonably promptly after the indemnified party becomes aware of the facts indicating that a claim for indemnification may be warranted, and shall state in reasonable detail (to the extent known) the nature of the claim. The failure of any indemnified party to give a Claim Notice shall not relieve the indemnifying party of its obligations under this Section 9.2, except to the extent that the indemnifying party is actually materially prejudiced by failure to give such Claim Notice. The indemnifying party may, through counsel of its own choosing and reasonably satisfactory to the indemnified party, assume the defense thereof or other indemnification obligation with respect thereto; provided, however, that any indemnified party shall be (a) entitled to participate in any such claim with counsel of its own choice but at its own expense and (b) shall be entitled to participate in any such claim with

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counsel of its own choice at the expense of the indemnifying party if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct. In any event, if the indemnifying party disputes the claim or otherwise fails to take reasonable steps necessary to defend diligently the action or proceeding within 20 days after receiving notice from such indemnified party, the indemnified party may assume such defense or other indemnification obligation and the fees and expenses of its attorneys will be covered by the indemnity provided for in this
Section 9.2 if and upon determination of an indemnifying party's obligation therefor. The indemnifying party shall not, without the written consent of the indemnified party, which shall not be unreasonably withheld or delayed, settle or compromise any pending or threatened Litigation or claim in respect of which indemnification may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) or consent to the entry of any judgment (i) which does not, to the extent that an indemnified party may have any liability with respect to such action or claim, include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such action or claim, (ii) which includes any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, or (iii) in any manner that involves any injunctive relief against the indemnified party or may materially and adversely affect the indemnified party. The indemnified party may not compromise or settle any claim without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), unless the sole relief granted is equitable relief for which the indemnifying party would have no liability or to which the indemnifying party would not be subject.

9.3. Expenses. At the Closing, the Company shall pay, or reimburse the Investors for, all reasonable costs and expenses incurred by the Investors in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby; but in no event shall the Company pay or reimburse the Investors for such costs and expenses in an amount in excess of $30,000. The Company shall pay its own expenses incurred in connection with the negotiation, execution, delivery, performance and consummation of this Agreement and the transactions contemplated hereby.

9.4. Delays or Omissions; Remedies. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any shares of Class E Preferred Stock or shares of Conversion Stock upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or

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default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any shares of Class E Preferred Stock or shares of Conversion Stock with respect to any breach or default under this Agreement, or any waiver on the part of any holder of shares of Class E Preferred Stock or shares of Conversion Stock of any provisions or conditions of this Agreement, must be in writing signed by such holder and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by Law or otherwise afforded to any holder of shares of Class E Preferred Stock or shares of Conversion Stock, shall be cumulative and not alternative, and any person having any rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages by reason of any breach of this Agreement and to exercise all other rights granted by Law, equity or otherwise.

9.5. Further Assurances. At any time or from time to time after the Closing, the Company, on the one hand, and the Investors, on the other hand, agree to cooperate with each other, and at the request of the other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and by the other Transaction Documents and to otherwise carry out the intent of the parties hereunder and thereunder.

9.6. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and each of the Investors and the respective successors, assigns, heirs and personal representatives of the Company and each of the Investors. The Company may assign its rights or obligations under this Agreement to any successor by merger, purchase, consolidation or otherwise of the Company, provided that such successor becomes a signatory to this Agreement. Prior to the Closing, the Investors may not assign their right or obligation under this Agreement to purchase shares of Class E Preferred Stock. The Company acknowledges that, after the Closing, subject to compliance with applicable securities Laws and the applicable provisions of this Agreement and the other Transaction Documents, any of the Investors may transfer all or part of the securities acquired by it hereunder and may, in its discretion, assign all or part of its rights and obligations under this Agreement to a transferee of such securities.

9.7. Entire Agreement. This Agreement and the Transaction Documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements, understandings or

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representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof.

9.8. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy (with a confirmatory copy sent by a different means within three business days of such notice), nationally recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties:

(i) if to the Company, to:

Capella Education Company 330 Second Avenue Suite 550 Minneapolis, Minnesota 55401 Telecopy:


Attention: Chief Executive Officer

with a copy to:

Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-3901
Telecopy: (612) 336-3026
Attention: David B. Miller, Esq.

and

(ii) if to the Investors, to:

Forstmann Little & Co.

767 Fifth Avenue, 44th Floor
New York, New York 10153
Telecopy: (212) 759-9059
Attention: Mr. S. Joshua Lewis

with copies to:

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Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telecopy: (212) 859-4000 Attention: Robert C. Schwenkel, Esq.

and

SmartForce plc 900 Chesapeake Drive Redwood City, California 94063 Telecopy: 650-817-5040 Attention: David Drummond

All such notices, requests, consents and other communications shall be deemed to have been given when received.

9.9. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

9.10. Titles and Subtitles; Definitions. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. The term "INCLUDING" shall mean including without limitation, whether or not so stated, and is meant to be by way of example rather than limitation. The term "MATERIAL ADVERSE EFFECT ON THE COMPANY" shall mean a material adverse effect on the Company and the Subsidiaries, taken as a whole, and the term "MATERIAL" (including when used in the foregoing phrase or in the phrase "in all material respects") shall mean material to the business, assets, liabilities, prospects, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries taken as a whole; provided, that, the Company and the Investors agree that Material Adverse Effect shall not include any such effect primarily attributable to or resulting from (a) changes in general economic or business conditions, the securities markets (public or private) or the Internet or education industries generally as they may affect the Company, (b) the announcement to employees, customers, suppliers or others of the transactions contemplated hereby, (c) the incurrence of liabilities, obligations and losses in the ordinary course of business substantially consistent with the Company's year 2000 plan (attached hereto as Schedule 9.10), (d) the taking of any action required by this Agreement or the other Transaction Documents and (e) any changes in generally accepted accounting principles. The term "CONTRACT" shall mean any agreement,

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contract, understanding or arrangement, whether written or oral, and including all amendments thereto. The term "TO THE COMPANY'S KNOWLEDGE" shall mean the knowledge of any of the persons set forth in Exhibit C, after reasonable inquiry. The term "PERSON" shall mean any individual, corporation, association, partnership, trust or other entity or organization, including a Governmental Entity. The term "DESIGNATED EMPLOYEE" shall mean the persons listed as such on Exhibit C. The term "SUBSIDIARY" shall mean each corporation or other person of which shares of capital stock or other equity interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation or other person are at the time owned, directly or indirectly, or the management of which is otherwise controlled, directly or indirectly, or both, by the Company.

9.11. Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with the Laws of the State of Minnesota without giving effect to the principles of conflict of laws. Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any and all rights to trial by jury in connection with any Litigation arising out of or relating to this Agreement or the transactions contemplated hereby.

9.12. Severability. Whenever possible, each provision of this Agreement shall he interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

CAPELLA EDUCATION COMPANY

By: /s/ Stephen Shank
   ---------------------------------------------
   Name:  Stephen Shank
   Title: President

FORSTMANN LITTLE & CO.
EQUITY PARTNERSHIP-VI, L.P.
By: FLC XXXII PARTNERSHIP, L.P., its
general partner

By: /s/ S J Lewis
   ---------------------------------------------
   Name: S J Lewis
   Title: General Partner

SMARTFORCE PLC

By:/s/ David C. Prummend
   ---------------------------------------------
   Name: David C. Prummend
   Title: CEO

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EXHIBIT 10.3

AMENDED AND RESTATED
CAPELLA EDUCATION COMPANY
1999 STOCK OPTION PLAN

1. PURPOSE. The purpose of this 1999 Stock Option Plan (the "Plan") is to promote the interests of Capella Education Company, a Minnesota corporation (the "Company"), and its stockholders by providing personnel of the Company and any parent or subsidiaries thereof, and any other individuals and entities who provide services to the Company or any parent or subsidiaries in the capacity of non-employee directors or advisors or consultants, with an opportunity to acquire a proprietary interest in the Company and thereby develop a stronger incentive to put forth maximum effort for the continued success and growth of the Company. In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining personnel of outstanding ability.

2. ADMINISTRATION.

(a) General. This Plan shall be administered by a committee of two or more directors of the Company (the "Committee") appointed by the Company's Board of Directors (the "Board"). If the Board has not appointed a committee to administer this Plan, then the Board shall constitute the Committee. The Committee shall have the power, subject to the limitations contained in this Plan, to fix any terms and conditions for the grant or exercise of any award under this Plan. A majority of the members of the Committee shall constitute a quorum for any meeting of the Committee, and the acts of a majority of the members present at any meeting at which a quorum is present or the acts unanimously approved in writing by all members of the Committee shall be the acts of the Committee. Subject to the provisions of this Plan, the Committee may from time to time adopt such rules for the administration of this Plan as it deems appropriate. The decision of the Committee on any matter affecting this Plan, or the rights and obligations arising under this Plan or any award granted hereunder, shall be final, conclusive and binding upon all persons, including without limitation the Company, stockholders and optionees.

(b) Indemnification. To the full extent permitted by law, (i) no member of the Committee or person to whom authority under this Plan is delegated shall be liable for any action, omission or determination taken or made in good faith with respect to this Plan or any award granted hereunder and (ii) the members of the Committee and each person to whom authority under this Plan is delegated shall be entitled to indemnification by the Company against and from any loss incurred by such member or person by reason of any such actions and determinations.

(c) Delegation of Authority. The Committee may delegate all or any part of its authority under this Plan to the Chief Executive Officer of the Company for purposes of granting and administering awards granted to persons other than persons who are then subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended


(the "Exchange Act"). The Chief Executive Officer of the Company may, in turn, delegate all or a portion of the delegated authority to such other officer or officers of the Company as the Chief Executive Officer may determine.

(d) Committee Composition when Common Stock is Publicly Traded. At the time that the Company's common stock is publicly traded, any options granted to persons subject to Section 16 of the Exchange Act shall be granted by the Board or a Committee consisting of at least two or more Non-Employee Directors, in accordance with Rule 16b-3 and any options intended to qualify as performance-based compensation within the meaning of Section 162(m) shall be granted by the Committee consisting of two or more Outside Directors, in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").

(e) Action by Board. Notwithstanding subparagraph 2(a) above, any grant of awards hereunder to any director of the Company who is not an employee of the Company at the time of grant ("Non-Employee Director Award"), and any action taken by the Company with respect to any Non-Employee Director Award, including any amendment thereto, and any acceleration of the vesting of any option constituting a Non-Employee Director Award, any extension of the time within which any option constituting a Non-Employee Director Award may be exercised, any determination pursuant to paragraph 8 relating to the payment of the purchase price of Shares (as defined in paragraph 3 below) subject to an option constituting a Non-Employee Director Award, or any action pursuant to paragraph 9 relating to the payment of withholding taxes, if any, through the use of Shares with respect to a Non-Employee Director Award shall be subject to prior approval by the Board.

3. SHARES. The shares that may be made subject to awards granted under this Plan shall be authorized and unissued shares of Common Stock of the Company, par value $0.10 per share ("Shares," and each individually a "Share"), and they shall not exceed 1,150,000 Shares in the aggregate, subject to adjustment as provided in paragraph 13, below, except that, if any option lapses or terminates for any reason before such option has been completely exercised, the Shares covered by the unexercised portion of such option may again be made subject to options granted under this Plan. An Option may not be exercisable for a fraction of a Share.

4. ELIGIBLE PARTICIPANTS. Options may be granted under this Plan to any employee of the Company, or any parent or subsidiary thereof, including any such person who is also an officer or director of the Company or any parent or subsidiary thereof. Non-statutory stock options (as defined in subparagraph 5(a) below) also may be granted to (i) any director of the Company who is not an employee of the Company or any parent or subsidiary thereof, (ii) other individuals or entities who are not employees but who provide services to the Company or a parent or subsidiary thereof in the capacity of an advisor or consultant, and (iii) any individual or entity that the Company desires to induce to become an employee, but any such grant shall be contingent upon such individual or entity becoming employed by the Company or a parent or subsidiary thereof. References herein to "employment" and similar terms (except "employee") shall include the providing of services in the capacity of an advisor or consultant

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or as a director. The employees and other individuals and entities to whom options may be granted pursuant to this paragraph 4 are referred to herein as "Eligible Participants."

5. TERMS AND CONDITIONS OF OPTIONS.

(a) General. Subject to the terms and conditions of this Plan, the Committee may, from time to time during the term of this Plan, grant to Eligible Participants options to purchase such number of Shares of the Company on such terms and conditions as the Committee may determine. In determining the Eligible Participants to whom options shall be granted and the number of Shares to be covered by each option, the Committee may take into account the nature of the services rendered by the respective Eligible Participants, their present and potential contributions to the success of the Company, and such other factors as the Committee in its sole discretion may deem relevant. The date and the time of approval by the Committee of the granting of an option shall be considered the date and the time of the grant of such option. The Committee in its sole discretion may designate whether an option granted to an employee is to be considered an "incentive stock option" (as that term is defined in Section 422 of the Code, or any amendment thereto) or a non-statutory stock option (an option granted under this Plan that is not intended to be an "incentive stock option"). The Committee may grant both incentive stock options and non-statutory stock options to the same employee. However, if an incentive stock option and a non-statutory stock option are awarded simultaneously, such options shall be deemed to have been awarded in separate grants, shall be clearly identified, and in no event shall the exercise of one such option affect the right to exercise the other. To the extent that the aggregate Fair Market Value (as defined in paragraph 7 below) of Shares with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as non-statutory stock options. Notwithstanding the foregoing, no incentive stock option may be granted under this Plan unless this Plan is approved by the stockholders of the Company within twelve months after the effective date of this Plan. The maximum number of Shares subject to options that may be granted to any one individual under the Plan in any fiscal year of the Company (the "Maximum Annual Grant") is 400,000 Shares (subject to adjustment pursuant to paragraph 13 hereof). The granting of an option to a person shall give such person no rights as a stockholder except as to Shares issued to such person.

(b) Purchase Price. The purchase price of each Share subject to an option granted pursuant to this paragraph 5 shall be fixed by the Committee, subject, however, to the remainder of this subparagraph 5(b). For non-statutory stock options, such purchase price may be set at any price the Committee may determine. In the case of a non-statutory stock option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per share on the date of grant. For incentive stock options, such purchase price shall be no less than 100% of the Fair Market Value of a Share on the date of grant, provided that if such incentive stock option is granted to an employee who owns, or is deemed under Section 424(d) of the Code to own, at the time such option is granted, stock of the Company (or

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of any parent or subsidiary of the Company) possessing more than 10% of the total combined voting power of all classes of stock therein (a "10% Stockholder"), such purchase price shall be no less than 110% of the Fair Market Value of a Share on the date of grant.

(c) Vesting. Each option agreement provided for in paragraph 6 shall specify when each option granted under this Plan shall become exercisable with respect to the Shares covered by the option. Each option agreement may specify certain conditions under which options granted under this Plan shall be immediately exercisable, including the occurrence of a change in control of the Company. Notwithstanding the provisions of any option agreement provided for in paragraph 6, the Committee may, in its sole discretion, declare at any time that any option granted under this Plan shall be immediately exercisable. Unless the Committee provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence.

(d) Termination. Each option granted pursuant to this paragraph 5 shall expire, and all rights to purchase Shares thereunder shall terminate, on the earliest of:

(i) ten years after the date such option is granted (or in the case of an incentive stock option granted to a 10% Stockholder, five years after the date such option is granted) or on such date prior thereto as may be fixed by the Committee on or before the date such option is granted;

(ii) the expiration of the period after the termination of the optionee's employment within which the option is exercisable as specified in paragraph 10(b) or 10(c), whichever is applicable (provided that the Committee may, in any option agreement provided for in paragraph 6 or by Committee action with respect to any outstanding option, extend the periods specified in paragraph 10(b) and 10(c)); or

(iii) the date, if any, fixed for cancellation pursuant to paragraph 11 or 12 below.

6. OPTION AGREEMENTS. All options granted under this Plan shall be evidenced by a written agreement in such form or forms as the Committee may from time to time determine, which agreement shall, among other things, designate whether the options being granted thereunder are non-statutory stock options or incentive stock options.

7. FAIR MARKET VALUE. For purposes of this Plan, the "Fair Market Value" of a Share at a specified date shall, unless otherwise expressly provided in this Plan, mean the closing or last sale price of a Share on the date immediately preceding such date or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, on the Composite Tape for New York Stock Exchange listed shares or, if Shares are not quoted on the Composite Tape for New York Stock Exchange listed shares, on the Nasdaq National Market or any similar system then in use or, if Shares are not included in the Nasdaq

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National Market or any similar system then in use, on the Nasdaq SmallCap Market or any similar system then in use, provided that if the Shares in question are not quoted on any such system, Fair Market Value shall be what the Committee determines in good faith to be 100% of the fair market value of a Share as of the date in question. Notwithstanding anything stated in this paragraph 7, if the applicable securities exchange or system has closed for the day by the time the determination is being made, all references in this paragraph to the date immediately preceding the date in question shall be deemed to be references to the date in question.

8. MANNER OF EXERCISE OF OPTIONS.

(a) General. A person entitled to exercise an option granted under this Plan may, subject to its terms and conditions and the terms and conditions of this Plan, exercise it in whole at any time, or in part from time to time, by delivery to the Company at its principal executive office, to the attention of its Secretary, of written notice of exercise, specifying the number of Shares with respect to which the option is being exercised and payment of the purchase price of the Shares.

(b) Payment. The consideration to be paid for the Shares, including the method of payment, shall be determined by the Committee (and in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (i) cash (including check, bank draft or money order); (ii) delivery of optionee's promissory note with such recourse, interest, security and redemption provisions as the Committee determines to be appropriate; (iii) cancellation of indebtedness; (iv) shares of Common Stock of the Company already owned by the optionee; (v) authorization of the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; (vi) any combination of the methods of payments described above; (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. Notwithstanding the foregoing, no person shall be permitted to pay any portion of the purchase price with Shares if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

9. TAX WITHHOLDING. Delivery of Shares upon exercise of any non-statutory stock option granted under this Plan shall be subject to any required withholding taxes. A person exercising a non-statutory stock option may, as a condition precedent to receiving the Shares, be required to pay the Company a cash amount equal to the amount of any required withholdings. In lieu of all or any part of such a cash payment, the Committee may, but shall not be required to, provide in any option agreement provided for in paragraph 6 (or provide by Committee action with respect to any outstanding option) that a person exercising an option may cover all or any part of the required withholdings, and any additional withholdings up to the amount needed to cover the individual's full FICA and federal, state and local income tax liability with respect to income arising from the exercise of the option, through the delivery to the Company of unencumbered Shares, through a reduction in the number of Shares delivered to the person exercising the option or through a subsequent return to the Company of Shares

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delivered to the person exercising the option (in each case, such Shares having an aggregate Fair Market Value on the date of exercise equal to the amount of the withholding taxes being paid through such delivery, reduction or subsequent return of Shares).

10. TRANSFERABILITY AND TERMINATION OF EMPLOYMENT.

(a) Transferability. During the lifetime of an optionee, only such optionee or his or her guardian or legal representative may exercise options granted under this Plan, and no option granted under this Plan shall be assignable or transferable by the optionee otherwise than by will or the laws of descent and distribution or, with respect only to non-statutory stock options, pursuant to a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that any optionee may transfer a non-statutory stock option granted under this Plan to a member or members of his or her immediate family (i.e., his or her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if (i) the option agreement with respect to such options expressly so provides either at the time of initial grant or by amendment to an outstanding option agreement and (ii) the optionee does not receive any consideration for the transfer. Any options held by any such transferee shall continue to be subject to the same terms and conditions that were applicable to such options immediately prior to their transfer and may be exercised by such transferee as and to the extent that such option has become exercisable and has not terminated in accordance with the provisions of the Plan and the applicable option agreement. For purposes of any provision of this Plan relating to notice to an optionee or to vesting or termination of an option upon the death, disability or termination of employment of an optionee, the references to "optionee" shall mean the original grantee of an option and not any transferee.

(b) Termination of Employment During Lifetime. During the lifetime of an optionee who is an employee of the Company or any parent or subsidiary thereof at the time of grant of an option, an option granted to such optionee may be exercised only while the optionee is employed by the Company or by a parent or subsidiary thereof, and only if such optionee has been continuously so employed since the date the option was granted, except that:

(i) an option shall continue to be exercisable for three months after termination of the optionee's employment, but (x) only to the extent that the option was exercisable immediately prior to such optionee's termination of employment, and (y) subject to any shorter time period for exercise provided in paragraph 11 or 12; provided, however, that if termination of the optionee's employment shall have been for Cause (as hereinafter defined), any option held by such optionee shall expire, and all rights to purchase Shares thereunder shall terminate, immediately upon such termination; for purposes of this paragraph 10(b)(i), "Cause" shall be deemed to exist upon (A) Optionee's failure or refusal substantially to perform his duties to the full extent of his abilities for reasons other than death or disability, after written notice to Optionee of such failure or refusal providing Optionee 30 days to take corrective action, (B) conviction of a

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felony crime, or commission of any act, the conviction for which would be a felony conviction, (C) theft or misappropriation of the Company's property, and (D) knowingly making a material false written statement to the Company's Board of Directors regarding the affairs of the Company; and

(ii) in the case of an optionee who is disabled (as hereinafter defined) while employed, an option shall continue to be exercisable for one year after termination of such optionee's employment.

(c) Termination Upon Death. With respect to an optionee whose employment terminates by reason of death, any option granted to such optionee may be exercised within one year after the death of such optionee.

(d) Vesting Upon Disability or Death. In the event of the disability (as hereinafter defined) or death of an optionee, any option granted to such optionee that was not previously exercisable shall become immediately exercisable in full if the disabled or deceased optionee shall have been continuously employed by the Company or a parent or subsidiary thereof between the date such option was granted and the date of such disability or death. "Disability" of an optionee shall mean any physical or mental incapacitation whereby such optionee is therefore unable for a period of twelve consecutive months or for an aggregate of twelve months in any twenty-four consecutive month period to perform his or her duties for the Company or any parent or subsidiary thereof. "Disabled," with respect to any optionee, shall mean that such optionee has incurred a Disability.

(e) Transfers and Leaves of Absence. For purposes of this Plan none of the following shall be deemed a termination of employment: (1) the transfer of employment of a person between any combination of the Company, a parent corporation or a subsidiary thereof or of the Company; (2) the change of status of a person from employee of the Company to consultant of the Company; or (3) a leave of absence granted to such person and approved by the Committee. The terms "parent" or "parent corporation" and "subsidiary" as used in this Plan shall have the meaning ascribed to "parent corporation" and "subsidiary corporation", respectively, in Sections 424(e) and (f) of the Code.

(f) Right to Terminate Employment. Nothing contained in this Plan, or in any option granted pursuant to this Plan, shall confer upon any optionee any right to continued employment by the Company or any parent or subsidiary of the Company or limit in any way the right of the Company or any such parent or subsidiary to terminate such optionee's employment at any time.

(g) Expiration Date. In no event shall any option be exercisable at any time after the time it shall have expired in accordance with paragraph 5(d) of this Plan. When an option is no longer exercisable, it shall be deemed to have lapsed or terminated and will no longer be outstanding.

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11. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the company, the Committee shall notify each optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for an optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Shares covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may provide that any Company repurchase option applicable to the Shares shall lapse as to all such Shares, provided that the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.

12. MERGER. In the event of a merger of the Company with or into another corporation or limited liability company, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option substituted by the successor entity or a parent or subsidiary of the successor entity. In the event that the successor entity refuses to assume or substitute for the Option, the optionee shall fully vest in and have the right to exercise the Option as to all of the Shares, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share covered by the option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, other securities or property) received in the merger or sale of assets by holders of Common Stock of the Company for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor entity or its parent, the Committee may, with the consent of the successor entity, provide for the consideration to be received upon the exercise of the Option, for each Share subject to the Option, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

13. ADJUSTMENTS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of any holder of an option, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under this Plan, the purchase price of each Share subject to outstanding options, the Maximum Annual Grant and, in order to prevent dilution or

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enlargement of rights of participants in this Plan, the number and kind of securities issuable upon exercise of outstanding options and the exercise price thereof.

14. SUBSTITUTE OPTIONS. Options may be granted under this Plan from time to time in substitution for stock options held by employees of other corporations who are about to become employees of the Company, or any parent or subsidiary thereof, or whose employer is about to become a subsidiary of the Company, as the result of a merger or consolidation of the Company or a subsidiary of the Company with another corporation, the acquisition by the Company or a subsidiary of the Company of all or substantially all the assets of another corporation or the acquisition by the Company or a subsidiary of the Company of at least 50% of the issued and outstanding stock of another corporation. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Plan to such extent as the Board at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted, but with respect to stock options which are incentive stock options, no such variation shall be permitted which affects the status of any such substitute option as an incentive stock option.

15. COMPLIANCE WITH LEGAL REQUIREMENTS.

(a) General. No certificate for Shares distributable under this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended, and the Exchange Act.

(b) Rule 16b-3. With respect to Eligible Participants who are subject to the reporting requirements of Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of this Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee.

16 RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and its assignees in the option agreement (a) a right of first refusal to purchase Shares that an optionee (or a subsequent transferee) may propose to transfer to a third party, (b) a right to repurchase a portion of or all Shares held by an optionee, and (c) a restriction on the transfer of a portion of or all Shares.

17. GOVERNING LAW. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken under this Plan shall be governed by the laws of the State of Minnesota without regard to the conflicts of law provisions thereof, and construed accordingly.

18. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time amend, suspend or discontinue this Plan; provided, however, that no amendment to this Plan shall,

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without the consent of the holder of the option, alter or impair any option previously granted under this Plan. To the extent considered necessary to comply with applicable provisions of the Code, any such amendments to this Plan may be made subject to approval by the stockholders of the Company.

19. TERM.

(a) Effective Date. This Plan shall be effective as of January 1, 2000.

(b) Termination. This Plan shall remain in effect until all Shares subject to it are distributed or this Plan is terminated under paragraph 18 above. No award of an incentive stock option shall be made under this Plan more than ten years after the effective date of this Plan (or such other limit as may be required by the Code) if such limitation is necessary to qualify the option as an incentive stock option.

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EXHIBIT 10.4

CAPELLA EDUCATION COMPANY
1999 STOCK OPTION PLAN

NON-STATUTORY STOCK OPTION AGREEMENT
(DIRECTOR)

Name of Optionee:__________________

No. of Shares Covered:_____________    Date of Grant:______________________

Exercise Price Per Share:__________    Expiration Date:____________________

Exercise Schedule (Cumulative):

 Date(s) of                    No. of Shares as to Which
Exercisability                Option Becomes Exercisable
--------------                --------------------------

This is a Non-Statutory Stock Option Agreement ("Agreement") between Capella Education Company, a Minnesota corporation (the "Company"), and the optionee identified above (the "Optionee") effective as of the date of grant specified above.

RECITALS

WHEREAS, the Company maintains the Capella Education Company 1999 Stock Option Plan (the "Plan"); and

WHEREAS, pursuant to the Plan, the Board of Directors of the Company (the "Board") or a committee of two or more directors of the Company (the "Committee") appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee); and


WHEREAS, the Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the "Option");

NOW, THEREFORE, the Company hereby grants this Option to the Optionee under the terms and conditions as follows.

TERMS AND CONDITIONS*

1. GRANT. The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

2. EXERCISE PRICE. The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

3. NON-STATUTORY STOCK OPTION. This Option is not intended to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

4. EXERCISE SCHEDULE. This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement. The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

5. EXPIRATION. This Option shall expire at 5:00 p.m. Central Time on the earliest of:

(a) The expiration date specified at the beginning of this Agreement (which date shall not be later than ten years after the date of grant);

(b) The last day of the period following the Optionee's termination of service as a director of the Company during which this Option can be exercised (as specified in Section 7(a) or 7(b) of this Agreement, whichever is applicable); or

(c) The date (if any) fixed for cancellation pursuant to Section 8 of this Agreement.


* Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

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If termination of the Optionee's status as a director of the Company shall have been for Cause, this Option shall expire immediately upon such termination. In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

6. PROCEDURE TO EXERCISE OPTION.

Notice of Exercise. This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company's Secretary, in the form attached to this Agreement. The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option. If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

Tender of Payment. Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

(a) Cash;

(b) Cancellation of indebtedness;

(c) By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value (as defined in paragraph 7 of the Plan) on the date of exercise equal to the purchase price of such Shares;

(d) By a reduction in the number of Shares delivered to the Optionee upon exercise, such number of Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

(e) To the extent permitted by law, a broker-assisted cashless exercise in which the Optionee irrevocably instructs a broker to deliver proceeds of a sale of all or a portion of the Shares to be issued pursuant to the exercise (or a loan secured by such Shares) to the Company in payment of the purchase price of such Shares.

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

Delivery of Certificates. As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased. The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in

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connection therewith. All Shares so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to issue or deliver any Shares prior to the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation as the Company shall determine to be necessary or desirable.

7. STATUS AS DIRECTOR REQUIREMENT. This Option may be exercised only while the Optionee remains a director of the Company or a parent or subsidiary thereof, and only if the Optionee has been a director continuously since the date of this Agreement; provided that:

(a) This Option may be exercised for one year following the day the Optionee ceases to be a director of the Company if such cessation of status as a director is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior such cessation; provided, however, that if termination of the Optionee's status as a director shall have been for Cause, this Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

(b) This Option may be exercised within one year after the Optionee ceases to be a director of the Company if such cessation is because of death or disability.

Notwithstanding the above, this Option may not be exercised after it has expired.

8. ACCELERATION OF OPTION.

Death or Disability. This Option may be exercised in full, regardless of whether such exercise occurs prior to a date on which this Option would otherwise vest, upon the death or disability of the Optionee; provided that the Optionee shall have continuously been a director of the Company or a parent or subsidiary thereof between the date of this Agreement and the date of such death or disability.

Change of Control. If a Change of Control (as defined in Section 10 of this Agreement) of the Company shall occur and within three years of such Change in Control, Optionee's status as a director of the Company shall be terminated other than for Cause (as defined below), the options subject to this Agreement, if not already exercised in full or otherwise terminated, expired or cancelled, shall become immediately exercisable in full and may be exercised within 30 days after such termination (subject to any applicable shorter time period for exercise set forth in this Section 8). For purposes of this Agreement, the term "Cause" shall be limited to the following grounds for termination:

(1) Optionee's failure or refusal substantially to perform his/her duties to the full extent of his/her abilities for reasons other than death or disability, after

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written notice to Optionee of such failure or refusal providing Optionee 30 days to take corrective action;

(2) Conviction of a felony crime, or commission of any act, the conviction for which would be a gross misdemeanor or felony conviction; and

(3) Theft or misappropriation of the Company's property.

Merger or Sale. In the event of a merger of the Company with or into another corporation or limited liability company or the sale of substantially all of the assets of the Company, and the successor entity, or a parent or subsidiary of the successor entity, refuses to assume this Option or to substitute an equivalent option, then this Option shall become exercisable in full immediately. The Committee shall notify Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of 15 days from the date of such notice and that the Option shall terminate upon the expiration of such period.

Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Shares covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may, but shall not be obligated to, provide that any Company repurchase option applicable to the Shares shall lapse as to all such Shares, provided that the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.

Discretionary Acceleration. The Committee has the power, in its sole discretion, to declare at any time that this Option shall be immediately exercisable.

9. TRANSFERABILITY. While the Optionee is alive, only the Optionee, his/her guardian or legal representative or a transferee who receives this Option in a permitted transfer (as described below in this Section 9) may exercise this Option. This Option may not be assigned or transferred other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the Optionee may transfer this Option to a member or members of his or her immediate family (i.e., his or her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if the Optionee does not receive any consideration for the transfer. This Option shall continue to be subject to the same terms and conditions that were applicable to this Option immediately prior to its

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transfer and may be exercised by such transferee as and to the extent that this Option has become exercisable and has not terminated in accordance with the provisions of the Plan and this Agreement. For purposes of any provision of the Plan or this Agreement relating to notice to the Optionee or to vesting or termination of this Option upon the death, disability or termination of employment of the Optionee, the references to "optionee" shall mean the original grantee of this Option and not any transferee.

10. CHANGE IN CONTROL.

(a) Definition. For purposes of this Plan, a "Change in Control" of the Company shall be deemed to occur if any of the following occur:

(1) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing the following: (i) 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities") at any time prior to the Company selling any of its shares in a public offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), or
(ii) 35% or more of the combined voting power of the Company's then outstanding Voting Securities at any time after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act. Provided, however, that the following shall not constitute a Change in Control pursuant to this Section 9(a)(1):

(A) any acquisition or beneficial ownership by the Company or a subsidiary;

(B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

(C) any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 50% of both the combined voting power of the Company's then outstanding Voting Securities and the Shares of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

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(2) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (C) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

(3) Approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares of the Company, as the case may be; or

(4) Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be.

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(b) After a Public Offering. At all times after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act, the references to 50% in subsections (a)(1)(C),
(a)(3) and (a)(4) of this section 9 shall be changed to 65%.

11. ASSIGNMENT OF THE COMPANY'S OBLIGATIONS. In the event of a merger of the Company with or into another corporation or limited liability company, or the sale of substantially all of the assets of the Company, then the successor entity, or a parent or subsidiary of the successor entity, may assume this Option or substitute an equivalent option.

12. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. No person shall have any of the rights of a shareholder of the Company with respect to any Share subject to this Option until the Share actually is issued to him/her upon exercise of this Option.

13. DISCRETIONARY ADJUSTMENT. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of this Option and the exercise price hereof.

14. TAX WITHHOLDING. Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes. As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of paragraph 9 of the Plan, an amount equal to the amount of any required withholdings.

15. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

16. DISCONTINUANCE OF EMPLOYMENT OR SERVICE AS DIRECTOR. This Agreement shall not give the Optionee a right to continued employment or service as a director of the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee or of which the Optionee serves as a director may terminate his/her employment or service as a director, as the case may be, at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

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17. OPTION SUBJECT TO PLAN, CERTIFICATE OF INCORPORATION AND BY-LAWS. The Optionee acknowledges that this Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

18. OBLIGATION TO RESERVE SUFFICIENT SHARES. The Company shall at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

19. BINDING EFFECT. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

20. CHOICE OF LAW. This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the ____ day of ________, 20__.

OPTIONEE

CAPELLA EDUCATION COMPANY

By________________________________________

Its_______________________________________

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__________________, 20___

Capella Education Company
20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention: Secretary

Ladies and Gentlemen:

I hereby exercise the following option (the "Option") granted to me under the Capella Education Company 1999 Stock Option Plan (the "Plan") with respect to the number of shares of Common Stock ("Shares") of Capella Education Company (the "Company"), indicated below:

NAME:                                _______________________________

DATE OF GRANT OF OPTION:             _______________________________

EXERCISE PRICE PER SHARE:            _______________________________

NUMBER OF SHARES WITH RESPECT TO
WHICH THE OPTION IS HEREBY
EXERCISED:                           _______________________________

TOTAL EXERCISE PRICE:                _______________________________

[ ] Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

[ ] Enclosed with this letter is a promissory note.

[ ] I hereby agree to pay the Total Exercise Price by cancellation of a debt owed to me by the Company.

[ ] I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker's Letter, I have delivered irrevocable instructions to _________________________________________ to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.


[ ] Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

[ ] I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances. I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

Please issue a certificate (the "Certificate") for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

NAME IN WHICH TO ISSUE CERTIFICATE: _______________________________

ADDRESS TO WHICH CERTIFICATE         _______________________________
SHOULD BE DELIVERED:                 _______________________________
                                     _______________________________
                                     _______________________________
                                     _______________________________
                                     _______________________________

PRINCIPAL MAILING ADDRESS FOR        _______________________________
HOLDER OF THE CERTIFICATE (IF        _______________________________
DIFFERENT FROM ABOVE):               _______________________________
                                     _______________________________
                                     _______________________________

                                   Very truly yours,

                                   _________________________________
                                   Signature

                                   _________________________________
                                   Name, please print

                                   _________________________________
                                   Social Security Number

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                            __________________, 20___

Capella Education Company
20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention:  Secretary

Ladies and Gentlemen:

            NAME OF OPTIONEE:                    _______________________________

            DATE OF GRANT OF OPTION:             _______________________________

            EXERCISE PRICE PER SHARE:            _______________________________

            NUMBER OF SHARES WITH RESPECT TO
            WHICH THE OPTION IS TO BE EXERCISED: _______________________________

            TOTAL EXERCISE PRICE:                _______________________________

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of common stock of Capella Education Company (the "Company") and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee's obligation to pay the Total Exercise Price.

Very truly yours,

Broker Name

By_________________________


EXHIBIT 10.5

CAPELLA EDUCATION COMPANY
1999 STOCK OPTION PLAN

NON-STATUTORY STOCK OPTION AGREEMENT
(EMPLOYEE)

Name of Optionee:

No. of Shares Covered:                  Date of Grant:

Exercise Price Per Share:               Expiration Date:

Exercise Schedule (Cumulative):

Date(s) of                   No. of Shares as to Which
Exercisability                 Option Becomes Exercisable
--------------               ----------------------------

This is a Non-Statutory Stock Option Agreement ("Agreement") between Capella Education Company, a Minnesota corporation (the "Company"), and the optionee identified above (the "Optionee") effective as of the date of grant specified above.

RECITALS

WHEREAS, the Company maintains the Capella Education Company 1999 Stock Option Plan (the "Plan"); and

WHEREAS, pursuant to the Plan, the Board of Directors of the Company (the "Board") or a committee of two or more directors of the Company (the "Committee") appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee); and


WHEREAS, the Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the "Option");

NOW, THEREFORE, the Company hereby grants this Option to the Optionee under the terms and conditions as follows.

TERMS AND CONDITIONS*

1. GRANT. The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

2. EXERCISE PRICE. The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

3. NON-STATUTORY STOCK OPTION. This Option is not intended to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

4. EXERCISE SCHEDULE. This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement. The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

5. EXPIRATION. This Option shall expire at 5:00 p.m. Central Time on the earliest of:

(a) The expiration date specified at the beginning of this Agreement (which date shall not be later than ten years after the date of grant);

(b) The last day of the period following the termination of employment of the Optionee during which this Option can be exercised (as specified in Section 7(a) or 7(b) of this Agreement, whichever is applicable); or

(c) The date (if any) fixed for cancellation pursuant to Section 8 of this Agreement.


* Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

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If termination of the Optionee's employment by the Company shall have been for Cause, this Option shall expire immediately upon such termination. In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

6. PROCEDURE TO EXERCISE OPTION.

Notice of Exercise. This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company's Secretary, in the form attached to this Agreement. The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option. If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

Tender of Payment. Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

(a) Cash;

(b) Cancellation of indebtedness;

(c) By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value (as defined in paragraph 7 of the Plan) on the date of exercise equal to the purchase price of such Shares;

(d) By a reduction in the number of Shares delivered to the Optionee upon exercise, such number of Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

(e) To the extent permitted by law, a broker-assisted cashless exercise in which the Optionee irrevocably instructs a broker to deliver proceeds of a sale of all or a portion of the Shares to be issued pursuant to the exercise (or a loan secured by such Shares) to the Company in payment of the purchase price of such Shares.

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

Delivery of Certificates. As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased. The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in

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connection therewith. All Shares so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to issue or deliver any Shares prior to the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation as the Company shall determine to be necessary or desirable.

7. EMPLOYMENT REQUIREMENT. This Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date of this Agreement; provided that:

(a) This Option may be exercised for three months following the day the Optionee's employment by the Company ceases if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment; provided, however, that if termination of the Optionee's employment shall have been for Cause, this Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

(b) This Option may be exercised within one year after the Optionee's employment by the Company ceases if such cessation of employment is because of death or disability.

Notwithstanding the above, this Option may not be exercised after it has expired.

8. ACCELERATION OF OPTION.

Death or Disability. This Option may be exercised in full, regardless of whether such exercise occurs prior to a date on which this Option would otherwise vest, upon the death or disability of the Optionee; provided that the Optionee shall have been continuously employed by the Company or a parent or subsidiary thereof between the date of this Agreement and the date of such death or disability.

Change of Control. If a Change of Control (as defined in Section 9 of this Agreement) of the Company shall occur and within three years of such Change in Control, (i) Optionee's employment with the Company shall be terminated other than for Cause (as defined below), or (ii) Optionee shall voluntarily leave employment with the Company for Good Reason (as defined below), then, upon the date of such termination or voluntary leaving of employment for Good Reason, the options subject to this Agreement, if not already exercised in full or otherwise terminated, expired or cancelled, shall become immediately exercisable in full and may be exercised within 30 days after such termination or voluntary leaving (subject to any applicable shorter time period for exercise set forth in this Section 8). For purposes of this Agreement, "Good Reason" is defined as the demotion or reduction of the job responsibilities of Optionee

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or the reassignment, without Optionee's consent, of Optionee's place of work to a location more than 50 miles from the Optionee's place of work immediately prior to the Change in Control. For purposes of this Agreement, the term "Cause" shall be limited to the following grounds for termination:

(1) Optionee's failure or refusal substantially to perform his duties to the full extent of his abilities for reasons other than death or disability, after written notice to Optionee of such failure or refusal providing Optionee 30 days to take corrective action.

(2) Conviction of a felony crime, or commission of any act, the conviction for which would be a felony conviction;

(3) Theft or misappropriation of the Company's property; and

(4) Knowingly making a material false written statement to the Company's Board of Directors regarding the affairs of the Company;

Merger or Sale. In the event of a merger of the Company with or into another corporation or limited liability company or the sale of substantially all of the assets of the Company, and the successor entity, or a parent or subsidiary of the successor entity, refuses to assume this Option or to substitute an equivalent option, then this Option shall become exercisable in full immediately. The Committee shall notify Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of 15 days from the date of such notice and that the Option shall terminate upon the expiration of such period.

Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Shares covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may, but shall not be obligated to, provide that any Company repurchase option applicable to the Shares shall lapse as to all such Shares, provided that the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.

Discretionary Acceleration. The Committee has the power, in its sole discretion, to declare at any time that this Option shall be immediately exercisable.

9. TRANSFERABILITY. While the Optionee is alive, only the Optionee, his/her guardian or legal representative or a transferee who receives this Option in a permitted transfer (as

-5-

described below in this Section 9) may exercise this Option. This Option may not be assigned or transferred other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the Optionee may transfer this Option to a member or members of his or her immediate family (i.e., his or her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if the Optionee does not receive any consideration for the transfer. This Option shall continue to be subject to the same terms and conditions that were applicable to this Option immediately prior to its transfer and may be exercised by such transferee as and to the extent that this Option has become exercisable and has not terminated in accordance with the provisions of the Plan and this Agreement. For purposes of any provision of the Plan or this Agreement relating to notice to the Optionee or to vesting or termination of this Option upon the death, disability or termination of employment of the Optionee, the references to "optionee" shall mean the original grantee of this Option and not any transferee.

10. CHANGE IN CONTROL.

(a) Definition. For purposes of this Plan, a "Change in Control" of the Company shall be deemed to occur if any of the following occur:

(1) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing the following: (i) 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities") at any time prior to the Company selling any of its shares in a public offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), or
(ii) 35% or more of the combined voting power of the Company's then outstanding Voting Securities at any time after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act. Provided, however, that the following shall not constitute a Change in Control pursuant to this Section 9(a)(1):

(A) any acquisition or beneficial ownership by the Company or a subsidiary;

(B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

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(C) any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 50% of both the combined voting power of the Company's then outstanding Voting Securities and the Shares of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

(2) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (C) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

(3) Approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares of the Company, as the case may be; or

(4) Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting

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power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be.

(b) After a Public Offering. At all times after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act, the references to 50% in subsections (a)(1)(C),
(a)(3) and (a)(4) of this section 9 shall be changed to 65%.

11. ASSIGNMENT OF THE COMPANY'S OBLIGATIONS. In the event of a merger of the Company with or into another corporation or limited liability company, or the sale of substantially all of the assets of the Company, then the successor entity, or a parent or subsidiary of the successor entity, may assume this Option or substitute an equivalent option.

12. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. No person shall have any of the rights of a shareholder of the Company with respect to any Share subject to this Option until the Share actually is issued to him/her upon exercise of this Option.

13. DISCRETIONARY ADJUSTMENT. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of this Option and the exercise price hereof.

14. TAX WITHHOLDING. Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes. As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of paragraph 9 of the Plan, an amount equal to the amount of any required withholdings.

15. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee. If there is any

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inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

16. DISCONTINUANCE OF EMPLOYMENT. This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

17. OPTION SUBJECT TO PLAN, CERTIFICATE OF INCORPORATION AND BY-LAWS. The Optionee acknowledges that this Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

18. OBLIGATION TO RESERVE SUFFICIENT SHARES. The Company shall at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

19. BINDING EFFECT. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

20. CHOICE OF LAW. This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the ____ day of ________, 20__.

OPTIONEE


CAPELLA EDUCATION COMPANY

By____________________________________
Its__________________________________

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__________________, 20___

Capella Education Company
20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention: Secretary

Ladies and Gentlemen:

I hereby exercise the following option (the "Option") granted to me under the Capella Education Company 1999 Stock Option Plan (the "Plan") with respect to the number of shares of Common Stock ("Shares") of Capella Education Company (the "Company"), indicated below:

NAME:                               ________________________________

DATE OF GRANT OF OPTION:            ________________________________

EXERCISE PRICE PER SHARE:           ________________________________

NUMBER OF SHARES WITH RESPECT TO
WHICH THE OPTION IS HEREBY
EXERCISED:                          ________________________________

TOTAL EXERCISE PRICE:               ________________________________

[ ] Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

[ ] Enclosed with this letter is a promissory note.

[ ] I hereby agree to pay the Total Exercise Price by cancellation of a debt owed to me by the Company.

[ ] I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker's Letter, I have delivered irrevocable instructions to _________________________________________ to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.


[ ] Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

[ ] I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances. I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

Please issue a certificate (the "Certificate") for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

NAME IN WHICH TO ISSUE CERTIFICATE: _______________________________

ADDRESS TO WHICH CERTIFICATE         _______________________________
SHOULD BE DELIVERED:                 _______________________________
                                     _______________________________
                                     _______________________________
                                     _______________________________

PRINCIPAL MAILING ADDRESS FOR        _______________________________
HOLDER OF THE CERTIFICATE (IF        _______________________________
DIFFERENT FROM ABOVE):               _______________________________
                                     _______________________________
                                     _______________________________

                                Very truly yours,

                                ____________________________________
                                Signature

                                ____________________________________
                                Name, please print

                                ____________________________________
                                Social Security Number

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                           __________________, 20___

Capella Education Company
20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention:  Secretary

Ladies and Gentlemen:

            NAME OF OPTIONEE:                     ______________________________

            DATE OF GRANT OF OPTION:              ______________________________

            EXERCISE PRICE PER SHARE:             ______________________________

            NUMBER OF SHARES WITH RESPECT TO
            WHICH THE OPTION IS TO BE EXERCISED:  ______________________________

            TOTAL EXERCISE PRICE:                 ______________________________

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of common stock of Capella Education Company (the "Company") and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee's obligation to pay the Total Exercise Price.

Very truly yours,


Broker Name

By__________________________________


EXHIBIT 10.6

CAPELLA EDUCATION COMPANY
1999 STOCK OPTION PLAN

INCENTIVE STOCK OPTION AGREEMENT

Name of Optionee:

No. of Shares Covered:                  Date of Grant:

Exercise Price Per Share:               Expiration Date:

Exercise Schedule (Cumulative):

Date(s) of                 No. of Shares as to Which
Exercisability              Option Becomes Exercisable
--------------             ---------------------------

This is an Incentive Stock Option Agreement ("Agreement") between Capella Education Company, a Minnesota corporation (the "Company"), and the optionee identified above (the "Optionee") effective as of the date of grant specified above.

RECITALS

WHEREAS, the Company maintains the Capella Education Company 1999 Stock Option Plan (the "Plan"); and

WHEREAS, pursuant to the Plan, the Board of Directors of the Company (the "Board") or a committee of two or more directors of the Company (the "Committee") appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee); and


WHEREAS, the Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of an incentive stock option (the "Option");

NOW, THEREFORE, the Company hereby grants this Option to the Optionee under the terms and conditions as follows.

TERMS AND CONDITIONS*

1. GRANT. The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

2. EXERCISE PRICE. The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement (which price shall not be less than the Fair Market Value (as defined in paragraph 7 of the Plan) as of the date of grant or, if the Optionee owns or is deemed to own stock possessing more than 10% of the combined voting power of all classes of stock of the Company, 110% of the Fair Market Value as of the date of grant).

3. INCENTIVE STOCK OPTION. This Option is intended to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

4. EXERCISE SCHEDULE. This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement. The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

5. EXPIRATION. This Option shall expire at 5:00 p.m. Central Time on the earliest of:

(a) The expiration date specified at the beginning of this Agreement (which date shall not be later than ten years after the date of grant or, if the Optionee owns or is deemed to own stock possessing more than 10% of the combined voting power of all classes of stock of the Company, five years after the date of grant);


* Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

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(b) The last day of the period following the termination of employment of the Optionee during which this Option can be exercised (as specified in Section 7(a) or 7(b) of this Agreement, whichever is applicable); or

(c) The date (if any) fixed for cancellation pursuant to Section 8 of this Agreement.

In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

6. PROCEDURE TO EXERCISE OPTION.

Notice of Exercise. This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company's Secretary, in the form attached to this Agreement. The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option. If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

Tender of Payment. Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

(a) Cash;

(b) Cancellation of indebtedness;

(c) By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value (as defined in paragraph 7 of the Plan) on the date of exercise equal to the purchase price of such Shares;

(d) By a reduction in the number of Shares delivered to the Optionee upon exercise, such number of Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

(e) To the extent permitted by law, a broker-assisted cashless exercise in which the Optionee irrevocably instructs a broker to deliver proceeds of a sale of all or a portion of the Shares to be issued pursuant to the exercise (or a loan secured by such Shares) to the Company in payment of the purchase price of such Shares.

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

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Delivery of Certificates. As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased. The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith. All Shares so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to issue or deliver any Shares prior to the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation as the Company shall determine to be necessary or desirable.

7. EMPLOYMENT REQUIREMENT. This Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date of this Agreement; provided that:

(a) This Option may be exercised for three months following the day the Optionee's employment by the Company ceases if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment.

(b) This Option may be exercised within one year after the Optionee's employment by the Company ceases if such cessation of employment is because of death or disability.

Notwithstanding the above, this Option may not be exercised after it has expired.

8. ACCELERATION OF OPTION.

Death or Disability. This Option may be exercised in full, regardless of whether such exercise occurs prior to a date on which this Option would otherwise vest, upon the death or disability of the Optionee; provided that the Optionee shall have been continuously employed by the Company or a parent or subsidiary thereof between the date of this Agreement and the date of such death or disability.

Change in Control. If a Change of Control (as defined in section 9 of this Agreement) of the Company shall occur and within three years of such Change in Control, (i) Optionee's employment with the Company shall be terminated other than for Cause (as defined below), or (ii) Optionee shall voluntarily leave employment with the Company for Good Reason (as defined below), then, upon the date of such termination or voluntary leaving of employment for Good Reason, the options subject to this Agreement, if not already exercised in full or otherwise terminated, expired or cancelled, shall become immediately exercisable in full and may be exercised within 30 days after such termination or voluntary leaving (subject to any applicable shorter time

-4-

period for exercise set forth in this section 8). For purposes of this Agreement, "Good Reason" is defined as the demotion or reduction of the job responsibilities of Optionee or the reassignment, without Optionee's consent, of Optionee's place of work to a location more than 50 miles from the Optionee's place of work immediately prior to the Change in Control. For purposes of this Agreement, the term "Cause" shall be limited to the following grounds for termination:

(1) Optionee's failure or refusal substantially to perform his duties to the full extent of his abilities for reasons other than death or disability, after written notice to Optionee of such failure or refusal providing Optionee 30 days to take corrective action.

(2) Conviction of a felony crime, or commission of any act, the conviction for which would be a felony conviction;

(3) Theft or misappropriation of the Company's property; and

(4) Knowingly making a material false written statement to the Company's Board of Directors regarding the affairs of the Company;

Merger or Sale. In the event of a merger of the Company with or into another corporation or limited liability company or the sale of substantially all of the assets of the Company, and the successor entity, or a parent or subsidiary of the successor entity, refuses to assume this Option or to substitute an equivalent option, then this Option shall become exercisable in full immediately. The Committee shall notify Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of 15 days from the date of such notice and that the Option shall terminate upon the expiration of such period.

Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee shall notify Optionee as soon as practicable prior to the effective date of such proposed transaction. The Committee in its discretion may provide for Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Shares covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Committee may, but shall not be obligated to, provide that any Company repurchase option applicable to the Shares shall lapse as to all such Shares, provided that the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.

Discretionary Acceleration. The Committee has the power, in its sole discretion, to declare at any time that this Option shall be immediately exercisable.

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9. CHANGE IN CONTROL.

(a) Definition. For purposes of this Plan, a "Change in Control" of the Company shall be deemed to occur if any of the following occur:

(1) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing the following: (i) 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities") at any time prior to the Company selling any of its shares in a public offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), or
(ii) 35% or more of the combined voting power of the Company's then outstanding Voting Securities at any time after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act. Provided, however, that the following shall not constitute a Change in Control pursuant to this section 9(a)(1):

(A) any acquisition or beneficial ownership by the Company or a subsidiary;

(B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

(C) any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 50% of both the combined voting power of the Company's then outstanding Voting Securities and the Shares of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

(2) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (C) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors

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of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

(3) Approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares of the Company, as the case may be; or

(4) Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 50% (subject to the modification in subsection (b) below) of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be.

(b) After a Public Offering. At all times after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act, the references to 50% in subsections (a)(1)(C),
(a)(3) and (a)(4) of this section 9 shall be changed to 65%.

10. LIMITATION ON TRANSFER. While the Optionee is alive, only the Optionee or his/her guardian or legal representative may exercise this Option. This Option may not be assigned or transferred other than by will or the laws of descent and distribution or

-7-

pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder.

11. ASSIGNMENT OF THE COMPANY'S OBLIGATIONS. In the event of a merger of the Company with or into another corporation or limited liability company, or the sale of substantially all of the assets of the Company, then the successor entity, or a parent or subsidiary of the successor entity, may assume this Option or substitute an equivalent option.

12. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. No person shall have any of the rights of a shareholder of the Company with respect to any Share subject to this Option until the Share actually is issued to him/her upon exercise of this Option.

13. DISCRETIONARY ADJUSTMENT. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of this Option and the exercise price hereof.

14. TRANSFER OF SHARES -- TAX EFFECTS. The Optionee hereby acknowledges that if any Shares received pursuant to the exercise of any portion of this Option are sold within two years from the date of grant or within one year from the effective date of exercise of the Option, or if certain other requirements of the Code are not satisfied, such Shares will be deemed under the Code not to have been acquired by the Optionee pursuant to an "incentive stock option" as defined in the Code; and that the Company shall not be liable to the Optionee in the event the Option for any reason is deemed not to be an "incentive stock option" within the meaning of the Code.

15. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

16. DISCONTINUANCE OF EMPLOYMENT. This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

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17. OPTION SUBJECT TO PLAN, CERTIFICATE OF INCORPORATION AND BY-LAWS. The Optionee acknowledges that this Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

18. OBLIGATION TO RESERVE SUFFICIENT SHARES. The Company shall at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

19. BINDING EFFECT. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

20. CHOICE OF LAW. This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the ____ day of ________, 20__.

OPTIONEE


CAPELLA EDUCATION COMPANY

By ______________________________________
Its ____________________________________

-9-

__________________, 20___

CAPELLA EDUCATION COMPANY
20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention: Secretary

Ladies and Gentlemen:

I hereby exercise the following option (the "Option") granted to me under the Capella Education Company 1999 Stock Option Plan (the "Plan") with respect to the number of shares of Common Stock ("Shares") of Capella Education Company (the "Company"), indicated below:

NAME:                              _________________________________

DATE OF GRANT OF OPTION:           _________________________________

EXERCISE PRICE PER SHARE:

NUMBER OF SHARES WITH RESPECT TO
WHICH THE OPTION IS HEREBY
EXERCISED:                         _________________________________

TOTAL EXERCISE PRICE:              _________________________________

[ ] Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

[ ] Enclosed with this letter is a promissory note.

[ ] I hereby agree to pay the Total Exercise Price by cancellation of a debt owed to me by the Company.

[ ] I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker's Letter, I have delivered irrevocable instructions to _________________________________________ to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.


[ ] Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

[ ] I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances. I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

Please issue a certificate (the "Certificate") for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

NAME IN WHICH TO ISSUE CERTIFICATE: _____________________________

ADDRESS TO WHICH CERTIFICATE        _____________________________
SHOULD BE DELIVERED:                _____________________________
                                    _____________________________
                                    _____________________________
                                    _____________________________
                                    _____________________________

PRINCIPAL MAILING ADDRESS FOR
HOLDER OF THE CERTIFICATE (IF       _____________________________
DIFFERENT FROM ABOVE):              _____________________________
                                    _____________________________
                                    _____________________________
                                    _____________________________

                               Very truly yours,

                               __________________________________
                               Signature

                               __________________________________
                               Name, please print

                               __________________________________
                               Social Security Number

-2-

__________________, 20___

CAPELLA EDUCATION COMPANY

20th Floor, 222 South Ninth Street
Minneapolis, MN 55402-3389

Attention: Secretary

Ladies and Gentlemen:

            NAME OF OPTIONEE:                     ______________________________

            DATE OF GRANT OF OPTION:              ______________________________

            EXERCISE PRICE PER SHARE:             ______________________________

            NUMBER OF SHARES WITH RESPECT TO
            WHICH THE OPTION IS TO BE EXERCISED:  ______________________________

            TOTAL EXERCISE PRICE:                 ______________________________

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of common stock of Capella Education Company (the "Company") and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee's obligation to pay the Total Exercise Price.

Very truly yours,


Broker Name

By________________________________


EXHIBIT 10.7

LEARNING VENTURES, INC.
1993 STOCK OPTION PLAN

1. Purpose of the Plan.

This Plan shall be known as the "Learning Ventures, Inc. 1993 Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of the Plan is to aid in maintaining and developing personnel capable of assuring the future success of Learning Ventures, Inc., a Minnesota corporation (the "Company") and its subsidiaries, to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options as provided herein. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not qualify as Incentive Stock Options.

2. Stock Subject to the Plan.

Subject to the provisions of section 12, the shares of stock to be subject to options under the Plan shall be shares of the Company's authorized common stock. Such shares may be either authorized but unissued shares, or issued shares which have been reacquired by the Company. Subject to the adjustment as provided in section 12, the maximum number of shares on which options may be exercised under this Plan shall be 1,487,500 shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan.

3. Administration of Plan.

(a) The Plan shall be administered by the Board of Directors of the Company or a committee of two or more directors of the Company. The members of such committee shall be appointed by and serve at the pleasure of the Board of Directors. The group administering the Plan shall be referred to herein as the "Committee. "

(b) The Committee shall have plenary authority in its discretion, but subject to the express provisions of this Plan, (i) to determine the purchase price of the common shares covered by each option, (ii) to determine the employees to whom and the time or times at which such options shall be granted and the number of shares to be subject to each option, (iii) to determine the terms of exercise of each option, (iv) to accelerate the time at which all or any part of an option may be exercised, (v) to amend or modify the terms of any option with the consent of the optionee, (vi) to interpret the Plan, (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, (viii) to determine the terms and provisions of each option agreement under this Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, and (ix) to make all other


determinations necessary or advisable for the administration of the Plan, subject to the exclusive authority of the Board of Directors under section 13 to amend or terminate the Plan. The Committee's determinations on the foregoing matters, unless otherwise disapproved by the Board of Directors of the Company, shall be final and conclusive.

(c) The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The granting of an option pursuant to the Plan shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Company and the employee to whom such right is granted. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable.

4. Eligibility.

Incentive Stock Options may only be granted under this Plan to any full or part-time employee (which term as used herein includes, but is not limited to, officers and directors who are also employees) of the Company and of its present and future subsidiary corporations (herein called "subsidiaries"). Members of the Board of Directors of the Company, consultants or independent contractors providing valuable services to the Company or one of its subsidiaries who are not also employees thereof shall be eligible to receive options which do not qualify as Incentive Stock Options. In determining the persons to whom options shall be granted and the number of shares subject to each option, the Committee may take into account the nature of services rendered by the respective employees, their present and potential contributions to the success of the Company and such other factors as the Committee in its discretion shall deem relevant. A person who has been granted an option under the Plan may be granted an additional option or options under the Plan if the Committee shall so determine; provided, however, that to the extent the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the stock with respect to which all Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all plans described in section 422 of the Code of his employer corporation and its parent and subsidiary corporations described in section 424(e) or 424(f) of the Code) exceeds $100,000, such options shall be treated as options which do not qualify as Incentive Stock Options.

5. Price.

The option price for all Incentive Stock Options granted under the Plan shall be determined by the Committee but shall not be less than 100% of the fair market value of shares of the Company's common stock at the date of granting of such option. The option price for options granted under the Plan which do not qualify as


Incentive Stock Options shall also be determined by the Committee. For purposes of the preceding sentence and for all other valuation purposes under the Plan, the fair market value of the Company's common stock shall be as reasonably determined by the Committee. If on the date of grant of any option granted under the Plan, the common stock of the Company is not publicly traded, the Committee shall make a good faith attempt to satisfy the option price requirement of this section 5 and in connection therewith shall take such action as it deems necessary or advisable.

6. Term.

Each option and all rights and obligations thereunder shall, subject to the provisions of section 9, expire on the date determined by the Committee and specified in the option agreement. The Committee shall be under no duty to provide terms of like duration for options granted under the Plan, but the term of an Incentive Stock Option may not extend more than ten (10) years from the date of granting of such option and the term of options granted under the Plan which do not qualify as Incentive Stock Options may not extend more than fifteen
(15) years from the date of granting of such option.

7. Exercise of Option.

(a) The Committee shall have full and complete authority to determine, subject to section 9, whether the option will be exercisable in full at any time or from time to time during the term of the option, or to provide for the exercise thereof in such installments, upon the occurrence of such events and at such times during the term of the option as the Committee may determine.

(b) The exercise of any option granted hereunder shall only be effective at such time that the sale of common stock pursuant to such exercise will not violate any state or federal securities or other laws.

(c) An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company either in cash (including check, bank draft or money order), or, at the discretion of the Committee, (i) by delivering certificates for shares of the Company's common stock already owned by the optionee having a fair market value equal to the full purchase price of the shares, or (ii) a combination of cash and such shares; provided, however, that an optionee shall not be entitled to tender shares of the Company's common stock pursuant to successive, substantially simultaneous exercises of options granted under this or any other stock option plan of the Company. The fair market value of such shares shall be determined as provided in section 5. Until such person has been issued a certificate or certificates for the shares subject to such exercise, he shall possess no rights as a stockholder with respect to such shares.


8. Additional Restrictions.

The Committee shall have full and complete authority to determine whether all or any part of the shares of common stock of the Company acquired upon exercise of any of the options granted under the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner the optionee's rights with respect thereto, but any such restriction shall be contained in the agreement relating to such options.

9. Effect of Termination of Employment or Death.

(a) In the event that an optionee shall cease to be employed by the Company or its subsidiaries, if any, for any reason other than his gross and willful misconduct or his death or disability as set forth in section 9(c), such optionee shall have the right to exercise the option at any time within thirty
(30) days after such termination of employment to the extent of the full number of shares he was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option.

(b) In the event that an optionee shall cease to be employed by the Company or its subsidiaries, if any, by reason of his gross and willful misconduct during the course of his employment, including but not limited to wrongful appropriation of funds of his employer or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of the misconduct.

(c) If the optionee shall die while in the employ of the Company or a subsidiary, if any, or within three months after termination of employment for any reason other than gross and willful misconduct, or the optionee's employment is terminated because optionee has become disabled (within the meaning of Code section 22(e)(3)) while in the employ of the Company or a subsidiary, if any, and such optionee shall not have fully exercised the option, such option may be exercised at any time within ninety (90) days after his death or the date of such disability by the optionee or the personal representatives of the optionee, as applicable, or by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares he was entitled to purchase under the option on the date of death (or termination of employment, if earlier) and subject to the condition that no option shall be exercisable after the expiration of the term of the option.

(d) Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate his employment at any time.


10. Ten Percent Shareholder Rule.

Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of section 424(d) of the Code) shares of common stock of the Company possessing more than ten percent (10% ) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations (within the meaning of section 424(e) or 424(f) of the Code), if any, then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of section 422(c)(7) of the Code, the option price shall be not less than 110% of the fair market value of the common stock of the Company determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted.

11. Non-Transferability.

No option granted under the Plan shall be transferable by an optionee, otherwise than by will or the laws of descent or distribution as provided in section 9(c). During the lifetime of an optionee the option shall be exercisable only by such optionee.

12. Dilution or Other Adjustments.

If there shall be any change in the shares of the Company's common stock through merger, consolidation, reorganization, recapitalization, stock dividend (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options shall be made by the Committee. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares and the price per share subject to outstanding options, in order to prevent dilution or enlargement of option rights.

13. Amendment or Discontinuance of Plan.

The Board of Directors may amend or discontinue the Plan at any time. However, no amendment of the Plan shall, without stockholder approval: (i) increase the maximum number of shares under the Plan as provided in section 2,
(ii) decrease the minimum option price provided in section 5, (iii) extend the maximum option term under section 6, or (iv) materially modify the eligibility requirements for participation in the Plan. The Committee shall not alter or impair any option theretofore granted under the Plan without the consent of the holder of the option.

14. Time of Granting.

Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the stockholders of the Company, and no action taken by the Committee or the Board of Directors (other than the execution and delivery of an option) shall constitute the granting of an option hereunder.


15. No Guaranty of Employment.

Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate any employee's employment at any time.

16. Effective Date and Termination of Plan.

(a) The Plan was approved by the Board of Directors on February 24, 1993, and shall be approved by the shareholders of the Company within twelve
(12) months thereof.

(b) Unless the Plan shall have been discontinued as provided in section 13, the Plan shall terminate February 23, 2003. No option may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted.


FIRST AMENDMENT
OF
LEARNING VENTURES, INC.
1993 STOCK OPTION PLAN

THIS FIRST AMENDMENT is made as of February 18,1994.

WHEREAS, the Board of Directors and Shareholders of Learning Ventures, Inc., a Minnesota corporation (the "Company"), approved and adopted the Learning Ventures, Inc. 1993 Stock Option Plan (the "Plan") as of February 24, 1993; and

WHEREAS, pursuant to Section 13 of the Plan, the Internal Revenue Code of 1986, as amended, and the Treasury Regulations issued thereunder, the Board of Directors has the power and authority to amend the Plan as set forth herein, and the Board of Directors has determined that such amendment is in the best interests of the Company.

NOW, THEREFORE, the Plan is hereby amended as follows:

I. Reduction of Number of Shares. The maximum number of shares subject to the Plan shall be reduced to One Million Two Hundred Thousand (1,200,000) shares. Accordingly, Section 2 of the Plan is hereby amended to read in its entirety as follows:

2. Stock Subject to the Plan.

Subject to the provisions of section 12, the shares of stock to be subject to options under the Plan shall be shares of the Company's authorized common stock. Such shares may be either authorized but unissued shares, or issued shares which have been reacquired by the Company. Subject to the adjustment as provided in section 12, the maximum number of shares on which options may be exercised under this Plan shall be One Million Two Hundred Thousand (1,200,000) shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan.

II. Survival of Plan. Except as set forth above, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF, the Company has executed this Amendment as of the date set forth in the first paragraph.

LEARNING VENTURES, INC.

By  /s/ Stephen Shank
   -----------------------
   Its  President


SECOND AMENDMENT OF LEARNING VENTURES, INC.
1993 STOCK OPTION PLAN

This Second Amendment is made effective November 1, 1995.

WHEREAS, the Board of Directors and Shareholders of Learning Ventures, Inc., a Minnesota corporation (the "Company" ), approved and adopted the Learning Ventures, Inc. 1993 Stock Option Plan (the "Plan" ) as of February 24, 1993, as amended February 18, 1994; and

WHEREAS, pursuant to Section 13 of the Plan, the Internal Revenue Code of 1986, as amended, and the Treasury Regulations issued thereunder, the Board of Directors has the power and authority to amend the Plan as set forth herein, and the Board of Directors has determined that such amendment is in the best interests of the Company.

NOW THEREFORE, the Plan is hereby amended as follows:

1. Paragraph 7(c) - Exercise of Option is hereby amended by changing the words ". . at the discretion of the Committee.." to " ... at the discretion of the Employee...."

2. Paragraph 9(a) - Effect of Termination of Employment or Death is hereby amended by changing the words "within thirty (30) days after such termination..." to "within sixty (60) after such termination...."

IN WITNESS WHEREOF, the Company has executed this Second Amendment as of the effective date set forth in the first paragraph.

LEARNING VENTURES, INC.

By  /s/ Paul F. Clifford
   -----------------------
   Its  Secretary


THIRD AMENDMENT
OF
LEARNING VENTURES, INC.
1993 STOCK OPTION PLAN

This Third Amendment is made effective December 27, 1995.

WHEREAS, the Board of Directors and Shareholders of Learning Ventures, Inc., a Minnesota corporation (the "Company"), approved and adopted the Learning Ventures, Inc. 1993 Stock Option Plan (the "Plan") as of February 24, 1993, as amended February 18, 1994 and November 1, 1995; and

WHEREAS, pursuant to Section 13 of the plan, the Internal Revenue Code of 1986, as amended, and the Treasury Regulations issued thereunder, the Board of Directors has the power and authority to amend the Plan as set forth herein, and the Board of Directors has determined that such amendment is in the best interests of the Company.

NOW THEREFORE, the Plan is hereby amended as follows:

1. Paragraph 1 of the Plan is amended by changing the words "This Plan shall be known as the "Learning Ventures, Inc. 1993 Stock Option Plan" to "This Plan shall be known as the "Learning Ventures International, Inc. 1993 Stock Option Plan.""

2. All references in the Plan to "Learning Ventures, Inc." are hereby amended and changed to "Learning Ventures International, Inc."

IN WITNESS WHEREOF, the Company has executed this Third Amendment as of the effective date set forth in the first paragraph.

LEARNING VENTURES, INC.

By  /s/ Paul F. Clifford
   -----------------------
   Its  Secretary


FOURTH AMENDMENT
OF
LEARNING VENTURES INTERNATIONAL, INC.
1993 STOCK OPTION PLAN

THIS FOURTH AMENDMENT is made as of September 29, 1997.

WHEREAS, the Board of Directors and Shareholders of Learning Ventures International, Inc., a Minnesota corporation (the "Company"), approved and adopted the Learning Ventures International, Inc. 1993 Stock Option Plan as of February 24, 1993, as amended February 18, 1994, November 1, 1995 and December 27, 1995 (the "Plan"); and

WHEREAS, the Board of Directors and Shareholders of the Company have approved the amendment of the Plan as set forth herein, and the Board of Directors has determined that such amendment is in the best interests of the Company.

NOW, THEREFORE, the Plan is hereby amended as follows:

I. Increase of Number of Shares. The maximum number of shares subject to the Plan shall be increased to 1,825,000 shares. Accordingly, Section 2 of the Plan is hereby amended to read in its entirety as follows:

2. Stock Subject to the Plan.

Subject to the provisions of section 12, the shares of stock to be subject to options under the Plan shall be shares of the Company's authorized common stock. Such shares may be either authorized but unissued shares, or issued shares which have been reacquired by the Company. Subject to the adjustment as provided in section 12, the maximum number of shares on which options may be exercised under this Plan shall be One Million Eight Hundred Twenty-Five Thousand (1,825,000) shares. If an option under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options thereafter granted during the term of the Plan.

II. Survival of Plan. Except as set forth above, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF, the Company has executed this Fourth Amendment as of the date set forth in the first paragraph.

LEARNING VENTURES INTERNATIONAL, INC.

By  /s/ Stephen Shank
   -----------------------
   Its  President


EXHIBIT 10.8

CAPELLA EDUCATION COMPANY
EMPLOYEE INCENTIVE STOCK OPTION AGREEMENT

This Option Agreement (the "Agreement") is made and entered into as of, _______________ by and between Capella Education Company, a Minnesota corporation (the "Company") and ________________________, an individual resident of the State of _________________ ("Employee").

WHEREAS, the Company has adopted the Learning Ventures International, Inc. 1993 Stock Option Plan (the "Plan") which permits issuance of stock options for the purchase of shares of common stock of the Company, and the Company has taken all necessary actions to grant the Option (as defined in
Section 1 below), pursuant and subject to the terms of the Plan.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee hereby agree as follows:

1. Grant of Option. The Company hereby grants to Employee the right and option (the "Option) to purchase all or any part of an aggregate of ____________ (______) shares of the Company's common stock at the option price of ________________ Dollars and ______ Cents ($_________) per share on the terms and conditions set forth in this Agreement and in the Plan. The Company intends that the Option shall be an Incentive Stock Option governed by the provisions of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The terms of the Plan and the Option shall be interpreted and administered so as to satisfy the requirements of the Code. A copy of the Plan will be furnished upon request of Employee.

2. Vesting of Option Rights. The Option shall not be exercisable the first time by Employee except in accordance with subsection 422(d) of the Code. Except as provided in the preceding sentence and except as otherwise provided in Sections 3 and 4 of this Agreement, the Option may be exercised by Employee in accordance with the following schedule:

On or after                Shares with respect to
the following date         which Option becomes exercisable
------------------         --------------------------------
__/__/01                   ___________________
__/__/02                   ___________________
__/__/03                   ___________________
__/__/04                   ___________________

Provided, however, that (i) if, prior to __________________________, Employee dies or becomes "disabled" (as defined below), then the foregoing vesting schedule shall not apply, and this Option shall be exercisable with respect to all ________________ shares (except as otherwise provided in clause (ii) immediately following), and (ii) if


Employee's employment terminates prior to ___________________, for any reason other than death or disability, then this Option shall be exercisable only with respect to those shares which Employee has earned the right to purchase, in accordance with the foregoing vesting schedule, as of the date on which Employee's employment terminates.

In all cases, the Option shall terminate at the close of business on, _______________________, or such shorter period as is prescribed herein. Employee shall not have any of the rights of a shareholder with respect to the shares subject to the Option until such shares shall be issued to Employee upon the proper exercise of the Option.

For purposes of this Agreement, Employee shall be considered "disabled" if Employee shall fail or be unable to render and perform the services required of Employee for a continuous period of 90 successive days, or for shorter periods aggregating 120 days or more during any 180 consecutive day period, by reason of physical or mental incapacity or disability stemming from any cause.

For purposes of this Agreement, the term "Cause" shall be limited to the following grounds for termination:

(a) Employee's failure or refusal substantially to perform Employee's duties to the full extent of Employee's abilities for reasons other than death or disability;

(b) Conviction of a felony crime, or commission of any act, the conviction for which would be a felony conviction;

(c) Theft or misappropriation of the Company's property;

(d) Knowingly making a material false written statement to the Company's Board of Directors or an officer of the Company regarding the affairs of the Company; and

(e) Termination upon the discontinuance of the Company's business.

For purposes of this Agreement, "Good Reason" shall be defined as the demotion or reduction of the job responsibilities of Employee or the reassignment, without Employee's consent, of Employee's place of work to a location more than 50 miles from the Employee's place of work immediately prior to the Change in Control.

For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to occur if any of the following occur:

(a) Definition.

(1) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of

2

securities of the Company representing the following: (i) 40% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities") at any time prior to the Company selling any of its shares in a public offering pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) 35% or more of the combined voting power of the Company's then outstanding Voting Securities at any time after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act. Provided, however, that the following shall not constitute a Change in Control pursuant to this paragraph (a)(1):

(A) any acquisition or beneficial ownership by the Company or a subsidiary;

(B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

(C) any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 60% of both the combined voting power of the Company's then outstanding Voting Securities and the shares of common stock of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and shares of common stock of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and shares of common stock, as the case may be, immediately prior to such acquisition;

(2) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (C) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

(3) Approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and shares of common stock of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 60% (subject to the modification in subparagraph (b) below) of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then

3

outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and shares of common stock of the Company, as the case may be; or

(4) Approval by the stockholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 60% (subject to the modification in subparagraph (b) below) of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and shares of common stock of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and shares of common stock of the Company, as the case may be.

(b) After a Public Offering. At all times after the Company sells any of its shares in a public offering pursuant to a registration statement filed under the Securities Act, the references to 60% in subparagraphs
(a)(1)(C), (a)(3) and (a)(4) above shall be changed to 65%.

3. Acceleration of Vesting. If a Change of Control of the Company shall occur and within three years of such Change in Control, (i) Employee's employment shall be terminated other than for Cause as defined in Section 2 above, or (ii) Employee shall voluntarily leave employment with the Company for "Good Reason" (defined in Section 2 above), then, upon the date of such termination or voluntary leaving of employment for Good Reason, the options subject to this Agreement, if not already exercised in full or otherwise terminated, expired or cancelled, shall become immediately exercisable in full.

4. Time Periods for Exercise of Option. The Option shall terminate and may no longer be exercised if Employee ceases to be employed by the Company, except that:

(a) If Employee's employment shall be terminated for any reason, voluntary or involuntary, other than death, disability or as a result of Employee's gross and willful misconduct. Employee may at any time within a period of sixty (60) days after such termination exercise the Option to the extent the Option is exercisable by Employee hereunder on the date of the termination of Employee's employment; and

(b) If Employee's employment is terminated as a result of Employee's gross and willful misconduct, including but not limited to wrongful appropriation of funds or

4

the commission of a gross misdemeanor or felony, the Option shall be terminated as of the date of the misconduct; and

(c) If Employee dies in the employ of the Company or Employee's employment is terminated because Employee has become disabled while in the employ of the Company, the Option may, within ninety (90) days after Employee's death or the date of termination for such disability, be exercised by Employee or Employee's personal representatives, if applicable, or by the person or persons to whom Employee's rights under the Option pass by will or by the applicable laws of descent and distribution; and

provided, however, that the Option may not be exercised to any extent by anyone after the termination date of the Option, ____________________.

5 Investment Representation. Employee hereby represents and agrees that any shares of stock which Employee may acquire pursuant to the exercise of the Option will be acquired for long-term investment purposes and not with the view toward the distribution or sale thereof in a public offering within the meaning of the federal Securities Act of 1933. Employee acknowledges that at the time of the acquisition such shares will not be registered under either the federal or applicable state securities laws, and that the Company will be relying upon the foregoing investment representation in agreeing to issue such shares to Employee. Employee acknowledges that the transferability of such shares will be subject to restrictions imposed by all applicable federal and state securities laws and agrees that the certificates evidencing such shares may be imprinted with an appropriate legend setting forth these restrictions on transferability.

6. Method of Exercise of Option. Subject to the foregoing, the Option may be exercised in whole or in part from time to time by serving written notice on the Company at its principal office in Minneapolis, Minnesota. The notice shall set forth the number of shares as to which the Option is being exercised and shall be accompanied by payment of the purchase price. Payment of the purchase price shall be made by check payable to the Company; or, at the discretion of Employee, (i) by delivering to the Company for cancellation shares of the Company's common stock already owned by Employee having a fair market value equal to the full purchase price of the shares being acquired, or (ii) a combination of cash and such shares. The fair market value of such shares shall be determined as provided in Section 5 of the Plan.

7 Miscellaneous.

(a) This Agreement shall not confer on Employee any right with respect to continuance of employment with the Company or any subsidiary of the Company, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Neither Employee nor Employee's legal representative, legatees or distributees, as the case may be, will be or will be deemed to be the holder of any shares subject to the Option unless and until the Option has been exercised and the purchase price of the shares purchased has been paid.

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(b) The Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in Section 4(c) above, and during Employee's lifetime the Option is exercisable only by Employee.

(c) If there shall be any change in the stock subject to the Option through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure of the Company, appropriate adjustments shall be made by the Company in the number of shares and the price per share of the shares subject to the Option in order to prevent dilution or enlargement of the option rights granted hereunder.

(d) The Company shall at all times during the term of the Option reserve and keep available such number of shares of the Company's common stock as will be sufficient to satisfy the requirements of this Agreement.

(e) If Employee shall dispose of any of the shares of stock acquired upon exercise of the Option within two (2) years from the date the Option was granted or within one (1) year after the date of exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction, Employee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and the consideration, if any, received for such shares.

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IN WITNESS WHEREOF, the Company and Employee have executed this Agreement as of the date set forth in the first paragraph.

CAPELLA EDUCATION COMPANY

By /s/ Stephen Shank
   -----------------------
   Stephen Shank, Chairman

By _______________________ **[___________________]

7

EXHIBIT 10.14

CONFIDENTIALITY, NON-COMPETITION AND INVENTIONS AGREEMENT

This Agreement About Confidentiality, Non-Competition, and Inventions ("Agreement") is entered into this 16th day of April 2001, between Michael Offerman ("Employee") and Capella Education Company.

A. Capella Education Company and its subsidiaries are collectively referred to as "Capella" in this Agreement.

B. Capella desires to employ Employee as Senior Vice President of Capella Education Company and Chief Executive Officer and President of Capella University. Employee desires to be employed in that capacity.

C. As an employee of Capella, Employee would have access to Confidential Information (a term which is defined below).

D. Capella provides, develops, sells, and markets on-line educational products and services. Much of the work of Capella is done through the Internet, which is global in coverage and can be accessed by people throughout the world.

E. As a condition of Employee' employment by Capella, Employee and Capella enter into this Agreement, the terms of which Employee acknowledges are reasonable and necessary for the protection of the legitimate interests of Capella.

AGREEMENT

In consideration of Capella's employing Employee, the parties agree as follows:

1. DEFINITIONS. For the purposes of this Agreement, the following terms have the following meanings:

a. "Confidential Information" means information proprietary to Capella and not generally known (including trade secret information) about Capella's customers, products, services, personnel, pricing, sales strategy, technology, methods, processes, research, development, finances, systems, techniques, accounting, purchasing, and business strategies. All information disclosed to Employee or to which the Employee obtains access, whether originated by the Employee or by others, during the period of the Employee's employment, shall be presumed to be Confidential Information if it is treated by Capella as being Confidential Information or if Employee has a reasonable basis to believe it to be Confidential Information.

b. "Inventions" means discoveries, improvements, ideas, concepts, processes, formulas, methods, analyses, and works of authorship (whether or not reduced to writing or put into practice) that (1) relate directly to the business of Capella; (2) relate to Capella's actual or demonstrably anticipated research or development; (3) result from any


work performed by Employee for Capella; (4) for which equipment, supplies, facilities, or trade secret information of Capella is used; or (5) is developed using any time for which Employee is compensated by Capella.

c. "Competing Organization" means any person, corporation, not-for-profit organization, or other entity that provides, develops, sells, or markets on-line credit-granting educational products or services in any country in which Capella did business or had customers at any time during the last 12 months of Employee's Capella employment. In the case of an organization that provides, develops, sells, or markets on-line credit-granting educational products or services within or from a distinct, separate division or unit of the organization (the "On-Line Unit") and also provides, develops, sells, or markets credit-granting educational products or services through other means within other distinct, separate divisions or units, the term "Competing Organization" shall be limited to the On-Line Unit, and shall not apply to the organization as a whole.

2. CONFIDENTIAL INFORMATION. Except as required in his duties of Capella employment or as authorized in writing by an officer of Capella, Employee shall not, either during the Employee's employment by Capella or at any time thereafter, use or disclose to any person any Confidential Information for any purpose.

3. RESTRICTIONS ON COMPETITION. For a period of 12 months after the Employee has left Capella employment for any reason, Employee shall:

a. inform any prospective new employer, prior to accepting employment, of the existence of this Agreement and provide such employer a copy of this Agreement;

b. not, directly or indirectly, as employee, consultant, contractor or otherwise, perform services for any Competing Organization; and

c. not directly or indirectly solicit or attempt to solicit any employee or independent contractor of Capella to cease working for Capella.

4. INVENTIONS. With respect to Inventions developed, made, authored, or conceived by Employee, either by the Employee or in connection with others, during the Employee's employment by Capella or (regardless of whether during normal working hours or whether at Capella premises) or within one year after the termination of that employment for any reason, Employee shall:

a. keep complete and accurate records of such Inventions, which records shall be Capella property;

b. promptly disclose such Inventions in writing to Capella;

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c. assign (and the Employee hereby does assign) to Capella all of the Employee's rights to such inventions and to letters patent and copyrights granted upon such Inventions in all countries; and

d. execute such documents and do such other acts as may be necessary in the opinion of Capella to establish and preserve its property rights and to obtain and maintain letters patent and copyrights in favor of Capella.

Nothing in this section 4 shall apply to any invention for which no equipment, supplies, facility or trade secret information of Capella was used and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of Capella or (b) to Capella's actual or demonstrably anticipated research and development, or (2) which does not result from any work performed for Capella.

5. RETURN OF PROPERTY. Upon termination of employment with Capella, Employee shall deliver promptly to Capella all records, manuals, books, forms, documents, letters, memoranda, data, tables, photographs, video tapes, audio tapes, computer disks and other computer storage media, and copies thereof, that are the property of Capella, or that relate in any way to the business, products, services, personnel, customers, practices, or techniques of Capella, and all other property of Capella (such as, for example, computers, cellular telephones, pagers, credit cards, and keys), whether or not containing Confidential Information, that are in Employee's possession or under his control.

6. REASONABLENESS OF RESTRICTIONS. Employee acknowledges and agrees that the terms of this Agreement are reasonable and necessary for the protection of Capella's Confidential Information and business and to prevent damage or loss to Capella as a result of any action of Employee. Employee specifically acknowledges and agrees that because of the world-wide coverage and accessibility of the Internet, it is not possible to limit further the geographic scope of the restrictions described in Paragraph 3 above in a manner that would still provide reasonable protection for the legitimate interests of Capella.

7. REMEDIES FOR BREACH. Employee hereby acknowledges and agrees that any breach by him of the provisions of this Agreement may cause Capella irreparable harm for which there is no adequate remedy at law. Therefore, Capella shall be entitled, in addition to any other remedies available, to injunctive or other equitable relief to require specific performance or to prevent a breach of the provisions of this Agreement. Any delay by Capella in asserting a right under this Agreement or any failure by Capella to assert a right under this Agreement will not constitute a waiver by Capella of any right hereunder, and Capella may subsequently assert any or all of its rights under this Agreement as if the delay for failure to assert rights had not occurred.

8. NO EMPLOYMENT RIGHTS. This Agreement does not require Capella to employ Employee for any particular length of time and does not restrict the ability of Capella to terminate the employment relationship. Employee's Capella employment is at-will.

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9. PARTIAL INVALIDITY. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, that invalidity or unenforceability shall not affect the other portions of this Agreement and the remaining terms and conditions, or portions thereof, shall remain in full force and effect. A court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable, and enforceable. It is the intention of the parties that the restrictions imposed by this Agreement be enforced to the maximum permissible extent.

10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall be enforceable by the parties hereto and their respective successors and assigns.

11. GOVERNING LAW. This Agreement, and any disputes arising out of it, shall be governed by the laws of the State of Minnesota without regard for conflicts of law principles.

12. FORUM SELECTION. Any disputes arising out of or related to this Agreement shall be litigated only in Minnesota state courts or in the United States District Court for the District of Minnesota, and Capella and Employee hereby consent to the exercise of personal jurisdiction over them for that purpose by Minnesota state courts and the United States District Court for the District of Minnesota.

EMPLOYEE

/s/ Michael J. Offerman
----------------------------------------

CAPELLA EDUCATION COMPANY

By /s/  Stephen Shank
   -------------------------------------

   Its Chairman and CEO
       ---------------------------------

4

EXHIBIT 10.15

CONFIDENTIALITY, NON-COMPETITION AND INVENTIONS AGREEMENT

This Agreement About Confidentiality, Non-Competition, and Inventions ("Agreement") is entered into this 9th day of May, 2001, between Paul Schroeder ("Employee") and Capella Education Company.

A. Capella Education Company and its subsidiaries are collectively referred to as "Capella" in this Agreement.

B. Capella desires to employ Employee as Senior Vice President and Chief Financial Officer, and Employee desires to be employed in that capacity.

C. As an employee of Capella, Employee would have access to Confidential Information (a term which is defined below).

D. Capella provides, develops, sells, and markets on-line educational products and services. Much of the work of Capella is done through the Internet, which is global in coverage and can be accessed by people throughout the world.

E. As a condition of Employee' employment by Capella, Employee and Capella enter into this Agreement, the terms of which Employee acknowledges are reasonable and necessary for the protection of the legitimate interests of Capella.

AGREEMENT

In consideration of Capella's employing Employee, the parties agree as follows:

1. DEFINITIONS. For the purposes of this Agreement, the following terms have the following meanings:

a. "Confidential Information" means information proprietary to Capella and not generally known (including trade secret information) about Capella's customers, products, services, personnel, pricing, sales strategy, technology, methods, processes, research, development, finances, systems, techniques, accounting, purchasing, and business strategies. All information disclosed to Employee or to which the Employee obtains access, whether originated by the Employee or by others, during the period of the Employee's employment, shall be presumed to be Confidential Information if it is treated by Capella as being Confidential Information or if Employee has a reasonable basis to believe it to be Confidential Information.

b. "Inventions" means discoveries, improvements, ideas, concepts, processes, formulas, methods, analyses, and works of authorship (whether or not reduced to writing or put into practice) that (1) relate directly to the business of Capella; (2) relate to Capella's actual or demonstrably anticipated research or development; (3) result from any work performed by Employee for Capella; (4) for which equipment, supplies, facilities, or


trade secret information of Capella is used; or (5) is developed using any time for which Employee is compensated by Capella.

c. "Competing Organization" means any person, corporation, not-for-profit organization, or other entity that provides, develops, sells, or markets on-line credit-granting educational products or services in any country in which Capella did business or had customers at any time during the last 12 months of Employee's Capella employment.

2. CONFIDENTIAL INFORMATION. Except as required in his duties of Capella employment or as authorized in writing by an officer of Capella, Employee shall not, either during the Employee's employment by Capella or at any time thereafter, use or disclose to any person any Confidential Information for any purpose.

3. RESTRICTIONS ON COMPETITION. For a period of 12 months after the Employee has left Capella employment for any reason, Employee shall:

a. inform any prospective new employer, prior to accepting employment, of the existence of this Agreement and provide such employer a copy of this Agreement;

b. not, directly or indirectly, as employee, consultant, contractor or otherwise, perform services for any Competing Organization; and

c. not directly or indirectly solicit or attempt to solicit any employee or independent contractor of Capella to cease working for Capella.

4. INVENTIONS. With respect to Inventions developed, made, authored, or conceived by Employee, either by the Employee or in connection with others, during the Employee's employment by Capella or (regardless of whether during normal working hours or whether at Capella premises) or within one year after the termination of that employment for any reason, Employee shall:

a. keep complete and accurate records of such Inventions, which records shall be Capella property;

b. promptly disclose such Inventions in writing to Capella;

c. assign (and the Employee hereby does assign) to Capella all of the Employee's rights to such inventions and to letters patent and copyrights granted upon such Inventions in all countries; and

d. execute such documents and do such other acts as may be necessary in the opinion of Capella to establish and preserve its property rights and to obtain and maintain letters patent and copyrights in favor of Capella.

2

Nothing in this section 4 shall apply to any invention for which no equipment, supplies, facility or trade secret information of Capella was used and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of Capella or (b) to Capella's actual or demonstrably anticipated research and development, or (2) which does not result from any work performed for Capella.

5. RETURN OF PROPERTY. Upon termination of employment with Capella, Employee shall deliver promptly to Capella all records, manuals, books, forms, documents, letters, memoranda, data, tables, photographs, video tapes, audio tapes, computer disks and other computer storage media, and copies thereof, that are the property of Capella, or that relate in any way to the business, products, services, personnel, customers, practices, or techniques of Capella, and all other property of Capella (such as, for example, computers, cellular telephones, pagers, credit cards, and keys), whether or not containing Confidential Information, that are in Employee's possession or under his control.

6. REASONABLENESS OF RESTRICTIONS. Employee acknowledges and agrees that the terms of this Agreement are reasonable and necessary for the protection of Capella's Confidential Information and business and to prevent damage or loss to Capella as a result of any action of Employee. Employee specifically acknowledges and agrees that because of the world-wide coverage and accessibility of the Internet, it is not possible to limit further the geographic scope of the restrictions described in Paragraph 3 above in a manner that would still provide reasonable protection for the legitimate interests of Capella.

7. REMEDIES FOR BREACH. Employee hereby acknowledges and agrees that any breach by him of the provisions of this Agreement may cause Capella irreparable harm for which there is no adequate remedy at law. Therefore, Capella shall be entitled, in addition to any other remedies available, to injunctive or other equitable relief to require specific performance or to prevent a breach of the provisions of this Agreement. Any delay by Capella in asserting a right under this Agreement or any failure by Capella to assert a right under this Agreement will not constitute a waiver by Capella of any right hereunder, and Capella may subsequently assert any or all of its rights under this Agreement as if the delay for failure to assert rights had not occurred.

8. NO EMPLOYMENT RIGHTS. This Agreement does not require Capella to employ Employee for any particular length of time and does not restrict the ability of Capella to terminate the employment relationship. Employee's Capella employment is at-will.

9. PARTIAL INVALIDITY. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, that invalidity or unenforceability shall not affect the other portions of this Agreement and the remaining terms and conditions, or portions thereof, shall remain in full force and effect. A court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable, and enforceable. It is the intention of the parties that the restrictions imposed by this Agreement be enforced to the maximum permissible extent.

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10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall be enforceable by the parties hereto and their respective successors and assigns.

11. GOVERNING LAW. This Agreement, and any disputes arising out of it, shall be governed by the laws of the State of Minnesota without regard for conflicts of law principles.

12. FORUM SELECTION. Any disputes arising out of or related to this Agreement shall be litigated only in Minnesota state courts or in the United States District Court for the District of Minnesota, and Capella and Employee hereby consent to the exercise of personal jurisdiction over them for that purpose by Minnesota state courts and the United States District Court for the District of Minnesota.

EMPLOYEE

/s/ Paul Schroeder
----------------------------------------

CAPELLA EDUCATION COMPANY

By /s/ Betsy Rausch
   -------------------------------------

   Its VP Human Resources
       ---------------------------------

4

EXHIBIT 10.16

CONFIDENTIALITY, NON-COMPETITION AND INVENTIONS AGREEMENT

This Confidentiality, Non-Competition, and Inventions Agreement ("Agreement") is entered into this ____ day of __________, ____ between _____________ ("Employee") and Capella Education Company.

A. Capella Education Company and its subsidiaries (including Capella University, Inc.) are collectively referred to as "Capella" in this Agreement.

B. Capella desires to employ Employee as Chief Financial Officer, and Employee desires to be employed in that capacity.

C. As an employee of Capella, Employee would have access to Confidential Information (a term which is defined below).

D. Capella provides, develops, sells, and markets on-line educational products and services. Much of the work of Capella is done through the Internet, which is global in coverage and can be accessed by people throughout the world.

E. As a condition of Employee's employment by Capella, Employee and Capella enter into this Agreement, the terms of which Employee acknowledges are reasonable and necessary for the protection of the legitimate interests of Capella.

AGREEMENT

In consideration of Capella's employing Employee, the parties agree as follows:

1. Definitions. For the purposes of this Agreement, the following terms have the following meanings:

a. "Capella Confidential Information" means information proprietary to Capella and not generally known (including trade secret information) about Capella's business, customers, learners, products, services, personnel, pricing, sales strategy, marketing efforts, technology, methods, processes, research, development, finances, systems, software, techniques, accounting, purchasing, business strategies, and plans. All information disclosed to Employee or to which Employee obtains access during Employee's Capella employment, whether originated by Employee or by others, shall be presumed to be Capella Confidential Information if it is treated by Capella as being Capella Confidential Information or if Employee has a reasonable basis to believe it to be Capella Confidential Information.

b. "Inventions" means discoveries, improvements, ideas, concepts, processes, formulas, methods, analyses, software, and works of authorship (whether or not reduced to writing or put into practice, and whether or not copyrighted, copyrightable, patented, or patentable) that (1) relate directly to the business of Capella; (2) relate to Capella's actual or demonstrably anticipated research or development; (3) result from any


work performed by Employee for Capella; (4) for which equipment, supplies, facilities, or trade secret information of Capella is used; (5) are developed, created, conceived or reduced to practice using any time for which Employee is compensated by Capella; or (6) are developed, created, conceived, or reduced to practice during the period in which Employee is employed by Capella or within one year after the termination of that employment for any reason.

c. "Non-Assigned Inventions" means as any invention for which no equipment, supplies, facility or trade secret information of Capella was used and which was developed entirely on Employee's own time, and (1) which does not relate (a) directly to the business of Capella or (b) to Capella's actual or demonstrably anticipated research and development, or (2) which does not result from any work performed for Capella.

d. "Competitor" means any person, corporation, not-for-profit organization, or other entity that provides, develops, sells, or markets on-line credit-granting educational products or services in any country in which Capella did business or had customers or learners at any time during the last 12 months of my Capella employment. In the case of a not-for-profit organization that provides, develops, sells, or markets on-line credit-granting educational products or services within or from a distinct, separate division or unit of the organization (the "On-Line Unit") and also provides, develops, sells, or markets credit-granting educational products or services through other means within other distinct, separate divisions or units, the term "Competitor" shall be limited to the On-Line Unit, and shall not apply to the organization as a whole.

2. CONFIDENTIAL INFORMATION. Except as required in Employee's duties of Capella employment or as authorized in writing by the Chief Executive Officer or his designee, Employee shall not, either during the Employee's employment by Capella or at any time thereafter, use or disclose to any person any Capella Confidential Information for any purpose. Employee shall follow all procedures and policies adopted by Capella from time to time regarding the treatment and protection of Capella Confidential Information as well as the confidential information of learners or of others.

3. RESTRICTIONS ON COMPETITION. For a period of 12 months after the Employee's Capella employment ends for any reason, Employee shall:

a. inform any prospective new employer, prior to accepting employment, of the existence of this Agreement and provide such employer a copy of this Agreement;

b. not, directly or indirectly, as employee, consultant, contractor or otherwise, perform services for any Competitor; and

c. not directly or indirectly solicit or attempt to solicit any employee or independent contractor of Capella to cease working for Capella.

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4. INVENTIONS.

a. With respect to Inventions developed, made, created, authored, conceived, or reduced to practice by Employee, in whole or in part, either by Employee or in connection with others, during Employee's employment by Capella (regardless of whether during normal working hours or whether at Capella premises) or within one year after the termination of that employment for any reason, Employee shall:

(i) keep complete and accurate records of such Inventions, which records shall be Capella property (except for records related solely to Non-Assigned Inventions, which records must be kept but are not Capella property);

(ii) comply with all of Capella's policies and guidelines related to inventions and copyrights, as they may be revised from time to time;

(iii) promptly disclose in writing such Inventions to Capella;

(iv) assign (and Employee hereby does assign) to Capella all of Employee's rights to such Inventions (except for Non-Assigned Inventions) and to letters patent and copyrights granted upon such Inventions (except for Non-Assigned Inventions) in all countries; and

(v) execute such documents and do such other acts as may be necessary in the opinion of Capella to establish and preserve its property rights and to obtain and maintain letters patent and copyrights in favor of Capella.

If for any reason any such assignment is invalid or ineffective for any reason, then Employee hereby grants Capella a perpetual, royalty-free, non-exclusive, worldwide license fully to exploit any intellectual property or proprietary rights in such Invention and any copyrights or patents (or other intellectual property or proprietary registrations or applications) resulting therefrom.

b. Capella shall compensate employees for assigning their rights in inventions that Capella seeks to protect under patent laws in an amount not to exceed $100 per invention (evenly allocated among all inventors).

c. If Capella in good faith believes that any Invention constitutes a Non-Assigned Invention, then Capella shall inform Employee of that fact within thirty (30) days of receiving a disclosure under subparagraph a(iii) of this Paragraph 4 (unless the parties agree on a different period of time on a case-by-case basis). If Capella does not so notify Employee and Employee nonetheless in good faith believes that such Invention constitutes a Non-Assigned Invention, then Employee shall inform Capella within thirty (30) days of the end of the period set forth in the preceding sentence, setting forth reasons for such belief. If within thirty (30) days of Capella's receipt thereof Capella informs Employee that it disagrees, then the parties

3

shall attempt in good faith to resolve their disagreement. Employee shall bear the burden of proving that such Invention constitutes a Non-Assigned Invention.

d. Unless proven otherwise, any Invention shall be presumed to have been conceived during Employee's employment with Capella if within one (1) year after termination of such employment such Invention is disclosed to others, is completed, or has a patent application filed thereon.

e. When developing a Capella course and/or content for a Capella course, (i) Employee shall abide by all of the terms, conditions and policies of Capella related to course and content development; (ii) Employee shall abide by the terms of any separate agreement between Employee and Capella related to the course or content development; and (iii) if Employee chooses to include or refer to any materials for which Employee owns the copyright, then Employee hereby grants, and agrees to grant, to Capella a royalty-free, perpetual, irrevocable, nonexclusive, and fully sublicensable right to use, reproduce, adapt, publish, translate, create derivative works of, distribute, perform, and display such materials (in whole or in part) worldwide and/or to incorporate them in other works in any form, media, or technology now known or later developed, solely in connection with providing the course (as the course may be changed from time to time).

f. Except to the degree that such materials are created in connection with the development of course design or content, Capella does not claim the copyrights to scholarly books or articles written by faculty members that relate to the faculty member's area of subject matter expertise and that do not relate to methods of course delivery or distance learning proprietary to Capella.

5. RETURN OF PROPERTY. Upon termination of employment with Capella, Employee shall deliver promptly to Capella all records, manuals, books, forms, documents, letters, memoranda, data, tables, photographs, video tapes, audio tapes, computer disks and other computer storage media, and copies thereof, that are the property of Capella, or that relate in any way to the business, products, services, personnel, customers, learners, practices, or techniques of Capella, and all other property of Capella (such as, for example, computers, cellular telephones, pagers, credit cards, and keys), whether or not containing Confidential Information, that are in Employee' possession or under his control.

6. REASONABLENESS OF RESTRICTIONS. Employee acknowledges and agrees that the terms of this Agreement are reasonable and necessary for the protection of Capella's Confidential Information and business and to prevent damage or loss to Capella as a result of any action of Employee. Employee specifically acknowledges and agrees that because of the world-wide coverage and accessibility of the Internet, it is not possible to limit further the geographic scope of the restrictions described in Paragraph 3 above in a manner that would still provide reasonable protection for the legitimate interests of Capella.

7. REMEDIES FOR BREACH. Employee hereby acknowledges and agrees that any breach by Employee of the provisions of this Agreement may cause Capella irreparable harm

4

for which there is no adequate remedy at law. Therefore, Capella shall be entitled, in addition to any other remedies available, to injunctive or other equitable relief to require specific performance or to prevent a breach of the provisions of this Agreement. Any delay by Capella in asserting a right under this Agreement or any failure by Capella to assert a right under this Agreement will not constitute a waiver by Capella of any right hereunder, and Capella may subsequently assert any or all of its rights under this Agreement as if the delay or failure to assert rights had not occurred.

8. NO EMPLOYMENT RIGHTS. This Agreement does not require Capella to employ Employee for any particular length of time and does not restrict the ability of Capella to terminate the employment relationship. Except as provided in a separate written agreement signed by the Capella Chief Executive Officer or his designee, Employee's Capella employment is at-will.

9. PARTIAL INVALIDITY. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, that invalidity or unenforceability shall not affect the other portions of this Agreement and the remaining terms and conditions, or portions thereof, shall remain in full force and effect. A court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable, and enforceable. It is the intention of the parties that the restrictions imposed by this Agreement be enforced to the maximum permissible extent.

10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall be enforceable by the parties hereto and their respective successors and assigns.

11. GOVERNING LAW. This Agreement and any disputes arising out of it shall be governed by the laws of the State of Minnesota without regard for the conflicts of law principles of any state.

12. FORUM SELECTION. Any disputes arising out of or related to this Agreement shall be litigated only in Minnesota state courts or in the United States District Court for the District of Minnesota, and Capella and Employee hereby consent to the exercise of personal jurisdiction over them for that purpose by Minnesota state courts and the United States District Court for the District of Minnesota. Neither employee nor Capella shall commence litigation against the other arising out of or related to this Agreement in any court outside the state of Minnesota.

EMPLOYEE


5

CAPELLA EDUCATION COMPANY

By _____________________________________

Its __________________________________

6

EXHIBIT 10.17

[CAPELLA EDUCATION COMPANY LETTERHEAD]

March 9, 2001

Mr. Paul Schroeder
4605 Sunnyside Road
Edina, MN 55424

Dear Paul:

We are pleased to extend you an offer of employment with Capella Education Company for the position of Senior Vice President and Chief Financial Officer. This is a corporate officer position. You will report to the Chairman and CEO of Capella Education Company. We are excited about the opportunities you will have to positively impact our organization.

BASE COMPENSATION: You will be paid on a bi-weekly basis an amount that would be $205,000 when annualized. It is our practice to review an individual's compensation and performance annually on the employment anniversary date. Additional compensation terms for this position are as follows:

HIRING BONUS: You will receive a hiring bonus in the amount of $25,000 no later than the first full payroll following your hire date. Should you leave the Company voluntarily within 12 months of receiving the payment, we ask that you agree to reimburse the company for these payments on a prorata basis.

ANNUAL INCENTIVE COMPENSATION POTENTIAL: In addition to your salary, you will be eligible to earn an annual incentive compensation award targeted at 40% of your base salary. The details of the incentive compensation program will be specified in an annual award plan. For the 2001 plan year, twenty percent or approximately $30,000 (20% of expected earnings of $154,000) will be guaranteed. All other terms and conditions of the Plan will apply, including the provision that you are an active employee at the time the incentive is normally awarded. A summary Plan document is included for your review.

STOCK OPTION GRANT: You will be granted options to purchase 100,000 shares of Capella Education Company common stock with an exercise price of $14.25 per share, exercisable over 10 years. The terms of the stock option grant will be specified in a definitive stock option agreement (the "Stock Option Agreement") which will provide that the right to exercise options to purchase 25,000 shares will vest on each of your first four anniversary dates of your initial employment with the Company. The Stock Option Agreement will also provide for immediate acceleration of the vesting of your stock option rights if, within the period required for full vesting of your stock option exercise rights, (1) there is a change of control of the ownership of the Company as defined in the Stock Option Agreement, and (2) within such period your employment is terminated or


Mr. Paul Schroeder
Letter of Employment
March 9, 2001

Page 2

your job is adversely affected by such changes as a reduction in responsibility or compensation or a relocation of the job.

You will also participate in an annual grant award program beginning July 1 following two years of employment with the company. The specific amount of the grant is based on your position and base compensation using a multiple of pay formula, and calculated using the Black Sholes valuation based on the market price at the time of the grant.

SEVERANCE PAY: In the event your employment with Capella is involuntarily terminated for any reason other than cause, you will be entitled to a severance benefit consisting of six (6) months base salary. For the purposes of this paragraph "Cause" means: i) your commission of a crime or other act that could materially damage the reputation of Capella; ii) your theft, misappropriation, or embezzlement of Capella property; iii) your falsification of records maintained by Capella; or iv) your failure substantially to perform the material duties of your Capella employment, which failure is not cured within 30 days after written notice from the CEO specifying the act of non-performance.

BENEFIT PLANS: The following will summarize the current benefit plans, for which you would be eligible as a full-time employee:

Medical/Dental - Subject to a 30 day waiting period, you will be eligible to participate in the company's medical plan. The plan is administered through Medica. The company will pay 100% of your medical premium. The company will contribute 70% of the cost of the dental coverage.

Life Insurance - The company provides paid life insurance in the amount of 1X salary. You may also elect to purchase additional coverage for yourself, spouse and/or dependents.

Disability Benefits - The company offers short and long-term disability benefits. The short-term disability coverage provides salary replacement for up to 26 weeks of disability. The amount and length of coverage is based upon length of service with the company. This benefit is paid for by the company. You may elect to purchase long-term disability coverage. The Plan replaces up to 60% of your salary as long as you are eligible for disability benefits under the Plan. The company pays 50% of the cost of this plan.

Cafeteria Plan - This plan allows you to pay for medical premiums, unreimbursed medical and child care expenses from pre-tax dollars. You would be eligible for this plan at the same time you are eligible for the medical insurance.

401K Retirement Plan - Under this plan, you may contribute up to 15% of your eligible compensation on a pre-tax basis up to IRS limits. You are eligible to participate in this plan immediately upon your employment with the company.

ESOP - The Company will also make an annual contribution to the ESOP up to 3% of eligible compensation in the form of company stock once you are eligible to participate in the Plan.

2

Mr. Paul Schroeder
Letter of Employment
March 9, 2001

Page 3

Employer contributions made in your first three years with Capella will vest at the end of your third year of employment. Employer contributions made after the end of your third year of employment will vest immediately.

Other benefits - You would earn 4 weeks of vacation per year, 10 paid holidays and up to 7 sick days allowed per year. Additionally, you would be eligible to receive one "life maintenance" day per year. As per policy, use this personal day as and when you wish.

You will be provided with company paid parking in a designated garage facility.

Paul, I am delighted to offer you this opportunity to join the Capella organization. We are impressed with the knowledge and talent you bring to our organization and are confident you will make a significant contribution to our future success.

Please indicate your acceptance of this offer by signing below and returning one copy to me.

Sincerely,

/s/ Betsy

Betsy Rausch
Human Resources Director

                                   Acceptance: /s/ Paul A. Schroeder
                                               --------------------------------

                                   Date:       3/9/01

Enclosure

3

EXHIBIT 10.18

[CAPELLA EDUCATION COMPANY LETTERHEAD]

April 16, 2001

Dr. Mike Offerman
5887 Tree Line Drive
Madison, WI 53711

Dear Mike:

We are pleased to extend you an offer of employment with Capella Education Company for the position of President and Chief Executive Officer of Capella University. This is a corporate officer position with Capella Education Company. You will also hold the title of Senior Vice President. This position has a dual reporting relationship. You will report to the Capella University Board of Directors with respect to matters of University governance and policy. You will report to the CEO of Capella Education Company with respect to Corporate related matters. This offer is contingent upon approval by the Board of Capella University meeting with you and making the actual appointment, and completion of your references. We are excited about the opportunities you will have to positively impact our organization.

BASE COMPENSATION: You will be paid on a bi-weekly basis an amount that would be $200,000 when annualized. It is our practice to review an individual's compensation and performance annually on the employment anniversary date. Additional compensation terms for this position are as follows:

ANNUAL INCENTIVE COMPENSATION POTENTIAL: In addition to your salary, you will be eligible to earn an annual incentive compensation award targeted at 40% of your base salary. The details of the incentive compensation program will be specified in an annual award plan. All terms and conditions of the Plan will apply, including the provision that you are an active employee at the time the incentive is normally awarded. A summary Plan document is included for your review.

STOCK OPTION GRANT: You will be granted options to purchase 75,000 shares of Capella Education Company common stock with an exercise price of $14.25 per share, exercisable over 10 years. The terms of the stock option grant will be specified in a definitive stock option agreement (the "Stock Option Agreement") which will provide that the right to exercise options to purchase 18,750 shares will vest on each of your first four anniversary dates of your initial employment with the Company. The Stock Option Agreement will also provide for immediate acceleration of the vesting of your stock option rights if, within the period required for full vesting of your stock option exercise rights, (1) there is a change of control of the ownership of the Company as defined in the Stock Option Agreement, and (2) within such period your employment is terminated or your job is adversely affected by such changes as a reduction in responsibility or compensation or a relocation of the job.

You will also participate in an annual grant award program beginning July 1 following two years of employment with the company. The specific amount of the grant is based on your position and base compensation using a multiple of pay formula, and calculated using the Black Sholes valuation based on the market price at the time of the grant.


Dr. Mike Offerman
Letter of Employment
April 16, 2001

Page 2

CONFIDENTIALITY AND NON-COMPETE AGREEMENT: Capella will prepare a Confidentiality and Non-Compete Agreement ("Agreement") which is a standard requirement for key officer positions of the company.

With our growing leadership position in the market, the Company has a great opportunity to build national recognition of the Capella brand as the brand of choice in the elearning market.

However, Capella expects increasing competition from for-profit and not-for profit organizations in the rapidly growing elearning market. Capella believes it is essential to take certain steps, including the execution of Non-Compete and Confidentiality Agreements for certain key positions, in order to protect the legitimate business interests of the company and to ensure the security and confidentiality of the company's customers, pricing, sales strategy, and technology.

The Agreement will contain a provision that will entitle you to 12 months base salary if you leave the company for any reason other than termination for Cause and are unable to find suitable employment as a direct result of the restrictions imposed by the Non-Compete Agreement with Capella. In the event you are involuntarily terminated for any reason other than cause, the following severance benefits will apply: (i) If such termination occurs within the first 12 months of the date of your first employment with Capella, your severance benefit will consist of 12 months base salary. (ii) If such termination occurs after the first anniversary date of your employment, your severance benefit will consist of 6 months base salary. If such termination for reason other than cause occurs in the timeframe specified in this subparagraph (ii)(i.e. after you have been employed by Capella for more than 12 months) and you are unable to find suitable employment as a direct result of the restrictions imposed by the noncompete agreement with Capella, you will be entitled to a monthly severance benefit equal to the lesser of 12 months or the time which it takes you to secure suitable employment, provided that in no event will such severance entitlement be less than 6 months. For the purposes of this paragraph "Cause" means: i) your commission of a crime or other act that could materially damage the reputation of Capella; ii) your theft, misappropriation, or embezzlement of Capella property; iii) your falsification of records maintained by Capella; or
iv) your failure substantially to perform the material duties of your Capella employment, which failure is not cured within 30 days after written notice from the CEO specifying the act of non-performance.

Capella will also agree to provide outplacement assistance in the event you are terminated for any reason other than cause.

BENEFIT PLANS: The following will summarize the current benefit plans, for which you would be eligible as a full-time employee. I have also enclosed a more detailed summary for your review.

Medical/Dental - Subject to a 30 day waiting period, you will be eligible to participate in the company's medical plan. The plan is administered through Medica. The company will pay 100% of your medical premium. The company will contribute 70% of the cost of the dental coverage.

Life Insurance - The company provides paid life insurance in the amount of 1X salary. You may also elect to purchase additional coverage for yourself, spouse and/or dependents.

Disability Benefits - The company offers short and long-term disability benefits. The short-term disability coverage provides salary replacement for up to 26 weeks of disability. The amount and length of coverage is based upon length of service with the company. This benefit is paid for by the company.

2

Dr. Mike Offerman
Letter of Employment
April 16, 2001

Page 3

You may elect to purchase long-term disability coverage. The Plan replaces up to 60% of your salary as long as you are eligible for disability benefits under the Plan. The company pays 50% of the cost of this plan.

Cafeteria Plan - This plan allows you to pay for medical premiums, unreimbursed medical and child care expenses from pre-tax dollars. You would be eligible for this plan at the same time you are eligible for the medical insurance.

401K Retirement Plan - Under this plan, you may contribute up to 15% of your eligible compensation on a pre-tax basis up to IRS limits. You are eligible to participate in this plan immediately upon your employment with the company.

ESOP - The Company will also make an annual contribution to the ESOP up to 3% of eligible compensation in the form of company stock. Employer contributions made in your first three years with Capella will vest at the end of your third "year of service" as defined in the Plan document. Employer contributions made after the end of your third year of service will vest immediately.

Other benefits - You would earn 4 weeks of vacation per year, 10 paid holidays and up to 7 sick days allowed per year. Additionally, you would be eligible to receive one "life maintenance" day per year. As per policy, use this personal day as and when you wish.

You will be provided with company paid parking in a designated garage facility.

Relocation - The company will provide relocation benefits as outlined in the enclosed summary document.

Mike, I am delighted to offer you this opportunity to join the Capella organization. We are impressed with the knowledge and talent you bring to our organization and are confident you will make a significant contribution to our future success.

Please indicate your acceptance of this offer by signing below and returning one copy to me.

Sincerely,

/s/ Stephen Shank

Stephen Shank
Chairman and CEO

                                        Acceptance: /s/ Michael J. Offerman
                                                    ----------------------------

                                        Date:       April 17, 2001

SS:br

Enclosures

3

EXHIBIT 10.18

[CAPELLA EDUCATION COMPANY LETTERHEAD]

To: Mike Offerman

From:    Steve Shank /s/ S. Shank

Date:    November 10, 2003

Re: New Role

I am pleased to offer you the position of senior vice president and chief executive officer of Capella University with the additional responsibilities we have discussed. This memo confirms the compensation and benefits details of your position.

SALARY: In this position you will be paid on a bi-weekly basis an amount that will equal $240,000 when annualized. The effective date of this salary change will be November 2.

SALARY REVIEW DATE: You will be eligible for a performance and salary review February 1, 2004.

INCENTIVE COMPENSATION: There will be no change in your annual incentive compensation award target of 40% of your annual earnings, or your annual option grant salary multiple of 60%.

OTHER BENEFITS: All other benefits will remain the same.

Mike, I am pleased to be able to offer you this opportunity to expand your role and impact on the organization. I am confident you will continue to make a valuable contribution to the company's success in this important position.


EXHIBIT 10.19

December 22, 2003

Mr. Scott Henkel
8592 Ridge Ponds Drive
Victoria, MN 55386

Dear Scott

We are pleased to formally extend you this offer of employment for the position of Vice President and Chief Information Officer for Capella Education Company. This is a corporate officer position. The position reports to the Chairman and Chief Executive Officer, Steve Shank. This offer is contingent upon signing a Confidentiality, Non-Competition and Inventions Agreement, a copy of which is enclosed, and the successful completion of a background check.

You will be paid on a bi-weekly basis, an amount that will equal $185,000 when annualized. You will be eligible for a performance and salary review as of February 1, 2005 and, under normal circumstances, annually thereafter. Capella offers a comprehensive compensation system; more information will be provided to you after your start.

ANNUAL INCENTIVE COMPENSATION: In addition to your salary, you will be eligible to earn an annual incentive compensation award with a target of 35% of your base salary starting in fiscal 2004. The details of the incentive compensation program will be specified in the enclosed annual award plan.

BENEFIT PLANS: The following will summarize the current benefit plans, for which you would be eligible as a full-time employee:

Medical/Dental - Effective the first day of the month following employment, you would be eligible to participate in the company's medical plan. The plan is administered through Medica. You will also be eligible to participate in the company's dental plan, administered by Delta Dental. Both plans offer you a choice of networks and/or benefit levels.

Life Insurance - The company provides paid life insurance in the amount of 1X salary. You may also elect to purchase additional coverage for yourself, spouse and/or dependents.

Disability Benefits - The Company offers short and long-term disability benefits. The short-term disability coverage provides salary replacement for up to 26 weeks of disability. The amount and length of coverage is based upon length of service with the company. This benefit is paid for by the Company. You may elect to purchase long-term disability coverage. The Plan replaces up to 60% of your salary as long as you are eligible for disability benefits under the Plan. The Company pays 50% of the cost of this plan.


Scott Henkel

Page 2

Cafeteria Plan - This plan allows you to pay for medical premiums, unreimbursed medical and child care expenses from pre-tax dollars. You would be eligible for this plan at the same time you are eligible for the medical insurance.

401K Retirement Plan - Under this plan, you may contribute up to 35% of your eligible compensation on a pre-tax basis (up to IRS limits).

ESOP - The Company will also make an annual discretionary contribution to the ESOP up to 3% of eligible compensation in the form of company stock once you are eligible to participate. Employer contributions made in your first three years with Capella will vest at the end of your third year of service as defined in the Plan document. Employer contributions made after the end of your third year of service will vest immediately.

Stock Option Grant - You will be granted options to purchase 35,000 shares of Capella Education Company common stock at the exercise price then in effect at the next scheduled Board of Directors meeting. The terms of the stock option grant will be specified in a definitive stock option agreement (the "Stock Option Agreement") which will provide that the right to exercise options to purchase 8,750 shares which will vest on each of your first four anniversary dates of your initial employment with the Company. The Stock Option Agreement will also provide for immediate acceleration of the vesting of your stock option rights if, within the period required for full vesting of your stock option exercise rights, (1) there is a change of control of the ownership of the Company as defined in the Stock Option Agreement, and (2) within such period your employment is terminated or your job adversely affected by such changes as a reduction in responsibility or compensation or a relocation of the job.

You will also participate in an annual grant award program beginning July 1 following two years of employment with the company. The specific amount of the grant is based on your position and base compensation using a multiple of pay formula, and calculated using the Black Sholes valuation based on the market price at the time of the grant.

EXECUTIVE SEVERANCE PLAN. Capella Education Company has established the Capella Education Company Executive Severance Plan to provide severance pay and other benefits to eligible employees. In your current position as Vice President and CIO, you have been designated as an eligible Level II participant. Please refer to the attached Plan Document for information on the specific provisions and conditions of the Plan

CONFIDENTIALITY, NON-COMPETITION AND INVENTIONS AGREEMENT: With our growing leadership position in the market, the Company has a great opportunity to build national recognition of the Capella brand as the brand of choice in the elearning market. However, Capella expects increasing competition from for-profit and not for-profit organizations in the rapidly growing elearning market. Capella believes it is essential to take certain steps, including the execution of a Confidentiality, Non-Competition, and Inventions Agreement for certain key positions, in order to protect the legitimate business interests of the Company and to ensure the security and confidentiality of the company's customers, pricing, sales strategy, and technology. Accordingly, Capella requires as a condition of employment that candidates, such as you, for key positions execute Confidentiality, Non-Competition and Invention Agreements.


Scott Henkel

Page 3

EMPLOYMENT AT WILL: Your employment will be at will. This means that either you or Capella may terminate the employment at any time for any reason, without advance notice.

OTHER BENEFITS: You will be entitled to Personal Time Off earned on a prorated monthly basis equal to a maximum 27 days/year, in accordance with the Company benefit statement, and 10 paid holidays. You are also eligible for paid parking in a designated parking facility.

Scott, we are delighted to be able to offer you this opportunity to join Capella. Your education and experience are impressive and I am confident you will make a valuable contribution to the Company's continued success.

Please sign and date below your acceptance of this offer and return in the enclosed envelope.

Sincerely,

CAPELLA EDUCATION COMPANY

Betsy Rausch
Vice President Human Resources

Enclosures

ACCEPTANCE: I hereby accept the offer of employment by Capella University on the terms described in this letter. I understand that I must sign and return to Capella the Confidentiality, Non-Competition and Inventions Agreement provided to me with this letter before I start my Capella employment.

/s/ Scott Henkel                                     1-6-04
--------------------------------------------------------------------------------
Scott Henkel                                         Date


EXHIBIT 10.20

[CAPELLA EDUCATION COMPANY LETTERTHEAD]

June 3, 2003

Ms. Heidi Thom
320 Louisiana Avenue North
Golden Valley, MN 55427

Dear Heidi:

We are pleased to formally extend you this offer of employment for the position of Vice President, Marketing for Capella Education Company. The position reports to Steve Shank, Chairman and CEO. This offer is contingent upon signing a Confidentiality, Non-Competition and Inventions Agreement, a copy of which is enclosed and the successful completion of a background check.

You will be paid on a bi-weekly basis, an amount that will equal $210,000 when annualized. You will be eligible for a performance and salary review as of February 1, 2004 and, under normal circumstances, annually thereafter. Merit pay guidelines currently in effect are based on 12 month intervals. Accordingly, increases awarded over a shorter time interval may be prorated based on the number of months from your hire date or date of last increase. Capella offers a comprehensive compensation system; more information will be provided to you after your start.

HIRING BONUS: You will be paid a lump sum hiring bonus equal to $35,000, effective the first full payroll period following your start date. Your agreement to this offer of employment also indicates your agreement that, if you voluntarily terminate employment from Capella within 12 months (52 weeks) of your start date, you will return the net (of taxes) amount of this bonus to Capella on a prorata basis (1/12 per month). This payment is not considered "base salary compensation" for purposes of the Executive Severance Plan or Management Incentive Plan.

ANNUAL INCENTIVE COMPENSATION: In addition to your salary, you will be eligible to earn an annual incentive compensation award with a target of 40% of your base salary earnings in 2003. The details of the incentive compensation program will be specified in the enclosed annual award plan. Capella will guarantee 100% of your targeted incentive award for 2003.

BENEFIT PLANS: The following will summarize the current benefit plans, for which you would be eligible as a full-time employee:

Medical/Dental - Effective the first day of the month following employment, you would be eligible to participate in the company's medical plan. The plan is administered through Medica. Under this plan, you would contribute 30% and the Company would pay 70% of the monthly premium. You will also be eligible to participate in the Company's dental plan,


Heidi Thom

Page 2

administered by Delta Dental. Both plans offer you a choice of networks and/or benefit levels.

Life Insurance - The Company provides paid life insurance in the amount of 1X salary. You may also elect to purchase additional coverage for yourself, spouse and/or dependents.

Disability Benefits - The Company offers short and long-term disability benefits. The short-term disability coverage provides salary replacement for up to 26 weeks of disability. The amount and length of coverage is based upon length of service with the company. This benefit is paid for by the Company. You may elect to purchase long-term disability coverage. The Plan replaces up to 60% of your salary as long as you are eligible for disability benefits under the Plan. The Company pays 50% of the cost of this plan.

Cafeteria Plan - This plan allows you to pay for medical premiums, unreimbursed medical and child care expenses from pre-tax dollars. You would be eligible for this plan at the same time you are eligible for the medical insurance.

401K Retirement Plan - Under this plan, you may contribute up to 35% of your eligible compensation on a pre-tax basis (up to IRS limits).

ESOP - The Company will also make an annual discretionary contribution to the ESOP up to 3% of eligible compensation in the form of company stock once you are eligible to participate. Employer contributions made in your first three years with Capella will vest at the end of your third year of service as defined in the Plan document. Employer contributions made after the end of your third year of service will vest immediately.

Stock Option Grant - You will be granted options to purchase 50,000 shares of Capella Education Company common stock at the exercise price then in effect at the next scheduled Board of Directors meeting. The terms of the stock option grant will be specified in a definitive stock option agreement (the "Stock Option Agreement") which will provide that the right to exercise options to purchase 12,500 shares which will vest on each of your first four anniversary dates of your initial employment with the Company. The Stock Option Agreement will also provide for immediate acceleration of the vesting of your stock option rights if, within the period required for full vesting of your stock option exercise rights, (1) there is a change of control of the ownership of the Company as defined in the Stock Option Agreement, and (2) within such period your employment is terminated or your job adversely affected by such changes as a reduction in responsibility or compensation or a relocation of the job.

You will also participate in an annual grant award program beginning July 1 following two years of employment with the company. The specific amount of the grant is based on your position and base compensation using a multiple of pay formula, and calculated using the Black Sholes valuation based on the market price at the time of the grant.

EXECUTIVE SEVERANCE PLAN: As a designated "Management Employee," you are eligible to participate in the Executive Severance Plan. This Plan provides for severance and other associated benefits in the event of termination of employment or other qualified adverse action due to a Change of Control, or termination of employment for reason other than


Heidi Thom

Page 3

"Cause." The terms and conditions of this benefit program are specified in the Executive Severance Plan document, a copy of which you will receive.

CONFIDENTIALITY, NON-COMPETITION AND INVENTIONS AGREEMENT: With our growing leadership position in the market, the Company has a great opportunity to build national recognition of the Capella brand as the brand of choice in the elearning market. However, Capella expects increasing competition from for-profit and not for-profit organizations in the rapidly growing elearning market. Capella believes it is essential to take certain steps, including the execution of a Confidentiality, Non-Competition, and Inventions Agreement for certain key positions, in order to protect the legitimate business interests of the Company and to ensure the security and confidentiality of the company's customers, pricing, sales strategy, and technology. Accordingly, Capella requires as a condition of employment that candidates, such as you, for key positions execute Confidentiality, Non-Competition and Invention Agreements.

OTHER BENEFITS: You will be entitled to Personal Time Off earned on a prorated monthly basis equal to a maximum 27 days/year, in accordance with the Company benefit statement, and 10 paid holidays. You are also eligible for paid parking in a designated parking facility.

Heidi, we are delighted to be able to offer you this opportunity to join Capella. Your education and experience are impressive and I am confident you will make a valuable contribution to the Company's continued success.

Please sign and date below your acceptance of this offer and return in the enclosed envelope.

Sincerely,

CAPELLA UNIVERSITY

/s/ Betsy

Betsy Rausch
Vice President Human Resources

Enclosures

C.c. Steve Shank

Enclosures

ACCEPTANCE: I hereby accept the offer of employment by Capella Education Company on the terms described in this letter. I understand that I must sign and return to Capella the Confidentiality, Non-Competition and Inventions Agreement provided to me with this letter before I start my Capella employment.

/s/ Heidi K. Thom                               6/4/03
--------------------------------------------------------------------------------
Heidi Thom                                      Date


EXHIBIT 10.21

NONDISCLOSURE AGREEMENT

Capella Education Employee ("Capella") and ______________ ("Employee") enter into this NONDISCLOSURE AGREEMENT (the "Agreement") effective _______________ upon the following terms and conditions:

1. PURPOSE OF AGREEMENT. Capella desires to disclose to the Employee, today and in the future, details about Capella's financing plans (the "Project"). These disclosures by Capella are made so that the Employee can properly perform the duties of his or her position. The parties recognize that, in the course of disclosures relating to the Project, Capella will disclose to Employee information that Capella considers to be confidential information. Accordingly, Capella and Employee enter into this Agreement regarding their rights and responsibilities with respect to such information.

2. DESIGNATION OF CONFIDENTIAL INFORMATION. For purposes of this Agreement, "Confidential Information" means any information provided by Capella to Employee related to Capella's financing arrangements, however manifested or communicated, that (a) Capella designates in writing as "Confidential Information," (b) Capella otherwise notifies Employee that the information is confidential, proprietary, or trade secret information of Capella, or (c) Employee understands or should understand reasonably is Confidential Information of Capella. "Confidential Information" includes, without limitation, financial data and projections, analyses, regulatory filings, data and other information related to Capella's financing arrangements.

3. RESTRICTIONS ON USE OF CONFIDENTIAL INFORMATION. Subject to the terms and conditions of this Agreement, Employee agrees that he/she will use reasonable efforts to maintain the secrecy of Confidential Information disclosed to him/her by Capella and that he/she will not use for his/her own benefit or disclose to a third party any Confidential Information except as may be necessary to carry out his or her duties with respect to the Project.

4. EXCEPTIONS TO RESTRICTIONS. The restrictions relating to Confidential Information in this Agreement will cease to apply to 5 years after the date of this Agreement. Nothing in this Agreement prohibits Employee from disclosing Confidential Information under a court order; provided, however, that before disclosing Confidential Information under a court order, Employee must give written notice to Capella that the court order has been issued.

5. RETURN OF INFORMATION. Upon the written request of Capella, Employee must return to Capella, or certify that he/she has destroyed, all tangible Confidential Information in his/her possession, including all copies.

6. MISCELLANEOUS. This Agreement is governed by and construed in accordance with the laws of Minnesota, without regard to principles of conflicts of law. This Agreement contains the entire and only agreement between the Capella and Employee relating to the subject matter of this Agreement and supersedes and merges in this Agreement any prior promises, agreements or understandings between the parties with respect to the subject matter of this Agreement. No provision of this Agreement may be deemed modified, amended, waived or revoked except in a writing signed by both Capella and Employee.

CAPELLA EDUCATION COMPANY _____________ -- EMPLOYEE


Print Name:_______________________


EXHIBIT 10.22

OFFICE LEASE

BETWEEN

601 SECOND AVENUE LIMITED PARTNERSHIP,

A TEXAS LIMITED PARTNERSHIP

LANDLORD

AND

CAPELLA EDUCATION COMPANY,

A MINNESOTA CORPORATION,

TENANT

225 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA


TABLE OF CONTENTS

Section                                                                                       Page
-------                                                                                       ----
1.     DEFINITIONS.........................................................................     1
2.     PREMISES............................................................................     4
3.     RENTABLE AREA.......................................................................     4
4.     TENANT'S LEASEHOLD IMPROVEMENTS.....................................................     5
5.     TERM................................................................................     5
6.     BASE RENT...........................................................................     7
7.     CONTRIBUTION TO OPERATING COSTS.....................................................     9
8.     NO PERSONAL LIABILITY...............................................................    15
9.     USE.................................................................................    16
10.    ASSIGNMENT AND SUBLETTING...........................................................    17
11.    MAINTENANCE.........................................................................    19
12.    ALTERATIONS; EQUIPMENT..............................................................    21
13.    KEYS; RIGHT OF ENTRY; RESERVED RIGHTS IN COMMON AREAS...............................    23
14.    SERVICES AND UTILITIES..............................................................    24
15.    WAIVER AND INDEMNITY................................................................    27
16.    INSURANCE...........................................................................    27
17.    WAIVER OF CLAIMS AND SUBROGATION....................................................    28
18.    DAMAGE..............................................................................    29
19.    CONDEMNATION........................................................................    29
20.    DEFAULT.............................................................................    29
21.    LANDLORD'S RIGHT TO CURE DEFAULTS; LATE PAYMENTS....................................    32
22.    WAIVER..............................................................................    32
23.    SUBORDINATION.......................................................................    33
24.    RULES AND REGULATIONS...............................................................    34
25.    COVENANT OF QUIET ENJOYMENT.........................................................    34
26.    LIMITED LIABILITY...................................................................    34
27.    NO REPRESENTATIONS OR WARRANTIES BY LANDLORD........................................    35
28.    NOTICES.............................................................................    35
29.    ESTOPPEL CERTIFICATES...............................................................    36
30.    SURRENDER, HOLDING OVER.............................................................    37
31.    TENANT'S TAXES......................................................................    37
32.    NO MERGER...........................................................................    38
33.    GRAPHICS; BUILDING DIRECTORY........................................................    38
34.    LIEN FOR RENT ......................................................................    38
35.    MISCELLANEOUS.......................................................................    38
36.    ADDITIONAL RIGHTS OF TENANT.........................................................    40

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                            LIST OF ATTACHED EXHIBITS

EXHIBIT A           FLOOR PLAN OF PREMISES

EXHIBIT B           LEGAL DESCRIPTION

EXHIBIT C           FORM OF DECLARATION OF COMMENCEMENT DATE AND RENTABLE AREA

EXHIBIT D           WORKLETTER

EXHIBIT E           RULES AND REGULATIONS OF THE PROJECT

EXHIBIT F           AIR CONDITIONING AND HEATING SERVICES

EXHIBIT G           EXTENSION OPTION

EXHIBIT H           PARKING

EXHIBIT I-1         EXPANSION OPTIONS

EXHIBIT I-2         POTENTIAL EXPANSION FLOORS

EXHIBIT J           RIGHT OF OFFER

EXHIBIT K           FORM OF CONFIDENTIALITY AGREEMENT

EXHIBIT L           STORAGE SPACE

EXHIBIT M           ASSIGNMENT LIMITATIONS

EXHIBIT N           FORM OF NON DISTURBANCE AGREEMENT

EXHIBIT O           CLEANING SPECIFICATIONS

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LEASE

This Lease is made as of February _23 , 2004 ("EFFECTIVE DATE"), by and between 601 Second Avenue Limited Partnership, a Texas limited partnership ("LANDLORD"), and Capella Education Company, a Minnesota corporation ("TENANT").

1. DEFINITIONS.

"AFFILIATE" of any entity means any other entity directly or indirectly controlling or controlled by or under direct or indirect common control with such entity. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any entity shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such entity, whether through the ownership of voting securities or by agreement or otherwise.

"ANTENNA SITE MANAGER" means SpectraSite Building Group, Inc.

"ASSIGNEE" means the assignee, mortgagee, subtenant or other transferee under an Assignment.

"ASSIGNMENT" means (i) any assignment, transfer, mortgage or other encumbrance of this Lease or any interest in this Lease, or (ii) any subletting or renting or permitting occupancy or use of the Premises, or any part thereof, by any third party, whether direct or indirect, voluntary or by operation of law.

"BASE BUILDING SYSTEMS" means the systems of the Project including, without limitation, the Project's electrical, mechanical, structural, plumbing, heating, ventilating, air conditioning and life safety/fire systems.

"BASE RENT" shall have the meaning set forth in Section 6.

"BUILDING" means the 18 story Park building located in the Project.

"CAMPBELL MITHUN LEASE" means that certain Lease dated June 28, 2000, between 222 South Ninth Street Limited Partnership, a Minnesota limited partnership, as landlord, and Tenant, as tenant, as amended by that certain Amendment No. 1 To Lease Agreement dated December 5, 2001, between ND Properties, Inc., as landlord, and Tenant, as tenant, and as further amended by that certain Amendment No. 2 To Lease Agreement dated October 28, 2002, for the premises which Capella is currently leasing in the Campbell Mithun Tower in Minneapolis, Minnesota.

"COMMENCEMENT DATE" shall have the meaning set forth in Section 5.2.

"COMMON AREAS" means those portions of the Project which are not leased or held for lease and which are, from time to time, made available by Landlord for the use in common by Landlord, Tenant, other tenants of the Project and such other persons as Landlord may designate including, without limitation, the main floor lobby and other public areas of the Project located on levels B-1, 1 and 2, those portions of the loading dock areas not reserved for

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the specific use of any particular tenant of the Project, the elevators located in the Project, the mail room for the Project and the elevator foyers, corridors and rest rooms on multi-tenant floors.

"DIRECT COMPETITOR OF TENANT" means any entity in the business of providing post secondary educational courses to students.

"EFFECTIVE DATE" means the date on which this Lease has been fully executed, which date shall be inserted into this Lease by Landlord contemporaneously with Landlord's execution of this Lease.

"ESTIMATED OPERATING COSTS" means Landlord's estimate of Operating Costs for a particular calendar year (or fiscal year where Landlord has exercised its option under Section 7.8).

"EVENT OF DEFAULT" shall have the meaning set forth in Section 20.

"HAZARDOUS MATERIAL" means any hazardous substance, toxic chemical, pollutant or other material which is or becomes regulated by the Comprehensive Environmental Response, Compensation and Liability Act of 1985 or the Minnesota Environmental Response and Liability Act or any similar law, regulation or code (local, state or federal), including without limitation petroleum and petroleum products and any material, equipment or machinery containing asbestos, polychlorinated biphenyls (PCB's), chlorofluorocarbons (CFC's) or hydrofluorocarbons (HCFC's).

"INITIAL PREMISES" means the Phase I Space, the Phase II Space and the Phase III Space.

"INITIAL EXTENDED TERM" shall have the meaning set forth in Section 5.

"INITIAL SCHEDULED TERM" shall mean the six year period beginning on the Phase I & II Rent Commencement Date.

"INTEREST RATE" means an annual rate equal to the lesser of (i) two percentage points above the reference rate of interest published from time to time by U.S. Bancorp (or its successors), or if U.S. Bancorp (or its successors) discontinues publishing such a rate, two percentage points in excess of the published prime rate or other equivalent reference rate of interest of a major commercial bank reasonably designated by Landlord, or (ii) the maximum contract interest rate per annum permitted by applicable law.

"LAND" means the real estate described on Exhibit B attached hereto.

"LEGAL REQUIREMENTS" shall have the meaning set forth in Section 9.1.

"MORTGAGE" means any mortgage or trust deed now existing or hereafter encumbering or otherwise affecting the Project or any substantial part thereof and all renewals, modifications, consolidations, replacements or extensions thereof.

"MORTGAGEE" shall have the meaning set forth in Section 23.

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"NORMAL BUSINESS HOURS" means the periods from 7:30 a.m. to 6:00
p.m., Monday through Friday, and 7:30 a.m. to 1:00 p.m. on Saturday, except during Holidays as defined in Exhibit F.

"OPERATING COSTS" shall have the meaning set forth in Section 7, as adjusted pursuant to Section 7.8.

"PHASE I & II RENT COMMENCEMENT DATE" means November 1, 2004.

"PHASE III RENT COMMENCEMENT DATE" means November 1, 2005.

"PHASE I SPACE" means the 119,711 square feet of Rentable Area which is located on the 8th and 9th floors of the Building and the 8th, 9th and 15th floors of the Tower and depicted on the floor plans which are attached hereto as Exhibit A.

"PHASE II SPACE" means the 30,335 square feet of Rentable Area which is located on the 7th floor of the Building and depicted on the floor plans which are attached hereto as Exhibit A.

"PHASE III SPACE" means the 53,275 square feet of Rentable Area which is located on the 6th and 7th floors of the Tower and depicted on the floor plans which are attached hereto as Exhibit A.

"PREMISES" shall mean Initial Premises and any other space which is added to the Initial Premises pursuant to the Expansion Options provided in Exhibit I-1, the Right of Offer provided in Exhibit J or in any other manner.

"PROJECT" means the Land, the Building and the Tower, the atrium connecting the Building and the Tower, the subterranean parking garage, all skyways and other improvements of Landlord now or hereafter constructed on the Land or on or in any appurtenant easement or encroachment areas, except improvements which tenants may remove therefrom pursuant to the terms of their respective leases.

"RENT" means Base Rent, Tenant's Additional Rent, and all other sums which shall become due and payable by Tenant to Landlord hereunder.

"RENTABLE AREA" shall be determined in accordance with Section 3.

"RENTABLE AREA OF THE PROJECT" means, during any year, the Rentable Area of space leased or held for lease as office space or retail space contained in the Project for such year.

"SUCCESSOR" shall have the meaning set forth in Section 10.7.

"TENANT'S ADDITIONAL RENT" means the sum of Tenant's Pro Rata Share of Operating Costs (determined in accordance with Section 7 below) plus Tenant's Property Management Fee.

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"TENANT IMPROVEMENTS" shall have the meaning set forth in Exhibit D.

"TENANT'S PRO RATA SHARE" is a fraction, the numerator of which for any year shall be the weighted average Rentable Area of the Premises for such year and the denominator of which shall be the Rentable Area of the Project for such year.

"TENANT'S PROPERTY MANAGEMENT FEE" means for any year three and 09/100 percent (3.09%) of the sum of Tenant's Base Rent and Tenant's Pro Rata Share of Operating Costs for such year.

"TERM" shall have the meaning set forth in Section 5.

"TOWER" means the 53 story office building located in the Project.

2. PREMISES.

2.1 Subject to and upon the terms, provisions and conditions hereinafter set forth, and each in consideration of the duties, covenants and obligations of the other hereunder, (i) Landlord hereby leases the Initial Premises to Tenant, and Tenant hereby leases the Initial Premises from Landlord, beginning on the Commencement Date and thereafter throughout the Lease Term, and (ii) Landlord hereby grants Tenant a non-exclusive license to use the Common Areas throughout the Lease Term for their intended purpose and in accordance with the rules and regulations of the Project. Landlord covenants and represents that (y) the Initial Premises is currently vacant (other than some personal property located thereon which belongs to American Express Financial Corporation), and (z) Landlord will cause the Initial Premises to be served by, and to be delivered in accordance with, Base Building Systems and conditions which meet or exceed the standards described in Section 14 (the "SPACE DELIVERY STANDARDS").

2.2 The Premises may be contracted pursuant to Section 5.3 or expanded pursuant to the Expansion Options provided in Exhibit I-1 or the Right of Offer provided in Exhibit J.

3. RENTABLE AREA.

3.1 For purposes of this Lease, the terms "RENTABLE AREA" and "USABLE AREA" shall be calculated substantially in accordance with the Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA Z65.1-1996.

3.2 Landlord certifies to Tenant that the Rentable Area of the Phase I Space, the Phase II Space and the Phase III Space has been calculated as of the Effective Date on the basis of the foregoing definitions as follows: (i) 119,711 square feet for the Phase I Space; (ii) 30,355 square feet for the Phase II Space; and (iii) 53,275 square feet for the Phase III Space (and such amounts shall not be adjusted as a result of minor variations resulting from any construction and completion of the Initial Premises for occupancy so long as such work is done in accordance with the terms and provisions of this Lease). Landlord further certifies to Tenant that the Rentable Area of the Project as of the Effective Date is 1,401,233 square feet.

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4. TENANT'S LEASEHOLD IMPROVEMENTS.

Landlord and Tenant shall each comply with the provisions of Exhibit D. Landlord is under no obligation to make any alterations, decorations, additions or improvements in or to the Premises, nor to bear the cost of the same, except as expressly set forth in Exhibit D. By taking occupancy of the Premises, Tenant shall be deemed to have acknowledged that Landlord has completed all of its obligations for improvements to the Premises, except as otherwise provided in Exhibit D. Except as expressly set forth in Section 2, on Exhibit D or elsewhere in this Lease, Tenant agrees that it is taking and accepting the Premises on the Commencement Date and thereafter on an "as is", "where is", and "with all faults" basis, without warranty or representation of any kind, including without limitation any warranty as to the merchantability or fitness for a particular purpose of any portion of the Premises, subject, however, to Landlord's obligations under Section 11.2.

5. TERM.

5.1 Subject to and upon the terms and conditions set forth herein, or in any Exhibit or Addendum hereto, the initial term of this Lease (the "INITIAL SCHEDULED TERM") shall commence on the Phase I & II Rent Commencement Date and shall continue until 11:59 p.m., Minneapolis, Minnesota, time on the day prior to the sixth anniversary of the Phase I & II Rent Commencement Date unless extended by Tenant's exercise of an Expansion Option pursuant to Exhibit I-1 or a Right of Offer pursuant to Exhibit J, as the case may be (as extended, the "INITIAL EXTENDED TERM"). For purposes of this Lease, the "TERM" or "LEASE TERM" means the Initial Scheduled Term of this Lease as the same may be hereafter extended or renewed pursuant to the Expansion Options provided in Exhibit I-1, the Right of Offer provided in Exhibit J, the Extension Options provided in Exhibit G, or in any other manner.

5.2 Landlord shall provide Tenant with access to the Phase I Space and the Phase II Space as soon as reasonably possible (and in any event within thirty (30) days) after the Effective Date (the date Landlord provides Tenant with access to the Phase I Space and the Phase II Space being referred to herein as the "COMMENCEMENT DATE") and access to the Phase III Space on May 1, 2005, so that Tenant may prepare the Initial Premises for its use. Landlord shall not, however, be liable to Tenant for any delay in giving possession of the Initial Premises to Tenant because of any holding over or retention of possession by any previous tenants or occupants of the same, nor shall any delay impair the validity of this Lease; provided, however, that if Landlord fails to deliver the Phase I Space and Phase II Space to Tenant on or before November 1, 2004, Tenant may, at its option, within thirty (30) days of said date, terminate this Lease by delivering written notice of termination to Landlord, and upon any such termination Landlord shall reimburse Tenant for all out-of-pocket costs and expenses incurred by Tenant in connection with this Lease, including, without limitation, design fees, construction costs and expenses, attorneys' fees, and consultants' fees. If Landlord fails to deliver the Phase III Space to Tenant on or before July 1, 2005, Tenant may, at its option, by written notice to Landlord given within thirty (30) days of said date, elect to exclude the Phase III Space from the Initial Premises, whereupon the Phase III Space shall become part of the Available Space under the Right of Offer. If any delay in delivering possession to Tenant of the Phase I and Phase II Space or the Phase III Space, as the case may be, actually delays the completion of the Tenant Improvements, the Phase I & II Rent Commencement Date or the Phase III Rent

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Commencement Date, as applicable, will be extended by the number of days that completion of the Tenant Improvements has been delayed, and if the Phase I & II Rent Commencement Date is so extended, then the expiration of the Initial Scheduled Term shall be similarly extended and any other date in this Lease which is thereby affected will be appropriately adjusted. Tenant agrees to be bound by and to comply with all of the terms and conditions of this Lease (other than Tenant's obligation to pay Rent) during any occupancy of the Premises by Tenant prior to the Phase I & II Rent Commencement Date with respect to the Phase I Space and the Phase II Space and prior to the Phase III Rent Commencement Date with respect to the Phase III Space. Notwithstanding anything to the contrary in this Lease, Tenant shall not be obligated to pay any Rent for the Phase I Space or the Phase II Space prior to the Phase I & II Rent Commencement Date and Tenant shall not be obligated to pay any Rent for the Phase III Space prior to the Phase III Rent Commencement Date.

5.3 During the Initial Scheduled Term, Tenant shall have the one time right (the "CONTRACTION OPTION") to contract the Premises by surrendering possession to Landlord of either one or two full floors of the Premises; provided that for purposes of such Contraction Option, a "full floor" shall mean all of the Rentable Area of a floor in the Tower only or in the Building only (so that if, for example, Tenant would like to surrender possession of all of the Rentable Area on the 9th floor of the Tower and the 9th floor of the Building, all of the space on the 9th floor of the Tower and the 9th floor of the Building would constitute two "full floors"). Tenant must exercise the Contraction Option, if at all, (i) by delivering a written notice to Landlord not earlier than fifteen (15) months and not later than twelve (12) months' prior to the date on which Tenant intends to surrender such space (the "CONTRACTION DATE"), which identifies the floor or floors which will be surrendered (the "CONTRACTION SPACE"), and (ii) by Tenant's payment not later than the Contraction Date, to Landlord in immediately available good funds of a Contraction Fee, computed as set forth in this Section 5.3. Tenant may not specify as the Contraction Date any date prior to July 1, 2008, or any date that is more than twelve (12) months after the last day of the Initial Scheduled Term. For purposes of designating Contraction Space (a) if Tenant's notice designates only one floor as Contraction Space, such floor shall be the uppermost floor of the Premises in the Tower or in the Building; (b) if Tenant's notice designates two floors as Contraction Space, one floor shall be the uppermost floor of the Premises in the Tower or in the Building, and the second floor shall be contiguous thereto (either vertically or horizontally), provided, however, if said uppermost floor in the Tower or Building is not contiguous (either vertically or horizontally) to any other floor of the Premises, then the second floor shall be the next uppermost floor in the Tower or Building; (c) in any case where Tenant is to designate as Contraction Space a floor that is the uppermost floor in the Premises and the uppermost floor of the Premises in the Tower is on the same level as the uppermost floor of the Premises in the Building, Tenant may designate either the floor in the Tower or the floor in the Building as the Contraction Space; and (d) in determining which floor is the uppermost floor in the Premises under this Section 5.3, that portion of the Premises on the 15th Floor of the Tower shall be disregarded. The "CONTRACTION FEE" shall be an amount equal to the sum of (A) the unamortized portion of Landlord's Transaction Costs as of the Contraction Date, with respect to the Contraction Space, plus (B) two months of the Base Rent and Tenant's Additional Rent (based upon the amounts which Tenant is obligated to pay Landlord for the month in which the Contraction Date occurs) for the Contraction Space. For purposes of determining the amount of the Contraction Fee, (x) "LANDLORD'S TRANSACTION COSTS" shall mean the total of the brokerage fees paid to CRESA Partners for their services in connection with this Lease, plus the

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Improvement Allowance (as defined in Exhibit D attached hereto) that is actually advanced or applied as a credit against Base Rent, (y) Landlord's Transaction Costs shall be amortized on a fully amortized basis together with ten percent (10%) interest on Landlord's Transaction Costs over the Initial Scheduled Term, and (z) the unamortized portion of Landlord's Transaction Costs with respect to the Contraction Space shall be determined by multiplying the total amount of the unamortized portion of Landlord's Transaction Costs as of Contraction Date, by a fraction, the numerator of which shall be the number of square feet of the Rentable Area of the Contraction Space, and the denominator of which shall be 203,321. Tenant shall also reimburse Landlord for the reasonable costs of removing and filling in any internal stairways installed by Tenant which serve the Contraction Space within thirty (30) days after Tenant's receipt of an invoice from Landlord for such costs based upon the lowest of three bids for such work which are obtained by Landlord.

5.4 Landlord shall promptly after the Commencement Date, the Phase I & II Rent Commencement Date, and the Phase III Rent Commencement Date, prepare a declaration (substantially in the form of Exhibit C attached hereto) confirming such date and the date on which the Initial Scheduled Term shall expire. Tenant shall execute and return each such declaration within twenty (20) days after submission. If Tenant fails to execute and return either declaration to Landlord within said twenty (20) day period, Tenant shall be conclusively deemed to have agreed that the information in the declaration is accurate and Tenant shall have thereby waived any right to object to the accuracy of such information unless Landlord has, during said twenty (20) day period, received a written notice from Tenant objecting to such information and describing in detail Tenant's reasons for so objecting.

6. BASE RENT.

6.1 Tenant shall pay as monthly "BASE RENT" for the Premises one-twelfth of the product of:

(a) Nine and 75/100 Dollars ($9.75) times the number of square feet of Rentable Area of the Phase I Space and the Phase II Space, collectively, for the period beginning on November 1, 2004 and ending on October 31, 2005;

(b) Ten Dollars ($10.00) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2005 and ending on October 31, 2006;

(c) Ten and 25/100 Dollars ($10.25) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2006 and ending on October 31, 2007;

(d) Ten and 50/100 Dollars ($10.50) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2007 and ending on October 31, 2008;

(e) Ten and 75/100 Dollars ($10.75) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2008 and ending on October 31, 2009;

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(f) Eleven Dollars ($11.00) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2009 and ending on October 31, 2010.

The Base Rent shall be paid in monthly installments, in advance, on the first day of each and every calendar month during the Term. If the initial or final month of the Term of this Lease is less than a calendar month, all Rent including the Base Rent for such partial month shall be prorated at the rate of one-thirtieth of the monthly Base Rent and all other Rent for each day within the Term of this Lease. Tenant will pay said Base Rent, together with Tenant's Additional Rent and all other amounts due under this Lease, to Landlord at the Project, or to such other party or address as Landlord may designate from time to time by notice to Tenant, without demand and without deduction, set-off, counterclaim or abatement except as expressly provided herein.

6.2 Notwithstanding anything to the contrary in this Lease, Tenant shall, for the period beginning on November 1, 2004, and ending on November 30, 2005, receive a credit each month against Tenant's obligation to pay Rent for the Premises in an amount equal to all of the monthly rent, estimated operating expenses (including management fees, but excluding charges for any services in addition to the basic services to be provided to Capella under the Campbell Mithun Lease) and real estate taxes which Tenant pays for the premises which Tenant is currently leasing (the "CAMPBELL MITHUN PREMISES") pursuant to the Campbell Mithun Lease as in effect on the Effective Date for the period from November 1, 2004, through November 30, 2005 (the "CAMPBELL MITHUN RENT"). If the Phase I & II Rent Commencement Date shall be extended pursuant to Section 5.2 (or Section 4 of Part III of the Work Letter), then the period during which Tenant is entitled to receive a credit pursuant to the preceding sentence shall be extended from November 30, 2005, to such later date as will enable Tenant to receive credit in the full amount of the Campbell Mithun Rent. Tenant represents to Landlord that: (a) the total monthly amount of base rent which Tenant is obligated to pay for the Campbell Mithun Premises during the period of November 1, 2004, through November 30, 2005, is $104,820.83 per month; (b) Tenant is obligated to pay during calendar year 2004 current estimated operating expenses (including management fees) of $57,679.52 per month and real estate taxes of $29,778.71 per month for the Campbell Mithun Premises which is comprised of a total of 91,480 square feet of rentable area; and (c) Tenant is not aware of the monthly charges for operating expenses and real estate taxes during calendar year 2005 for the Campbell Mithun Premises. Tenant shall, within ten (10) days after being notified of any adjustment (including any refund or abatement) in the amount of the Campbell Mithun Rent for calendar years 2004 and 2005, notify Landlord of such adjustment, but if Tenant shall fail to so notify Landlord, such failure shall constitute an Event of Default by Tenant only if such failure shall continue for fifteen (15) days after written notice of default is given by Landlord in accordance with Section 20.1(c). Tenant hereby acknowledges that Landlord shall be entitled to receive a portion of any refund of estimated operating expenses which Tenant is entitled to receive pursuant to the Campbell Mithun Lease for calendar years 2004 and 2005, and that Tenant shall not be entitled to compromise the amount of any such refund. Tenant shall, within ten
(10) days after receiving a refund of the operating expenses which Tenant has paid pursuant to the Campbell Mithun Lease, pay to Landlord (i) in the case of any refund for calendar year 2004, one-sixth (1/6) of such refund, and (ii) in the case of any refund for calendar year 2005, the full amount of such refund. Landlord acknowledges that if Tenant receives a reconciliation of operating expenses under the Campbell Mithun Lease

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requiring Tenant to make an additional payment for calendar years 2004 or 2005 over and above the estimated operating expenses theretofore paid by Tenant, Tenant shall be entitled to an additional credit against Rent in an amount equal to (a) in the case of any additional payment due for calendar year 2004, one-sixth (1/6) of such additional payment, and (b) in the case of any additional payment due for calendar year 2005, the full amount of such additional payment. Tenant shall not be entitled to receive a credit against the Base Rent due to Landlord under this Section 6.2 which is greater than the total amount of the monthly rent, operating expenses and management fees which Tenant actually pays for the Campbell Mithun Premises for the period commencing on November 1, 2004, and ending on November 30, 2005. Tenant agrees to provide Landlord with reasonable evidence of Tenant's payment of Campbell Mithun Rent from time to time upon Landlord's request.

7. CONTRIBUTION TO OPERATING COSTS.

7.1 Tenant shall pay to Landlord on the first day of each month throughout the Lease Term an amount equal to one-twelfth of Tenant's Additional Rent (based on Estimated Operating Costs in accordance with Section 7.5 below). Tenant's Additional Rent shall be paid to Landlord without deduction, set-off, counterclaim or abatement except as expressly provided herein and shall be prorated for any partial month during the Lease Term.

7.2 "OPERATING COSTS" are hereby defined with respect to any calendar year to include all operating expenses of the Project, computed on an accrual basis in accordance with generally accepted accounting principles which shall be consistently applied (except that taxes shall be based on a due and payable, and not an accrual, basis). Except as otherwise specifically excluded herein, the term "operating costs" as used herein shall mean all expenses, costs and disbursements of every kind and nature relating to or incurred or paid in connection with the ownership, operation, repair and maintenance of the Project, including but not limited to, the following:

(a) all taxes and assessments and governmental charges whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing the Premises or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation or the rent payable by tenants of the Project (provided that Tenant will be responsible for ad valorem taxes on its personal property and on the value of leasehold improvements to the extent that same exceed the base building improvements), together with any reasonable costs or fees incurred in any challenge or contest of such taxes, assessments or other charges (collectively, "TAXES"); provided that operating expenses shall not include Landlord's general income, excess profit, franchise, transfer, inheritance, estate or gift taxes, except to the extent assessed, levied or imposed in lieu of Taxes;

(b) any other fee, charge or assessment imposed by any governmental entity for fire protection, police, trash or other service or amenity;

(c) costs incurred for electricity, gas, fuel, steam, water, sewer or other utilities required in connection with the operation and maintenance of the Project;

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(d) the cost of all premiums and other charges incurred by Landlord with respect to insurance on the Project for all risk property insurance, liability insurance, workers' compensation insurance, boiler and machinery insurance, sprinkler leakage, water damage, legal liability, burglary and hold-up insurance, fidelity and pilferage insurance on equipment and materials, rental abatement insurance, and such other insurance as is deemed necessary or advisable in Landlord's reasonable judgment or is required by any Mortgagee;

(e) costs incurred in connection with the inspection, servicing, maintenance and repair (including all outside contracts relating to the operation and maintenance) of the Project and appurtenances thereto including, without limitation, janitorial and window cleaning, rubbish removal, exterminating, landscaping, water treatment, elevator, electrical, plumbing, and mechanical equipment and the cost of materials, tools, supplies and equipment (not of a capital nature) used in connection therewith;

(f) compensation provided in the form of wages, salaries and such other compensation and benefits (including payroll taxes, federal, state and local unemployment taxes, social security taxes, welfare, retirement, vacation, holiday, other paid absences and other fringe benefits) as well as any adjustments thereto, to the extent relating to persons not above the level of the on-site Project manager who perform duties connected with the operation and maintenance of the Project (but only for the portion of their time allocable to work related to the Project), and further excluding any time reasonably allocable to leasing or other functions;

(g) expenses reimbursable to the property manager, including the rent of the property manager's offices in the Project, and all other costs and expenses incurred by Landlord in maintaining a property management office in the Project, but excluding the costs of any marketing center or any other space in the Project which is used primarily for leasing space to new tenants;

(h) fees for professional services (including accounting and legal costs), but only to the extent directly related to the operation and management of the Project and not involving leasing matters or matters associated with the operation of the business of the entity which constitutes Landlord such as the preparation of tax returns and internal financial statements;

(i) any equipment rental;

(j) operating costs relating to skyways;

(k) amortization of the cost, together with reasonable finance charges, of furnishing and installing capital improvements which are (a) undertaken by Landlord in the reasonable good faith belief that the reduction in Operating Costs likely to result from such capital improvements will equal or exceed the amortized cost of such capital improvements; (b) required by Landlord's insurance carrier; or (c) required as a result of any applicable law, rule, regulation or order of any governmental or quasi-governmental authority having jurisdiction over the Project which first becomes effective on or after the

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Effective Date (all such costs shall be amortized over the useful life of the capital improvement items with the useful life and amortization schedule being determined in accordance with generally accepted accounting principles, but in no event shall such useful life extend beyond the remaining useful life of the Project); and

(l) costs of licenses, permits (not including building permits), and inspection fees for the Project.

Notwithstanding anything contained in the foregoing list, out of pocket expenses for the following shall be excluded from Operating Costs (unless offset by a corresponding credit):

(i) costs of repairs or other work occasioned by fire, windstorm or other casualty, to the extent that such costs are reimbursed to Landlord by insurers;

(ii) costs of correcting any violations of any Legal Requirements, except to the extent of what would have been the costs of compliance in the first instance if such compliance would have been properly included in Operating Expenses under Section 7.2;

(iii) costs directly or indirectly resulting from or relating to (including repairs, restoration, security measures, emergency or temporary services, inspection and, during the period of such repair or restoration, any increase in operating expenses resulting from) the exercise of rights of eminent domain, regardless of whether paid for by condemnation proceeds;

(iv) costs of correcting defects in, or the inadequacy of, the initial design or construction of the Project, or the materials used in the initial construction of the Project or in the Project equipment or appurtenances thereto;

(v) leasing commissions, attorneys' fees and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, or prospective tenants or other occupants of the Project;

(vi) costs incurred in renovating or otherwise improving or decorating or redecorating space leased to tenants of the Project or other space leased or held for lease in the Project;

(vii) Landlord's costs for electricity and other services sold to tenants or which Landlord is actually reimbursed by tenants, other than through payment of Operating Costs, as a separate additional charge or rental;

(viii) depreciation and amortization, except as provided in
Section 7.2(k) above;

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(ix) costs which under generally accepted accounting principles, consistently applied, must be capitalized, except as provided in Section 7.2(k) above;

(x) all amounts paid to subsidiaries or affiliates of Landlord for services on or to the Project, to the extent that the costs of such services demonstrably exceed competitive costs for such services rendered by persons or entities of similar skill, competence and experience;

(xi) payments on any Mortgage or any other loan (except as otherwise permitted with respect to certain capital improvements as provided in Section 7.2(k) above) and rental under any ground lease;

(xii) rentals and other related expenses, if any, incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial services and which is not affixed to the Building and except as provided in Section 7.2(k) above;

(xiii) all items and services for which Landlord actually receives reimbursement from Tenant (other than through Tenant paying Tenant's Additional Rent) or for which Tenant actually pays third parties;

(xiv) costs incurred in advertising for the Project or other marketing or promotional activity specifically and primarily designed for marketing space in the Project, but excluding the costs of amenities provided for the benefit of existing tenants of the Project;

(xv) any bad debt expense or bad debt reserve, whether for rent or otherwise, or any fees or penalties charged to Landlord as a result of not paying any amount constituting costs or expenses when due;

(xvi) costs (and reserves thereof) of a capital nature irrespective of the amount thereof, including capital improvements, capital repairs and replacements and capital equipment, except as provided in Section 7.2(k) above;

(xvii) costs in connection with services or other benefits of a type which are not provided, or which are provided at higher levels or greater amounts than, or to a degree which is higher than furnished to Tenant, but which are provided to other Project tenants;

(xviii) except for Tenant's Property Management Fee and as specifically provided in Sections 7.2(f), 7.2(g) and 7.2(h) above, fees or costs for management of the Project, including any property management fee paid to a property management company for the

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Project, or any fees, costs or expenses associated with any accounting, bill-paying or management activities;

(xix) costs of entertaining current or prospective Project tenants, and costs incurred in advertising in respect of or for the Project or other marketing or promotional activity;

(xx) all direct costs arising from the operation of the Parking Garage including costs of operating a ticket booth, janitorial services, striping, lamp replacement and repair and replacement of concrete and reinforcing; provided that Operating Costs shall include the cost of all Taxes and insurance premiums allocable to the Parking Garage and any costs and expenses that relate to the maintenance, repair and operation of the structural elements of the Project or Base Building Systems even if such structural elements or Base Building Systems are located in or about the Parking Garage;

(xxi) capital costs for sculpture, paintings or other art objects;

(xxii) contributions to any political or charitable organizations; and

(xxiii) travel, entertainment and related expenses incurred by Landlord or its personnel, except for the reasonable cost of out of state travel and meals, but only if directly related to, and to the extent of, services which are being provided to the Project.

Operating Costs shall be "net" only and for that purpose shall be deemed reduced by the amount of any insurance reimbursement, other reimbursement, credit or the like received or receivable by Landlord in connection with such operating expense.

7.3 Landlord may at its sole discretion pay any Taxes in installments when allowed by law, in which case each installment included in Operating Costs shall include any interest charged thereon.

7.4 Taxes shall be included in Tenant's Additional Rent in monthly installments which are computed such that at each date an installment of Taxes is due to the taxing authorities, the proportion of annual taxes theretofore included in Tenant's Additional Rental equals the proportion of annual Taxes due to the taxing authorities at such installment due date, it being understood that this may necessitate some installments to be included in one year for Taxes payable in the following year.

7.5 Landlord shall from time to time give Tenant notice of Landlord's determination of Estimated Operating Costs for the pertinent calendar year. If Landlord makes a redetermination of Estimated Operating Costs at a time other than the commencement of a calendar year, then at the time of the next due monthly installment of Tenant's Additional Rent, such installment shall be increased or reduced, as the case may be, by the monthly difference in Tenant's Additional Rent resulting from the redetermination, times the number of months elapsed in such year prior to the date on which such next monthly installment of Tenant's

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Additional Rent is due. Landlord agrees to use reasonable efforts to inform Tenant if, during any calendar year, Landlord believes that the actual amount of Operating Costs for such calendar year will be significantly greater than the most recent estimate of such Operating Costs which Landlord has given to Tenant.

7.6 Within one hundred twenty (120) days after the end of each calendar year, Landlord shall submit to Tenant a statement setting forth (i) the Operating Costs of the Project actually incurred for such calendar year, (ii) Tenant's Additional Rent, based on such Operating Costs for such year, and (iii) the aggregate of Tenant's payments of Tenant's Additional Rent for such year. Within thirty (30) days after the delivery of such statement (including any statement delivered after the expiration or termination of the Term of this Lease), the party in whose favor there exists a difference, if any, between (x) Tenant's Additional Rent (based on Operating costs actually incurred), and (y) Tenant's payments of Tenant's Additional Rent, shall pay the amount of such difference to the other; provided that Landlord shall have the right to offset any amount owed by Landlord to Tenant pursuant to this Section 7.6 against amounts which Tenant then owes Landlord.

If Tenant would like more information with respect to one or more specific line items set forth on the annual statement, Tenant may, within sixty (60) days after receipt thereof, request such additional information, and Landlord shall, within thirty (30) days of Tenant's request, provide Tenant with more detailed information with respect to such line items. Each statement furnished by Landlord hereunder shall constitute a final determination upon Tenant unless Tenant shall within ninety (90) days after delivery thereof (or, if Tenant has requested additional information from Landlord, then sixty (60) days after Landlord provides such additional information), give written notice to Landlord that Tenant disputes the accuracy thereof, which notice shall specify in reasonable detail the inaccuracies of the statement.

7.7 Tenant shall have the right to audit Operating Costs provided such audit is conducted pursuant to the following terms and conditions: (a) Tenant shall not have the right to conduct an audit if an Event of Default by Tenant exists; (b) such audit must be conducted by Tenant's employees or an independent nationally or regionally recognized accounting or consulting firm that is not being compensated by Tenant, Tenant's officers, directors, shareholders, partners or agents on a contingency fee basis, after execution of a Confidentiality Agreement in the form of Exhibit K attached hereto; (c) such audit must be commenced within ninety (90) days after Landlord submits to Tenant the annual statement described in Section 7.6 (or, if Tenant has requested additional information from Landlord, then sixty (60) days after Landlord provides such additional information), and once commenced, such audit shall be completed in a diligent and expeditious manner (and Tenant shall inform Landlord once such audit is completed); (d) Tenant shall supply Landlord with a copy of the relevant portion of any audit within fifteen (15) days after Tenant's receipt of the same (but if Tenant shall fail to provide such copy to Landlord, such failure shall constitute an Event of Default by Tenant only if such failure shall continue for fifteen (15) days after written notice of default is given by Landlord in accordance with Section 20.1(c)); (e) no audit shall be conducted if Tenant has previously conducted an audit for the same period of time; (f) such audit shall be conducted during normal business hours, at a mutually agreed upon time, at Landlord's business address or at such other location as Landlord normally keeps its books and records of Operating Costs; (g) if Tenant exercises its audit rights to audit a period of time for which the books and records are

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held by another party that is not affiliated with or controlled by or under common control with Landlord, such information must be obtained by Tenant, as Tenant's sole cost and expense, from the keeper of the books and records; (h) such audit shall be at Tenant's sole cost and expense and any out of pocket costs or expenses incurred by Landlord in providing Tenant with the information required to perform such audit, including, but not limited to, copying costs and delivery fees shall be paid by Tenant to Landlord upon demand; provided, however, that Landlord shall reimburse Tenant for its actual and reasonable out of pocket costs of conducting such audit (other than any fees owing to an auditor or inspector retained on a contingency fee basis) if it is determined pursuant to such audit that Landlord has overstated the actual amount of Tenant's Additional Rent for the applicable year by in excess of three percent (3%); (i) any information obtained by Tenant as a result of such audit shall be held in strict confidence by Tenant and shall not be disseminated further except to Tenant's accountants, attorneys and lenders, or in connection with the enforcement by Tenant of its rights under this Lease; (j) no subtenant shall have any right to conduct an audit and no assignee shall conduct an audit for any period during which assignee was not in possession of the Premises; and (k) if it is determined pursuant to such audit that there has been an overpayment or underpayment of Tenant's Additional Rent, the parties shall promptly make such reconciliation payments and/or refunds as are appropriate. Further, notwithstanding the fact that Tenant has elected to conduct such audit, Tenant shall not have the right to withhold or offset any part of Tenant's Additional Rent, which Tenant shall pay to Landlord as and when due and payable in accordance with the terms of this Lease.

7.8 Landlord may, at its option, by giving thirty (30) days' written notice to Tenant change its accounting year hereunder from a calendar year to a fiscal year, making such adjustments from the end of the last calendar year to the commencement of the first full fiscal year as shall be appropriate pursuant to generally accepted accounting principles. Upon such change, references in this Section 7 to a calendar year shall be deemed to be references to a fiscal year.

7.9 Notwithstanding any other provision herein to the contrary, (i) if at any time the entire Project is not fully occupied, or if full services are not provided to all areas of the Project which are leased or available for lease during all or any portion of a calendar year, then those elements of Operating Costs and Estimated Operating Costs which vary with occupancy (or for which full service is not provided to all areas) shall be adjusted to equal the cost which Landlord would have incurred if the Project were fully occupied and all rentable areas had received full services; and (ii) if Tenant's use of the Premises or any portion thereof is ever such that the services furnished thereto are more than are being furnished to other tenants in the Project, then an adjustment shall be made to Tenant's Additional Rent to reflect the extra costs incurred by Landlord as a result thereof.

8. NO PERSONAL LIABILITY.

Tenant will not be obligated to post a security deposit or letter of credit to secure Tenant's obligations under this Lease. No present or future partner, shareholder, member or principal of or in Tenant will have any personal liability for the payment of Rent or other amounts due under this Lease or the performance of Tenant's other obligations under this Lease.

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9. USE.

9.1 Tenant may use and occupy the Premises solely for general office purposes and for no other purpose. Tenant shall not occupy or use the Premises or any part thereof for any business or purpose which is unlawful, and Tenant shall comply, at Tenant's expense, in all material respects with all present and future laws, statutes, ordinances, orders, rules, codes, regulations, decrees and requirements of all governmental units (including any agency, department, commission, board, bureau or subdivision thereof) (collectively, the "LEGAL REQUIREMENTS") which relate directly to the specific nature of Tenant's use or occupancy of the Premises. Landlord shall, at Landlord's expense (subject to the provisions in Section 7.2(k), comply with all present and future Legal Requirements which relate to the use, condition or occupancy of the Premises and the Project for general office purposes, including those required by the Americans with Disabilities Act. Tenant shall, at Tenant's expense, comply with all requirements of the Americans with Disabilities Act which arise as a result of any alterations, additions, or improvements to the Premises which are not consistent with a build-out for general office occupancy levels. Tenant acknowledges that it has had a full opportunity to make its own determination that the configuration and nature of the Premises are suitable for Tenant's business, and Tenant is not relying upon any implied-by-law warranty as to the suitability of the Premises for Tenant's particular business.

Notwithstanding anything to the contrary in this Lease, Tenant shall not use the Premises for any purpose which would (i) adversely affect the exterior appearance of the Project in Landlord's reasonable judgment, (ii) offend persons of normal sensibilities by reason of items which are visible from the elevators in the Project, (iii) adversely affect ventilation in other areas of the Project (including without limitation, the creation of offensive odors),
(iv) create unreasonable elevator loads, (v) cause structural loads to be exceeded, (vi) create unreasonable noise levels, or (vii) otherwise unreasonably interfere with Project operations or other tenants of the Project. In all events, Tenant shall not engage in any activity which is not in keeping with the first-class standards of the Project. Tenant also agrees that Tenant will not
(y) use any part of the Premises which may be located on the first or second floor of the Tower for retail banking purposes; provided, however, such restriction shall not prohibit Tenant from operating an office to provide financial aid counseling and services for students and prospective students; or
(z) use any portion of the Premises for health care services, telephone or telegraph agencies, radio, television stations, employment agencies, public restaurants or bars, retail, wholesale or discount shops for sale of merchandise, retail service shops, on site classrooms (other than in a manner not involving significant portions of the Premises or significant numbers of non-employee attendees) or governmental or quasi-governmental bureaus, departments or agencies; provided, however, nothing herein shall prohibit any broadcasts or other communications to students or prospective students via the internet or by any other means which are not disruptive to the Project or any other tenants.

9.2 Tenant shall not conduct or permit to be conducted any activity, or place any equipment in or about the Premises, which may be hazardous. If any increase in the rate of fire insurance or other insurance is due to activity or equipment of Tenant in or about the Premises, Tenant shall be liable for the full amount of such increase and shall reimburse Landlord therefor and, further, if such activity or equipment jeopardizes any insurance coverage, Tenant shall immediately cause the discontinuance of such conduct or shall remove such equipment.

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9.3 Tenant shall not install, use, generate, store or dispose of in or about the Premises any Hazardous Material without Landlord's prior written approval of each Hazardous Material, except that Tenant may use immaterial quantities of Hazardous Materials customarily used in the ordinary course of office business operations so long as Tenant uses such Hazardous Materials strictly in accordance with all Legal Requirements. Tenant shall reimburse Landlord upon demand for any costs which Landlord incurs as a result of Tenant's installation, use, generation, storage or disposal of any Hazardous Materials and Tenant shall indemnify, defend and hold Landlord and any Mortgagee harmless from and against any claim, damage, loss, liability or expense (including, without limitation, the fees and disbursements of any attorneys or consultants incurred by Landlord) arising out of Tenant's installation, use, generation, storage, or disposal of any Hazardous Materials, regardless of whether Landlord has approved the activity.

9.4 Tenant shall not allow the use of any tobacco products in any portion of the Premises or the Project, except at such outdoor areas which Landlord agrees to reasonably designate for smokers from time to time. Tenant shall not permit its directors, officers, partners, employees, agents, contractors or invitees to carry, possess or store a firearm in or about the Project except strictly in accordance with Legal Requirements.

9.5 Landlord shall not lease any part of the first or second floors of the Project to a Direct Competitor of Tenant.

10. ASSIGNMENT AND SUBLETTING.

10.1 There shall be no Assignment by Tenant without in each such case obtaining the prior written consent of Landlord except as provided in Section 10.7, which consent shall not be unreasonably withheld or delayed. No Assignment by Tenant shall relieve Tenant of any obligation under this Lease, and Tenant shall remain fully liable hereunder. Any attempted Assignment by Tenant in violation of the terms and covenants of this Section 10 shall be void. Any consent by Landlord to a particular Assignment shall not constitute Landlord's consent to any other or subsequent Assignment, and any proposed Assignment by a subtenant of Tenant shall be subject to the provisions of this Section 10 as if it were a proposed Assignment by Tenant. The provisions of this Section 10.1 are subject to the provisions of Section 10.10.

10.2 It is expressly agreed by Tenant that it shall be reasonable for Landlord and Landlord shall be entitled to withhold its consent to any proposed assignment of this Lease or a sublease of all or a portion of the Premises if any one of the following applies:

(a) the assignee or subtenant is an entity described on or engaged in a business described on Exhibit M attached hereto;

(b) in Landlord's reasonable business judgment, the assignee or subtenant is of a character or reputation or engaged in a business which is not consistent with the quality and reputation of the Project; or

(c) in the case of an assignment of this Lease (as opposed to a sublease) only, the net worth of the assignee as of the date the notice of the proposed Assignment is given pursuant to Section 10.3 or as of the consummation of the Assignment and any

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transactions related thereto, is or will be less than the tangible net worth of Tenant as of the date of this Lease.

Tenant acknowledges and agrees that the right of Landlord to withhold its consent reasonably with respect to proposed Assignments under this Section 10 is for the mutual benefit of Landlord and Tenant, preserves the benefit of this Lease for Tenant in those circumstances, as contemplated hereby, where such benefit is appropriate to be preserved, and is appropriate and reasonable, given the respective interests of Landlord and Tenant in the Project. Landlord may impose reasonable conditions in respect of any consent to an Assignment.

10.3 If Tenant desires at any time to make an Assignment, Tenant shall give Landlord written notice of such desire at least thirty (30) days in advance of the date on which Tenant desires to make such Assignment and shall submit in writing to Landlord (i) the name of the proposed Assignee, (ii) the nature of the proposed Assignee's business to be carried on the Premises, (iii) a copy of the proposed Assignment agreement and any other agreements to be entered into concurrently with such Assignment, including full disclosure of the rent to be paid and all other financial terms, and (iv) such financial information as Landlord may reasonably request concerning the proposed Assignee. Neither the furnishing of such information nor the payment of attorneys' fees pursuant to
Section 10.9 shall limit any of Landlord's rights or alternatives under this
Section 10.

10.4 Each subtenant or assignee shall fully observe all covenants of this Lease, including without limitation, the provisions of Section 9 of this Lease, and no consent by Landlord to an Assignment shall be deemed in any manner to be a consent to a use not permitted under Section 9.

10.5 Whether or not Landlord has consented to the applicable Assignment, fifty percent (50%) of the amount by which the consideration (after deducting from such consideration the amount of any leasehold improvement costs, marketing costs and any brokerage fees paid by Tenant in connection with such Assignment) received by Tenant pursuant to any Assignment (other than an Assignment under
Section 10.7) exceeds, in any month, the Base Rent and Tenant's Additional Rent then required to be paid with respect to such space, shall be payable by Tenant directly to Landlord as additional rent hereunder on or before the first day of each such month.

10.6 Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder or in the Project or in all other property referred to herein, and upon any such transfer (any such transferee to have the benefit of, and be subject to, the provisions of Sections 26 and 27 hereof), and the express written agreement of the transferee to assume, perform and be bound by all of the terms and conditions of this Lease applicable to Landlord as if such transferee was an original party to this Lease, the transferor shall have no further liability hereunder with respect to the rights and obligations so assigned and transferred other than liability for payment of the Improvement Allowance and any liability, claim, offset or defense which such transferee is not subject to or for which such transferee is not liable to Tenant.

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10.7 Notwithstanding anything to the contrary in this Section 10, upon written notice to Landlord (which notice shall be accompanied by the information which Tenant is required to provide under Section 10.3, to the extent applicable), but without the need for any consent of Landlord and without applicability of Sections 10.2, 10.5 or 10.10, Tenant may make an Assignment to any Affiliate, or to any entity (a "SUCCESSOR") resulting from the merger of or consolidation with Tenant, or to any person or entity which acquires all or a majority of the stock of Tenant or substantially all of the assets of Tenant as a going concern (any of such events is referred to as a "PERMITTED TRANSFER"); provided that any such Successor agrees to assume the obligations and liabilities of Tenant hereunder pursuant to an agreement executed for the benefit of and in form reasonably acceptable to Landlord.

10.8 Notwithstanding anything to the contrary in this Section 10 and except as provided in Section 10.7, no Assignment by Tenant shall become effective until Tenant and any proposed assignee or subtenant have executed and delivered to Landlord an agreement by which such assignee or subtenant agrees to assume the obligations and liabilities of Tenant hereunder pursuant to an agreement executed for the benefit of and in form reasonably acceptable to Landlord.

10.9 Tenant shall be obligated to promptly reimburse Landlord for any reasonable attorneys' fees incurred by Landlord in reviewing and preparing any documents associated with any such proposed Assignment.

10.10 Notwithstanding anything to the contrary in this Section 10, if Tenant in good faith desires at any time to make (or to seek an opportunity to make) a Third-Party Assignment, Tenant shall give advance written notice to Landlord (an "ASSIGNMENT NOTICE") in accordance with this Section 10.10. For purposes hereof, a "THIRD-PARTY ASSIGNMENT" means a complete assignment of this Lease or a sublease of all or substantially all of the Premises for all or substantially all of the then remaining Term, other than any Assignment (a) to an Affiliate of Tenant, or (b) made in connection with a Permitted Transfer. The Assignment Notice shall specify the earliest date (the "TARGET DATE") upon which Tenant may make a Third-Party Assignment; the Target Date may not be earlier than six (6) months from the date the Assignment Notice is given to Landlord. Following receipt of an Assignment Notice, Landlord shall have the option, which may be exercised in Landlord's sole discretion by giving written notice to Tenant within thirty (30) days after Landlord's receipt of the Assignment Notice, to terminate this Lease effective as of the Termination Date to be specified by Tenant as herein provided. If within thirty (30) days after Landlord's receipt of the Assignment Notice Landlord shall by written notice to Tenant elect to terminate the Lease, Tenant may at any time thereafter send a supplemental written notice to Landlord (a "TERMINATION DATE NOTICE") specifying the date upon which this Lease shall terminate (the "TERMINATION DATE"); provided, however, that Tenant may not specify as the Termination Date any date that is (i) earlier than the Target Date, (ii) later than six months after the Target Date, and (iii) less than sixty (60) days after the date the Termination Date Notice is given by Tenant to Landlord. If Tenant shall fail to give a Termination Date Notice, the Termination Date shall be the date that is six months after the Target Date. If Landlord fails to notify Tenant in writing of such election within the thirty (30) day period after Landlord's receipt of the Assignment Notice, (x) Landlord shall be deemed to have waived its right to terminate this Lease under this Section 10.10, (y) Tenant need not give a Termination Date Notice and no Termination Date shall be established pursuant to this Section

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10.10, and (z) the provisions of this Section 10.10 shall be of no further force or effect; provided, however, that if Tenant shall send an Assignment Notice to Landlord and Landlord does not within thirty (30) days of receipt thereof give written notice terminating this Lease, and if Tenant does not make a Third-Party Assignment within twenty-four (24) months of the date of such Assignment Notice, then Landlord's rights under this Section 10.10 shall be reinstated, and Landlord and Tenant shall have the same rights and obligations under this
Section 10.10 just as though such Assignment Notice had never been given by Tenant. If Landlord exercises its option to terminate this Lease by giving written notice to Tenant within the thirty (30) day period after Landlord's receipt of the Assignment Notice, the Term of this Lease shall end on the Termination Date and Tenant shall have no obligation to pay any Rent for the period after the Termination Date.

11. MAINTENANCE.

11.1 Without limiting Landlord's obligation to provide routine janitorial services as set forth in Section 14, and subject to Section 11.3, Tenant agrees to maintain, at Tenant's sole cost and expense and in accordance with the standards of a first class office building in downtown Minneapolis, all leasehold improvements, fixtures and equipment installed in the Premises; to use the Premises in a prudent and orderly manner; to suffer no waste or injury to the Premises or any improvements or fixtures therein; and at the expiration or other termination of this Lease, to surrender the same with all improvements in the same order and condition in which they were on the Commencement Date, or in such better condition as they may thereafter be put, except for (i) Landlord's maintenance requirements, (ii) ordinary wear and tear, (iii) damage by insured casualty, and (iv) any other alterations or improvements permitted under this Lease which under the terms of this Lease Tenant is not required to remove at the expiration or earlier termination of the Term. Subject to Section 17, any cost of repairs or improvements to the Project, to the Premises or to any Common Areas which are occasioned by any act or omission or default of Tenant, its officers, employees, agents or invitees, or which arise because of Legal Requirements and the particular nature of Tenant's use and occupancy of the Premises or because of any leasehold improvements or alterations to the Premises which are made by or on behalf of Tenant, shall be paid for by Tenant, as additional rent hereunder, immediately upon billing.

11.2 Landlord agrees, throughout the Lease Term, to maintain the Project and the Common Areas in a manner consistent with other first class office projects in the central business district of downtown Minneapolis. Unless otherwise stipulated herein, including but not limited to Section 9.1, Landlord shall not be required to make any improvements to or repairs of any kind or character to the Premises during the Term of this Lease, except such repairs to the structure of the Project and the Base Building Systems as may be deemed necessary by Landlord: (i) for normal maintenance operations, (ii) to keep the Project compliant with the Space Delivery Standards pursuant to Section 14, and
(iii) to maintain the Project in a manner consistent with other first class office projects in the central business district of downtown Minneapolis.

11.3 Notwithstanding any provisions of this Lease to the contrary, all repairs, alterations or additions to the Base Building Systems (as opposed to those involving only Tenant's leasehold improvements), and all repairs, alterations or additions to Tenant's leasehold improvements which affect the Base Building Systems or the structural elements of the Project,

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made by, for or on behalf of Tenant shall be made by Landlord or a contractor approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant shall promptly reimburse Landlord for any reasonable out of pocket costs incurred by Landlord in having the plans and specifications for any such alterations or additions reviewed by Landlord's architects or engineers.

11.4 If Tenant experiences any damage, interruption or disturbance to the Premises, Tenant's operations, or Tenant's equipment as a result of any electro-magnetic fields, Tenant shall promptly notify Landlord thereof and Landlord shall, at Tenant's written request and at Tenant's expense, but subject to the rights of other tenants of the Project, take such actions as may be reasonably necessary or desirable to minimize or eliminate such condition.

11.5 Landlord represents and warrants that the Premises and the Project are substantially in compliance with applicable Legal Requirements.

11.6 Landlord represents and warrants that the Premises and the Project are free of Hazardous Materials, except for those Hazardous Materials which are contained in construction materials that are customarily incorporated at the time of installation in or from time to time typically used in the operation of first class office buildings or such quantities of Hazardous Materials as are customarily used in the ordinary course of office business operations and in accordance with all Legal Requirements.

11.7 Landlord agrees, at Tenant's request, to make a representative of Landlord available to help Tenant identify any cabling or wiring within the Premises that serves any other tenants of the Project.

12. ALTERATIONS; EQUIPMENT.

12.1 Tenant will not make or permit anyone to make any alterations, decorations, additions or improvements, structural or otherwise, in or to the Premises or the Project, or place safes, vaults or other heavy furniture or equipment within the Premises, without first obtaining the prior written consent of Landlord; provided, however, such consent shall not be required for (i) the Tenant Improvements provided in Exhibit D (which are subject to the consent requirements contained in Exhibit D), (ii) any recarpeting or redecorating, or
(iii) any alterations, additions or improvements to the Premises that do not result in a cost to Tenant greater than Fifty Thousand and No/100 Dollars ($50,000) and that do not affect the structural elements of the Project or the Base Building Systems. Tenant shall nonetheless provide Landlord with reasonable advance notice as to alterations, decorations, additions and improvements which Tenant is permitted to make under this Lease without the need for Landlord consent (which notice from Tenant may be given orally, or by any other means that are practical under the circumstances, and need not be given in accordance with the provisions of Section 28, or for any work that is insignificant). An alteration, addition or improvement shall be deemed to affect the structural elements of the Project if such alteration, addition or improvement includes any cuts into the Project structure or the Project walls or floors including, without limitation, the installation of any escalators or stairways. Landlord's consent may be conditioned upon such requirements as Landlord may reasonably impose, including without limitation, the right to approve the plans and specifications for the alterations and the contractor who will perform such

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alterations. In addition, Landlord shall have the right to require Tenant, prior to the commencement of any alteration, addition or improvement requiring Landlord's consent, to deliver such security against mechanics' liens as Landlord may reasonably require, but only if the financial strength of Tenant is at such time significantly less than the financial strength of Tenant as of the Effective Date.

12.2 If any mechanic's lien is filed against any part of the Project for work claimed to have been done for, or materials claimed to have been furnished to, Tenant, such mechanic's lien shall be discharged by Tenant within twenty
(20) days after receipt of written notice from Landlord, at Tenant's sole cost and expense, by the payment thereof or by making any deposit required by law or by posting a bond with such surety, in such amount and in such form as Landlord deems proper. Tenant shall immediately notify Landlord of any mechanic's lien or other lien filed against the Project or any part thereof by a contractor or subcontractor of Tenant or otherwise by reason of work claimed to have been done for or materials claimed to have been furnished to Tenant. If Tenant fails to remove such lien or post such bond within the twenty (20) day period following the filing thereof, Landlord may, upon not less than twenty (20) days' written notice to Tenant, at its sole discretion and without waiving its rights and remedies based on such breach by Tenant and without releasing Tenant from any of its obligations, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall, in such event, pay to Landlord at once, upon notice by Landlord, any sum paid by Landlord to remove such lien, together with interest at the Interest Rate from the date of such payment by Landlord. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by Legal Requirements, or that Landlord shall deem proper for the protection of Landlord, the Premises, the Project and any other party having an interest therein, from liens. All material suppliers, contractors, artisans, mechanics, laborers and other parties hereafter contracting with Tenant for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Premises are hereby charged with notice that they must look solely to Tenant for payment of the same and Tenant's purchase orders, contracts and subcontracts in connection therewith must clearly state this requirement.

12.3 All alterations, decorations, additions or improvements shall be made in accordance with all Legal Requirements and insurance guidelines and shall be performed in a good and workmanlike manner by contractors included on Landlord's list of approved contractors. Tenant shall deliver to Landlord a copy of the "as-built" plans and specifications (in both drawn and CAD disc format) for all alterations or physical additions so made in or to the Premises. Upon completion of any alterations, decorations, additions or improvements, Tenant shall cause its architects and contractors to certify that no asbestos containing materials or other Hazardous Materials are present in such alterations, additions or improvements except for such Hazardous Materials which are present in natural substances and typical construction materials used in first-class office buildings in Minneapolis, Minnesota. Tenant shall use commercially reasonable efforts in the construction or installation of Tenant's alterations or fixtures to not cause any disturbance of tenants adjacent to Tenant or to Landlord, including any labor disturbance. If a labor disturbance occurs, Landlord may prevent any persons giving rise to the disturbance from entering the Project. Any core drilling and other activities that may cause significant noise or vibrations will be performed after normal business hours.

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12.4 Upon completion of any such alterations, decorations, additions or improvements, Tenant shall deliver to Landlord evidence of payment, contractors' affidavits and full and final lien waivers for all labor, services, or materials performed or supplied in connection with such alteration, decoration, addition or improvement. Tenant shall indemnify, defend (at Landlord's request and with counsel approved by Landlord) and hold Landlord harmless from and against all losses, costs, damages, claims, liabilities, causes of action and expenses
(including attorneys' fees and disbursements, whether suit is commenced or not) arising out of or relating to any alterations, decorations, additions or improvements that Tenant or any of its contractors make to the Premises, including any occasioned by the filing of any mechanic's, material supplier's, construction or other liens or claims (and all costs or expenses associated therewith) asserted, filed or arising out of any such work. Without limiting the generality of the foregoing, Tenant shall repair or cause to be repaired at its expense all damage caused by any of its contractors, subcontractors or their employees or agents. Tenant shall reimburse Landlord for any costs incurred by Landlord to repair any damage caused by any of Tenant's contractors or any costs incurred by Landlord in requiring any of Tenant's contractors to comply with the rules and regulations of the Project as in effect from time to time. Tenant shall also reimburse Landlord upon demand for any costs Landlord may incur to have an engineer review all mechanical, structural, electrical, plumbing and life safety systems installed by any of Tenant's contractors.

12.5 All alterations, decorations, additions or improvements in or to the Premises or the Project made by Tenant (not including any of Tenant's trade fixtures) shall become the property of Landlord upon the expiration or termination of this Lease and shall remain upon and be surrendered with the Premises as a part thereof without disturbance or injury, unless, prior to the installation thereof, Landlord requires, in a written notice delivered to Tenant, unusual trade fixtures not consistent with a general office use build-out to be removed by Tenant at Tenant's sole cost and expense, in which event Tenant shall remove the same prior to the expiration or termination of this Lease and shall repair any damage caused thereby. Notwithstanding any provision to the contrary in this Section 12.5, any internal staircases and vaults installed by or at the request of Tenant shall be removed by Tenant at its expense prior to the expiration or termination of this Lease and Tenant shall repair any damages caused thereby. Tenant shall not, however, be required to remove any of the existing leasehold improvements in the Initial Premises.

12.6 Tenant shall not place or maintain any sign, advertisement or notice on any part of the outside of the Premises or any area which is readily visible from outside the Premises unless approved in writing by Landlord (which approval will not be unreasonably withheld or delayed); except for suite identification signage and signage which states that Tenant bans guns on the Premises.

12.7 Tenant agrees specifically that no food, soft drink or other vending machine will be installed within the Premises without the prior written consent of Landlord, except that Tenant may install vending machines for the sole and exclusive use by Tenant and Tenant's employees in an area designated by Tenant and approved by Landlord, provided such machines do not contain any CFC's.

12.8 Tenant shall not install any fixtures or equipment which consume more than the amount of electricity specified in Section 14 without first obtaining the prior written consent of

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Landlord. If Tenant requires electrical capacity in excess of that specified in
Section 14, Tenant shall pay to Landlord the cost of the excess electrical usage plus all costs of installation, operation (including electrical metering) and maintenance of any and all electrical, ventilation or air conditioning modifications which Landlord determines to be necessary. Equipment belonging to Tenant which causes noise or vibration that may be transmitted to the structure of the Project or to any space therein to such a degree as to be objectionable to Landlord or to any tenant in the Project shall be installed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise and vibration. Landlord shall have the right at any time to limit the weight and prescribe the position of safes and other heavy equipment or fixtures.

13. KEYS; RIGHT OF ENTRY; RESERVED RIGHTS IN COMMON AREAS.

13.1 Subject to the other terms and conditions of this Lease, Landlord will provide Tenant with access to the Premises, twenty-four (24) hours a day, seven (7) days per week. Landlord shall manage the Project's card access system, but Tenant shall be responsible for managing its own card access system for the Premises. Landlord shall provide audit reports on a semi-annual basis and additional ad-hoc requests each year without charge. Landlord shall furnish Tenant with cards for after-hours access to the Project for all of Tenant's employees and students upon an order signed by Tenant and at Tenant's expense. All keys and cards furnished by Landlord shall remain the property of Landlord. No additional locks shall be allowed on any door of the Premises without Landlord's prior written consent, and Tenant shall not make or permit to be made any duplicate keys, except those furnished by Landlord. Upon the expiration or termination of this Lease, Tenant shall immediately surrender to Landlord all keys to any locks on or within the Premises and all access cards provided by Landlord, and give to Landlord an explanation of the combination of all locks for safes, safe cabinets and vault doors, if any, in the Premises. Tenant shall pay for any locks or access reader card systems installed in the Premises and the cost of replacing any lost or damaged keys or access cards. Tenant shall also provide Landlord with a keying schedule for the Premises.

13.2 Tenant shall permit Landlord and Landlord's representatives and agents, to enter into and upon any part of the Premises, at all reasonable hours to examine, inspect and protect the Premises, and to make such alterations, renovations, restorations and/or repairs as Landlord shall deem necessary or desirable for the Premises, for any other premises in the Project, or the Project itself (including access to adjacent roof surfaces and to distribution systems above the ceiling of the Premises), to post notices of non-responsibility, to provide janitorial services, to perform maintenance work requested by Tenant or to provide other services required to be performed by Landlord hereunder, or to exhibit the Premises to prospective tenants during the last twelve (12) months of the Term, or to prospective purchasers, mortgagees, investors or lenders at any time. Landlord shall give reasonable advance oral notice prior to entry except for janitorial service and emergencies and to perform repairs requested by Tenant. Landlord shall use reasonable efforts to not unreasonably interfere with the conduct of Tenant's business, but Landlord shall in no event be liable to Tenant for any damages in connection with such entry or installation; provided, however, if any of the services to be provided by Landlord under this Lease are interrupted for three (3) consecutive business days for any reason as a result of such entry or installation, and Tenant's use or enjoyment of the Premises is materially affected

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thereby, then all Rent shall abate on a per diem basis with respect to those portions of the Premises which Tenant is not using from and after said third day until such services are restored.

13.3 Subject to the provisions of Section 35.15, Landlord reserves the right to (i) impose such security restrictions in the Common Areas as it deems appropriate; (ii) close temporarily or restrict the use of any of the Common Areas for maintenance or repair purposes; (iii) use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof; and (iv) use on an occasional or temporary basis or allow the occasional, temporary use by others of the atrium and the first and second floors of the Project, for civic, charitable, cultural, business and other events.

14. SERVICES AND UTILITIES.

Landlord shall use reasonable efforts to furnish (as part of the Operating Costs of the Project) Tenant, while Tenant occupies the Premises, the following services at levels commensurate with the general standards followed by landlords of first-class office buildings in Minneapolis, Minnesota:

(a) Hot and cold domestic water for restrooms and cold domestic water at those points of supply provided for general use of other tenants in the Project.

(b) During Normal Business Hours, and subject to curtailment as required by Legal Requirements, central heat and air conditioning in season, at such temperatures and in such amounts as are in keeping with the standards described in Exhibit F hereto and otherwise in accordance with the standards of a first class office building. Landlord agrees to provide the Premises with heating and air conditioning during other than Normal Business Hours at Tenant's request. The charge for such after hours services initially shall be at the rate of $35.00 per hour (or partial hour), for the first floor or partial floor within the Building or Tower, and $5.00 per hour (or partial hour) for each additional floor or partial floor in the Building or Tower, which amounts may be increased by Landlord from time to time, but shall not be greater than the reasonable cost to Landlord in providing such after hours services (for purposes of computing the charge for after hours services, each floor in Tower and each floor in the Building shall be treated as separate floors, so that if Tenant requests after hours services on a floor in the Tower and on the same floor in the Building, Tenant's request shall be treated as a request for two floors). Tenant shall be charged for a minimum of one hour of service in connection with each such request. Tenant shall give Landlord notice by telephone for the need for such heating and air conditioning during other than Normal Business Hours no later than noon of the business day with respect to services for the evening of such business day, and no later than noon of the immediately preceding business day with respect to services for Holidays or weekends.

(c) Routine electric lighting service for all public areas and special service areas of the Project.

(d) Janitor service on a five (5) day week basis (except for Holidays as described in Exhibit F hereto) which shall be provided after 9:00 p.m. and prior to 7:30 a.m. on

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Mondays through Fridays pursuant to the cleaning specifications attached hereto as Exhibit O; provided, however, if Tenant's floor coverings or other improvements cost more to clean than typical floor coverings or improvements, Tenant shall pay, as additional rent, the additional costs, if any, attributable thereto. Landlord represents to Tenant that (i) its security service provider currently performs criminal background checks through the Minnesota Bureau of Criminal Apprehension and the Federal Bureau of Investigation for each of its security personnel servicing the Premises, and (ii) its janitorial service provider currently performs background checks through the Minnesota Bureau of Criminal Apprehension for its personnel servicing the Premises.

(e) Equipment and personnel to limit access to the Project after Normal Business Hours; provided, however, Landlord will provide Tenant with access to the Premises, twenty-four (24) hours a day, seven (7) days per week.

(f) Sufficient electrical capacity for (i) convenience outlets and equipment such as personal computers, photocopying machines and other machines of similar low voltage (120/208 volts) requirements; provided, however, total rated power consumption of 120/208 volt power shall not exceed two and one-quarter (2.25) watts per square foot of Usable Area (as defined in Section 3.1); and (ii) fluorescent light fixtures and equipment of high voltage (277/480 volts) requirements; provided, however, total rated power consumption of 277/480 volt power shall not exceed three and four tenths (3.40) watts per square foot of Usable Area. If any electrical, telephone switching or other equipment requires air conditioning or electrical usage in excess of the foregoing limitations or requires modifications to a base building electrical panel, the same shall be installed or performed at Tenant's expense and Tenant shall pay all operating costs relating thereto, including metering.

(g) All building standard fluorescent bulb replacement in all areas and all building standard incandescent bulb replacement in public areas, toilet and rest room areas and stairwells, together with base building starters and ballasts as replacement is needed for such lighting.

(h) Non-exclusive passenger elevator service to the Premises twenty-four (24) hours per day and non-exclusive freight elevator service during Normal Business Hours.

(i) Base building telephone risers in accordance with Landlord's rules and regulations with respect to telephone service as they may exist from time to time. Landlord shall have the right to impose reasonable charges for the use by third party telecommunications providers of the Base building telephone risers.

(j) Uniformed guards and/or equipment on a twenty-four (24) hour-per-day, seven (7) day-per-week basis to maintain security for the Project.

To the extent the services described in (a), (b), (c), (f) and (h) require electricity, gas or water supplied by public utilities, Landlord's covenants thereunder shall only impose on Landlord the obligation to use its reasonable efforts to cause the applicable public utilities to furnish the same. Failure by Landlord to furnish the services described in this Section 14 to any

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extent, or any cessation thereof, shall not render Landlord liable in any respect for damages to either person or property, nor be construed as an eviction of Tenant, nor, except as explicitly provided below, work an abatement of any Rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Landlord agrees, however, to use diligent efforts to promptly repair any Base Building Systems and to restore any services described in this Section 14 which are interrupted during Normal Business Hours.

If any of the services to be provided by Landlord under this Section 14 are interrupted for:

(x) three (3) consecutive business days for any reason within Landlord's reasonable control (as opposed to generally prevailing circumstances); or

(y) seven (7) consecutive days for any reason not within Landlord's control (including generally prevailing circumstances);

and, in either event, if Tenant's use or enjoyment of the Premises is materially affected thereby, then if Tenant has promptly notified Landlord in writing of such interruption, all Rent shall abate on a per diem basis with respect to those portions of the Premises which Tenant is not using from and after said third day (or seventh day, as the case may be) until such services are restored.

Landlord reserves the right to require telecommunication connections and services to be made only pursuant to agreements between Landlord and telecommunications providers which are satisfactory to Landlord in its reasonable discretion, provided that any such agreement shall permit Tenant to obtain the telecommunication services Tenant needs at competitive rates and on competitive conditions. Tenant shall conserve heat, air conditioning, water and electricity and shall use due care in the use of the Premises and of the public areas in the Project. All thermostats within the Premises shall be under the sole control of Landlord, and Tenant shall not, nor shall it permit any of its employees, agents, representatives or invitees, to open, change or tamper with any thermostats.

15. WAIVER AND INDEMNITY.

15.1 Except as expressly provided to the contrary in this Lease, Landlord and Landlord's Affiliates and each of their partners, directors, officers, shareholders and employees shall not be liable to Tenant, or those claiming by, through or under Tenant, for any damage or claims, however caused, arising from loss or damage to books, records, computer or other electronic equipment, data or media, files, artwork, money, securities, negotiable instruments or papers, or any other personal property in the Project, the interruption in the use of any cellular or wireless communication devices or the interruption in the use of the Premises, any fire, robbery, theft, assault, or any other casualty, any leakage or bursting of pipes or water vessels or any roof or wall leakage or other water damage, in any part or portion of the Premises or the Project.

15.2 Subject to the provisions of Section 17 which shall control if they conflict with the provisions of this Section 15.2, Tenant shall indemnify, defend (at Landlord's request and with counsel reasonably approved by Landlord) and hold Landlord and Landlord's Affiliates (and each of their partners, directors, officers, shareholders and employees) harmless from and against every demand, claim, cause of action, judgment and expense, including, but not limited

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to, reasonable attorneys' fees and disbursements of counsel, whether suit is initiated or not, and all loss and damage arising from or related to any bodily or personal injury, death or property damage occurring in the Premises, except to the extent caused by the gross negligence or willful misconduct of Landlord or Landlord's Affiliates or any of their representatives, agents, contractors or employees.

15.3 Subject to the provisions of Section 17 which shall control if they conflict with the provisions of this Section 15.3, Landlord shall indemnify, defend (at Tenant's request and with counsel reasonably approved by Tenant) and hold Tenant and Tenant's Affiliates (and each of their governors, members, partners, directors, officers, shareholders and employees) harmless from and against every demand, claim, cause of action, judgment and expense, including, but not limited to, reasonable attorneys' fees and disbursements of counsel, whether suit is initiated or not, and all loss or damage arising from or related to any bodily or personal injury, death or property damage occurring in those portions of the Project which are not leased to Tenant or other tenants, except to the extent caused by the gross negligence or willful misconduct of Tenant, Tenant's Affiliates or any of their representatives, agents, contractors or employees.

16. INSURANCE.

16.1 Landlord shall maintain all risk property insurance on the Project and the leasehold improvements in the Premises with coverage limits for such leasehold improvements of $25.00 dollars per square foot of Rentable Area for such leasehold improvements. Said insurance shall be maintained with an insurance company authorized to do business in Minnesota, in amounts desired by Landlord and at the expense of Landlord (but with the same to be included in the Operating Costs described in Section 7.2) and payments for losses thereunder shall be made solely to Landlord. If the annual premiums to be paid by Landlord shall exceed standard rates because of Tenant's operations within or the contents of the Premises, Tenant shall promptly pay the excess amount of the premium upon request by Landlord. Tenant shall maintain all risk property insurance on all of its personal property, including removable trade fixtures, located in the Premises and on the value of any of Tenant's leasehold improvements in excess of the coverage limits to be maintained by Landlord as described above, subject to commercially reasonable deductibles. Prior to the Commencement Date and prior to the expiration of then-existing policies, Tenant shall deliver to Landlord certificates evidencing maintenance of the insurance required herein.

16.2 Landlord shall maintain a policy of commercial liability insurance with the premium thereon fully paid on or before the due date, issued by and binding upon an insurance company authorized to do business in Minnesota, such insurance to afford minimum protection (which may be effected by primary and/or excess coverage) of not less than $5,000,000 combined single limit. Tenant shall maintain a policy of commercial liability insurance with the premium thereon fully paid on or before the due date, issued by and binding upon an insurance company acceptable to Landlord that is authorized to do business in Minnesota, such insurance to afford minimum protection (which may be effected by primary and/or excess coverage) of not less than $5,000,000 combined single limit. Landlord and Landlord's property manager shall be named as additional insureds on Tenant's liability policy. Prior to the Commencement Date and prior to the expiration of then-existing policies, Tenant shall deliver to Landlord a certificate of insurance in form satisfactory to Landlord evidencing maintenance of the insurance required

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herein together with a copy of the endorsement to Tenant's commercial liability policy which adds Landlord and Landlord's property manager as additional insureds. Upon Landlord's request, Tenant shall also promptly deliver to Landlord a certified copy of the insurance policy which Tenant is required to maintain hereunder.

17. WAIVER OF CLAIMS AND SUBROGATION.

Notwithstanding anything to the contrary in this Lease, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action or cause of action, against the other and their Affiliates and each of their partners, shareholders, officers, employees and contractors for any loss or damage that may occur to the Premises or the Project, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause which could be insured against under the terms of the all risk property insurance policies referred to in Section 16 hereof (whether or not actually insured) or which is actually insured against by the party in question, regardless of cause or origin, including negligence of the other party hereto or its Affiliates or any of their partners, shareholders, officers, employees and contractors, and covenants that to the extent of such waiver no insurer shall hold any right of subrogation against the other party hereto. In addition, Tenant hereby waives all rights of recovery with respect to property damage against all other tenants of the Project that have, prior to any loss by Tenant, executed a reciprocal waiver of recovery rights for the benefit of Tenant.

18. DAMAGE.

In the event of a fire or other casualty in the Premises, Tenant shall immediately give notice thereof to Landlord. If the Premises shall be damaged by fire or other casualty so as to render the Premises untenantable in whole or in part, the Rent provided for herein shall abate thereafter as to the portion of the Premises rendered untenantable until the earlier of (a) such time as the Premises are made tenantable, or (b) five (5) business days after Landlord substantially completes the restoration of the Premises. If damage by fire or other casualty results in the Premises being untenantable in whole or in substantial part for a period reasonably estimated by a responsible contractor selected by Landlord to be one (1) year or longer after Landlord's insurance settlement, and if Landlord shall decide not to rebuild, then either party may terminate this Lease upon such date as written notice is provided to the other party and all Rent owed up to the time of such destruction or termination shall be paid by Tenant. Landlord shall give Tenant written notice of its decisions, estimates or elections under this Section 18 within sixty (60) days after any such damage or destruction. If this Lease is not terminated, Landlord shall commence and prosecute with all due diligence restoration of the Premises. Notwithstanding anything contained in this Section 18 to the contrary, Landlord shall only be obligated to restore the Premises to the extent of the insurance proceeds actually received, but if the insurance proceeds actually received do not permit Landlord to restore the Premises, Landlord shall so notify Tenant and either Landlord or Tenant may terminate this Lease by written notice given within sixty (60) days after Landlord's notice. If Landlord restores the Premises or the Project in accordance with the provisions of this Section 18, then Tenant shall not have any right to terminate this Lease because of such damage pursuant to (i) any common law rights, (ii) Minnesota Statutes Section 504B.131 as now in effect or as it may be hereafter amended or supplemented, or
(iii) any comparable right established by a similar statute.

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19. CONDEMNATION.

If (a) any material portion of the Premises shall be permanently taken or condemned, this Lease shall, upon written notice from either party, terminate as of the date of such condemnation or taking, or (b) more than fifteen percent (15%) of the Building or the Tower, or such lesser portion as is necessary for the commercially reasonable operation of the Project, shall be permanently taken or condemned, this Lease shall, upon written notice from Landlord or Tenant, terminate as of the date of such taking. If not terminated as provided above, this Lease shall continue in full force and effect and Rent shall be partially abated based on the number of square feet of Rentable Area taken. All proceeds payable on account of any interest in the Premises and/or the Project to either or both parties to this Lease from any taking or condemnation of the Premises shall belong to and be paid to Landlord. Nothing contained herein shall prevent Tenant from seeking and retaining a separate award from the condemning authority in any proceeding involving a taking or a sale in lieu of a taking, for Tenant's trade fixtures, equipment or relocation expenses.

20. DEFAULT.

20.1 Any one of the following events shall constitute an event of default ("EVENT OF DEFAULT") by Tenant:

(a) Tenant shall fail to pay any installment of Rent within five (5) days after receiving written notice of such failure from Landlord;

(b) Tenant shall fail to execute and deliver a subordination instrument or an estoppel certificate within twenty (20) days after a request therefor, as required respectively by Sections 23 and 29, if such failure continues for more than ten (10) days after Tenant has received written notice of such failure from Landlord;

(c) Tenant shall violate or fail to perform any of the other conditions, covenants or agreements herein made by Tenant and such default shall continue for fifteen (15) days after written notice from Landlord; provided, however, that if the nature of such default is such that Tenant can cure the default, but Tenant can not reasonably cure such default within fifteen (15) days, then the Event of Default shall be suspended if Tenant promptly commences to cure the default and thereafter diligently and continuously prosecutes the curing of the default to completion, but only if the continuation of such default does not create material risk to the Project or substantial interference to other tenants of the Project;

(d) If (1) the interest of Tenant under this Lease shall be levied upon under execution or other legal process, (2) any petition shall be filed by or against Tenant to declare Tenant bankrupt or to delay, reduce or modify Tenant's debts or obligations, (3) Tenant shall be declared insolvent according to law, or (4) any assignment of Tenant's property shall be made for the benefit of creditors, or a receiver or trustee is appointed for Tenant or its property (provided that no such levy, execution, legal process or petition filed against Tenant shall constitute a breach of this Lease if Tenant shall vigorously

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contest the same by appropriate proceedings and shall remove or vacate the same within thirty (30) days from the date of its creation, service or filing); or

(e) If Tenant is a partnership or other entity and Tenant shall be dissolved or otherwise liquidated, except in connection with a merger, consolidation or other reorganization resulting in the continuation of Tenant's business substantially as previously conducted and such merger, consolidation or other reorganization is an Assignment to which Landlord has given its consent in accordance with Section 10.

20.2 If an Event of Default shall have occurred and be continuing:

(a) Landlord may terminate this Lease and forthwith repossess the Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (i) the cost of recovering the Premises (including attorneys' fees, disbursements of counsel and any costs of suit), (ii) the unpaid Rent earned at the time of termination, plus interest thereon at the Interest Rate, (iii) the present value (discounted at the then current reference rate of interest published from time to time by U.S. Bancorp, or its successors) of the balance of the Rent for the remainder of the Term less the present value (discounted at the same rate) of the amount Tenant reasonably demonstrates that Landlord would in all likelihood receive from leasing the Premises to another tenant for said period, taking into account the cost of reletting, the then-current market conditions, the time the Premises was vacant and other similar costs, and (iv) any other sum of money and damages owed by Tenant to Landlord.

(b) Landlord may terminate Tenant's right of possession (but not this Lease) and may repossess the Premises or any portion thereof by eviction action or otherwise by process of law, without thereby releasing Tenant from any liability hereunder and without demand or notice of any kind to Tenant and without terminating this Lease, in which event Landlord may, but shall be under no obligation to do so, relet the same for the account of Tenant for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting Landlord is authorized to decorate or to make any repairs, changes, alterations or additions to the Premises as may be reasonably necessary or desirable in Landlord's judgment, and (i) if Landlord does not relet the Premises, or
(ii) if the same are relet and the amounts received from such reletting (after first deducting therefrom, for retention by Landlord, the unpaid Rent due hereunder earned but unpaid at the time of reletting plus interest thereon at the Interest Rate, the cost of recovering possession (including attorneys' fees, disbursements of counsel and any costs of suit), all of the costs and expenses of such decorations, repairs, changes, alterations and additions, the expense of such reletting and the cost of collection of the rent accruing therefrom), are not equal to or greater than the Rent provided for in this Lease to be paid, then (y) Tenant shall pay to Landlord as damages if the Premises are not relet, a sum equal to the amount of the Rent reserved in this Lease for such period or periods, plus the cost of recovering possession of the Premises (including attorneys' fees and any costs of suit), the unpaid Rent earned at the time of repossession plus interest thereon at the Interest Rate, and the costs incurred in any attempt by Landlord to relet the Premises, or (z) if the Premises have been relet, the Tenant shall satisfy and pay any such deficiency. Any such payments due Landlord shall be made upon demand therefor from time to time

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and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section 20 from time to time. No delivery to or recovery by Landlord of any portion due Landlord hereunder shall be any defense in any action to recover any amount not theretofore reduced to judgment in favor of Landlord, nor shall such reletting be construed as an election on the part of Landlord to terminate this Lease unless a written notice of such intention be given to Tenant by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.

20.3 In the event of a breach by either party of any of the agreements, conditions, covenants or terms hereof, the non breaching party shall have the right of injunction to restrain the same and the right to invoke any remedy allowed by law or in equity whether or not other remedies, indemnities or reimbursements are provided in this Lease. The rights and remedies given to Landlord and Tenant in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by Landlord or Tenant, shall be deemed to be in exclusion of any of the others.

20.4 Intentionally omitted.

20.5 If either party hereto initiates litigation to enforce the provisions of this Lease against the other party, the prevailing party in such litigation shall be entitled to reimbursement from the non-prevailing party of all reasonable and documented costs and expenses, including reasonable attorneys' fees, paid or incurred by the prevailing party in connection with such litigation. For purposes of this Section 20, the term "prevailing party" shall be defined to mean the party whose position in such litigation is substantially upheld.

20.6 Any one of the following events shall constitute an Event of Default by Landlord:

(a) Landlord's failure to pay any amount which is properly due and payable to Tenant within ten (10) business days' after written notice from Tenant that the same was not paid when due; or

(b) Landlord's failure to perform any of Landlord's obligations under this Lease, within thirty (30) days after Landlord has received written notice of such failure from Tenant; provided, however, that if the nature of such default is such that Landlord can cure the default, but not within thirty (30) days, then such default shall not constitute an Event of Default so long as Landlord commences cure within thirty (30) days and thereafter diligently and continuously prosecutes the curing of the default to completion, but only if continuation of the default does not create substantial interference to Tenant's enjoyment of the Premises.

21. LANDLORD'S RIGHT TO CURE DEFAULTS; LATE PAYMENTS.

If Tenant defaults in the making of any payment, or in the doing of any act herein required to be made or done by Tenant, or does or suffers any act prohibited herein, then Landlord may, but shall not be required to, make such payment or do such act, or correct any damage caused by such prohibited act and enter the Premises as appropriate in connection

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therewith. Tenant shall reimburse Landlord on demand for all costs and expenses incurred by Landlord in curing any such default plus a charge of ten percent (10%) to cover Landlord's overhead in curing any non-monetary default, together with interest thereon at the Interest Rate from the date such sums are incurred by Landlord. Notwithstanding the foregoing, the making of any such payment or the doing of any such act by Landlord shall not operate to cure such default or to estop Landlord from the pursuit of any remedy to which Landlord would otherwise be entitled. If any installment of Rent is not paid by Tenant when due and payable: (i) Tenant shall pay Landlord a one-time late charge in the amount of five percent (5%) of the delinquent installment as compensation to Landlord for administrative costs provided that such one-time late charge shall be waived for the first time only during any consecutive twelve (12) month period that any installment of Rent is not paid by Tenant when due; and (ii) the unpaid balance due Landlord shall bear interest at the Interest Rate from the date such installment became due and payable to the date of payment thereof by Tenant, and such interest shall constitute additional rent hereunder which shall be immediately due and payable.

22. WAIVER.

Waiver by a party of any breach of any covenant, condition or agreement herein contained will not operate as a waiver of such covenant, condition, or agreement itself, or of any subsequent breach thereof. Failure of a party to declare any default immediately upon occurrence thereof, or delay in taking any action in connection therewith, will not waive such default nor constitute a waiver of any future default, but such party shall have the right to declare any such default at any time and take such action as might be lawful or authorized hereunder, either in law or in equity. Receipt by a party of a lesser amount of money than it is due and any endorsement or statement on any check or letter accompanying a check for payment of money will not be deemed an accord and satisfaction, and such party may accept such check or payment without prejudice to its right to recover the balance of such money due or to pursue any other remedy available under this Lease. Re-entry by Landlord, and/or acceptance by Landlord of keys from Tenant, shall not be considered an acceptance of a surrender of this Lease.

23. SUBORDINATION.

This Lease is subject and subordinate to each Mortgage which may now or subsequently affect Landlord's interest in the Project, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided that the holder of any such Mortgage (a "MORTGAGEE") agrees in writing not to disturb Tenant's rights under this Lease during any period that an Event of Default does not exist hereunder. Tenant agrees, however, that any Mortgagee, may at its option, unilaterally elect to subordinate, in whole or in part, by an instrument in form and substance satisfactory to such party, such Mortgage to this Lease. Tenant agrees to execute promptly and to deliver to Landlord an instrument or instruments in substantially the form attached hereto as Exhibit N or another form to which Tenant has no reasonable objection, to confirm the foregoing if requested by Landlord within twenty (20) days after written request thereof by Landlord, but such failure or refusal shall in no way affect the validity or enforceability of this Section 23. In the event of the enforcement by the Mortgagee of the remedies provided for by law or by such Mortgage, Tenant shall, upon request of any person succeeding to the interest of the Landlord automatically become the tenant of such successor in interest, without change in the terms or provisions of this Lease, provided that such successor in

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interest shall not be (i) bound by any payment of Rent for more than one month in advance except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease; (ii) bound by any amendment to or modification of this Lease made without the consent of the Mortgagee if Tenant has received notice of the existence of such Mortgagee; (iii) liable for any act, warranty or omission of the prior Landlord under this Lease; (iv) subject to any offsets, deductions or defenses which Tenant might have arising out of acts or omissions of the prior Landlord; or (v) liable for the breach of any warranties or obligations relating to construction of improvements for the Project or leasehold improvements in the Premises performed or to have been performed by the prior Landlord; provided, however, that such successor in interest shall be subject to any offset right against Rent that Tenant may have in case Landlord shall fail to pay any portion of the Phase I & II Space Improvement Allowance or the Phase III Space Improvement Allowance pursuant to Exhibit D; the Second Extension Term Allowance pursuant to Exhibit G; the Expansion Space Improvement Allowance pursuant to Exhibit I, or the Available Space Improvement Allowance pursuant to Exhibit J. At the request of Landlord, a Mortgagee or any such successor in interest, Tenant shall, within twenty (20) days after written request therefor, execute and deliver to Landlord, such Mortgagee or successor in interest a written instrument whereby Tenant confirms the foregoing attornment.

Tenant agrees to give to each Mortgagee who has given Tenant written notice of its address a copy of any default notice sent by Tenant to Landlord pursuant to this Lease which would entitle Tenant to terminate or cancel this Lease or abate the Rent payable hereunder, and agrees that, notwithstanding any provision of this Lease to the contrary, no rental abatement or notice of termination of this Lease by Tenant shall be effective unless all such Mortgagees have received said notice and have failed for thirty (30) days after receipt thereof to cure Landlord's default, or if the default cannot be cured within thirty (30) days, have failed to promptly commence and to diligently pursue the cure of Landlord's default which gave rise to such right of termination or abatement.

Landlord represents and warrants to Tenant that Landlord owns fee simple title to the Project, subject only to a Mortgage in favor of The Northwestern Mutual Life Insurance Company ("NWML"). Landlord agrees to obtain and deliver to Tenant as soon as reasonably possible, but in no event later than thirty (30) days after the Effective Date, a Non-Disturbance Agreement executed by NWML and Landlord in the form attached hereto as Exhibit N, or with such changes thereto as are approved by Tenant. If Landlord shall fail to deliver such Non-Disturbance Agreement to Tenant within said thirty (30) day period, Tenant may by written notice to Landlord terminate this Lease, and upon any such termination Landlord shall reimburse Tenant for out-of-pocket costs and expenses incurred by Tenant in connection with this Lease, including, without limitation, design fees, construction costs and expenses, attorneys' fees and consultants' fees.

24. RULES AND REGULATIONS.

Tenant shall comply with, and Tenant shall cause its visitors, employees, contractors, agents and invitees to comply with, all Legal Requirements and with the reasonable rules and regulations of the Project adopted, altered and consistently enforced on a non-discriminatory basis by Landlord from time to time for the safety, care and cleanliness of the Premises and Project and for preservation of good order therein, all of which will be sent by

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Landlord to Tenant in writing and shall be thereafter carried out and observed by Tenant, its employees, contractors, agents, invitees and visitors. The initial rules and regulations of the Project are attached hereto as Exhibit E.

25. COVENANT OF QUIET ENJOYMENT.

Landlord covenants that it has the right to make and enter into this Lease for the Term aforesaid and covenants that if Tenant shall pay the Rent and all other sums due by Tenant hereunder and perform all of the covenants, terms and conditions of this Lease to be performed by Tenant, Tenant shall, during the Term hereby created, freely, peaceably and quietly occupy and enjoy the Premises. It is understood and agreed by Tenant that this covenant and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its and their respective ownership of the Landlord's interest hereunder.

26. LIMITED LIABILITY.

Tenant specifically agrees to look solely to Landlord's interest in the Project and the Land for the recovery of any judgment against Landlord, it being agreed that Landlord (and its partners and shareholders) shall never be personally liable for any such judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord.

27. NO REPRESENTATIONS OR WARRANTIES BY LANDLORD.

Neither Landlord nor any agent or employee of Landlord has made any representations or promises with respect to the Premises or the Project except as herein expressly set forth, and no right, privileges, easements or licenses are acquired by Tenant except as herein expressly set forth. Tenant has no right to light or air over any premises adjoining the Project. This Lease (including all Exhibits hereto) constitutes the entire agreement of the parties with respect to the subject matter hereof and all prior and contemporaneous written and oral agreements are merged herein.

28. NOTICES.

All notices or other communications hereunder shall be in writing and shall be hand delivered or sent by United States Mail, registered or certified, return receipt requested or by courier service, to the appropriate address indicated below, or at such other place or places as either Landlord or Tenant may, from time to time, respectively, designate in a written notice given to the other. Any notice by Tenant to Landlord shall be addressed to the Landlord at:

601 Second Avenue Limited Partnership c/o Hines Interests Limited Partnership 225 South Sixth Street, Suite 2590

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Minneapolis, MN 55402
Attention: Property Manager

With a copy to:

601 Second Avenue Limited Partnership c/o Hines Interests Limited Partnership Three First National Plaza, Suite 440 Chicago, Illinois 60602
Attention: C. Kevin Shannahan

and if requested in writing by Landlord or required under the terms of this Lease, given or served simultaneously to each Mortgagee at the address specified in a written request by such party. Any notice by Landlord to Tenant shall be addressed to the Tenant at:

Before the Phase I & II Rent Commencement Date:

Capella Education Company

222 South 9th Street
20th Floor
Minneapolis, Minnesota 55402 Attention: Chief Financial Officer

with a copy to:

Capella Education Company
222 South 9th Street
20th Floor
Minneapolis, Minnesota 55402 Attention: Vice President/General Counsel

On or after the Phase I & II Rent Commencement Date:

Capella Education Company

225 South 6th Street
8th Floor
Minneapolis, Minnesota 55402 Attention: Chief Financial Officer

with a copy to:

Capella Education Company
225 South 6th Street
8th Floor
Minneapolis, Minnesota 55402 Attention: Vice President/General Counsel

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Any notice mailed shall be deemed to have been given on the regular business day next following the date of deposit of such item in a depository of the United States Postal Service in the continental United States. Notice effected other than by mail shall be deemed to have been given at the time of actual delivery. Each party reserves the right to designate up to four additional parties to receive copies of any notice to be given to such party under this Lease.

29. ESTOPPEL CERTIFICATES.

Tenant agrees at any time and from time to time, within twenty (20) days after receipt of a written request from Landlord, to execute, acknowledge and deliver to Landlord or a party designated by Landlord a statement in writing
(i) certifying (if true) that this Lease is unmodified and in full force and effect, or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications, (ii) stating the Commencement Date and the expiration date of the Term of this Lease, (iii) stating the dates to which the Rent and other charges hereunder have been paid by Tenant, (iv) stating whether or not, to Tenant's actual knowledge, Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease, and, if Landlord is in default, specifying each such default, (v) agreeing that Tenant and Landlord will not thereafter modify the Lease without the approval of any Mortgagee identified by Landlord, (vi) agreeing that Tenant shall not prepay any Rent more than one month in advance, and (vii) stating any extension, renewal, expansion, contraction or termination rights or rights of first offer or refusal with respect to the Premises or any other space in the Project which have been granted to Tenant. Any such statement delivered pursuant hereto may be relied upon by any owner of the Project, any prospective purchaser of the Project, any present or prospective Mortgagee of the Project or of Landlord's interest, or any prospective assignee of any such Mortgagee.

30. SURRENDER, HOLDING OVER.

Upon the expiration of this Lease or the earlier termination of Tenant's right to possession, Tenant shall immediately vacate the Premises, remove all of its personal property therefrom and leave the Premises in the condition required by this Lease. Any property required to be removed pursuant to the terms of this Lease and not removed shall be deemed abandoned, and Tenant shall be liable for all costs of removal and disposal. If Tenant continues to occupy the Premises or any part thereof, after the expiration or termination of the Term, whether with or without the consent of the Landlord, such tenancy shall be at will (except that Landlord shall have the right, by giving written notice thereof to Tenant at time while Tenant remains in possession of any portion of the Premises, to convert such holdover to a month-to month tenancy) and Tenant shall continue to be bound by all of the terms and conditions of this Lease except that the monthly rent shall be one and one-half (1-1/2) times the Base Rent and Tenant's Additional Rent payable immediately prior to such expiration or termination. No holding over by Tenant after the Term shall be construed to extend this Lease. The entitlement to the holdover rental amount will be Landlord's exclusive right and remedy against Tenant for any holdover not in excess of sixty (60) days and will be deemed to cover all liabilities, obligations or charges which may be incurred by Landlord because of a holdover by Tenant which does not exceed sixty (60) days, but neither this Section 30 nor the acceptance of any rent shall prevent Landlord from exercising any remedy to regain immediate possession of the Premises. If Tenant holds over for a period in excess of sixty (60) days, Tenant shall be liable to Landlord for all

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damages which Landlord sustains because of such hold over including all claims for damages by any tenant to whom Landlord may have leased all or any part of the Premises effective upon the termination of this Lease and for any other liability, loss, cost, damage or expense (including attorneys' fees, disbursements of counsel and any costs of suit) incurred by Landlord as a result of such holding over.

31. TENANT'S TAXES.

At least ten (10) days prior to delinquency, Tenant shall pay all taxes levied or assessed upon Tenant's equipment, furniture and other personal property located in or about the Premises. If any such taxes are imposed upon Landlord, Tenant shall pay to Landlord, at least twenty (20) days before the date each installment is due to the taxing authority, the portion allocable to Tenant pursuant to this Section 31.

32. NO MERGER.

The voluntary or other surrender of this Lease by Tenant, or a termination thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies affecting the Premises.

33. GRAPHICS; BUILDING DIRECTORY.

No signs, numerals, letters or other graphics shall be used or permitted on any part of the outside of the Premises or any area which is readily visible from outside the Premises, unless approved in writing by Landlord (which approval shall not be unreasonably withheld or delayed); except for suite identification signage and signage which states that Tenant bans guns on the Premises. Prior to the Commencement Date, Landlord shall install, at Landlord's expense, two (2) strips on the Project directory board to be placed in the main lobby of the Building or Tower listing Tenant's name and as many lines on the Project's electronic directory as Tenant may request from time to time. Any subsequent modifications to the identification of Tenant on either Project directory shall be subject to Landlord's consent, which shall not be unreasonably withheld, and, if such consent is granted, shall be made, at Tenant's expense, by Landlord at Landlord's then current charges for such modifications.

34. Intentionally omitted.

35. MISCELLANEOUS.

35.1 This Lease shall be strictly construed neither against Landlord or Tenant; the captions in this Lease are for convenience only and are not a part of this Lease; each provision hereof shall be deemed both a covenant and a condition running with the Land; except as otherwise expressly provided in this Lease and its Exhibits and other attachments, the singular includes the plural and the plural includes the singular; "or" is not exclusive; a reference to an agreement or other contract includes supplements and amendments thereto to the extent permitted by this Lease; a reference to any laws includes any amendment or supplement to such laws; a reference to a person or other entity includes its permitted successors and assigns; accounting provisions have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis; the words "such as," "include," "includes" and

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"including" are not limiting; except as specifically agreed upon in this Lease, any right may be exercised at any time and from time to time and all obligations are continuing obligations throughout the Term of this Lease, and in calculating any time period, the first day shall be excluded and the last day shall be included and all days are calendar days unless otherwise specified.

35.2 This is a Minnesota contract and shall be construed according to the laws of Minnesota.

35.3 Wherever in this Lease any terms, covenants or conditions are required to be kept or performed by Landlord, Landlord shall be deemed to have kept and performed such terms, covenants and conditions notwithstanding any act or omission of Landlord, if such act or omission is pursuant to any Legal Requirement.

35.4 Whenever in this Lease there is imposed upon Landlord or Tenant the obligation to use its best efforts, reasonable efforts or diligence, Landlord or Tenant, as the case may be, shall be required to do so only to the extent the same is economically feasible and otherwise will not impose upon Landlord or Tenant, as the case may be, unreasonable financial or other burdens.

35.5 If more than one person or entity shall sign this Lease as Tenant, the obligations set forth herein shall be deemed joint and several obligations of each such party.

35.6 Time is of the essence with respect to this Lease and each and every provision hereof.

35.7 If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party hereunder, shall be held invalid or unenforceable to any extent, the remaining terms, conditions and covenants of this Lease shall not be affected thereby, and each of said terms, covenants and conditions shall be valid and enforceable to the fullest extent permitted by law.

35.8 If any action or proceeding is brought by Landlord or Tenant to interpret the provisions hereof, or to enforce either party's respective rights under this Lease or to collect any sums owing by a party, the prevailing party shall be entitled to recover from the unsuccessful party therein, in addition to all other remedies, all costs incurred by the prevailing party in such action or proceeding, including reasonable attorneys' fees and disbursements of counsel to be fixed by the court having jurisdiction thereof.

35.9 If Tenant is a corporation, partnership or other entity, Tenant warrants that all consents or approvals (copies of which shall be delivered to Landlord on the execution of this Lease by Tenant) required of third parties (including but not limited to its Board of Directors or partners) for the execution, delivery and performance of this Lease have been obtained, that Tenant has the right and authority to enter into and perform its covenants contained in this Lease, and that this Lease is binding upon Tenant in accordance with its terms.

35.10 Tenant warrants that it has not engaged or dealt with any broker in connection with this Lease other than Landlord, Landlord's affiliates and CRESA Partners. Tenant agrees to

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indemnify, defend and hold Landlord harmless from and against any claim for broker's fees or finder's fees asserted on account of any dealings with Tenant by any broker other than those specified herein. Landlord warrants that it has not engaged or dealt with any broker in connection with this Lease other than Landlord, Landlord's affiliates and CRESA Partners. Landlord agrees to indemnify, defend and hold Tenant harmless from and against any claim for broker's fees or finder's fees asserted on account of any dealings with Landlord by any broker other than those specified herein. Landlord agrees to pay or cause to be paid to CRESA Partners a commission of $4.00 per square foot of the Rentable Area of the Initial Premises; with fifty percent (50%) of such commission to be paid within thirty (30) days of the date on which this Lease has been fully executed and delivered, thirty seven percent (37%) of such commission to be paid within thirty (30) days of the Phase I & II Rent Commencement Date, and thirteen percent (13%) of such commission to be paid within thirty (30) days of the Phase III Rent Commencement Date. If Tenant exercises its First Extension Option, Landlord agrees to pay a brokerage commission to Tenant or Tenant's broker of $2.00 per square foot of the Rentable Area of the Premises (based upon such Rentable Area as of the date on which the First Extension Term commences) within thirty (30) days after the date on which the First Extension Term commences. If Tenant exercises its Second Extension Option, Landlord agrees to pay Tenant or Tenant's broker a commission of $4.00 per square foot of the Rentable Area of the Premises (based upon such Rentable Area as of the date on which the Second Extension Term commences) within thirty
(30) days after the date on which the Second Extension Term commences. Lastly, if Tenant exercises an Expansion Option, or if any Available Space is added to the Premises (as defined in the Right of Offer) pursuant to the Right of Offer during the Initial Scheduled Term, Landlord agrees to pay Tenant or Tenant's broker a commission of (i) $4.00 per square foot of the Rentable Area of the Expansion Space, or (ii) $2.00 per square foot of the Rentable Area of the Available Space, in either event within thirty (30) days after the applicable Expansion Space Rent Commencement Date or Available Space Rent Commencement Date, as the case may be.

35.11 All rights and remedies of Landlord under this Lease shall be cumulative and none shall exclude any other rights or remedies allowed by law.

35.12 The provisions of this Lease which relate to periods subsequent to the expiration of the Term shall survive the expiration of the Term.

35.13 Either party will, upon the written request of the other party, execute a short form lease ("MEMORANDUM OF LEASE") regarding this Lease, in a form suitable for recording with the Registrar of Titles and/or the County Recorder for Hennepin County, Minnesota. The party requesting the execution of such Memorandum of Lease will bear all costs of the Memorandum of Lease, including any recording fees. Upon the execution of an amendment to this Lease and the written request of either party, the parties shall execute a corresponding amendment to the Memorandum of Lease.

35.14 Either party will, following any termination of this Lease and upon the written request of the other party, execute a document setting forth the date of such termination, in a form suitable for recording with the Registrar of Titles and/or the County Recorder for Hennepin County, Minnesota. Failure of a party to execute such a document shall not affect the termination, and in such event the party requesting the document may execute and file an

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affidavit setting forth the date of termination. The party requesting the execution of such document shall bear all costs thereof, including any recording fees.

35.15 No Exhibit attached to this Lease nor any other materials provided by Landlord shall constitute a warranty or agreement as to the configuration of the Project. Landlord reserves the right from time to time to modify the Project, including Common Areas, appurtenances and rentable areas, and to change the name of the Project, the Building and the Tower (subject to Tenant's rights under Section 36.2) without in any case reducing the obligations of Tenant hereunder; provided, however, that all such modifications shall be consistent with the standards of a first class office building in downtown Minneapolis and no such modification of the Common Areas shall diminish in any material respect Tenant's right to use and enjoy the Common Areas.

35.16 Subject to the provisions in Section 36.2, Tenant shall not use the name of the Project or any part thereof for any purpose whatsoever, except to identify the location of the Premises in Tenant's address. Landlord reserves the right to change the name of the Project or any part thereof at any time and Landlord shall have no liability whatsoever to Tenant by reason of any such change.

35.17 This Lease shall be binding upon and inure to the benefit of the parties hereto and, subject to the restrictions and limitations herein contained, their respective heirs, successors and assigns.

35.18 This Lease may not be altered, changed or amended, except by an instrument in writing executed by all parties hereto.

35.19 The terms and provisions of Exhibits A through O, inclusive, attached hereto are hereby made a part of this Lease for all purposes.

35.20 This Lease may be executed in any number of counterparts, all of which shall be considered one and the same Lease notwithstanding that all parties hereto have not signed the same counterpart. Signatures of this Lease which are transmitted by facsimile shall be valid for all purposes. Any party shall, however, deliver an original signature for this Lease to the other party upon request.

36. ADDITIONAL RIGHTS OF TENANT

36.1 MONUMENT SIGNAGE. Prior to the Phase I & II Rent Commencement Date, Landlord shall, upon Tenant's request and at Tenant's expense, install Tenant's name in the top position on the Project's monument sign at the Sixth Street and Second Avenue entry way (the "SECOND AVENUE MONUMENT SIGN") to the Project (such right being referred to herein as "TENANT'S TOP MONUMENT SIGNAGE RIGHT"). Tenant's Top Monument Signage Right shall remain in effect in all events through January 1, 2006, and thereafter only for so long as Tenant, its Affiliates and/or Successors are Directly Occupying at least 200,000 square feet of the Rentable Area of the Project. For so long as Tenant, its Affiliates and/or Successors, however, are Directly Occupying at least 100,000 square feet of Rentable Area in the Project, Tenant shall have the right to have Tenant's name installed, at Tenant's expense, in a prominent manner on, but not at the top of, the Second Avenue Monument Sign ("TENANT PROMINENT MONUMENT

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SIGNAGE RIGHT"). Tenant's Top Monument Signage Right and Tenant's Prominent Monument Signage Right are collectively referred to herein as "TENANT'S MONUMENT SIGNAGE RIGHTS". Tenant's Monument Signage Rights shall be personal to Capella Education Company, its Affiliates and Successors, and may not be assigned other than to an Affiliate or Successor of Capella Education Company. If, at any time, Tenant, its Affiliates and/or Successors are not Directly Occupying at least 200,000 square feet of Rentable Area in the Project, Landlord shall have the right, at Tenant's expense, to remove Tenant's sign from the top of the Second Avenue Monument Sign and to permit the top of the Second Avenue Monument Sign to be used to identify any tenant of the Project that is leasing more space in the Project than Tenant. If, at any time, Tenant, its Affiliates and/or Successors are not Directly Occupying at least 100,000 square feet of Rentable Area in the Project, then all of Tenant's Monument Signage Rights under this Section shall forever terminate and Landlord may, at Tenant's expense, remove Tenant's name from the Second Avenue Monument Sign. For purposes of this Article 36, Tenant shall be deemed to be "DIRECTLY OCCUPYING" all space in the Project that Tenant leases directly from Landlord (whether under this Lease or any other direct lease with Landlord) which Tenant has not subleased to a Third Party Subtenant. A "THIRD PARTY SUBTENANT" is any person or entity that is not an Affiliate of or Successor to Tenant. Tenant's rights under this Section 36.1 may not be assigned apart from the Lease.

36.2 NAMING RIGHTS. At such time, if any, as Tenant, its Affiliates and/or Successors are Directly Occupying over 400,000 square feet of Rentable Area in the Project and for so long thereafter as Tenant, its Affiliates and/or Successors are Directly Occupying at least 300,000 square feet of Rentable Area in the Project, Tenant shall have the exclusive right to name the Tower (i) "Capella Tower," or (ii) any other name which identifies Tenant (or an Affiliate of Tenant occupying significant space in the Project) that is selected by Tenant and approved by Landlord, which approval shall not to be unreasonably withheld or delayed (the "NAMING RIGHT"); provided that if Tenant, its Affiliates and/or Successors are Directly Occupying less than 350,000 square feet, but more than 300,000 square feet of Rentable Area in the Project, then Landlord may terminate the Naming Right, but only if the exclusive right to name the Tower is going to be granted by Landlord to a tenant that will be or is leasing more space in the Project than Tenant. For so long as Tenant's Naming Right is in effect, Tenant shall have the exclusive right, at Tenant's expense, to install and maintain one monument sign with the name Capella Tower (or other name as discussed above) at the Sixth Street and Second Avenue entry way to the Project, subject to Landlord's reasonable approval as to the design, size and actual location of the same and compliance with all applicable Legal Requirements. Tenant shall pay all costs which are incurred by Landlord in connection with so identifying the Tower and all costs which Landlord is required to pay as reimbursement to any tenants of the Tower because of such name change and all costs incurred by Landlord to remove existing Project signage and replace any such removed signage with signage of comparable quality. The Naming Right shall be personal to Capella Education Company and may not be assigned other than to an Affiliate or Successor. If, at any time, (i) Tenant, its Affiliates and/or Successors are not Directly Occupying at least 300,000 square feet of Rentable Area in the Project,
(ii) Landlord terminates the Naming Right in order to grant the right to name the Tower to a larger tenant as permitted above, or (iii) this Lease is terminated, then (x) Tenant's Naming Right shall forever terminate and Landlord may change the name of the Tower, (y) Landlord may remove, at Tenant's expense, any signage with the name that Tenant has chosen for the Tower, and (z) Landlord may grant rights to name the Tower to any third party in the case of clause (i) and (iii) above. Nothing in this Section shall

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preclude Landlord from granting, and Landlord shall have the right, at any time and from time to time, to grant naming rights with respect to the Building to any third party and Landlord shall have the right, at any time prior to the date on which Tenant would otherwise become entitled to the Naming Right, to grant the exclusive right to name the Tower to any tenant of the Project that leases more Rentable Area in the Project than Tenant. Notwithstanding anything to the contrary in this Lease, for so long as Tenant, its Affiliates and/or Successors are Directly Occupying at least 100,000 square feet of Rentable Area in the Project, Landlord shall not grant the exclusive right to name the Tower or the Building to a Direct Competitor of Tenant or change the name of the Tower or the Building to reflect the name of a Direct Competitor of Tenant. Tenant's rights under this Section 36.2 may not be assigned apart from the Lease.

36.3 EMERGENCY GENERATOR. Tenant shall have the right, at Tenant's sole cost and expense, and subject to Landlord's reasonable approval with respect to the type and location thereof, to install and maintain an emergency generator on the B1 Level of the Project for the exclusive use of Tenant throughout the Lease Term. Alternatively, Tenant shall have the right, which must be exercised by giving Landlord written notice thereof not less than sixty (60) days prior to the Phase I & II Rent Commencement Date, to use the emergency generator which is owned by Landlord and located on the B1 Level of the Project to supply emergency power for Tenant's use; provided that Tenant shall be responsible for all costs incurred in operating, repairing, maintaining and replacing Landlord's emergency generator.

36.4 SATELLITE DISH. Landlord grants to Tenant the non-exclusive right to install one (1) satellite dish, at the location on the roof of the Building designated by Landlord, together with associated wiring from the antenna to the Premises (collectively, the "Antenna"), at any time during the Term of this Lease (including any extension or renewal thereof) and to use the Antenna solely in connection with the conduct of Tenant's business subject to the terms of this Lease and to the following additional terms:

(a) The Antenna shall be installed at Tenant's sole expense at such specific location, in such manner, and by such contractors as shall be approved in writing by Landlord and Landlord's Antenna Site Manager; provided, however, that in no event shall the approval by the Antenna Site Manager be unreasonably withheld, delayed or conditioned. Tenant shall be responsible for all costs and expenses of Landlord relating to the installation of the Antenna, including the costs of any consultant or supervision necessary in connection with such installation, payable as Additional Rent within thirty (30) days after Landlord's invoice.

(b) The functional characteristics, size, design, color and general appearance of the Antenna shall be subject to prior approval in writing by Landlord and Landlord's Antenna Site Manager, which approval shall not be unreasonably withheld or delayed by either party. Such approval shall not create any warranty by or impose any liability for Landlord.

(c) Tenant shall at its expense repair and maintain the Antenna in good and safe condition and in compliance with applicable laws, and Landlord shall have no responsibility for any damage to or interference with the Antenna from any cause whatsoever. Tenant shall be responsible for and shall at its sole expense repair any

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damage caused by the installation, maintenance, operation, condition, or use of the Antenna, and any related roof or wall penetrations, including, without limitation, any water damage or other damage to the Building or Landlord's or other tenant's premises or personal property. Tenant shall be responsible for all utilities, expenses, taxes or assessments in connection with the Antenna and shall obtain and keep in effect any and all licenses, permits and other governmental approvals which are or may become required for the operation and use of the Antenna. All work to be done by Tenant pursuant to this Section shall otherwise be subject to the terms and conditions of this Lease.

(d) Tenant shall indemnify and hold harmless Landlord from any losses, costs, claims, actions, causes of action, expenses (including reasonable attorney's fees) or liabilities of any sort whatsoever arising by reason of the installation, maintenance, operation, condition, use or removal of the Antenna or the exercise of any of Tenant's rights under this Section.

(e) Upon the expiration or termination of this Lease, or the termination of Tenant's right to possession of the Premises, Tenant shall remove the Antenna and repair any damage resulting from such removal at Tenant's sole expense.

(f) Landlord may relocate the Antenna on not less than ninety (90) days' prior written notice to Tenant to another location at the Building suitable for Tenant's purposes. The expense of such relocation shall be paid by Landlord, except that all such expenses shall be paid by Tenant if the relocation is necessitated by applicable legal or insurance requirements as reasonably determined by Landlord. Landlord may interrupt or turn off the Antenna, on reasonable prior notice to Tenant, in the event of an emergency or as reasonably necessary in connection with repairs to the Building.

(g) Tenant shall not cause or permit the Antenna to interfere with other communication devices now or hereafter installed at the Building. In case of any such interference, Tenant shall at its expense use best efforts to promptly eliminate such interference. Tenant shall not allow other tenants of the Building or any other person to utilize the Antenna without first obtaining Landlord's written consent. The rights granted in this Section relating to the Antenna may not be transferred by Tenant except in connection with an assignment permitted by this Lease. The obligations of Tenant contained in this Section shall survive the termination of this Lease.

(h) Tenant shall not be obligated to pay any separate rental for the right to install and operate the Antenna.

(i) Upon the occurrence of any default under this Section, in addition to Landlord's other rights and remedies, Landlord may, immediately and without further notice or legal process, terminate Tenant's rights under this Section and disconnect, remove and store the Antenna at Tenant's expense.

36.5 JANITORIAL SERVICES. Notwithstanding anything to the contrary in this Lease, Tenant shall have the right to contract separately for any special janitorial services which are not then included in the standard janitorial services being provided by Landlord pursuant to

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Section 14 of this Lease; provided that Tenant first obtains Landlord's written approval of the contractor selected by Tenant to perform any such special janitorial services, which approval shall not be unreasonably withheld by Landlord. Landlord also agrees to cooperate with Tenant regarding the scheduling of the janitorial services to be provided by Landlord pursuant to Section 14 of this Lease.

IN WITNESS WHEREOF, Landlord has executed this Lease to be effective as of the date first above set forth.

[SIGNATURE PAGES FOLLOW]

45

SIGNATURE PAGE
FOR
OFFICE LEASE
BETWEEN
601 SECOND AVENUE LIMITED PARTNERSHIP
AND
CAPELLA EDUCATION COMPANY

LANDLORD:

601 SECOND AVENUE LIMITED PARTNERSHIP,
a Texas limited partnership

By: Minneapolis 601 Limited Partnership, a Texas
limited partnership, its sole general partner

By: Hines Acquisitions No. 2 Limited
Partnership a Texas limited partnership, its
sole general partner

By: Hines Interests Limited Partnership,
a Delaware limited partnership, its
sole general partner

By: Hines Holdings, Inc., a Texas
close corporation, its sole
general partner

By: /s/ C.K. Shannahan
Name: C. Kevin Shannahan
Title: Executive Vice
       President


SIGNATURE PAGE
FOR
OFFICE LEASE
BETWEEN
601 SECOND AVENUE LIMITED PARTNERSHIP
AND
CAPELLA EDUCATION COMPANY

TENANT:

CAPELLA EDUCATION COMPANY
a Minnesota corporation

By: /s/ Joe Gaylord
    ---------------------------------------
Name: Joe Gaylord
Title: CFO

47

EXHIBIT B

LEGAL DESCRIPTION

Lot 6, Block 219, Town of Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

The Northeasterly 7 feet of Lots 1, 2, and 3; the Northeasterly 7 feet of the Northwesterly half of Lot 4; the Southeasterly half of Lot 4; and Lots 5, 6, 7, 8, 9 and 10;

all in Block 219, Brown and Jackins' Addition to Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

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EXHIBIT C

FORM OF DECLARATION OF
COMMENCEMENT DATE

This Declaration is made as of February ___, 2004, by and between 601 Second Avenue Limited Partnership, a Texas limited partnership ("LANDLORD") and Capella Education Company, a Minnesota corporation ("TENANT").

Landlord and Tenant are parties to that certain Office Lease (the "LEASE") dated as of February ___, 2004.

In accordance with the Lease, Landlord and Tenant hereby memorialize that:

1. The **[INSERT COMMENCEMENT DATE, PHASE I & II RENT COMMENCEMENT DATE OR PHASE III RENT COMMENCEMENT DATE, AS APPROPRIATE]** is -------------------------.

2. The expiration date of the Initial Scheduled Term is October 31, 2010.

TENANT:

CAPELLA EDUCATION COMPANY,
a Minnesota corporation

By: _______________________________________

Name: _____________________________________

Title: ____________________________________

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LANDLORD:

601 SECOND AVENUE LIMITED PARTNERSHIP,
a Texas limited partnership

By: Minneapolis 601 Limited Partnership, a Texas
limited partnership, its sole general partner

By: Hines Acquisitions No. 2 Limited
Partnership a Texas limited partnership, its
sole general partner

By: Hines Interests Limited Partnership,
a Delaware limited partnership, its
sole general partner

By: Hines Holdings, Inc., a Texas
close corporation, its sole
general partner

By:_________________________________
Name: C. Kevin Shannahan
Title: Executive Vice
President

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EXHIBIT D
WORKLETTER

PART I. SCHEDULE OF CRITICAL DATES.

Set forth below is a schedule of certain critical dates relating to Landlord's and Tenant's respective obligations with respect to construction of those leasehold improvements (including all cabling and wiring) which Tenant desires to make to the Initial Premises (the "TENANT IMPROVEMENTS"). These dates and the respective obligations of Landlord and Tenant are more fully described in Part II below.

                                 Date Due                                          Responsible Party
                                 --------                                          -----------------
A.    Space Plan Delivery Date   May 1, 2004, or as soon thereafter as is               Tenant
                                 reasonably possible

B.    Landlord Review Date       Within seven (7) business days after                  Landlord
                                 Landlord receives the Tenant Space Plan

All references to days mean calendar days, not working or business days. If Tenant delivers the Tenant Space Plan prior to the date set forth above, the same nevertheless shall be deemed delivered on the date set forth above for purposes of the foregoing schedule.

PART II. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS.

1. Tenant will deliver to Landlord no later than the Space Plan Delivery Date (described in Part I above) a detailed space plan containing the information described in Part VI below, together with other relevant information and written instructions relating thereto which are required to prepare the Tenant Working Drawings (defined below) for the Tenant Improvements (said space plan and other information and instructions being called the "TENANT SPACE PLAN").

2. Landlord will review the Tenant Space Plan to determine if it satisfies the requirements listed in Part VI below, and Landlord shall report any non-conformity to Tenant on or before the Landlord Review Date (described in Part I above).

3. Tenant shall cause working drawings (the "TENANT WORKING DRAWINGS") of the Tenant Improvements shown on the Tenant Space Plan to be prepared and delivered to Landlord. The Tenant Working Drawings shall consist of the (a) complete sets of plans and specifications in the form of working drawings or construction drawings identifying Tenant's interior layout of the Initial Premises, including complete sets of detailed architectural, structural, mechanical, electrical, and plumbing working drawings for any and all Tenant Improvements, and (b) any design materials prepared in collaboration with a subcontractor for any portion of the Tenant Improvements being constructed on a design-build basis. The Tenant Working Drawings shall include such written instructions or specifications as may be necessary or required to secure a building permit from the City of Minneapolis for the Tenant Improvements to commence in due course. The Tenant Working Drawings shall be prepared by architects, engineers and

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design/build subcontractors selected by Tenant and approved by Landlord, which approval will not be unreasonably withheld or delayed.

4. Landlord shall have ten (10) business days to review the initial submittal of the Tenant Working Drawings and seven (7) business days to review any resubmittal of the Tenant Working Drawings and notify Tenant whether Landlord approves the same (which approval shall not be unreasonably withheld or delayed) or the reasons Landlord does not approve them.

5. Upon receipt of the final, mutually approved Tenant Working Drawings, Tenant agrees to submit for pricing by its contractors and subcontractors the Tenant Improvements (any contractor selected by Tenant with Landlord's approval to supervise the construction of the Tenant Improvements is hereinafter called the "GENERAL CONTRACTOR"). Tenant shall then enter into a Construction Contract with the General Contractor. LANDLORD SHALL NOT BE OBLIGATED TO, AND DOES NOT, MAKE ANY WARRANTIES, EXPRESS OR IMPLIED WITH RESPECT TO THE TENANT IMPROVEMENTS WORK NOR SHALL LANDLORD BE OBLIGATED FOR ANY OF THE WARRANTIES FROM TENANT'S ARCHITECT OR THE GENERAL CONTRACTOR TO TENANT. ALL IMPLIED WARRANTIES WITH RESPECT THERETO, INCLUDING BUT NOT LIMITED TO THOSE OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY NEGATED AND WAIVED.

6. Tenant shall pay and be responsible for the architectural and engineering fees incurred in preparing the Tenant Space Plan and the Tenant Working Drawings or otherwise relating to the making of all of the Tenant Improvements.

7. Tenant shall be solely responsible for the compliance of the Tenant Space Plan, the Tenant Working Drawings and all of the Tenant Improvements with applicable Legal Requirements and building rules and regulations.

8. If in the exercise of Landlord's reasonable judgment it would be prudent to have those aspects of the Tenant Working Drawings which affect the structural elements of the Project or Base Building Systems reviewed by Landlord's architects or engineers, Tenant shall promptly reimburse Landlord for any reasonable out-of-pocket costs incurred by Landlord in connection with such review.

PART III. CERTAIN PROVISIONS RELATING TO THE TENANT IMPROVEMENTS.

1. Upon execution of the Construction Contract between Tenant and the General Contractor, Tenant agrees to use diligence to cause the General Contractor to complete the installation of the Tenant Improvements on or before the estimated finish date shown therein, subject to typical excused delay events. Tenant shall pay all costs incurred in connection with the Tenant Improvements work including the costs of the materials and labor therefor and associated architectural and engineering fees.

2. The Construction Contract between Tenant and the General Contractor shall contain an estimate of the date the Tenant Improvements will be Substantially Complete. "SUBSTANTIALLY COMPLETE" means the date on which (i) a certificate of occupancy has been issued for the

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Premises, and (ii) the Tenant Improvements have been substantially completed in accordance with the Tenant Working Drawings, with a punch-list of uncompleted items which do not interfere in any material respect with the use or enjoyment of the Premises.

3. Tenant may make changes in the Tenant Improvements with the prior approval of Landlord and as otherwise provided for in the Construction Contract between Tenant and the General Contractor; provided, however, that Landlord's approval shall not be required for changes relating to decorating or finishes, or for change orders of $50,000 or less that do not affect structural elements of the Project or Base Building Systems. Any change which Tenant desires to make in the Tenant Improvements requiring Landlord's approval shall be described in a written change order that shall be submitted for Landlord's approval, which approval shall not be unreasonably withheld or delayed. All change orders, whether or not requiring Landlord's approval shall, however, be delivered to Landlord within twenty four (24) hours after execution by Tenant (but if Tenant shall fail to so deliver copies to Landlord, such failure shall constitute an Event of Default by Tenant only if such failure shall continue for fifteen (15) days after written notice of default is given by Landlord in accordance with
Section 20.1(c)) and all changes shall be reflected on the "as-built" plans and specifications (in both drawn and CAD disc format) which shall be delivered by Tenant to Landlord after the Tenant Improvements have been completed.

4. If for any reason the Initial Premises are not ready for occupancy by the estimated finish date stated in the Construction Contract between Tenant and the General Contractor, Landlord shall not be liable or responsible for any claims, damages or liabilities in connection therewith or by reason thereof, unless such delay is directly caused by (i) Landlord's failure to respond to any submittal or resubmittal of the Tenant Working Drawings within the time periods required in Section 4 of Part II to this Exhibit D, or (ii) an act or omission of Landlord (except for actions taken to enforce Landlord's rights under this Lease) related to the construction of the Tenant Improvements, but only if, in either case, Tenant has promptly notified Landlord in writing that Tenant reasonably believes that any act or omission of Landlord may delay substantial completion of the Tenant Improvements for the Phase I Space and the Phase II Space beyond November 1, 2004, or if Tenant reasonably believes that any act or omission of Landlord may delay substantial completion of the Tenant Improvements for the Phase III Space beyond November 1, 2005 (such delays are referred to herein as "LANDLORD CAUSED DELAYS"). If the Tenant Improvements for the Phase I Space and the Phase II Space are not completed on or before November 1, 2004, because of Landlord Caused Delays, the Phase I & II Rent Commencement Date shall be delayed by one day for each day of such delay. If the Tenant Improvements for the Phase III Space are not completed on or before November 1, 2005, because of Landlord Caused Delays, the Phase III Rent Commencement Date shall be delayed by one day for each day of such delay.

5. David Spillman is hereby designated the individual who Landlord agrees shall be available to meet and consult with Tenant as Landlord's representative respecting the matters which are the subject of this Exhibit, and who, as between Landlord and Tenant, shall have the power to legally bind Landlord ("LANDLORD'S DESIGNATED REPRESENTATIVE"). Carla Bustrom is hereby designated as the individual who Tenant agrees shall be available to meet and consult with Landlord as Tenant's representative respecting the matters which are subject to this Exhibit, and who, as between Tenant and Landlord, shall have the power to legally bind Tenant ("TENANT'S

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DESIGNATED REPRESENTATIVE"). Landlord and Tenant shall each have the right to change their respective representatives, and such representatives' responsibilities, upon notice to the other party given pursuant to the terms of the Lease. All inquiries or instructions from Tenant's Designated Representative or Tenant's architect pertaining to the Tenant Improvements shall be directed in writing to the Landlord's Designated Representative.

6. Landlord's Designated Representative shall at all times have access to and the right to inspect the Tenant Improvements.

7. Landlord's Designated Representative shall have authority to reject any of the Tenant Improvements which do not conform to the Contract Documents (as defined in the Construction Contract between Tenant and the General Contractor) if such non-conforming Tenant Improvements would adversely affect the structural elements of the Project or the Base Building Systems.

PART IV. GENERAL CONTRACTOR.

1. The General Contractor shall: (i) conduct its work in such a manner so as not to unreasonably interfere with any other construction occurring on or in the Project or the Premises; (ii) comply with all ru1es and regulations relating to the construction activities in or on the Project, as may be reasonably promulgated from time to time by Landlord; and (iii) maintain such insurance and bonds in force and effect as may be reasonably requested by Landlord or as required by applicable law. As a condition precedent to Landlord's approving the General Contractor, Tenant and the General Contractor shall deliver to Landlord such assurances or instruments to evidence the General Contractor's compliance or agreement to comply with the provisions of this paragraph as may be reasonably requested by Landlord.

2. Tenant shall indemnify, defend (with counsel acceptable to Landlord) and hold Landlord, harmless from and against any and all losses, damages, costs (including costs of suit and attorneys' fees), liabilities, or causes of action arising out of or relating to the work of the General Contractor, including but not limited to mechanics', materialmen's or other liens or claims (and all costs or expenses associated therewith) asserted, filed or arising out of any such work, except to the extent such liens arise by reason of Landlord's failure to timely advance the Phase I and II Space Improvement Allowance or the Phase III Space Improvement Allowance, as provided herein. All materialmen, contractors, artisans, mechanics, laborers and other parties hereafter contracting with Tenant or any of Tenant's contractors or subcontractors for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Premises are hereby charged with notice that they must look solely to Tenant for payment for same. Without limiting the generality of the foregoing, Tenant shall repair or cause to be repaired at its expense all damage caused by the General Contractor, its subcontractors or their employees.

PART V. CONSTRUCTION COORDINATION FEE.

If Tenant retains the services of Landlord to serve as Tenant's construction coordinator, Tenant shall pay Landlord a construction coordination fee equal to three percent (3%) of the actual construction costs for the Tenant Improvements, which fee shall be paid to Landlord at the same

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time that Landlord pays Tenant the Improvement Allowance as provided in Part VII of this Exhibit D.

PART VI. MINIMUM INFORMATION REQUIRED OF TENANT SPACE PLAN.

FLOOR PLANS INDICATING:

1. Location and type of all partitions.

2. Location and types of all doors.

3. Location and type of glass partitions, windows and doors - indicate framing if not building standard.

4. Location of telephone equipment room.

5. Location of all building standard electrical items - outlets, switches, telephone outlets, lights.

6. Location and type of all non-building standard electrical items including lighting and security systems.

7. Location and type of equipment that will require special electrical requirements.

8. Location, weight per square foot and description of any exceptionally heavy equipment or filing system exceeding 50 psf live load.

9. Requirements for special air conditioning or ventilation.

10. Type and color of floor covering.

11. Location and type of wall covering.

12. Location and type of building standard and non-building standard paint or finishes.

13. Location and type of plumbing, including special sprinkling requirements.

14. Location and type of kitchen equipment.

DETAILS SHOWING:

All millwork with verified dimensions and dimensions of all equipment to be built-in.

15. Corridor entrance.

16. Bracing or support of special walls, glass partitions, etc., if required.

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PART VII. IMPROVEMENT ALLOWANCE.

1. To help defray the costs of the Tenant Improvements for the Phase I Space and the Phase II Space and the costs incurred in moving into the Phase I Space and Phase II Space, Landlord agrees to make available to Tenant an allowance in an amount of up to Thirty Dollars ($30.00) times the Rentable Area of the Phase I Space and the Phase II Space (the "PHASE I & II SPACE IMPROVEMENT ALLOWANCE"). The Phase I & II Space Improvement Allowance shall be payable on account of costs incurred in designing and constructing the Tenant Improvements (including all consultant fees which directly relate to the Tenant Improvements, construction costs, permits, cabling, architectural engineering plans) for the Phase I Space and the Phase II Space and for moving costs. For so long as Tenant is not in default under this Lease, Landlord shall pay the Phase I & II Space Improvement Allowance on a monthly basis all in accordance with customary construction disbursement procedures and upon receipt of a sworn construction statement and draw request, with supporting lien waivers from all material contractors and subcontractors delivered one month in arrears. Landlord shall be permitted to offset against the Phase I & II Space Improvement Allowance any amounts past due to Landlord by Tenant under this Lease. If the actual costs of the Tenant Improvements for the Phase I Space and the Phase II Space plus the costs incurred in moving into the Phase I Space and Phase II Space exceed the amount of the Phase I & II Space Improvement Allowance, Tenant shall pay the excess costs without reimbursement from Landlord as and when such excess costs become due and payable. If the actual costs of the Tenant Improvements for the Phase I Space and the Phase II Space plus the costs incurred in moving into the Phase I Space and Phase II Space are less than the Phase I & II Space Improvement Allowance, Landlord shall credit up to but not more than $5.00 per square foot of the Phase I & II Space Improvement Allowance against the first installments of Base Rent which are due and payable under this Lease for the Phase I Space and the Phase II Space. Landlord's obligation to make the Phase I & II Space Improvement Allowance available (other than in the form of a credit against Base Rent in an amount not to exceed $5.00 per square foot) to Tenant shall expire with respect to any portion of the Phase I & II Space Improvement Allowance that is not used by Tenant on or before January 1, 2006.

2. To help defray the costs of the Tenant Improvements for the Phase III Space and the costs incurred in moving into the Phase III Space, Landlord agrees to make available to Tenant an allowance in an amount of up to Thirty Dollars ($30.00) times the Rentable Area of the Phase III Space (the "PHASE III SPACE IMPROVEMENT ALLOWANCE"). The Phase III Space Improvement Allowance shall be payable on account of costs incurred in designing and constructing the Tenant Improvements (including all consultant fees which directly relate to the Tenant Improvements, construction costs, permits, cabling, architectural engineering plans) for the Phase III Space plus the costs incurred in moving into the Phase III Space. For so long as Tenant is not in default under this Lease, Landlord shall pay the Phase III Space Improvement Allowance on a monthly basis all in accordance with customary construction disbursement procedures and upon receipt of such documentation as is required by title insurance companies and institutional construction lenders. Landlord shall be permitted to offset against the Phase III Space Improvement Allowance any amounts past due to Landlord by Tenant under this Lease. If the actual costs of the Tenant Improvements for the Phase III Space plus the costs incurred in moving into the Phase III Space exceed the amount of the Phase III Space Improvement Allowance, Tenant shall pay the excess costs without reimbursement from Landlord as and when such excess costs become due and payable. If the actual costs of the Tenant Improvements for

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the Phase III Space plus the costs incurred in moving into the Phase III Space are less than the Phase III Space Improvement Allowance, Landlord shall credit up to but not more than $5.00 per square foot of the Phase III Space Improvement Allowance against the first installments of Base Rent which are due and payable under this Lease for the Phase III Space. Landlord's obligation to make the Phase III Space Improvement Allowance available to Tenant shall expire (other than in the form of a credit against Base Rent in an amount not to exceed $5.00 per square foot) with respect to any portion of the Phase III Space Improvement Allowance that is not used by Tenant on or before March 1, 2007.

3. The Phase I & II Space Improvement Allowance and the Phase III Space Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed as part of the Tenant Improvements and paid for with the Phase I & II Space Improvement Allowance and the Phase III Space Improvement Allowance shall be owned by Landlord.

4. If Landlord fails to pay any portion of the Phase I & II Space Improvement Allowance or the Phase III Space Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten
(10) business days after receiving written from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

PART VIII. LANDLORD SERVICES; DELIVERIES.

1. CABLE RUNS; FLOOR REINFORCEMENT. Landlord will use reasonable efforts, subject to the rights of other tenants of the Project, to facilitate: (i) Tenant's placement of horizontal cable runs above the ceiling grid on floors immediately below the lowest floor in each of the Tower and the Building included within the Premises from time to time, and (ii) Tenant's reinforcement of the lowest floor in each of the Tower and the Building included within the Premises from time to time.

2. ACCESS. During the course of the Tenant Improvement Work, Landlord will also provide, at no cost to Tenant (i) space to accommodate a trash dumpster of a size and at a location in the loading dock area, each of which has been approved by Landlord, which approval shall not be unreasonably withheld or delayed, and
(ii) access to Tenant's Contractor and subcontractors (and each other person engaged by Tenant to provide design, construction, installation or move-in services) to the Project and designated construction floors of the Premises twenty four (24) hours a day, seven (7) days a week, subject to compliance with standard building procedures.

3. CHARGES. Neither Tenant nor its Contractor will be charged for, and Landlord will provide at no cost, electricity, water, toilet facilities, HVAC, loading docks, dumpster space or freight elevators during the construction of the Tenant Improvements. Tenant may contract on a monthly basis at Landlord's usual rates for parking (if available) for Tenant's architects, designers, contractors and subcontractors. Landlord will, subject to the rights of other tenants of the Project, make other areas of the Project that are necessary for the construction of the Tenant Improvements (such as risers and closets) available to Tenant.

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4. EXISTING DESIGN MATERIALS. Landlord has provided Tenant with a copy of its current Project Design Manual (the "PROJECT DESIGN MANUAL") and shall provide to Tenant copies of all existing drawings and floor plans for the Premises to the extent available, including current wiring schematics and riser capacities for voice and data communications.

PART IX. TIME OF THE ESSENCE.

It is stipulated that time is of the essence in connection with Tenant's compliance with the terms of this Exhibit D.

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EXHIBIT E

RULES AND REGULATIONS OF THE PROJECT

Except as otherwise specifically provided in the Lease or any other Exhibits thereto:

1. Tenant shall not inscribe, display, print or affix any sign, placard, banner, picture, advertisement, name or notice on or to any part of the outside or inside of the Building, Tower or Project without the written consent of Landlord. Landlord shall have the right to remove any such sign, placard, banner, picture, advertisement, name or notice, unless Landlord has given written consent, without notice to and at the expense of Tenant. Landlord shall not be liable in damages for any such removal.

2. All approved signs or lettering on doors and walls to the Premises shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord in a manner and style acceptable to Landlord.

3. Tenant shall not use any blinds, shades, awnings, or screens in connection with any exterior window or door of the Premises unless approved in writing by Landlord. Tenant shall not use any drape or window covering facing any exterior glass surface visible from outside of the Building, the Tower or the Project other than the standard drape or window covering established by Landlord. Tenant shall not place any bottles, parcels or other articles on the window sills.

4. The sidewalks, halls, vestibules, passages, exits, entrances, elevators, stairways, and Common Areas of the Project shall not be used for the disposal of trash or be obstructed by Tenant or used by Tenant for any purpose other than for ingress to and egress from the Premises. The halls, passages, exits, entrances, elevators, stairways, balconies and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Project and its tenants, provided that nothing herein contained shall be construed to prevent such access to the Premises by persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. Tenant may not place any items on the balconies of the Building without obtaining Landlord's prior written consent, which may be withheld or given in Landlord's sole discretion.

5. Tenant shall not go upon the roof of the Building, the Tower or the Project. Tenant shall not throw anything out of the doors or windows or down the passageways. Landlord shall have the right to control and operate all Common Areas of the Project (including, without limitation, the Parking Garage, ramps, stairs, plazas and park) in the best interests of tenants generally.

6. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys and access cards for any offices, rooms and toilet rooms which shall have been furnished to Tenant or which Tenant shall have made, and in the event of loss of any keys so furnished, shall pay Landlord therefor.

7. Tenant shall not use the toilet rooms, toilets, urinals, wash bowls, and other plumbing fixtures and similar apparatus for any purpose other than that for which they were constructed

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and no foreign substance of any kind whatsoever (including without limitation any sweepings, rubbish, rags or similar materials) shall be thrown, discarded or disposed of therein and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by Tenant.

8. Tenant shall not overload any floor of the Premises.

9. All routine deliveries (other than by courier personnel) to Tenant's Premises during 8:00 a.m. to 5:00 p.m. weekdays shall be made through the freight elevators. Tenant shall not use hand trucks or vehicles (other than a wheelchair or similar personal motorized vehicle for an individual) in passenger elevators. Passenger elevators are to be used only for the movement of persons (including mail clerks using push carts and courier personnel so long as they shall not unreasonably interfere with elevator traffic), unless an exception is approved by the Building management office. Tenant shall be solely responsible to have a person present at the loading dock to receive all deliveries made to Tenant at the loading dock and to deliver same from the loading dock to the Premises; Landlord has no responsibility or liability for receiving deliveries.

10. All moving of furniture, bulky packages, cartons, supplies, large quantities of food or beverages, merchandise, freight or equipment of any kind by Tenant into or out of the Building, the Tower or other areas of the Project shall be via the freight handling facilities, unless otherwise directed by Landlord, at such time and in such manner as Landlord shall prescribe. Advance written notice of intent to move such items must be made to the building management office. Any hand trucks or vehicles permitted must be equipped with soft rubber tires and side guards. Tenant is to assume all risks for (i) damage to articles moved;
(ii) injury to any persons arising from or related to such movement; or (iii) any damage to Landlord's equipment or property. Landlord will not be liable for any acts of any person(s) engaged in, or any damage or loss to any of said property or person(s) resulting from any act in connection with such movement by or on behalf of Tenant.

11. Landlord shall have the right to prescribe the weight, size and position of heavy equipment brought into the Project and also the times and manner of moving the same in and out of the Project. Safes or other heavy objects shall, if considered necessary by Landlord, stand on a platform of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property from any cause, and all damage done to the Building, the Tower or other areas of the Project by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant.

12. Tenant space that is visible from public areas must be kept neat and clean. All freight elevator lobbies are to be kept neat and clean. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises unless otherwise agreed to by Landlord. Window cleaning shall be done only by Landlord.

13. Tenant shall not commit any nuisance, or use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in any manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein. Without limitation to the foregoing, no smoking or other use of tobacco

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products shall be allowed in any portion of the Premises or the Project, except in the areas designated by Landlord pursuant to Section 9.4 of the Lease.

14. Tenant shall not bring or keep in or about the Premises, the Building, the Tower or other areas of the Project any animals (other than as required for handicapped persons), including without limitation any birds or fish, fish tanks or aquariums. No bicycles shall be brought into or kept in or about the Premises.

15. Neither Tenant nor any other occupant (including without limitation, Tenant's servants, employees, agents, visitors or licensees) shall at any time
(i) use or keep in the Premises, the Building, the Tower or other areas of the Project any gasoline or other flammable, explosive or combustible fluid, chemical, gas or substance, except immaterial quantities of normal office products typically found in a first-class office building, provided such products are stored and used in areas approved by Landlord and in accordance with all applicable building and fire codes or other laws; (ii) install any chemical storage tanks in the Premises; or (iii) use any method of heating or air-conditioning other than that supplied by Landlord.

16. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord. The expenses of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant.

17. Tenant will comply with all security procedures during Normal Business Hours and after hours and on weekends. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 p.m. and 7:00 a.m. the following day, access to the Project or to the halls, corridors, elevators or stairways in the Project, or to the Premises, may be refused unless the person seeking access (a) is known to the person or employee of the Project in charge and has a pass or
(b) is properly identified. Any person whose presence in the Project at any time shall, in the sole judgment of Landlord, be prejudicial to the safety, character, reputation and interests of the Project or its tenants may be denied access to the Project or may be ejected therefrom. Landlord may require any person leaving the Project with any package or other object to exhibit a pass from the tenant from whose premises the package or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibility on Landlord for the protection of any tenant against the removal of property from the premises of the tenant. The Landlord shall in no case be liable to Tenant for damages for any error with regard to the admission to or exclusion from the Project of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Project during the continuance of the same by closing of the doors or otherwise, for the safety of the tenants and protection of property in the Project.

18. Tenant shall see that the exterior doors of the Premises are closed when not in use and closed and securely locked before leaving the Project and must observe strict care and caution that all water apparatus are entirely shut off before Tenant or Tenant's employees leave the Project and that all electricity, gas or air shall likewise be carefully shut off, so as to prevent waste or damage.

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19. Additional services requested by Tenant shall be attended to only upon application to the building manager at the office of the Project, and employees of Landlord will not perform any work or do anything outside of their regular duties upon such application by Tenant unless under special instructions from Landlord.

20. Tenant shall cooperate with Landlord in obtaining maximum effectiveness of the cooling system by closing the blinds when the sun's rays fall directly on windows of the Premises. Tenant shall not obstruct, alter or in any way impair the efficient operation of Landlord's heating, ventilating and air-conditioning system and shall not place bottles, machines, parcels or other articles on any induction unit enclosure so as to interfere with air flow. Tenant shall not tamper with or change the setting of any thermostats or temperature control valves. Any damage caused by tampering will be repaired at Tenant's expense. Landlord shall adjust thermostats as required to maintain Building standard temperature as set forth in Exhibit F.

21. Tenant shall cooperate to prevent canvassing, soliciting and peddling within the Project.

22. The Premises shall in no event be used for manufacturing, storage (except as such storage may be incidental to permitted uses under the Lease), cooking (except in an employee lunchroom on cooking equipment approved by Landlord) or sleeping, lodging or living quarters.

23. Tenant shall not conduct any auction, fire, bankruptcy, going out of business, liquidation or similar sales.

24. Installing of wire or cabling within the Project shall follow all applicable codes and Landlord's reasonable telecommunication rules.

25. Except as may be permitted by the Lease or as may otherwise be agreed in writing by Landlord or Landlord's Antenna Site Manager, Tenant shall not place any radio or television antennae on the roof of the Project or on any exterior part of the Premises or the Project, nor shall Tenant place a microwave or satellite dish or other transmitting device anywhere in the Premises.

26. The exterior walls of the Project shall not be punctured, penetrated or otherwise adversely affected by wall hangings or other improvements or property located in, on or about the Premises. No nails, hooks or screws will be inserted in the exterior walls of the Project without the express written consent of the Landlord.

27. Any alterations, additions or improvements to any premises in the Project shall be of a quality at least equal to building standards per the Tenant Design Manual for the Project in effect from time to time.

28. All contractors invited to perform work within the Project, whether at the direction of Landlord or a Project tenant, shall be required to sign in at the lobby courtesy desk, indicate who they will be working for, describe the scope of services to be performed, provide an estimate of the amount of time required to perform the services, and deposit picture identification in exchange for an authorized contractor identification badge prior to commencing their work. Any contractor found in the Project without an identification badge will be escorted to the lobby courtesy desk to complete the sign-in process. No contractor will be allowed to check out keys

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from the property management office without presenting an authorized contractor identification badge. Prior to leaving the Project, all contractors shall be required to sign out at the lobby courtesy desk, indicate the status of their work, and return the authorized contractor identification badge in exchange for their identification. Landlord reserves the right to deny access to the Project to any contractor who does not comply with this rule.

29. Tenant shall not permit any of its partners, directors, officers, employees, agents, contractors or invitees to carry, possess or store any firearms or other weapons in any portion of the Project other than strictly in accordance with all Legal Requirements.

Landlord reserves the right to rescind any of these rules and regulations and to make such other and further rules and regulations as in its reasonable judgment shall, from time to time, be required for the safety, protection, care and cleanliness of the Building and/or the Project, the operation thereof, the preservation of good order therein and the protection and comfort of the tenants and their agents, employees and invitees. Such rules and regulations, when made and written notice thereof is given to a tenant, shall be binding upon it in like manner as if originally herein prescribed.

For purposes of these rules and regulations, the term "TENANT" shall include Tenant and Tenant's employees, agents, licensees, visitors and invitees.

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EXHIBIT F

AIR CONDITIONING AND HEATING SERVICES

Subject to the provisions of Section 14, Landlord will furnish building standard air conditioning and central heating during Normal Business Hours. Upon request of Tenant made in accordance with the rules and regulations for the Building, Landlord will furnish air conditioning and heating at other times (that is, at times other than during Normal Business Hours) in which event Tenant shall reimburse Landlord for furnishing such services to the Premises based upon an hourly rate, as adjusted from time to time, reflecting the cost to Landlord (which cost may include, but not be limited to, overhead expenses) for providing said after hours services.

The Building standard heating, ventilating and air conditioning system shall meet the following design conditions, at the stated outside design conditions, based on one person per 100 square feet of Usable Area:

1. Summer - Outdoor conditions 92 degrees Fahrenheit dry bulb, 75 degrees Fahrenheit wet bulb; indoor conditions 78 degrees Fahrenheit dry bulb (per Minneapolis energy code), 50% relative humidity at design condition.

2. Winter - Outdoor conditions minus 16 degrees Fahrenheit dry bulb; indoor conditions 72 degrees Fahrenheit dry bulb (per Minneapolis energy code).

The following dates shall constitute "HOLIDAYS" as said term is used in this Lease:

(1) New Year's Day
(2) Memorial Day
(3) Independence Day
(4) Labor Day
(5) Thanksgiving Day
(6) Christmas
(7) Any other holiday recognized and taken by tenants occupying at least one-half (-1/2) of the net Rentable Area of office space in the Project.

If in the case of any Holiday described in (1) through (6) above, a different day shall be observed than the respective day above-described, then that day which constitutes the day observed by national banks in Minneapolis, Minnesota, on account of such Holiday shall constitute the Holiday under this Lease.

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EXHIBIT G

EXTENSION OPTION

1. Subject to the provisions of this Exhibit G, Tenant is hereby granted the option to extend the Term of this Lease (the "EXTENSION OPTIONS") as to all (but not part) of the Premises for two (2) periods of five (5) years each (the "EXTENSION TERMS"); except that the term of the First Extension Term may be less than five (5) years if the Initial Scheduled Term of this Lease is extended (a) as provided in Section 2 of Exhibit I-1 to the Lease (providing for extension under certain circumstances if Tenant exercises an Expansion Option during the Initial Scheduled Term), or (b) as provided in Section 5 of Exhibit J to the Lease (providing for extension under certain circumstances if Tenant exercises a Right of Offer during the Initial Scheduled Term).

2. Each Extension Term shall commence at the expiration of the then present Term of the Lease.

3. Not earlier than eighteen (18) months and not later than fifteen (15) months prior to the expiration of the First Extension Term, Landlord shall notify Tenant in writing as to Landlord's reasonable estimate of the Market Base Rental Rate for the Premises during the Second Extension Term (the "EXTENSION TERM RATE NOTICE").

4. If Tenant desires to exercise an Extension Option, Tenant must give Landlord written notice of such exercise ("TENANT'S EXERCISE NOTICE")

(a) in the case of the First Extension Option, no earlier than fifteen (15) months prior to the expiration of the Initial Extended Term, and no later than the later of (i) twelve (12) months prior to the expiration of the Initial Extended Term, and (ii) thirty (30) days after written notice from Landlord inquiring whether Tenant intends to exercise the Extension Option for the First Extension Term, which notice may be given by Landlord no earlier than sixteen (16) months prior to the expiration of the Initial Extended Term; and

(b) in the case of the Second Extension Term, no later than the later of (i) fifteen (15) months prior to the expiration of the First Extension Term, and (ii) thirty (30) days after Tenant's receipt of the Extension Term Rate Notice described in Section 3 of this Exhibit G. Any Tenant's Exercise Notice given with respect to the Second Extension Term shall be subject to rescission as provided in Section 11 of this Exhibit G.

Time is of the essence and timely notice is an express condition of valid exercise of the Extension Option.

5. The extension of this Lease pursuant to the exercise of the First Extension Option shall be upon the same terms and conditions of this Lease (including, without limitation, Tenant's obligation to pay Tenant's Additional Rent), except:

(a) the monthly Base Rent for the Premises (except for any Available Space that is added to the Premises after the Initial Scheduled Term, the Base Rent for which shall be established pursuant to the Right of Offer) during the First Extension Term (and for

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any extension of the Initial Scheduled Term as provided in Section 2 of Exhibit I-1 to the Lease or Section 5 of Exhibit J to the Lease) shall be equal one-twelfth of the product of:

(i) Eleven and 25/100 Dollars ($11.25) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2010, and ending on October 31, 2011;

(ii) Eleven and 50/100 Dollars ($11.50) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2011, and ending on October 31, 2012;

(iii) Twelve and 25/100 Dollars ($12.25) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2012, and ending on October 31, 2013;

(iv) Twelve and 50/100 Dollars ($12.50) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2013, and ending on October 31, 2014;

(v) Twelve and 75/100 Dollars ($12.75) times the number of square feet of Rentable Area of the Premises for the period beginning on November 1, 2014, and ending on October 31, 2015; and

(b) Tenant shall not be entitled to any construction, buildout or other allowances with respect to the Premises during the First Extension Term.

6. The renewal of this Lease pursuant to the exercise of the Second Extension Option shall be upon the same terms and conditions of this Lease (including, without limitation, Tenant's obligation to pay Tenant's Additional Rent), except:

(a) the Base Rent for the Premises during the Second Extension Term shall be equal to ninety percent (90%) of the Market Base Rental Rate for the Second Extension Term as of the commencement of the Second Extension Term;

(b) Tenant shall have no option to renew this Lease beyond the Second Extension Term provided for herein;

(c) the leasehold improvements will be provided in their then-existing condition (on an "as is" basis) at the time the Second Renewal Term commences, except that Landlord shall make an allowance available to Tenant for refurbishment of the Premises in an amount of up to Five Dollars ($5.00) per square foot of the Rentable Area of the Premises as of the date on which the Second Extension Term commences (the "SECOND EXTENSION TERM ALLOWANCE"). For so long as Tenant is not in default under this Lease, Landlord shall pay the Second Extension Term Allowance on a monthly basis all in accordance with customary construction disbursement procedures and upon receipt of a sworn construction statement and draw request, with supporting lien waivers from all material contractors and subcontractors delivered one month in arrears. Landlord

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shall be permitted to offset against the Second Extension Term Allowance any amounts past due to Landlord by Tenant under this Lease;

(d)The Second Extension Term Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed and paid for with the Second Extension Term Improvement Allowance shall be owned by Landlord; and

(e)If Landlord fails to pay any portion of the Second Extension Term Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten (10) business days after receiving written notice from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

7. Tenant shall have no right to exercise the Extension Option if Capella Education Company has assigned this Lease other than in connection with a Permitted Transfer (as defined in Section 10.7 of the Lease) or subleased more than twenty percent (20%) of the Rentable Area of the Premises other than in connection with a Permitted Transfer.

8. If Tenant fails to duly and timely exercise the First Extension Option, Tenant's Extension Option for the Second Extension Term shall thereupon automatically terminate and expire.

9. Tenant shall not have the right to exercise a Extension Option if an Event of Default exists under this Lease on the date Tenant's notice is sent under
Section 3 above, and if, at any time thereafter until the commencement of the Extension Term, an Event of Default exists under this Lease, Landlord shall, in addition to any other rights which Landlord may have under this Lease, have the right to terminate this Lease effective as of the scheduled expiration date of the then current Term of this Lease and prior to the commencement of the Extension Term.

10. For the purpose of this Exhibit G, the term "MARKET BASE RENTAL RATE" shall mean the amount of cash which a landlord would receive annually by then renting the space in question assuming the landlord to be a prudent person willing to lease but being under no compulsion to do so, assuming the tenant to be a prudent person willing to lease but being under no compulsion to do so, and assuming a lease containing the same terms and provisions as those herein contained. Market Base Rental Rate shall take into consideration all relevant factors including the condition of the space and the Second Extension Term Allowance.

11. During the sixty (60) day period (the "Negotiation Period") commencing on the later of (i) the date that is fifteen (15) months prior to the expiration of the First Extension Term, or (ii) the date of Landlord's delivery to Tenant of the Extension Term Rate Notice, Landlord and Tenant shall each be available to meet with the other on a regular basis to determine whether they can agree on the Market Base Rental Rate for the Premises for the Second Extension Term. If they fail to reach agreement, Tenant may, by written notice to Landlord given at any time prior to the date that is twenty (20) days after the last day of the Negotiation Period (a) elect to rescind any Tenant's Exercise Notice theretofore given by Tenant with respect to the Second Extension Term, in which case the rights of Landlord and Tenant under the Lease shall continue just as

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though Tenant's Exercise Notice had never been given for the Second Extension Term, and the Term of the Lease shall expire at the end of the First Extension Term; or (b) elect to have the Market Base Rental Rate for the Second Extension Term determined by arbitration in accordance with this Exhibit G; if within said 20-day period Tenant does not in writing elect option (b), Tenant will be conclusively deemed to have elected option (a).

12. If Tenant and Landlord cannot agree to the Market Base Rental Rate for the Second Extension Term (it being agreed that both Landlord and Tenant will be reasonable in their attempt to determine the Market Base Rental Rate), and if such rate is to be determined by arbitration in accordance with this Exhibit G, the following procedures shall apply:

The determination of the Market Base Rental Rate will be determined by an arbitration board consisting of three reputable real estate professionals with experience with first-class office buildings in the Minneapolis-St. Paul metropolitan area, each of whom shall be a Member of the Appraisal Institute with the designation of "MAI." Within twenty (20) days after initiation of arbitration, each party shall appoint one arbitrator who shall have no material financial or business interest in common with the party making the selection and shall not have been employed by such party for a period of three years prior to the date of selection. If a party fails to give notice of appointment of its arbitrator within the 20-day period provided above, then upon two (2) business days notice the other party may appoint the second arbitrator. The arbitrators selected by the parties shall attempt to agree upon a third arbitrator. If the first two arbitrators are unable to agree on a third arbitrator within thirty
(30) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the presiding judge of the Hennepin County District Court, or by any person to whom such presiding judge formally delegates the matter or, if such methods of appointment fail, by the American Arbitration Association. The parties will submit to the arbitrators the definition of the Market Base Rental Rate, each party will be entitled to present to the arbitrators evidence concerning the Market Base Rental Rate at a hearing scheduled not earlier than thirty (30) and not later than sixty (60) days after the final arbitrator has been selected, and each arbitrator shall submit his or her determination in a sealed envelope by the 20th day following the date of such hearing, and any determination not submitted by such time shall be disregarded. The parties shall meet on said 20th day (or if it is not a business day, on the first business day thereafter) at 11:00 a.m. at the office of Landlord, or such other place as the parties may agree and simultaneously deliver the determinations. If the determinations of at least two of the arbitrators shall be identical in amount such amount shall be deemed the Market Base Rental Rate. If the determination of the three arbitrators shall be different in amount, the Market Base Rental Rate shall be determined as follows:

(a)If neither the highest or lowest determination differs from the middle determination by more than ten percent (10%) of such middle determination, then the Market Base Rental Rate shall be deemed to be the average of the three determinations; and

(b)If clause (a) does not apply, then the Market Base Rental Rate shall be deemed to be the average of the middle determination and the determination closest in amount to such middle determination.

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The decision of the arbitrators, determined as above set forth, will be final and non-appealable. Except where specifically provided otherwise in this Lease, each party shall bear its own expenses in connection with the arbitration and the costs of its arbitrator, and the cost of the third arbitrator shall be shared equally by Landlord and Tenant. The costs of all counsel, experts and other representatives that are retained by a party will be paid by such party.

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EXHIBIT H

PARKING

1. Commencing as of the Phase I & II Rent Commencement Date and continuing thereafter throughout the Term, Landlord agrees to make available to Tenant and Tenant shall have the right to use up to eighty (80) parking contracts ("PARKING CONTRACTS") for unreserved parking in the general parking area of the parking facility in the Project (the "PARKING GARAGE"), but only if Tenant gives written notice to Landlord at least sixty (60) days prior to the Phase I & II Rent Commencement Date that Tenant desires to use Parking Contracts and the number of such Parking Contracts which Tenant desires to use. Notwithstanding the foregoing, if Tenant (a) exercises its Contraction Option (as defined in Section 5.3 of the Lease), the number of Parking Contracts which Landlord is obligated to make available to Tenant shall be reduced (as of the Contraction Date) by one Parking Contract for each 2,500 square feet of the Rentable Area of the Contraction Space effective as of the Contraction Date, or (b) exercises an Expansion Option (as defined in Exhibit I-1) or acquires space pursuant to its Right of Offer (as defined in Exhibit J), the number of Parking Contracts which Landlord is obligated to make available to Tenant shall be increased by one Parking Contract for each 2500 square feet of Rentable Area which is thereby added to the Premises. If at any time Tenant is using less than the maximum number of Parking Contracts to which it is entitled under this Exhibit G, Tenant may thereafter obtain, upon sixty (60) days' prior notice, additional Parking Contracts (up to the maximum number to which Tenant is entitled), but only to the extent that contracts are available as determined by Landlord on a "first come first served basis"; provided that in determining whether Parking Contracts are available for use by Tenant, Landlord shall terminate any short term Parking Contracts which are then being used by parties who are not affiliated with a tenant of the Project. Tenant may from time to time on not less than sixty (60) days written notice to Landlord reduce the number of Parking Contracts that it desires to use, except that in any six (6) month period Tenant may not reduce by more than twenty (20) the number of Parking Contracts that it desires to use.

2. Tenant shall pay as rent for each of the Parking Contracts (i) ninety percent (90%) of the then-current market rate as charged from time to time by Landlord, plus any applicable tax, during the Initial Scheduled Term (as the same may be extended pursuant to Exhibit I-1 or Exhibit J) and during the First Extension Term, and (ii) one hundred percent (100%) of the then-current market rate as charged from time to time by Landlord, plus any applicable tax, during the Second Extension Term. The use of the Parking Contracts shall be subject to such terms and conditions as are generally imposed from time to time by the operator of the Parking Garage. Tenant shall pay such rent to Landlord in a single monthly payment for all of the Parking Contracts on the first day of each calendar month during the Term of the Lease, and the failure of Tenant to timely pay the same shall constitute an Event of Default under the Lease.

3. Tenant waives any claims for damage, theft or other loss, however caused, to vehicles using Parking Contracts hereunder, it being agreed that any user of any Parking Contract shall look exclusively to the vehicle's insurance in the event of such loss. Landlord may require each user to sign such a waiver agreement as a condition to use of a Parking Contract.

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4. Tenant may permit use of its Parking Contracts only by Tenant, Tenant's officers, employees, partners, guests and visitors, or by a permitted assignee or subtenant of the Premises or its officers, employees, partners, guests and visitors.

5. Landlord may from time to time establish reasonable rules for the safe and efficient operation of the Parking Garage, and Tenant shall cause all users of the Parking Contracts to comply with such rules.

6. During the continuance of an Event of Default (as defined in Section 20.1 of the Lease), Landlord may at its option terminate all rights with respect to the Parking Contracts.

7. In the event of any misuse of any of the Parking Contracts by any individual user thereof or upon Tenant's failure to pay rental for any Parking Contract within five (5) days after receiving written notice of such failure from Landlord, Landlord shall have the right to suspend all rights of such user with respect to such Parking Contract without affecting or limiting any of Tenant's or such user's obligations with respect thereto, including, but not limited to, the payment of the rent applicable to any such Parking Contract, or Landlord shall have the right to terminate such Parking Contract by delivering written notice of such termination to Tenant.

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EXHIBIT I-1

EXPANSION OPTIONS

1. Subject to the terms and conditions set forth in this Exhibit I-1, Landlord hereby grants Tenant the options (individually, an "EXPANSION OPTION" and collectively, the "EXPANSION OPTIONS") to add the following expansion spaces (each an "EXPANSION SPACE") to the Premises:

(a)"FIRST EXPANSION OPTION" shall mean the entire Rentable Area on either one or two full floors (as determined by Tenant) in the Tower or the Building (as determined by Landlord), which floors shall be contiguous to the Premises (after giving effect to the First Expansion Option) and selected by Landlord if available for lease to Tenant as determined by Landlord and if a contiguous floor is not available for lease to Tenant, then such floor or floors shall be selected by Landlord from the floors identified on the stacking plan which is attached to this Exhibit I-1 as Exhibit I-2; with possession of the First Expansion Space being delivered to Tenant on February 1, 2007, plus or minus six (6) months (with the exact date being specified in the Landlord's Expansion Notice that will be delivered to Tenant in accordance with Section 3 of this Exhibit I-1); provided that if all or any part of the 5th floor in the Tower and/or the 4th floor of the Tower is added to the Premises pursuant to Tenant's exercise of a Right of Offer or otherwise, then Landlord's obligation to deliver Expansion Space pursuant to the First Expansion Option shall be reduced by the amount of space on the 5th floor and/or the 4th floor so added to the Premises; and

(b)"SECOND EXPANSION OPTION" shall mean the entire Rentable Area on either one or two full floors (as determined by Tenant) in the Tower or the Building (as determined by Landlord), which floors shall be contiguous to the Premises (after giving effect to the Second Expansion Option) and selected by Landlord if available for lease to Tenant as determined by Landlord and if a contiguous floor is not available for lease to Tenant, then such floor or floors shall be selected by Landlord from the floors identified on the stacking plan which is attached to this Exhibit I-1 as Exhibit I-2; with possession of the Second Expansion Space being delivered to Tenant on February 1, 2008, plus or minus six (6) months (with the exact date being specified in the Landlord's Expansion Notice that will be delivered to Tenant in accordance with Section 3 of this Exhibit I-1).

2. Notwithstanding anything to the contrary in this Lease, if there would be less than five years remaining on the Lease Term as of an Expansion Space Rent Commencement Date (as defined below): (a) the Term of this Lease shall be automatically extended by virtue of Tenant's exercise of the Expansion Option so that the then current Term of this Lease for all of the Premises shall expire on the day prior to the fifth anniversary of the applicable Expansion Space Rent Commencement Date, and (b) the Base Rent for the Premises during the period beginning on the day after the last day of the Initial Scheduled Term and ending on the last day of the Initial Extended Term shall be in the amounts, and with the adjustments specified in, Section 4 of Exhibit G to this Lease.

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3. Not earlier than sixteen (16) months and not later than thirteen (13) months prior to the earliest date on which Landlord is entitled to deliver possession of the applicable Expansion Space to Tenant, Landlord shall give Tenant written notice ("LANDLORD'S EXPANSION NOTICE") of (i) the floor or floors on which such Expansion Space will be located, and (ii) the date Landlord will deliver all of such Expansion Space to Tenant if Tenant exercises such Expansion Option.

4. Tenant must exercise each Expansion Option, if at all, by delivering written notice of Tenant's exercise of the Expansion Option ("TENANT'S EXPANSION NOTICE") not later than the later of (i) twelve (12) months prior to the earliest date on which Landlord is entitled to deliver possession of the applicable Expansion Space to Tenant, and (ii) thirty (30) days after the date on which Landlord provides Tenant with Landlord's Expansion Notice, time being of the essence and timely notice being an express and agreed condition of such exercise. Failure by Tenant to give timely notice of its exercise of either Expansion Option shall constitute Tenant's decision not to exercise the applicable Expansion Option, which shall thereupon automatically terminate. Tenant's Expansion Notice shall identify whether Tenant desires to add one or two full floors to the Premises.

5. Each Expansion Space shall be added to the Premises and leased to Tenant upon the same terms and conditions of this Lease (including, without limitation, Tenant's obligation to pay Additional Rent), except:

(a) Tenant shall not be obligated to pay any Base Rent or Additional Rent for the Expansion Space until the earlier of (i) the date which is sixty (60) days after the date on which possession of the Expansion Space is delivered to Tenant, and (ii) the date on which Tenant takes occupancy of any portion of the applicable Expansion Space for the conduct of its business (the "EXPANSION SPACE RENT COMMENCEMENT Date"); provided that from and after the date on which possession of the Expansion Space is delivered to Tenant, the Expansion Space shall be part of the Premises for all purposes of this Lease other than Tenant's obligation to pay Base Rent and Additional Rent and Tenant shall be bound by and shall comply with all of the provisions of this Lease (including those terms and conditions pertaining to acts or omissions of Tenant or Tenant's representatives, employees, agents, and contractors);

(b) the Base Rent for each Expansion Space shall be the same as the Base Rent as Tenant is obligated to pay from time to time for the Initial Premises;

(c) Tenant shall accept each Expansion Space in its "as is" condition on the date that possession of the Expansion Space is delivered to Tenant; except that the Expansion Space shall be delivered in accordance with the Space Delivery Standards, and except that Landlord shall make an allowance available to Tenant in an amount of up to Thirty Dollars ($30.00) per square foot of the Rentable Area of the Expansion Space to pay for those costs which are incurred by Tenant in designing and constructing those leasehold improvements which Tenant desires to make to the Expansion Space (the "EXPANSION SPACE IMPROVEMENT ALLOWANCE"). For so long as Tenant is not in default under this Lease, Landlord shall pay each Expansion Space Improvement Allowance on a monthly basis in accordance with customary construction disbursement procedures and upon

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receipt of a sworn construction statement and draw request, with supporting lien waivers from all material contractors and subcontractors delivered one month in arrears. Landlord shall be permitted to offset against each Expansion Space Improvement Allowance any amounts past due to Landlord by Tenant under this Lease. If the actual cost of designing and constructing improvements to the Expansion Space plus the cost of moving into the Expansion Space shall be less than the Expansion Space Improvement Allowance, Landlord shall credit up to but not more than $5.00 per square foot of the Expansion Space Improvement Allowance against the Rent next coming due under the Lease;

(d) The term of this Lease shall expire for the Expansion Space upon the expiration of the Lease Term or Extension Term for the balance of the Premises;

(e) Each Expansion Space Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed and paid for with an Expansion Space Improvement Allowance shall be owned by Landlord;

(f) If Landlord fails to pay any portion of an Expansion Space Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten (10) business days after receiving written from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

6. Tenant shall have no right to exercise an Expansion Option if Capella Education Company has exercised the Contraction Option (as defined in Section 5.3 of the Lease) or if Capella Education Company has assigned this Lease other than in connection with a Permitted Transfer (as defined in Section 10.7 of the Lease) or if Capella Education Company has subleased more than twenty percent (20%) of the Rentable Area of the Premises other than in connection with a Permitted Transfer.

7. Tenant shall have no right to exercise an Expansion Option if on the date Tenant delivers a Tenant's Expansion Notice an Event of Default exists under this Lease and, if at any time after Tenant exercises an Expansion Option until the date on which Landlord is scheduled to deliver possession of the Expansion Space to Tenant, an Event of Default exists under this Lease, Landlord shall, in addition to any other rights which Landlord may have under this Lease, have the right to terminate Tenant's right to lease the Expansion Space by giving Tenant written notice of such termination.

8. Landlord shall promptly after any Expansion Space Rental Commencement Date prepare a declaration confirming the Expansion Space Rental Commencement Date and the Rentable Area of the Expansion Space and deliver such declaration to Tenant. If such declaration is complete and correct, Tenant shall execute and return such declaration within thirty (30) days after submission, failing which, Tenant shall be conclusively deemed to have agreed that the information in the declaration is accurate and Tenant shall have thereby waived

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any right to object to the accuracy of such information unless within such thirty (30) day period Tenant notifies Landlord of its reasons for objecting to the declaration.

9. Landlord shall not be liable for any delay in delivering or any failure to deliver possession of any Expansion Space to Tenant by reason of any holding over by any previous tenants or occupants of same, nor shall such failure impair the validity of the Lease. Landlord shall, however, use all reasonable efforts to deliver possession of any Expansion Space in accordance with the provisions of this Exhibit I-1.

10. Subject to the provisions in Section 1(a) of this Exhibit I-1, Tenant's Expansion Options shall be independent of Tenant's Right of Offer and no failure by Tenant to exercise its Right of Offer with respect to any Available Space shall affect either Expansion Option.

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EXHIBIT J

RIGHT OF OFFER

1. Tenant shall have the continuous right ("RIGHT OF OFFER") during the Term of this Lease to elect to lease any Available Space which is located on a floor which is then contiguous to a floor of the Premises (other than 15th floor of the Tower) on and subject to the terms and conditions set forth in this Exhibit J. In addition, Tenant shall have a one time Right of Offer to lease the 3rd and 4th floors of the Building (the "3RD AND 4TH FLOOR SPACE") if the current tenant occupying such floors in the Building does not exercise its existing renewal right.

2. "AVAILABLE SPACE" means space described in Section 1 of this Exhibit J upon the expiration of the rights of existing tenants to such space. As of the Effective Date, Landlord represents to Tenant that, as to the following floors which are now or which later may constitute Available Space, the only rights of existing tenants are as follows: (i) as to the 10th and 11th floors of the Tower and the 5th, 6th and 10th floors of the Building, all rights of American Express Financial Corporation to such space under its current lease, which lease is currently scheduled to expire on June 30, 2008; (ii) as to the 3rd and 4th Floor Space, all rights of International Business Machines Corporation under its current lease, which lease is currently scheduled to expire on December 31, 2006 (subject to a right to extend for a five-year period ending December 31, 2011);
(iii) as to the 5th floor of the Tower, there are no currently existing rights; and (iv) as to the 4th floor of the Tower, all rights of ePredix under its current lease, which lease is currently scheduled to expire on July 31, 2005 (subject to a right to extend for a two-year period ending July 31, 2007). Tenant's Right of Offer is subject to (a) the existing rights in favor of other tenants specified in this Section 2, (b) any rights hereafter granted by Landlord with respect to space on any floor that is not contiguous to the Premises at the time such rights are granted by Landlord, and (c) any rights granted by Landlord with respect to space on any floor that is contiguous to the Premises which Landlord has offered to Tenant pursuant to this Exhibit J but as to which Tenant has not exercised its Right of Offer hereunder. The date following the expiration of all of such rights to lease any such space shall be deemed to be the date on which such space becomes available for lease pursuant to this Exhibit J.

3. Landlord shall use reasonable efforts to give notice to Tenant as and when Landlord anticipates that any Available Space will become available; provided that Landlord shall notify Tenant prior to July 31, 2005, if the 3rd and 4th Floor Space will become available for lease by Tenant. Landlord shall state in each notice (an "AVAILABLE SPACE NOTICE") hereunder (i) the space available,
(ii) the date Landlord anticipates that such space will be available for delivery, (iii) the term that the Available Space is available for lease by Tenant (if less than for all of the remaining Lease Term), and (iv) with respect to any Available Space which would be added to the Premises after the expiration of the Initial Scheduled Term, Landlord's reasonable estimate of the Market Base Rental Rate with respect to such space. Landlord shall not give Tenant an Available Space Notice (i) more than eighteen (18) months prior to the date on which Landlord anticipates that such space shall become available with respect to the space currently under lease to American Express Financial Corporation, or
(ii) more than eighteen (18) months prior to the date on which Landlord anticipates that any other space not currently leased to American Express Financial Corporation shall become available with respect to the space unless prior thereto Landlord has in good faith entered into substantive discussions with respect to leasing all

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or a significant portion of such space with a specific third party. If an Available Space Notice from Landlord identifies Available Space on more than one
(1) floor or two (2) or more non-contiguous spaces on the same floor, Tenant may exercise its Right of Offer as to all of such spaces or on a floor-by-floor basis (when the Available Space is on more than one floor) and on a space-by-space basis (when the Available Space includes non-contiguous spaces on the same floor).

4. Tenant may elect to lease all (but, except as provided in Section 3 above, not less than all) of any individual Available Space by giving Landlord written notice of such election on or before the date that is thirty (30) days after Tenant's receipt of the Available Space Notice given by Landlord with respect to such Available Space, which notice from Tenant shall specify the Available Space which Tenant desires to lease (if Tenant is entitled to lease less than all of such Available Space under Section 3 above) and whether Tenant accepts Landlord's reasonable estimate of the Market Base Rental Rate for such Available Space. If Tenant fails to respond within the time required, Tenant's rights under this Exhibit J with respect to such space shall automatically terminate, and Tenant shall have no further right under this Exhibit J to lease such space unless Landlord leases such space and such lease expires or is terminated; provided, however, if at any time Landlord offers, and Tenant declines to take, any Available Space, and within six (6) months after the latest date that Tenant could have elected to lease such Available Space pursuant to this Right of Offer Landlord wishes to make such space available to a third party on economic terms more favorable (determined in accordance with Landlord's customary method of calculating the net effective rent in lease transactions) than those contained in Landlord's initial Available Space Notice, Landlord will by written notice re-offer such space to Tenant a second time in accordance with this Exhibit J. If Landlord re-offers any Available Space to Tenant, then Tenant shall have 15 (instead of 30) days in which to give Landlord written notice of Tenant's election to lease such Available Space; if Tenant fails to respond to Landlord's re-offer of such space within said 15 day period, Tenant's rights under this Exhibit J with respect to such space shall automatically terminate, and Tenant shall have no further right under this Exhibit J to lease such space unless Landlord leases such space and such Lease expires or is terminated.

5. Notwithstanding anything to the contrary in this Lease, if Tenant is exercising a Right of Offer during the Initial Scheduled Term and there would be less than five (5) years remaining on the Lease Term as of the applicable Available Space Rent Commencement Date (as defined below): (a) the Term of this Lease shall be automatically extended by virtue of Tenant's exercise of the Right of Offer for all of the Premises so that the then current Term of this Lease shall expire on the day prior to the fifth anniversary of the applicable Available Space Rent Commencement Date, and (b) the Base Rent for the Premises during the period beginning on the day after the last day of the Initial Scheduled Term and ending on the last day of the Initial Extended Term shall be in the amounts, and with the adjustments specified in Section 4 of Exhibit G to this Lease. Tenant may not elect to lease any Available Space under this Exhibit J during the last year of the First Extension Term, unless Tenant has then exercised the Extension Option for the Second Extension Term, or during the last year of the Second Extension Term. For purposes of this Exhibit J, Available Space shall be deemed to have been "ADDED TO THE PREMISES" on the Available Space Rent Commencement Date.

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6. Any space for which Tenant elects to exercise its Right of Offer under this Exhibit J shall become part of the Premises, and except to the extent expressly provided to the contrary in this Exhibit J (including without limitation, this
Section 6), shall be subject to the terms of this Lease applicable thereto, without modification, and the Term of this Lease shall commence for such Available Space on the earlier of (i) sixty (60) days after the date such space is delivered to Tenant in an "as is" broom clean condition, and (ii) the date on which Tenant takes occupancy of any portion of the Available Space for the conduct of its business (the "AVAILABLE SPACE RENT COMMENCEMENT DATE"); provided that from and after the date on which possession of the Available Space is delivered to Tenant, the Available Space shall be part of the Premises for all purposes of this Lease other than Tenant's obligation to pay Base Rent and Additional Rent and Tenant shall be bound by and shall comply with all of the provisions of this Lease (including those terms and conditions pertaining to acts or omissions of Tenant or Tenant's representatives, employees, agents, and contractors).

7. The Base Rent for any Available Space (the "AVAILABLE SPACE RENT") which is added to the Premises (i) during the Initial Scheduled Term shall be the same as the Base Rent which is payable from time to time for the Initial Premises, and
(ii) for any Available Space which is added to the Premises after the Initial Scheduled Term shall (unless Tenant accepts Landlord's reasonable estimate of the Market Base Rental Rate for such space, as set forth in the applicable Available Space Notice) be computed at the Market Base Rental Rate determined by arbitration in accordance with this Exhibit J.

8. The Market Base Rental Rate for any Available Space that is added to the Premises after the Initial Scheduled Term shall be determined as of the applicable Available Space Rent Commencement Date. Tenant shall also be obligated to pay Additional Rent for any Available Space. As provided in Section
3 (and, for re-offered space, Section 4) above, Landlord shall give Tenant notice of Landlord's reasonable estimate of the Market Base Rental Rate for any Available Space that will be added to the Premises after the Initial Scheduled Term. If Tenant does not accept Landlord's reasonable estimate, and if Landlord and Tenant cannot agree upon the determination of the Market Base Rental Rate within thirty (30) days after Landlord's Available Space Notice is given, and if Tenant nonetheless timely exercises its Right of Offer for the Available Space, the determination of the Market Base Rental Rate will be submitted to arbitration in accordance with this Exhibit J. If the arbitration has not been completed on the applicable Available Space Rent Commencement Date, Tenant will pay, in monthly installments (and in addition to and not in lieu of the Rent due with respect to the Premises [exclusive of such Available Space]), one-twelfth of Landlord's reasonable determination of the Available Space Rent, plus Additional Rent for such Available Space. Upon determination of the Market Base Rental Rate by arbitration, Landlord shall pay to Tenant or Tenant shall pay to Landlord, as appropriate, the amount equal to the overpayment or underpayment of the Available Space Rent from the applicable Available Space Rent Commencement Date until the determination of the Market Base Rental Rate by arbitration, together with interest accrued thereon during such period at a rate of interest equal to the Interest Rate. Commencing as of the later of the determination of such Market Base Rental Rate or the applicable Available Space Rent Commencement Date, and on the first day of each and every month thereafter, Tenant shall pay to Landlord in addition to the Rent then in effect with respect to the Premises (exclusive of such Available Space), an amount equal to one-twelfth (1/12th) of the per annum Available Space Rent, plus Additional Rent with respect to such Available Space.

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9. The term of this Lease for all Available Space shall expire upon the expiration of the Term for the balance of the Premises, unless, as specified in Landlord's notice, such space is not available to be leased to Tenant through the expiration of the Term for the balance of the Premises (in which event such shorter term specified in the Landlord's notice shall apply to any such Available Space).

10. Tenant shall accept any Available Space or permitted portion thereof in its "as is" condition as of the applicable Available Space Rent Commencement Date and Tenant shall not be entitled to any construction, build-out or other allowances with respect to the Available Space, unless Landlord agrees, in Landlord's sole discretion, to make an improvement allowance available to Tenant; except that the Available Space shall be delivered in accordance with the Space Delivery Standards, and except that if the Available Space will be added to the Premises during the Initial Scheduled Term, then, in such case only, Landlord shall make an allowance available to Tenant in an amount of up to Thirty Dollars ($30.00) per square foot of the Rentable Area of the Available Space to pay for those costs which are incurred by Tenant in designing and constructing those leasehold improvements which Tenant desires to make to the Available Space (the "AVAILABLE SPACE IMPROVEMENT ALLOWANCE"). For so long as Tenant is not in default under this Lease, Landlord shall pay any Available Space Improvement Allowance on a monthly basis in accordance with customary construction disbursement procedures and upon receipt of a sworn construction statement and draw request, with supporting lien waivers from all material contractors and subcontractors delivered one month in arrears. Landlord shall be permitted to offset against any Available Space Improvement Allowance any amounts past due to Landlord by Tenant under this Lease. If the actual cost of designing and constructing improvements to the Available Space plus the cost of moving into the Available Space shall be less than the Available Space Improvement Allowance, Landlord shall credit up to but not more than $5.00 per square foot of the Available Space Improvement Allowance against the Rent next coming due under the Lease.

11. Each Available Space Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed and paid for with an Available Space Improvement Allowance shall be owned by Landlord.

12. If Landlord fails to pay any portion of an Available Space Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten (10) business days after receiving written from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

13. Landlord shall promptly after any Available Space Rent Commencement Date prepare a declaration confirming the Available Space Rent Commencement Date and the Rentable Area of the Available Space. If the declaration is complete and correct, Tenant shall execute and return such declaration within thirty (30) days after submission, failing which Tenant shall be conclusively deemed to have agreed that the information in the declaration is accurate and Tenant shall have thereby waived any right to object to the accuracy of such information unless within such thirty (30) day period Tenant notifies Landlord of its reasons for objecting to the declaration.

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14. This Exhibit J shall in no event constitute a covenant or guarantee by Landlord that any Available Space will be available for lease by Tenant at any time.

15. Tenant shall have no right to exercise the Right of Offer if an Event of Default exists under this Lease at the time Landlord gives an Available Space Notice under Section 3 above and, if at any time thereafter until the date Landlord is to deliver the Available Space in question to Tenant, an Event of Default exists under this Lease, Landlord shall, in addition to any other rights which Landlord may have under this Lease, have the right to terminate Tenant's right to lease such Available Space by giving Tenant written notice of such termination.

16. If at the time Landlord would be required to provide Tenant with an Available Space Notice pursuant to Section 3 above, Capella Education Company has exercised the Contraction Option (as defined in Section 5.3 of the Lease), Capella Education Company has assigned this Lease other than to an Affiliate or in connection with a Permitted Transfer (as defined in Section 10.7 of the Lease), or Capella Education Company has subleased more than twenty percent (20%) of the Rentable Area of the Premises other than to an Affiliate or in connection with a Permitted Transfer, then Landlord shall not be obligated to provide Tenant with notice of such Available Space and Tenant's Right of Offer to lease such Available Space shall, upon the occurrence of any such event, automatically terminate and have no further force or effect.

17. Landlord shall not be liable for failure to give possession of any Available Space by reason of any holding over or retention of possession by any previous tenants or occupants of same, nor shall such failure impair the validity of this Lease. However, Landlord does agree to use reasonable diligence to deliver possession of the Available Space on the date specified in Landlord's Available Space Notice.

18. For the purpose of this Exhibit J, the term "MARKET BASE RENTAL RATE" shall mean the amount of cash which a landlord would receive annually by then renting the space in question assuming the landlord to be a prudent person willing to lease but being under no compulsion to do so, assuming the tenant to be a prudent person willing to lease but being under no compulsion to do so, and assuming a lease containing the same terms and provisions as those herein contained. Market Base Rental Rate shall take into consideration all relevant factors including the condition of the space.

19. If Tenant elects to lease Available Space offered to Tenant in accordance with this Exhibit J, but does not accept Landlord's reasonable estimate of the Market Base Rental Rate for such space, and if Tenant and Landlord cannot agree to the Market Base Rental Rate on or before the date that is thirty (30) days after Tenant's receipt of the Available Space Notice given by Landlord with respect to such Available Space, either party may by written notice to the other initiate the determination of such rate by arbitration in accordance with the following provisions:

The determination of the Market Base Rental Rate will be determined by an arbitration board consisting of three reputable real estate professionals with experience with first-class office buildings in the Minneapolis-St. Paul metropolitan area, each of whom shall be a Member of the Appraisal Institute with the designation of "MAI." Within twenty (20) days after initiation of arbitration, each party shall appoint one arbitrator who shall have no material financial or business interest in common with the

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party making the selection and shall not have been employed by such party for a period of three years prior to the date of selection. If a party fails to give notice of appointment of its arbitrator within the twenty
(20) day period specified above, then upon two (2) business days notice the other party may appoint the second arbitrator. The arbitrators selected by the parties shall attempt to agree upon a third arbitrator. If the first two arbitrators are unable to agree on a third arbitrator within thirty (30) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the presiding Judge of the Hennepin County District Court, or by any person to whom such presiding judge formally delegates the matter or, if such methods of appointment fail, by the American Arbitration Association. The parties will submit to the arbitrators the definition of the Market Base Rental Rate from this Exhibit J each party will be entitled to present to the arbitrators evidence concerning the Market Base Rental Rate at a hearing scheduled not earlier than thirty (30) and not later than sixty (60) days after the final arbitrator has been selected, and each arbitrator shall submit his or her determination in a sealed envelope by the 20th day following such hearing, and any determination not submitted by such time shall be disregarded. The parties shall meet on said 20th day (or if it is not a business day, on the first business day thereafter) at 11:00 a.m. at the office of Landlord, or such other place as the parties may agree and simultaneously deliver the determinations. If the determinations of at least two of the arbitrators shall be identical in amount, such amount shall be deemed the Market Base Rental Rate. If the determination of the three arbitrators shall be different in amount, the Market Base Rental Rate shall be determined as follows:

(1) If neither the highest or lowest determination differs from the middle determination by more than ten (10) percent of such middle determination, then the Market Base Rental Rate shall be deemed to be the average of the three determinations; and

(2)If clause (1) does not apply, then the Market Base Rental Rate shall be deemed to be the average of the middle determination and the determination closest in amount to such middle determination.

The decision of the arbitrators, determined as above set forth, will be final and non-appealable. Except where specifically provided otherwise in this Lease, each party shall bear its own expenses in connection with the arbitration and the costs of its arbitrator, and the cost of the third arbitrator shall be shared equally by Landlord and Tenant. The costs of all counsel, experts and other representatives that are retained by a party will be paid by such party.

20. Subject to the provisions of Section 1(a) of Exhibit I-1, Tenant's Right of Offer shall be independent of Tenant's Expansion Options and no failure by Tenant to exercise an Expansion Option shall affect any Right of Offer to which Tenant is entitled under this Exhibit J.

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EXHIBIT K

FORM OF CONFIDENTIALITY AGREEMENT

This Confidentiality Agreement ("Agreement") is entered into effective as of _____________, 200__ by Capella Education Company, a Minnesota corporation ("Tenant") and where an outside auditor is being used by Tenant to perform audit services, by _________________("Auditor").

RECITALS

A. 601 Second Avenue Limited Partnership, a Texas limited partnership, as Landlord ("Landlord"), and Tenant are parties to an Office Lease (the "Lease") dated as of ______________, 2004 (as amended, the "Lease") with respect to certain premises within the project commonly known as 225 South Sixth, located in downtown Minneapolis, Minnesota, and more particularly described in the Lease.

B. Section 7.7 of the Lease requires that any audit of Operating Costs under the Lease may be conducted only by Tenant or its representatives after the execution of a Confidentiality Agreement.

C. Auditor has been retained by Tenant to conduct such an audit.

NOW THEREFORE, in consideration of the agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tenant and Auditor agree as follows:

1. DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meanings given in the Lease.

2. PROTECTED MATERIAL. Tenant and Auditor agree to treat confidentially in accordance with terms of this Agreement all information furnished by Landlord or its property manager or their respective employees, contractors and agents in connection with the audit, including, without limitation, (i) the books and records of Landlord and its property manager, (ii) any other information regarding the operation of the Project furnished to Tenant by Landlord or its property manager and their respective employees, contractors and agents and (iii) any analysis, compilations, studies or other documents or records prepared by the Tenant, or their respective principals, officers, employees, agents, advisors, affiliates or representatives (collectively, "Representatives") which contain or otherwise reflect or are generated from such information. The information and materials contained in clauses (i), (ii) and
(iii) is sometimes hereinafter collectively referred to as the "Material".

3. DISSEMINATION OF MATERIAL. Auditor and Tenant agree that the Material shall (i) not be used other than in connection with the conducting of the audit of Operating Expenses for the Premises, and any arbitration or other proceeding in connection therewith, and (ii) shall be kept confidential and shall not be disclosed by Auditor, Tenant or their respective Representatives, except as may be required by legal process or applicable law.

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4. PROCEDURES. Auditor and Tenant shall (i) maintain adequate procedures, including, without limitation, written agreements, disclosure to employees on a need to know basis only, segregation of the Material from the material of others and accountability of written information, to ensure the continuing confidentiality of the material and (ii) shall notify Landlord immediately of any unauthorized use, disclosure, publication or reproduction of any Material by any person or entity whatsoever.

5. TERM. The agreements of Auditor as set forth herein shall survive the relationship between Auditor and Tenant.

6. ATTORNEYS' FEES. If Landlord, Tenant or Auditor retains an attorney or initiates any litigation or other proceeding to enforce the provisions of this Agreement, the prevailing party in such litigation or other proceeding shall be entitled to recover all reasonable and documented costs and expenses, including reasonable attorneys' fees, paid or incurred by such party in connection therewith from the non-prevailing party. For purposes of this Section, the term "prevailing party" shall be defined to mean the party whose position in such litigation is substantially upheld

7. INJUNCTIVE RELIEF. Tenant and Auditor hereby acknowledge that the damages to be sustained by Landlord because of any breach by Tenant or Auditor of their obligations under this Agreement may be difficult if not impossible not establish and that Landlord shall be entitled to an order for injunctive relief to compel Tenant and Auditor to comply with their obligations under this Agreement.

8. GOVERNING LAW. This Agreement shall be constructed in accordance with the laws of the State of Minnesota.

9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which will be considered one and the same Agreement notwithstanding that all parties hereto have not signed the same counterpart. Signatures on this Agreement which are transmitted by facsimile shall be valid for all purposes. Any party shall, however, deliver an original signature for this Agreement to the other party upon request.

In Witness Whereof, the parties have executed this Agreement to be effective as of the date first above written.

TENANT:

CAPELLA EDUCATION COMPANY

By: ________________________________
Name:_______________________________
Title: _____________________________

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AUDITOR:

By: ________________________________
Name:_______________________________
Title: _____________________________

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EXHIBIT L

STORAGE SPACE

This Exhibit L forms a part of the attached Lease and is governed by the attached Lease except as expressly provided to the contrary in this Exhibit. Capitalized terms used in this Exhibit have the meaning set forth in the Lease.

1. Commencing as of the Phase I & II Commencement Date and continuing thereafter throughout the Term, Landlord agrees to provide to Tenant and Tenant agrees to pay for storage space in an area designated by Landlord in the storage area of the Project consisting of not less than 250 square feet and not more than 2,000 square feet (the "Storage Space"); but only if Tenant gives written notice to Landlord at least sixty (60) days prior to the Phase I & II Rent Commencement Date that Tenant desires to use Storage Space and the approximate square footage of the Storage Space which Tenant desires to use. The Storage Space is not part of the Premises, unless expressly stated to the contrary in this Exhibit.

2. Upon not less than thirty (30) days written notice to Tenant, Landlord may from time to time relocate the Storage Space to a different location within the Project. The costs of any such relocation shall be borne by Landlord and Landlord shall schedule any such relocation at a time reasonably acceptable to Tenant, so that Tenant may monitor the relocation work.

3. Tenant acknowledges that the Storage Space shall be delivered to Tenant in its "as is" condition, and that Landlord shall have no obligation with respect to the improvement of such space, except that the Storage Space shall have locking doors.

4. The Storage Space shall be accessible by Tenant twenty four (24) hours a day, seven (7) days a week, subject to compliance with standard building procedures.

5. Tenant agrees to pay the annual sum of Ten Dollars ($10.00) per square foot of area in the Storage Space, which shall be due and payable in twelve equal monthly installments in advance on or before the first day of each month throughout the Term. Such amount shall be a "gross rent" for the Storage Space and Tenant shall not be obligated to pay any Operating Costs for the Storage Space. From and after the end of the Initial Scheduled Term, the rent for the Storage Space, expressed as a monthly charge, may be changed by Landlord not more than once during any calendar year to reflect the then market rate as charged by Landlord by giving not less than thirty (30) days advance written notice thereof to Tenant. In the event Tenant objects to the revised rent for the Storage Space as established by Landlord, it may by written notice to Landlord cancel this Storage Space lease effective upon the adjustment date provided such written notice of cancellation is given to Landlord within fifteen
(15) days after receipt by Tenant of the notice of the escalation by Landlord.

6. The Storage Space may be used for self-service storage only. If Tenant uses the Storage Space for any other purpose, then in lieu of the rent set forth in this Exhibit L, Tenant shall pay Base Rent and Tenant's Additional Rent with respect to the Storage Space at the same rates as are applicable to the Premises. Landlord shall have no obligation (i) to provide HVAC service to the Storage Space or (ii) to provide to the Storage Space any other services (including, without limitation, the services described in Section 14 of the Lease) other than minimal lighting or fulfill

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with respect to the Storage Space any other obligations under the Lease except as specifically provided herein. If Tenant, subject to the terms and conditions of the Lease, installs any HVAC or other equipment Tenant shall be solely responsible for maintaining same. Tenant shall, at its sole cost and expense, replace and pay for all replacement lighting bulbs, tubes, ballasts and starters required for the Storage Space and shall provide its own Janitorial services and any other services including heating, ventilation and air conditioning necessary for Tenant's use of and operations in the Storage Space.

7. Upon the occurrence of an Event of Default (as defined in Section 20.1 of the Lease), Landlord may at its option terminate Tenant's rights with respect to the Storage Space.

8. Landlord and its agents and employees shall not be liable for loss or damage to any personal property stored by Tenant or under Tenant's rights herein caused by fire, theft, water or any other cause whatsoever and Tenant (i) waives any claim against Landlord for and in respect thereto; (ii) hereby agrees to indemnify and defend Landlord against all claims against Landlord or any loss or damage to any such personal property from any cause; and (iii) Tenant agrees that it shall look solely to its insurance in the event of any loss or damage to the same. Landlord recommends that Tenant store its personal property located within the Storage Space on pallets. It is further expressly understood that the relationship between Landlord and Tenant in this Exhibit constitutes an agreement to use said Storage Space subject to the terms and conditions herein only, and that neither such relationship nor the storage of any such personal property thereunder shall constitute a bailment or create the relationship of bailor and bailee.

9. If the Storage Space shall be damaged by fire or other casualty rendering it unusable by Tenant or if all or any part of the Storage Space is taken by eminent domain proceedings, the rights and remedies of Landlord or Tenant shall be determined pursuant to the terms of the Lease; provided, however, notwithstanding anything to the contrary in the Lease, Tenant shall in no event have the right to terminate the Lease in the event of damage by fire or other casualty to the Storage Space or any taking of the Storage Space by eminent domain.

10. Tenant covenants not to suffer any waste or damage or disfigurement or injury to the Storage Space or any other part of said Project, and Tenant specially covenants not to store in the Storage Space any flammable liquids, any other Hazardous Materials, or any other materials which in Landlord's judgment are likely to impose an undue risk or result in higher premiums for the casualty insurance carried by Landlord, as owner of the Project. Tenant agrees to comply with all applicable laws, ordinances and regulations relating to its use of the Storage Space.

11. Landlord reserves the following rights (in respect to use of such Storage Space) exercisable without notice and without liability to Tenant and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to claim for setoff or abatement of Tenant hereunder:

(a) To retain at all times and to use in appropriate instances keys to all doors within and into the Storage Space. No locks shall be changed without the prior written consent of Landlord. This provision shall not apply to Tenant's safes or other areas maintained by Tenant for the safety and security of monies, securities, negotiable instruments or like items or areas containing proprietary items or information.

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(b) To make repairs, alterations, additions or improvements, whether structural or otherwise, in and about said Project, or any part thereof, and for such purposes to enter upon the Storage Space and, during the continuation of any of said work, to temporarily close doors, entryways, public spaces and corridors in said Project and to interrupt or temporarily suspend services and facilities without liability, cost or abatement of rent.

(c) To enter the Storage Space in a lawful manner for any other lawful purpose.

12. If a key or keys is supplied by Landlord to Tenant in connection with the rights granted herein, Tenant shall surrender such key or keys to Landlord upon expiration or earlier termination of the Lease or this Exhibit. Upon the expiration of the Lease or the earlier termination hereof, Tenant shall immediately vacate the Storage Space, remove all of its property therefrom and leave the Storage Space in the same condition as the Storage Space was in at the Commencement Date, reasonable wear and tear excepted.

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EXHIBIT M

ASSIGNMENT LIMITATIONS

1. Governmental or quasi-governmental entity

2. Child care facility

3. Health care, dental or personal counseling office

4. Retail travel agency

5. Entity primarily engaged in political or lobbying activities

6. Entity engaged in commerce in "X rated" media

7. Broadcasting studios for TV or radio (but nothing herein shall prohibit equipment or facilities used in connection with broadcasts or other communications to students of Tenant or prospective students of Tenant via the internet or by any other means)

8. Retail sale or rental of products or materials

9. Employment agency (but nothing herein shall prohibit educational counseling or placement services to students of Tenant)

10. Beauty services

11. Schools or other training or educational operations with onsite classrooms, other than onsite classrooms which are used in a manner which is incidental to their primary business activities, and other than on-site classrooms not involving significant portions of the Premises or a significant number of non-employee attendees

12. Operation primarily engaged in clerical support, data processing or messenger services

Nothing in this Exhibit shall prohibit an Assignment of this Lease for use as the regional, executive, corporate or headquarters office or offices of businesses engaged in the activities described in 2, 3, 4, 7, 8, 9, 10 and 11 above so long as in such regional, executive, corporate or headquarters office in the Premises the Assignee does not conduct the operation or activity or type of facility described in the list above.

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EXHIBIT N

FORM OF NON DISTURBANCE AGREEMENT

NON-DISTURBANCE AND ATTORNMENT AGREEMENT

THIS AGREEMENT is entered into effective as of the ___ day of February, 2004, between CAPELLA EDUCATION COMPANY, a Minnesota corporation, whose mailing address is Capella Education Company, 222 South 9th Street, 20th Floor, Minneapolis, Minnesota 55402 Attention: Vice President/General Counsel ("Tenant"), 601 SECOND AVENUE LIMITED PARTNERSHIP, a Texas limited partnership, whose mailing address is c/o Hines Interests Limited Partnership, 225 South Sixth Street, Suite 2590, Minneapolis, Minnesota 55402 ("Borrower"), and THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation ("Lender"), whose address for notices is 720 East Wisconsin Avenue, Milwaukee, WI 53202, Attention: Real Estate Investment Department, Reference Loan No.C-331830.

RECITALS

A. Tenant is the lessee, and Borrower is the lessor under a certain lease dated February, 2004 (the "Lease").

B. Lender has made a mortgage loan secured by a mortgage, deed to secure a debt or deed of trust from Borrower for the benefit of Lender recorded as Document No. 2027651 (as it may be amended, restated or otherwise modified from time to time, the "Lien Instrument") encumbering the fee title to and/or leasehold interest in the land described in Exhibit A attached hereto and the improvements thereon (collectively, the "Property"), wherein the premises covered by the Lease (the "Demised Premises") are located.

C. Borrower and Lender have executed an Absolute Assignment of Leases and Rents (the "Absolute Assignment"), pursuant to which (i) the Lease is assigned to Lender and (ii) Lender grants a license back to Borrower permitting Borrower to collect all rents, income and other sums payable under the Lease until the revocation by Lender of such license, at which time all rents, income and other sums payable under the Lease are to be paid to Lender.

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D. Lender has required the execution of this Agreement by Borrower and Tenant as a condition to Lender making the requested mortgage loan or consenting to the Lease, and Tenant has required the execution of this Agreement by Lender and Borrower as a condition to Tenant entering into the Lease.

E. Tenant acknowledges that, as its consideration for entering into this Agreement, Tenant will benefit by entering into an agreement with Lender concerning Tenant's relationship with any purchaser or transferee of the Property (including Lender) in the event of foreclosure of the Lien Instrument or a transfer of the Property by deed in lieu of foreclosure (any such purchaser or transferee and each of their respective successors or assigns is hereinafter referred to as "Successor Landlord").

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tenant, Borrower and Lender agree as follows:

1. Tenant and Borrower agree for the benefit of Lender that:

(a) Tenant shall not pay, and Borrower shall not accept, any rent or additional rent more than one month in advance;

(b) Except as specifically provided in the Lease, Tenant and Borrower will not enter into any agreement for the cancellation of the Lease or the surrender of the Demised Premises without Lender's prior written consent;

(c) Tenant and Borrower will not enter into any agreement amending or modifying the Lease without Lender's prior written consent, except for amendments or modifications specifically contemplated in the Lease for confirming the lease commencement date, the rent commencement date, the term, the square footage leased, the renewal or extension of the Lease, the leasing of additional space at the Property, or as otherwise specifically contemplated in the Lease;

(d) Tenant will not terminate the Lease because of a default thereunder by Borrower unless Tenant shall have first given Lender written notice and a reasonable opportunity to cure such default;

(e) Tenant, upon receipt of notice from Lender that it has exercised its rights under the Absolute Assignment and revoked the license granted to Borrower to collect all rents, income and other sums payable under the Lease, shall pay to Lender all rent and other payments then or thereafter due under the Lease, and any such payments to Lender shall be credited against the rent or other obligations due under the Lease as if made to Borrower; and

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(f) Tenant will not conduct any dry cleaning operations on the Demised Premises using chlorinated solvents nor will Tenant use any chlorinated solvents in the operation of their business on the Demised Premises.

2. Subject to the terms of this Agreement, the Lease is hereby subordinated in all respects to the Lien Instrument and to all renewals, modifications and extensions thereof, subject to the terms and conditions hereinafter set forth in this Agreement, but Tenant waives, to the fullest extent it may lawfully do so, the provisions of any statute or rule of law now or hereafter in effect that may give or purport to give it any right or election to terminate or otherwise adversely affect the Lease or the obligations of Tenant thereunder by reason of any foreclosure proceeding.

3. Borrower, Tenant and Lender agree that, unless Lender shall otherwise consent in writing, the fee title to, or any leasehold interest in, the Property and the leasehold estate created by the Lease shall not merge but shall remain separate and distinct, notwithstanding the union of said estates either in Borrower or Tenant or any third party by purchase, assignment or otherwise.

4. If the interests of Borrower in the Property are acquired by a Successor Landlord:

(a) If Tenant shall not then be in default in the payment of rent or other sums due under the Lease or be otherwise in material default under the Lease (in each case, beyond the expiration of applicable notice and cure periods), the Lease shall not terminate or be terminated and the rights of Tenant thereunder shall continue in full force and effect except as provided in this Agreement;

(b) Tenant agrees to attorn to Successor Landlord as its lessor; Tenant shall be bound under all of the terms, covenants and conditions of the Lease for the balance of the term thereof, including any Extension Options which are exercised in accordance with the terms of the Lease;

(c) The interests so acquired shall not merge with any other interests of Successor Landlord in the Property if such merger would result in the termination of the Lease;

(d) If, notwithstanding any other provisions of this Agreement, the acquisition by Successor Landlord of the interests of Borrower in the Property results, in whole or part, in the termination of the Lease, there shall be deemed to have been created a lease between Successor Landlord and Tenant on the same terms and conditions as the Lease, except as modified by this Agreement, for the remainder of the term of the Lease with Extension Options, if any; and

(e) Successor Landlord shall be bound to Tenant under all of the terms, covenants and conditions of the Lease, and Tenant shall, from and after Successor Landlord's acquisition of the interests of Borrower in the real estate, have the

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same remedies against Successor Landlord for the breach of the Lease that Tenant would have had under the Lease against Borrower if the Successor Landlord had not succeeded to the interests of Borrower; provided, however, that Successor Landlord shall not be:

(i) Liable for the breach of any representations or warranties set forth in the Lease or for any act, omission or obligation of any landlord (including Borrower) or any other party occurring or accruing prior to the date of Successor Landlord's acquisition of the interests of Borrower in the Demised Premises, except for any repair and maintenance obligations of a continuing nature as of the date of such acquisition;

(ii) Subject to any offsets or defenses which Tenant might have against any landlord (including Borrower) prior to the date of Successor Landlord's acquisition of the interests of Borrower in the Demised Premises except to the extent that such offsets
(a) were used to fund the Improvement Allowance (as defined in the Lease), including interest, or to fund the repairs, maintenance or other actions which would otherwise be an obligation of Successor Landlord upon its acquisition of the interests of Borrower in the Property and (b) are otherwise expressly provided for under the Lease;

(iii) Liable for the return of any security deposit under the Lease unless such security deposit shall have been actually deposited with Successor Landlord;

(iv) Bound to Tenant for any claims arising subsequent to the date upon which Successor Landlord transfers its interest in the Demised Premises to any third party;

(v) Liable to Tenant under any indemnification provisions set forth in the Lease arising prior to Successor Landlord's acquisition of the interests of Borrower in the Property; or

(vi) Liable for any damages in excess of Successor Landlord's equity in the Property.

The provisions of this paragraph shall be effective and self-operative immediately upon Successor Landlord succeeding to the interests of Borrower without the execution of any other instrument.

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5. Tenant represents and warrants that Tenant, to its actual knowledge:
(i) is not a person or entity with whom Lender is restricted from doing business with under regulations of the Office of Foreign Asset Control ("OFAC") of the Department of the Treasury (including, but not limited to, those named on OFAC's Specially Designated and Blocked Persons list) or under any statute, executive order (including, but not limited to, the September 24, 2001 Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action; (ii) is not knowingly engaged in, and shall not knowingly engage in, any dealings or transaction or knowingly be otherwise associated with such persons or entities described in (i) above; and (iii) is not a person or entity whose activities violate the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 or the regulations or orders thereunder.

6. This Agreement may not be modified orally or in any other manner except by an agreement in writing signed by the parties hereto or their respective successors in interest. In the event of any conflict between the terms of this Agreement and the terms of the Lease, the terms of this Agreement shall prevail. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective heirs, successors and assigns, and shall remain in full force and effect notwithstanding any renewal, extension, increase, or refinance of the indebtedness secured by the Lien Instrument, without further confirmation. Upon recorded satisfaction of the Lien Instrument, this Agreement shall become null and void and be of no further effect.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

[SIGNATURE PAGES FOLLOW]

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TENANT:                                     CAPELLA EDUCATION COMPANY,
                                            a Minnesota corporation

                                            By:_________________________________

                                            Its:________________________________

STATE OF MINNESOTA           )
                             )ss.
COUNTY OF HENNEPIN           )

The foregoing instrument was acknowledged before me this _____ day of February, 2004, by ___________________________ the _______________ of Capella Education Company, a Minnesota corporation, on behalf of the corporation.


Notary Public

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BORROWER:                  601 SECOND AVENUE LIMITED PARTNERSHIP,
                           a Texas limited partnership

                           By: Minneapolis 601 Limited Partnership, a Texas
                               limited partnership, its sole general partner

                               By: Hines Acquisitions No. 2 Limited
                                   Partnership, a Texas limited partnership, its
                                   sole general partner

                                   By: Hines Interests Limited Partnership,
                                       a Delaware limited partnership, its
                                       sole general partner

                                       By: Hines Holdings, Inc., a Texas
                                           close corporation, its sole
                                           general partner

                                           By:__________________________________

                                           Name:C. Kevin Shannahan
                                           Its: Executive Vice
                                                President

STATE OF   _____________)
                        ) SS.
COUNTY OF  _____________)

The foregoing instrument was acknowledged before me this day of February, 2004, by C. Kevin Shannahan, the Senior Vice President of Hines Holdings, Inc. a Texas close corporation, as sole general partner of Hines Interests Limited Partnership, a Delaware limited partnership, as sole general partner of Hines Acquisitions No. 2 Limited Partnership, a Texas limited partnership, as sole general partner of Minneapolis 601 Limited Partnership, a Texas limited partnership, as sole general partner of 601 Second Avenue Limited Partnership, a Texas limited partnership, on behalf of the corporation and partnerships.


Notary Public

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LENDER:                            THE NORTHWESTERN MUTUAL LIFE INSURANCE
                                   COMPANY, a Wisconsin corporation

      By: Northwestern Investment Management Company, LLC, a Delaware limited
          liability company, its wholly owned affiliate and authorized
          representative

                                   By:__________________________________________

                                       Managing Director

                                   Attest:______________________________________
                                         Assistant Secretary

STATE OF WISCONSIN             )
                               )   SS.
COUNTY OF MILWAUKEE            )

The foregoing instrument was acknowledged before me this _________________ day of February, 2004 by ________________and __________________ the Managing Director and Assistant Secretary respectively, of Northwestern Investment Management Company, LLC on behalf of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation, and acknowledged the execution of the foregoing instrument as the act and deed of said corporation.


Notary Public My commission expires:

This instrument was prepared by Fred W. Bessette, Attorney, for The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, WI 53202.

WHEN RECORDED MAIL TO

The Northwestern Mutual Life Ins. Co.
720 East Wisconsin Ave. - Rm N16WC
Milwaukee, WI 53202
Attn: Kathleen A. Evanson
LOAN NO. C-331830

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EXHIBIT "A"

Lot 6, Block 219, Town of Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

The Northeasterly 7 feet of Lots 1, 2, and 3; the Northeasterly 7 feet of the Northwesterly half of Lot 4; the Southeasterly half of Lot 4; and Lots 5, 6, 7, 8, 9 and 10;

all in Block 219, Brown and Jackins' Addition to Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

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EXHIBIT O

JANITORIAL SPECIFICATIONS

225 South Sixth Street

I. PUBLIC AREAS

A. Public Areas G & L - Plaza & Dock

NIGHTLY

Sweep all floors G & L
Spot sweep plaza
Clean door glass G & L
Clean metal and painted doors Vacuum elevators
Damp wipe metal and glass in elevators (also freight) Clean escalator steps
Clean escalator stainless
Clean escalator glass
Clean elevator tracks
Spot clean inner and outer perimeter glass Spot clean metal planters
Vacuum entry grates and walk off mats Clean public telephone stations Dust and damp wipe (as needed) window mullions Clean directory
Clean guards stations
Empty ash/waste urns and wipe as needed Vacuum - 2nd floor lobby
Spot lobby carpets
Spot granite and terrazzo floors and walls Automatic scrub G & L terrazzo floors Wipe window frames (as needed)

MONTHLY

Damp wipe all granite walls (as needed) Machine sweep and scrub plaza (as needed) Shampoo elevators
Shampoo lobby and entries
Squeegee door and perimeter glass (as needed)

B. Public Areas - Lobbies and Halls

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NIGHTLY

Vacuum carpets
Spot small spills
Dust baseboards (as needed)
Wipe tenant signs (as needed) Spot walls
Wipe doors
Clean glass (as needed)
Empty ash/waste urns

MONTHLY

Edge vacuum
Shampoo carpets (as needed)

C. Connecting Skyways

NIGHTLY

Spot sweep/Spot spills/spots on carpet

Vacuum carpets
Clean door glass
Dust window ledges
Clean railing glass if applicable Clean spills

SEMI-ANNUAL

Shampoo carpets (or as needed)

Clean all glass

II. TENANT AREAS

NIGHTLY

Empty all waste receptacles and remove waste paper and rubbish from the Premises nightly
Dust desks, tables, credenzas, counters, file tops and other horizontal surfaces (provided they are clear of papers and other materials - the janitorial staff will not remove any materials left on desks and tabletops) Dust plastic chair mats
Remove fingerprints and smudges from doors, door frames, light switch plates and private entrance glass Dust mop tile floors on a nightly basis; damp mop stains as needed

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Spot clean small stains in carpeting as needed (there may be a charge to tenant for excessive stains) Spot clean walls
Vacuum all traffic lanes of carpeted areas on a daily basis; vacuuming to include entire carpeted surface area on a weekly basis
Spot clean office glass (there may be a charge to tenant for this work)

MONTHLY

Brush chairs or vacuum on a monthly basis; such cleaning not to include the use of upholstery cleaning solvent Spray buff resilient tile floors monthly (there may be a charge to tenant for this work)

QUARTERLY

Dust diffusers (as needed)

Dust building standard mini-blinds twice a year

SEMI-ANNUAL

Strip and refinish floor tile semi-annually (there may be a charge to tenant for this work) Dust ceiling light fixtures (as needed) Perimeter windows (exterior panels) washed two times a year Perimeter windows (interior panels) washed once a year

AS NEEDED

Edge vacuuming is done on an as needed basis Dust wall coverings as needed (there may be a charge to tenant for this work)
Spot clean all glass furniture as needed (there may be a charge to tenant for this work)

EXTRA CLEANING

Any janitorial services beyond the specific services identified above, except as noted, shall be subject to an additional charge reflecting Landlord's actual cost

III. UNDERGROUND PARKING

A. May - October

Ramp

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NIGHTLY

Spot sweep debris between cars

Machine sweep all accessible areas and drive lanes on one level alternating nightly Apply oil-dry to any car fluid puddles Dust signs on one level alternating nightly Clean outside of attendant's booth Police parking level stairways for debris Clean access control equipment Wipe fire extinguisher boxes (as needed) Spot all doors
Machine scrub the floor of one level alternating nightly

WEEKLY

Sweep and damp mop as needed one flight of stairs, alternating weekly.
Wash as needed one level of signs, alternating levels weekly Perform routine equipment maintenance checks and wash all floor machines

Ramp Elevators Lobbies

NIGHTLY

Vacuum nightly
Spot clean door glass
Spot carpet and walls
Clean waste/ash urns (as needed) Police garage levels for debris Vacuum standing water as needed

B. November - April

NIGHTLY

Vacuum standing water (as needed) Spot sweep debris between cars and open areas Machine sweep as time permits Police parking level stairways for debris Clean outside of attendant's booth Clean mechanical equipment (as needed) Wipe fire extinguisher boxes (as needed) Spot all doors
Machine scrub the floor of one level alternating nightly

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WEEKLY

Sweep and damp mop as needed one flight of stairs, alternating weekly
Damp wipe as needed all signs on one level Perform routine equipment maintenance checks and wash all floor machines

ANNUALLY

Dust pipes and ductwork as needed

IV. REST ROOMS

NIGHTLY

Clean and sanitize porcelain fixtures

Spot clean walls
Clean mirrors
Polish chrome and stainless
Sweep floors
Wet mop floors
Stock paper products and cloth towels Empty trash
Fill soap dispensers

MONTHLY

Inspect for repairs/additional cleaning

QUARTERLY

Dust vents
Machine scrub floors
Linseed oil door kickplates

ANNUALLY

Wash walls

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EXHIBIT 10.23

SHORT TERM OFFICE SPACE LEASE

This Short Term Office Space Lease ("LEASE" or "AGREEMENT") is made and entered into effective as of February 23, 2004, by and between 601 Second Avenue Limited Partnership, a Texas limited partnership ("Landlord"), and Capella Education Company, a Minnesota corporation ("Tenant").

RECITALS

A. Landlord and Tenant have entered into an Office Lease of even date herewith (the "CAPELLA Lease") for space in the office project known as 225 South Sixth Street (the "PROJECT") which is owned by Landlord and located in Minneapolis, Minnesota.

B. Tenant would like to use some office space in the Project on a temporary basis until a portion of the Premises which is Tenant is initially leasing from Landlord pursuant to the Capella Lease is ready to be occupied by Tenant for the conduct of Tenant's business.

B. Landlord is willing to grant Tenant the right to use such space on the terms and conditions hereinafter set forth.

Accordingly, Landlord and Tenant hereby agree as follows:

1. DEFINITIONS. Those capitalized terms which are used in this Agreement and are not defined herein shall have the meaning given to them in the Capella Lease.

2. LEASE. Landlord hereby leases to Tenant all 26,896 square feet of the Rentable Area on the 6th floor of the Tower which is depicted on the floor plan that is attached hereto as Exhibit A (the "PREMISES") from the date on which this Agreement has been fully executed and delivered (the "COMMENCEMENT DATE"), which date shall be inserted by Landlord into the first paragraph of this Agreement contemporaneously with Landlord's delivery of a fully executed copy of this Agreement to Tenant until 11:59 p.m. on the day immediately prior to the Phase I & II Rent Commencement Date (as such term is defined in the Capella Lease) (the "LEASE TERM"). Tenant shall have the right to use the Premises for general office purposes, purposes incidental thereto and for no other purpose.

3. PAYMENT OF VARIABLE OPERATING COSTS. As consideration for Landlord's lease of the Premises to Tenant, Tenant agrees to reimburse Landlord for the cost of the janitorial services and the utility expenses to be provided to the Premises during the Lease Term (the "VARIABLE EXPENSES"), which is hereby stipulated to be $3.04 per square foot of Rentable Area per year. Landlord and Tenant agree that the amount of the monthly payment of Variable Expenses is based upon the estimated cost of such expenses for the Project on a square foot basis for calendar year 2004 and that there shall not be any reconciliation or adjustment of the amount of Variable Expenses to be paid by Tenant when the actual cost of the janitorial services and utility expenses for calendar year 2004 are known. The Variable

A-1

Expenses for the first full calendar month and any initial partial calendar month shall be paid to Landlord within ten (10) days after the Commencement Date. Thereafter, the Variable Expenses shall be due and payable to Landlord on or before the first day of each calendar month. The Variable Expenses for any partial calendar month shall be prorated based upon the actual days in such month. Tenant shall be obligated to pay Landlord a late fee equal to five percent (5%) of the overdue amount of any Variable Expenses which are not received by Landlord prior to the fifth (5th) day of the calendar month in which due.

4. SERVICES. Landlord shall, throughout the Lease Term, provide to Tenant the services described in Article 14 of the Capella Lease.

5. ALTERATIONS. Tenant will not make or permit anyone to make any alterations, decorations, additions or improvements, structural or otherwise, in or to the Premises or the Project, or place safes, vaults or other heavy furniture or equipment within the Premises, without first obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. In making any alterations, decorations, additions or improvements, structural or otherwise, in or to the Premises which have been approved by Landlord, Tenant shall be bound by and shall comply in all respects with the provisions set forth in Article 12 of the Capella Lease.

6. RULES. Tenant shall comply with and cause its visitors, employees, contractors, agents and invitees to comply with, all legal requirements and with the rules and regulations of the Project adopted and altered by Landlord from time to time for the safety, care and cleanliness of the Premises and Project and for preservation of good order therein.

7. SURRENDER OF PREMISES. On the Phase I & II Rent Commencement Date, Tenant shall immediately vacate the Premises, remove all of its personal property from the Premises, restore any damage caused by Tenant, its employees, agents or contractors and leave the Premises in broom clean condition. Any personal property required to be removed pursuant to the terms of this Agreement and not removed shall be deemed abandoned, and Tenant shall be liable for all costs of removal and disposal. If Tenant continues to occupy the Premises or any part thereof after the Phase I & II Rent Commencement Date or any earlier termination of this Lease without the prior written consent of Landlord, Tenant shall be obligated to pay the same Base Rent and Tenant's Additional Rent for the Premises as Tenant is obligated to pay for the Initial Premises under the Capella Lease. In addition, Tenant shall indemnify Landlord against all claims for damages by any party to whom Landlord may have leased all or any part of the Premises effective upon the termination of this Lease and for any other liability, loss, cost, damage or expense (including attorneys' fees, disbursements of counsel and any costs of suit) incurred by Landlord as a result of such holding over, and the provisions of this Section 7 shall not prevent Landlord from exercising any right or remedy available at law or in equity to regain immediate possession of the Premises and/or damages from Tenant.

7. RELEASE. Landlord and Landlord's Affiliates and each of their partners, directors, officers, shareholders and employees shall not be liable to Tenant, or those

A-2

EXHIBIT 10.23

claiming by, through or under Tenant, for any damage or claims, however caused, arising from loss or damage to books, records, computer or other electronic equipment, data or media, files, artwork, money, securities, negotiable instruments or papers, or any other personal property in the Project, the interruption in the use of any cellular or wireless communication devices or the interruption in the use of the Premises, any fire, robbery, theft, assault, or any other casualty, any leakage or bursting of pipes or water vessels or any roof or wall leakage or other water damage, in any part or portion of the Premises or the Project.

8. INDEMNIFICATION. Subject to the provisions of Section 10 of this Agreement which shall control if they conflict with the provisions of this
Section 8, Tenant shall indemnify, defend (at Landlord's request and with counsel reasonably approved by Landlord) and hold Landlord and Landlord's Affiliates (and each of their partners, directors, officers, shareholders and employees) harmless from and against every demand, claim, cause of action, judgment and expense, including, but not limited to, reasonable attorneys' fees and disbursements of counsel, whether suit is initiated or not, and all loss and damage arising from or related to any bodily or personal injury, death or property damage occurring in the Premises, except to the extent caused by the gross negligence or willful misconduct of Landlord or Landlord's Affiliates or any of their representatives, agents, contractors or employees.

9. INSURANCE. Tenant shall maintain a policy of commercial liability insurance with the premium thereon fully paid on or before the due date, issued by and binding upon a solvent insurance company authorized to do business in Minnesota, such insurance to afford minimum protection (which may be effected by primary and/or excess coverage) of not less than $5,000,000 combined single limit. Landlord shall be named as an additional insured on Tenant's liability policy. Prior to the Commencement Date, Tenant shall deliver to Landlord an ACORD Form 27 Certificate of Insurance in form satisfactory to Landlord evidencing maintenance of the insurance required herein.

10. WAIVER OF RECOVERY RIGHTS. Notwithstanding anything to the contrary in this Agreement, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action or cause of action, against the other and their Affiliates and each of their partners, shareholders, officers, employees and contractors for any loss or damage that may occur to the Premises or the Project, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause which could be insured against under the terms of the all risk property insurance policies referred to in Section 16 of the Capella Lease (whether or not actually insured) or which is actually insured against by the party in question, regardless of cause or origin, including negligence of the other party hereto or its Affiliates or any of their partners, shareholders, officers, employees and contractors, and covenants that to the extent of such waiver no insurer shall hold any right of subrogation against the other party hereto. In addition, Tenant hereby waives all rights of recovery with respect to property damage against all other tenants of the Project that have, prior to any loss by Tenant, executed a reciprocal waiver of recovery rights for the benefit of Tenant.

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EXHIBIT 10.23

11. RIGHT OF ENTRY. Landlord shall have the right upon reasonable oral notice to Tenant and at reasonable times to examine, inspect and protect the Premises, and to make such alterations, renovations, restorations and/or repairs as Landlord shall deem necessary or desirable for the Premises, for any other premises in the Project, or the Project itself and to show the Premises to prospective tenants, lenders and buyers of the Project.

12. LIMITED LIABILITY. Tenant specifically agrees to look solely to Landlord's interest in the Project for the recovery of any judgment against Landlord, it being agreed that Landlord (and its partners and shareholders) shall never be personally liable for any such judgment.

13. ATTORNEYS' FEES. In addition to all other remedies of Landlord, Landlord shall be entitled to reimbursement upon demand of all attorneys' fees and disbursements of counsel incurred by Landlord in connection with any default by Tenant in the performance of its obligations under this Agreement, whether suit is initiated or not.

14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which shall be considered one and the same Agreement, even though all parties hereto have not signed the same counterpart. Signatures on this Agreement which are transmitted by facsimile shall be valid for all purposes. Any party shall, however, deliver an original signature for this Agreement to the other party upon request.

15. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Tenant without Landlord's prior written consent, which may be withheld, conditioned or given in Landlord's sole discretion.

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EXHIBIT 10.23

IN WITNESS WHEREOF, Tenant has executed this Short Term Office Space Lease to be effective as of the date first above written.

TENANT:

CAPELLA EDUCATION COMPANY,
a Minnesota corporation

By: /s/ Joe Gaylord
    --------------------------
Name: Joe Gaylord
Title: CFO

This is signature page to that certain Short Term Office Space Lease by and between 601 Second Avenue Limited Partnership, a Texas limited partnership, as Landlord, and Capella Education Company, a Minnesota corporation, as Tenant, with respect to certain Premises located in the office project now known as 225 South Sixth Street in Minneapolis, Minnesota.

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EXHIBIT 10.23

IN WITNESS WHEREOF, Landlord has executed this Short Term Office Space Lease to be effective as of the date first above written.

LANDLORD:

601 SECOND AVENUE LIMITED PARTNERSHIP

By: Minneapolis 601 Limited Partnership, a Texas
limited partnership, its general partner

By: Hines Acquisitions No. 2
Limited Partnership, a Texas limited
partnership, its sole general partner

By: Hines Interests
Limited Partnership, a Delaware
limited partnership, its sole general
partner

By: Hines Holdings, Inc., a
Texas close corporation, its
sole general partner

By: /s/ C. Kevin Shannahan
    ---------------------------------------
    Name: C. Kevin Shannahan
    Title: Executive Vice President

This is signature page to that certain Short Term Office Space Lease by and between 601 Second Avenue Limited Partnership, a Texas limited partnership, as Landlord, and Capella Education Company, a Minnesota corporation, as Tenant, with respect to certain Premises located in the office project now known as 225 South Sixth Street in Minneapolis, Minnesota.

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EXHIBIT 10.23

DECLARATION OF
COMMENCEMENT DATE

This Declaration is made as of February 23, 2004, by and between 601 Second Avenue Limited Partnership, a Texas limited partnership ("LANDLORD") and Capella Education Company, a Minnesota corporation ("TENANT").

Landlord and Tenant are parties to that certain Office Lease (the "LEASE") dated as of February 23, 2004.

In accordance with the Lease, Landlord and Tenant hereby memorialize that:

1. The Commencement Date is February 23, 2004.

2. The expiration date of the Initial Scheduled Term is October 31, 2010.

TENANT:

CAPELLA EDUCATION COMPANY,
a Minnesota corporation

By: /s/ Joe Gaylord
    -----------------------
Name: Joe Gaylord
Title: CFO


In Witness Whereof, the undersigned has executed this Declaration to be effective as of the date set forth in the first paragraph of the Declaration.

LANDLORD:

601 SECOND AVENUE LIMITED PARTNERSHIP,
a Texas limited partnership

By: Minneapolis 601 Limited Partnership, a Texas
limited partnership, its sole general partner

By: Hines Acquisitions No. 2
Limited Partnership a Texas limited
partnership, its sole general partner

By: Hines Interests Limited
Partnership, a Delaware limited
partnership, its sole general partner

By: Hines Holdings, Inc., a
Texas close corporation, its
sole general partner

By: /s/ C. Kevin Shannahan
    ------------------------------------
    Name: C. Kevin Shannahan
    Title: Executive Vice President

This is a signature page to that certain Declaration of Commencement Date by and between 601 Second Avenue Limited Partnership, a Texas limited partnership, and Capella Education Company, a Minnesota corporation, with respect to premises located in the office project now known as 225 South Sixth Street in Minneapolis, Minnesota.


EXHIBIT 10.24

MEMORANDUM OF LEASE

THIS MEMORANDUM OF LEASE, dated as of March 10, 2004 (the "EFFECTIVE DATE") is between 601 Second Avenue Limited Partnership, a Texas limited partnership ("LANDLORD") and Capella Education Company, a Minnesota corporation ("TENANT").

RECITALS

A. Landlord, as landlord, and Tenant, as tenant, have entered into that certain Office Lease dated as of February 23, 2004 (the "LEASE"), relating to certain real property (the "PROJECT") located at 225 South Sixth Street, Minneapolis, Minnesota, and legally described on Exhibit A attached hereto. The Project consists, in part, of an eighteen (18) story building (the "BUILDING") and a fifty-three (53) story office tower (the "TOWER").

B. Landlord and Tenant now wish to memorialize of record the existence of the Lease and certain specific terms of the same.

C. All terms defined in the Lease shall have the same meanings when used herein as when used in the Lease.

NOW, THEREFORE, in consideration of the Lease and other good and valuable consideration, Landlord and Tenant agree as follows:

1. Landlord hereby demises and leases to Tenant, and Tenant hereby takes and leases from Landlord, the Initial Premises upon the terms and conditions more particularly set forth in the Lease. The Initial Premises means the (a) 119,711 square feet of Rentable Area on the 8th and 9th floors of the Building and the 8th, 9th and 15th floors of the Tower, (b) 30,335 square feet of Rentable Area on the 7th floor of the Building, and (c) 53,275 square feet of Rentable Area on the 6th and 7th floors of the Tower, all as depicted on the floor plans which are attached hereto as Exhibit B.


2. The Term of the Lease shall be a term of six (6) years, commencing on November 1, 2004, and terminating on October 31, 2010, (subject to the provisions of the Lease), and contains two Extension Options permitting extension of the Term to October 31, 2020.

3. Reference is made to the Lease for a full statement of the terms and conditions of the Lease, all of which are hereby incorporated by reference.

4. Nothing in this Memorandum of Lease shall be construed to amend, modify, change, alter, amplify, interpret or supersede any of the terms and provisions of the Lease, which shall in all things control.

IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Memorandum of Lease as of the Effective Date.

[SIGNATURE PAGES FOLLOW]

-2-

EXHIBIT 10.24

SIGNATURE PAGE
FOR
MEMORANDUM OF LEASE
BETWEEN
601 SECOND AVENUE LIMITED PARTNERSHIP
AND
CAPELLA EDUCATION COMPANY

LANDLORD:

601 SECOND AVENUE LIMITED PARTNERSHIP,
a Texas limited partnership

By: Minneapolis 601 Limited Partnership, a Texas
limited partnership, its sole general partner

By: Hines Acquisitions No. 2 Limited
Partnership, a Texas limited partnership, its
sole general partner

By: Hines Interests Limited Partnership,
a Delaware limited partnership, its
sole general partner

By: Hines Holdings, Inc., a Texas
close corporation, its sole
general partner

By: /s/ C. Kevin Shannahan
    ----------------------
    Name: C. Kevin Shannahan
    Title: Executive Vice
             President


STATE OF ILLINOIS )
) ss.
COUNTY OF COOK )

The foregoing instrument was acknowledged before me this 19th day of March, 2004, by C. Kevin Shannahan, the Executive Vice President of Hines Holdings, Inc., a Texas close corporation and sole general partner of Hines Interests Limited Partnership, a Delaware limited partnership and sole general partner of Hines Acquisitions No. 2 Limited Partnership, a Texas limited partnership and sole general partner of Minneapolis 601 Limited Partnership, a Texas limited partnership and sole general partner of 601 Second Avenue Limited Partnership, a Texas limited partnership, on behalf of the limited partnership.

/s/ Madeline Greenlee
------------------------
Notary Public


EXHIBIT 10.24

SIGNATURE PAGE
FOR
MEMORANDUM OF LEASE
BETWEEN
601 SECOND AVENUE LIMITED PARTNERSHIP
AND
CAPELLA EDUCATION COMPANY

TENANT:

CAPELLA EDUCATION COMPANY
a Minnesota corporation

By: /s/ Joe Gaylord
    ---------------------------
    Name: Joe Gaylord
    Title: CFO

STATE OF MINNESOTA  )
                    ) ss.
COUNTY OF HENNEPIN  )

The foregoing instrument was acknowledged before me this 20th day of February, 2004, by Joe Gaylord, the CFO of Capella Education Company, a Minnesota corporation, on behalf of the corporation.

/s/ Sharyl J. Thompson
------------------------
Notary Public

After recording, please return to:
Faegre & Benson LLP (WLU)
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402-3026


EXHIBIT 10.24

EXHIBIT A

LEGAL DESCRIPTION

Lot 6, Block 219, Town of Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

The Northeasterly 7 feet of Lots 1, 2, and 3; the Northeasterly 7 feet of the Northwesterly half of Lot 4; the Southeasterly half of Lot 4; and Lots 5, 6, 7, 8, 9 and 10;

all in Block 219, Brown and Jackins' Addition to Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

A-1

EXHIBIT 10.24

RECORDING REQUESTED BY


WHEN RECORDED MAIL TO

The Northwestern Mutual Life Ins. Co.
720 East Wisconsin Ave. - Rm N16WC
Milwaukee, WI 53202
Attn: Kathleen A. Evanson
Loan No. C-331830 SPACE ABOVE THIS LINE FOR RECORDER'S USE

NON-DISTURBANCE AND ATTORNMENT AGREEMENT

THIS AGREEMENT is entered into as of March 10 , 2004, between CAPELLA EDUCATION COMPANY, a Minnesota corporation, whose mailing address is 225 South Sixth Street, Minneapolis, MN 55402, ("Tenant"),601 SECOND AVENUE LIMITED PARTNERSHIP, a Texas limited partnership, whose mailing address is 225 S. 6th St., #2590, Minneapolis, MN 55402, ("Borrower"), and THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation ("Lender"), whose address for notices is 720 East Wisconsin Avenue, Milwaukee, WI 53202, Attention: Real Estate Investment Department, Reference Loan No.C-331830.

RECITALS

A. Tenant is the lessee and Borrower is the lessor under a certain lease dated February 23, 2004 (the "Lease").

B. Lender has made a mortgage loan secured by a mortgage, deed to secure a debt or deed of trust from Borrower for the benefit of Lender recorded as Document No. 2631800 in Volume 2773, Page 827519 (as it may be amended, restated or otherwise modified from time to time, the "Lien Instrument") encumbering the fee title to and/or leasehold interest in the land described in Exhibit A attached hereto and the improvements thereon (collectively, the "Property"), wherein the premises covered by the Lease (the "Demised Premises") are located.

C. Borrower and Lender have executed an Absolute Assignment of Leases and Rents (the "Absolute Assignment"), pursuant to which (i) the Lease is assigned to Lender and (ii) Lender grants a license back to Borrower permitting Borrower to collect all rents, income and other sums payable under the Lease until the revocation by Lender of such license, at which time all rents, income and other sums payable under the Lease are to be paid to Lender.

B-1

D. Lender has required the execution of this Agreement by Borrower and Tenant as a condition to Lender making the requested mortgage loan or consenting to the Lease and Tenant has required the execution of this Agreement by Lender and Borrower as a condition to Tenant entering into the Lease.

E. Tenant acknowledges that, as its consideration for entering into this Agreement, Tenant will benefit by entering into an agreement with Lender concerning Tenant's relationship with any purchaser or transferee of the Property (including Lender) in the event of foreclosure of the Lien Instrument or a transfer of the Property by deed in lieu of foreclosure (any such purchaser or transferee and each of their respective successors or assigns is hereinafter referred to as "Successor Landlord").

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tenant, Borrower and Lender agree as follows:

1. Tenant and Borrower agree for the benefit of Lender that:

(a) Tenant shall not pay, and Borrower shall not accept, any rent or additional rent more than one month in advance;

(b) Except as specifically provided in the Lease, Tenant and Borrower will not enter into any agreement for the cancellation of the Lease or the surrender of the Demised Premises without Lender's prior written consent;

(c) Tenant and Borrower will not enter into any agreement amending or modifying the Lease without Lender's prior written consent, except for amendments or modifications specifically contemplated in the Lease for confirming the lease commencement date, the rent commencement date, the term, the square footage leased, the renewal or extension of the Lease, or the leasing of additional space at the Property, or as otherwise specifically contemplated in the Lease;

(d) Tenant will not terminate the Lease because of a default thereunder by Borrower unless Tenant shall have first given Lender written notice and a reasonable opportunity to cure such default; and

(e) Tenant, upon receipt of notice from Lender that it has exercised its rights under the Absolute Assignment and revoked the license granted to Borrower to collect all rents, income and other sums payable under the Lease, shall pay to Lender all rent and other payments then or thereafter due under the Lease, and


any such payments to Lender shall be credited against the rent or other obligations due under the Lease as if made to Borrower.

(f) Tenant will not conduct any dry cleaning operations on the Demised Premises using chlorinated solvents nor will Tenant use any chlorinated solvents in the operation of their business on the Demised Premises.

2. Subject to the terms of this Agreement, the Lease is hereby subordinated in all respects to the Lien Instrument and to all renewals, modifications and extensions thereof, subject to the terms and conditions hereinafter set forth in this Agreement, but Tenant waives, to the fullest extent it may lawfully do so, the provisions of any statute or rule of law now or hereafter in effect that may give or purport to give it any right or election to terminate or otherwise adversely affect the Lease or the obligations of Tenant thereunder by reason of any foreclosure proceeding.

3. Borrower, Tenant and Lender agree that, unless Lender shall otherwise consent in writing, the fee title to, or any leasehold interest in, the Property and the leasehold estate created by the Lease shall not merge but shall remain separate and distinct, notwithstanding the union of said estates either in Borrower or Tenant or any third party by purchase, assignment or otherwise.

4. If the interests of Borrower in the Property are acquired by a Successor Landlord:

(a) If Tenant shall not then be in default in the payment of rent or other sums due under the Lease or be otherwise in material default under the Lease (in each case, beyond the expiration of applicable notice and cure periods), the Lease shall not terminate or be terminated and the rights of Tenant thereunder shall continue in full force and effect except as provided in this Agreement;

(b) Tenant agrees to attorn to Successor Landlord as its lessor; Tenant shall be bound under all of the terms, covenants and conditions of the Lease for the balance of the term thereof, including any renewal options which are exercised in accordance with the terms of the Lease;

(c) The interests so acquired shall not merge with any other interests of Successor Landlord in the Property if such merger would result in the termination of the Lease;

(d) If, notwithstanding any other provisions of this Agreement, the acquisition by Successor Landlord of the interests of Borrower in the Property results, in whole or part, in the termination of the Lease, there shall be deemed to have been created a lease between Successor Landlord and Tenant on the same


terms and conditions as the Lease, except as modified by this Agreement, for the remainder of the term of the Lease with renewal options, if any; and

(e) Successor Landlord shall be bound to Tenant under all of the terms, covenants and conditions of the Lease, and Tenant shall, from and after Successor Landlord's acquisition of the interests of Borrower in the real estate, have the same remedies against Successor Landlord for the breach of the Lease that Tenant would have had under the Lease against Borrower if the Successor Landlord had not succeeded to the interests of Borrower; provided, however, that Successor Landlord shall not be:

(i) Liable for the breach of any representations or warranties set forth in the Lease or for any act, omission or obligation of any landlord (including Borrower) or any other party occurring or accruing prior to the date of Successor Landlord's acquisition of the interests of Borrower in the Demised Premises, except for any repair and maintenance obligations of a continuing nature as of the date of such acquisition;

(ii) Subject to any offsets or defenses which Tenant might have against any landlord (including Borrower) prior to the date of Successor Landlord's acquisition of the interests of Borrower in the Demised Premises except to the extent that such offsets
(a) were used to fund the Improvement Allowance (as defined in the Lease), including interest, or to fund the repairs, maintenance or other actions which would otherwise be an obligation of Successor Landlord upon its acquisition of the interest of Borrower in the Property and (b) are otherwise expressly provided for under the Lease;

(iii) Liable for the return of any security deposit under the Lease unless such security deposit shall have been actually deposited with Successor Landlord;

(iv) Bound to Tenant for any claims arising subsequent to the date upon which Successor Landlord transfers its interest in the Demised Premises to any third party;

(v) Liable to Tenant under any indemnification provisions set forth in the Lease arising prior to Successor Landlord's acquisition of the interest of Borrower in the Property; or

(vi) Liable for any damages in excess of Successor Landlord's equity in the Property.


The provisions of this paragraph shall be effective and self-operative immediately upon Successor Landlord succeeding to the interests of Borrower without the execution of any other instrument.

5. Tenant represents and warrants that Tenant, to its actual knowledge:
(i) is not a person or entity with whom Lender is restricted from doing business with under regulations of the Office of Foreign Asset Control ("OFAC") of the Department of the Treasury (including, but not limited to, those named on OFAC's Specially Designated and Blocked Persons list) or under any statute, executive order (including, but not limited to, the September 24, 2001 Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action; (ii) is not knowingly engaged in, and shall not knowingly engage in, any dealings or transaction or knowingly be otherwise associated with such persons or entities described in (i) above; and (iii) is not a person or entity whose activities violate the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 or the regulations or orders thereunder.

6. This Agreement may not be modified orally or in any other manner except by an agreement in writing signed by the parties hereto or their respective successors in interest. In the event of any conflict between the terms of this Agreement and the terms of the Lease, the terms of this Agreement shall prevail. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective heirs, successors and assigns, and shall remain in full force and effect notwithstanding any renewal, extension, increase, or refinance of the indebtedness secured by the Lien Instrument, without further confirmation. Upon recorded satisfaction of the Lien Instrument, this Agreement shall become null and void and be of no further effect.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

TENANT: CAPELLA EDUCATION COMPANY,
a Minnesota corporation

By: /s/ Joe Gaylord
    ---------------------

Attest: _______________
            Secretary


STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )

The foregoing instrument was acknowledged before me this 8th day of March, 2004, by Joe Gaylord to me known and known to me to be (one of the) officers on behalf of Capella Education Company, a corporation. He/she is personally known to me.

NOTARY PUBLIC:

Signature  /s/ Lee A. Willhite
           -------------------

              Lee A. Willhite
           -----------------------
           Name (typed or printed)

                                             My commission Expires:

 BORROWER:                 601 SECOND AVENUE LIMITED PARTNERSHIP, a Texas
                           limited partnership

                              By: Minneapolis 601 Limited Partnership, a Texas
                                  limited partnership, its general partner

                                  By: Hines Acquisitions No. 2 Limited
                                      Partnership, a Texas limited partnership,
                                      its sole general partner

                                      By: Hines Interests Limited
                                          Partnership, a Delaware limited
                                          partnership, its sole general partner

                                          By: Hines Holdings, Inc., a
                                              Texas close corporation, its
                                              sole general partner

                                          By: /s/ C. Kevin Shannahan
                                              --------------------------------
                                              Name: C. Kevin Shannahan
                                              Its: Executive Vice President

STATE OF ILLINOIS )
                  ) Sections
COUNTY OF COOK )

The foregoing instrument was acknowledged before me this 19th day of March, 2004, by C. Kevin Shahannan, the Executive Vice President of Hines Holdings, Inc. a Texas close corporation, as sole general partner of Hines Interests Limited Partnership, a Delaware limited partnership, as sole general partner of Hines Acquisitions No. 2 Limited Partnership, a Texas limited partnership, as sole general partner of Minneapolis 601 Limited Partnership, a Texas limited partnership, as sole general partner of 601 Second Avenue Limited Partnership, a Texas limited partnership, on behalf of the corporation and partnerships.

/s/ Madeline Greenlee
----------------------------
               Notary Public

LENDER:                     THE NORTHWESTERN MUTUAL LIFE
                            INSURANCE COMPANY, a Wisconsin corporation

                            By: Northwestern Investment Management Company,
                                LLC, a Delaware limited liability company, its
                                wholly owned affiliate and authorized
                                representative.

                                By: /s/Michael P. Cusick
                                    --------------------
                                Michael P. Cusick, Managing Director

                                Attest: /s/ Robert J. Bastien
                                        ---------------------
                                Robert J. Bastien, Assistant Secretary

STATE OF WISCONSIN  )
                    ) ss.

COUNTY OF MILWAUKEE )

The foregoing instrument was acknowledged before me this 23rd day of February, 2004 by Michael P. Cusick and Robert J. Bastien the Managing Director and Assistant Secretary respectively, of Northwestern Investment Management Company, LLC on behalf of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation, and acknowledged the execution of the foregoing instrument as the act and deed of said corporation.

/s/ Janet M. Szukalski
-----------------------------------
Janet M. Szukalski, Notary Public
My commission expires:  May 9, 2004

This instrument was prepared by Judith L. Perkins, Attorney, for The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, WI 53202.


EXHIBIT "A"

Parcel 1:

Lot 6, Block 219, Town of Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for said County.

Parcel 2:

The Northeasterly 7 feet of Lots 1, 2 and 3, the Northeasterly 7 feet of the Northwesterly Half of Lot 4, the Southeasterly Half of Lot 4, Lots 5, 6, 7, 8, 9 and 10, Block 219, Brown and Jackins' Addition to Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for said County.


EXHIBIT 10.25

JMB 103 (2/89)
Triple Net

OFFICE LEASE

THIS LEASE made as of the 28 day of June, 2000, between 222 South Ninth Street Limited Partnership, a Minnesota limited partnership ("Landlord'), and Capella Education Company, a Minnesota corporation, whose address is Suite 550, Towle Building, 330 Second Avenue South, Minneapolis, Minnesota 55401 ("Tenant").

WITNESSETH:

ARTICLE 1

Premises and Term

Landlord hereby leases to Tenant and Tenant hereby leases from Landlord that certain space (the "Premises") consisting of (i) the entire rentable area of the twentieth floor, one-half (1/2) of the rentable area of the nineteenth floor, and one-half (1/2) of the rentable area of the sixteenth floor (collectively, the "Initial Premises"), and (ii) the one-half (1/2) of the nineteenth floor which was not part of the Initial Premises (the "19th Floor Remainder Space") and the one-half (1/2) of the sixteenth floor which was not part of the Initial Premises (the "16th Floor Remainder Space," the 19th Floor Remainder Space and the 16th Floor Remainder Space are collectively referred to herein as the "Secondary Premises"), as described or shown on Exhibit A attached hereto, in the building known as the Piper Jaffray Tower (the "Building") located at 222 South Ninth Street, Minneapolis, Minnesota ("Property", as further described in Article 25), subject to the provisions herein contained. The term (the "Term") of this Lease with respect to the Initial Premises shall commence on the 1st day of November, 2000 (the "Commencement Date"), and end on the 31st day of October, 2005 (the "Expiration Date"), unless sooner terminated as provided herein. The term of this Lease with respect to the Secondary Premises shall commence on April 1, 2001. The Commencement Date with respect to the Secondary Premises shall be subject to adjustment as provided in Article 4. Landlord and Tenant have, for purposes of the calculation of Rent set forth below, utilized Landlord's calculations of the rentable area of the Initial Premises at 46,056 square feet, the rentable area of the 19th Floor Remainder Space at 11,356 square feet, the rentable area of the 16th Floor Remainder Space at 11,356 square feet, and the rentable area of the Property at 724,734 square feet. The specified rentable area of the Premises has been determined by Landlord through its calculation of the usable area and multiplication of that figure by a factor of 1.09. Upon the request of Tenant, Landlord shall provide its usable area measurements and rentable area calculations for the Premises for Tenant's review (which review shall occur, if at all, within sixty (60) days of Tenant's execution of the Lease). If Tenant disagrees with the rentable area calculation, it shall provide notice of same to Landlord within ten (10) days of receipt of Landlord's calculations. In such event, the parties shall confer with Landlord's architect and if they still cannot agree on the rentable area calculation within ten (10) days thereafter, the parties shall submit the matter to a mutually acceptable third party architect, who shall perform measurements and calculations of the usable and rentable areas. If the third party architect confirms Landlord's calculations within 400 rentable square feet, Tenant shall pay all costs associated with the third party architect. If the measurement differs by more than 400 rentable square feet, Landlord shall pay such costs. In


either case, the parties shall be bound by the determination of the third party architect. In making its calculations, the third party architect shall apply current BOMA measurement standards utilized for Class A buildings in the Minneapolis downtown market. If applicable, the parties shall execute an amendment to the Lease, setting forth the revised rentable square feet of the Premises, and the Rent shall be adjusted by such amendment retroactively to the Commencement Date to reflect such adjusted _____ble square feet. As to any partial floors that may be occupied by Tenant under this Lease, ________ table/usable factor shall not exceed 1.15.

ARTICLE 2

BASE RENT

Tenant shall pay Landlord monthly Base Rent as set forth in the following table, in advance on or before the first day of each calendar month during the Term, except that Base Rate for the first full calendar month for which Base Rent shall be due, shall be paid on the Commencement Date.

                                                                     Monthly        Base Rent per
         Lease Period                        Annual Base Rent       Base Rent        Square Foot
-----------------------------------          ----------------     -------------     -------------
November 1, 2000 - October 31, 2001          $     587,214.00     $   48,934.50      $   12.75
November 1, 2001 - October 31, 2002          $     893,984.00     $   74,498.67      $   13.00
November 1, 2002 - October 31, 2003          $     911,176.00     $   75,931.33      $   13.25
November 1, 2003 - October 31, 2004          $     928,368.00     $    77364.00      $   13.50
November 1, 2004 - October 31, 2005          $     945,560.00     $   78,796.67      $   13.75

The annual Base Rent and monthly Base Rent listed above for the period from November 1, 2000 through October 31, 2001 is the annual Base Rent and monthly Base Rent for the Initial Premises only. Such figure shall be adjusted proportionately for the Secondary Premises based on the date that Tenant takes occupancy of the Secondary Premises as set forth in Article 4.

If the Term commences on a day other than the first day of a calendar month, or ends on a day other than the last day of a calendar month, then the Base Rent for such month shall be prorated on the basis of the ratio of the number of days of such month that are included within the Term to the total number of days in such month.

ARTICLE 3

ADDITIONAL RENT

(A) TAXES. Tenant shall pay Landlord an amount equal to Tenant's Prorate Share of Taxes in the manner described below. The terms "Taxes" and "Tenant's Prorata Share" shall have the meanings specified therefor in Article 25.

2

(B) OPERATING EXPENSES. Tenant shall pay Landlord an amount equal to Tenant's Prorata Share of Operating Expenses in the manner described below. The terms "Operating Expenses" and "Tenant's Prorata Share" shall have the meanings specified therefor in Article 25.

(C) INTENTIONALLY OMITTED.

(D) MANNER OF PAYMENT. Taxes and Operating Expenses shall be paid in the following manner:

(i) Landlord may reasonably estimate in advance the amounts Tenant shall owe for Taxes and Operating Expenses for any full or partial calendar year of the Term. In such event, Tenant shall pay such estimated amounts, on a monthly basis, on or before the first day of each calendar month, together with Tenant's payment of Base Rent. Such estimate may be reasonably adjusted from time to time by Landlord.

(ii) Within 120 days after the end of each calendar year, or as soon thereafter as practicable, Landlord shall provide a statement (the "Statement") to Tenant showing: (a) the amount of actual Taxes and Operating Expenses for such calendar year, with a listing of amounts for major categories of Operating Expanses, (b) any amount paid by Tenant towards Taxes and Operating Expenses during such calendar year on an estimated basis, and (c) any revised estimate of Tenant's obligations for Taxes and Operating Expenses for the current calendar year.

(iii) If the Statement shows that Tenant's estimated payments were less than Tenant's actual obligations for Taxes and Operating Expenses for such year, Tenant shall pay the difference. If the Statement shows an increase in Tenant's estimated payments for the current calendar year, Tenant shall pay the difference between the new and former estimates, for the period of January 1 of the current calendar year through the month in which the Statement is sent. Tenant shall make such payments within thirty (30) days after Landlord sends the Statement.

(iv) If the Statement shows that Tenant's estimated payments exceeded Tenant's actual obligations for Taxes and Operating Expenses, Tenant shall receive a credit for the difference against payments of Rent next due. If the Term shall have expired and no further Rent shall be due, Tenant shall receive a refund of such difference, within thirty (30) days after Landlord sends the Statement.

(v) So long as Tenant's obligations hereunder are not materially adversely affected thereby, Landlord reserves the right to reasonably change, from time to time, the manner or timing of the foregoing payments. In lieu of providing one Statement covering Taxes and Operating Expenses, Landlord may provide separate statements, at the same or different times.

3

No delay by Landlord in providing the Statement (or separate statements) shall be deemed a default by Landlord or a waiver of Landlord's right to require payment of Tenant's obligations for actual or estimated Taxes or Operating Expenses.

(E) PRORATION. If the Term commences other than on January 1, or ends other than on December 31, Tenant's obligations to pay estimated and actual amounts towards Taxes and Operating Expenses for such first or final calendar years shall be prorated to reflect the portion of such years included in the Term. Such proration shall be made by multiplying the total estimated or actual (as the case may be) Taxes and Operating Expenses, for such calendar years by a fraction, the numerator of which shall be the number of days of the Term during such calendar year, and the denominator of which shall be the number of days in such calendar year.

(F) LANDLORD'S RECORDS. Landlord shall maintain detailed records respecting Taxes and Operating Expenses and determine the same in accordance with sound and generally acceptable accounting and management practices, consistently applied. Although this Lease contemplates the computation of Taxes and Operating Expenses on a cash basis, Landlord shall make reasonable and appropriate accrual adjustments to ensure that each calendar year includes substantially the same recurring items. Landlord reserves the right to change to a full accrual system of accounting so long as the same is consistently applied and Tenant's payment obligation for Taxes or Operating Expenses over the entire Term is not increased over the amount that would have been otherwise payable had no such change been implemented. Tenant or its representative shall have the right to examine such records upon reasonable prior notice specifying such records Tenant desires to examine, during normal business hours at the Building by sending such notice no later than forty-five (45) days following the furnishing of the Statement. Tenant may take exception to matters included in Taxes or Operating Expenses Landlord's computation of Tenant's Prorata Share, or any other matter impacting upon Tenant's payment obligations with regard to Taxes and Operating Expenses by sending notice specifying such exception and the reasons therefor to Landlord no later than thirty (30) days after Landlord makes such records available for examination. Such Statement shall be considered final, except as to matters to which exception is taken after examination of Landlord's records in the foregoing manner and within the foregoing times. Tenant acknowledges that Landlord's ability to budget and incur expenses depends on the finality of such Statement, and accordingly agrees that time is of the essence of this Paragraph. If Tenant takes exception to any matter contained in the Statement as provided herein, the parties shall refer the matter to an accounting firm mutually designated by the parties (or if the parties cannot agree as to the accounting firm within thirty (30) days of Tenant's taking exception to such matters contained in the Statement, designated by Landlord, subject to the criteria that: (i) such accounting firm is a "Big 5" accounting firm, and (ii) Landlord shall not have had any business relationship with the accounting firm within the prior two (2) years), whose certification as to the proper amount shall be final and conclusive as between Landlord and Tenant. Tenant shall promptly pay the cost of such certification unless such certification determines that Tenant was overbilled (based upon the Statement) by more than two percent (2%), in which event Landlord shall pay the cost of such certification. If such certification indicates that the amount actually paid by Tenant, in relation to a matter for which Tenant has taken exception pursuant to this Paragraph, exceeds the amount Tenant should have paid, then Landlord shall credit the difference against the then next due payments to be made by Tenant under this Article 3, or if the Lease has expired, such amount shall be refunded to Tenant

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within thirty (30) days of such certification. Pending resolution of any such exceptions in the foregoing manner, Tenant shall continue paying Tenant's Prorata Share of Taxes and Operating Expenses in the amounts determined by Landlord, subject to adjustment after any such exceptions are so resolved.

(G) RENT AND OTHER CHARGES. Base Rent, Taxes, Operating Expenses, and any other amounts which Tenant is or becomes obligated to pay Landlord under this Lease or other agreement entered into in connection herewith, are sometimes herein referred to collectively as "Rent," and all remedies applicable to the non-payment of Rent shall be applicable thereto. Rent shall be paid at any office maintained by Landlord or its agent at the Property, or at such other place as Landlord may designate.

ARTICLE 4

COMMENCEMENT OF TERM

On or before March 1, 2001, Tenant shall deliver written notice (the "Secondary Premises Notice") to Landlord indicating either (a) that Tenant elects to occupy, for the purpose of conducting its business, the entire Secondary Premises on April 1, 2001, or (b) that Tenant elects to occupy, for the purpose of conducting its business, the 19th Floor Remainder Space on April 1, 2001, with occupancy, for the purpose of conducting its business, of the 16th Floor Remainder Space to begin on October 1, 2001. In the event that Tenant elects to occupy only the 19th Floor Remainder Space on April 1, 2001, the term of the Lease with respect to such space shall commence on April 1, 2001, and the term of the Lease with respect to the 16th Floor Remainder Space shall commence on October 1, 2001. Failure of Tenant to deliver such notice on or before March 1, 2001 shall be deemed an election by Tenant to occupy only the 19th Floor Remainder Space on April 1, 2001. Rent shall first be payable on the entire Secondary Premises on April 1, 2001 if Tenant has elected to occupy the entire Secondary Premises on that date, or on April 1, 2001 for the 19th Floor Remainder Space and October 1, 2001 for the 16th Floor Remainder Space, if Tenant has elected to initially occupy only one-half (1/2) of the Secondary Premises.

With the exception of such portion of the Premises on the 16th floor of the Building which Landlord must temporarily close in order to close off the existing interior stairway between the 16th floor of the Building and the adjacent floor, Landlord shall deliver (a) the Initial Premises to Tenant within five (5) business days of Landlord's receipt of a fully executed copy of this Lease, and (b) the Secondary Premises to Tenant within five (5) business days after written request firm Tenant for delivery of same. Tenant shall be entitled to commence construction of its improvements in the Secondary Premises, pursuant to Exhibit B attached hereto, at any time after delivery of the Secondary Premises to Tenant. During any period that Tenant shall be permitted to enter any portion of the Premises prior to the Commencement Date other than to occupy the same (e.g., to perform alterations or improvements), Tenant shall comply with all terms and provisions of this Lease, except those provisions requiring the payment of Rent. Tenant shall also have the right to occupy all or a portion (as reasonably determined by Tenant) of the 16th Floor Remainder Space while the Initial Premises are under construction (which space shall be made available in its "as-is" condition) for temporary occupancy without any obligation for the payment of Rent with

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respect to the 16th Floor Remainder Space. Landlord shall permit early entry, provided the Premises are legally available and Landlord has completed any work required under this Lease or any separate agreement entered in connection herewith. Notwithstanding the foregoing, if Tenant elects to take possession of the Secondary Premises in two phases and Tenant opens for business in the 16th Floor Remainder Space prior to October 1, 2001, then Rent shall commence on such date and be prorated based on the number of rentable square feet in the 16th Floor Remainder Space occupied and opened for business by Tenant.

ARTICLE 5

CONDITION OF PREMISES

Tenant has inspected the Premises, Property, Systems and Equipment (as defined in Article 25), or has had an opportunity to do so, and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements except for Landlord providing an improvement allowance as set forth in the Work Agreement attached hereto as Exhibit B and as otherwise expressly provided in any separate agreement that may be signed by the parties To the extent that Tenant requires a demising wall between the Initial Premises and the 19th Floor Remainder Space and/or the 16th Floor Remainder Space, such demising wall shall be constructed at Tenant's expense and in accordance with the provisions of Section 8 of this Lease. Prior to delivering possession of the Initial Premises to Tenant, Landlord shall close off the existing interior stairway between the 16th floor of the Building and the adjacent floor, at Landlord's sole cost and expense.

ARTICLE 6

USE AND RULES

Tenant shall use the Premises for offices, the preparation of educational programs and materials, and related functions inherent in its on-line educational program (all of which shall be implemented consistent with the Rules, as defined below), including "periodic seminars" (as defined below), and for such other purposes as Landlord may specifically authorize in writing and no other purpose whatsoever, in compliance with all applicable Laws, and without disturbing or interfering with any other tenant or occupant of the Property. For purposes of this Lease, the term "periodic seminars" shall mean seminars of not more than fifty (50) people per seminar, of a duration not to exceed two consecutive days, and occurring not more frequently than one (1) time in any calendar month. Landlord's approval of "periodic seminars" shall in no event be construed as a representation by Landlord that any such "periodic seminar" is in compliance with applicable Laws. Notwithstanding the foregoing, except for "periodic seminars," in no event shall Tenant use any portion of the Premises for classroom purposes. Tenant shall not use the Premises in any manner so as to cause a cancellation of Landlord's insurance policies, or an increase in the premiums thereunder. Tenant shall comply with all rules set forth in Rider One attached hereto (the "Rules"). Landlord shall have the right to reasonably amend such Rules and supplement the same with other reasonable Rules (not inconsistent with this Lease or with Tenant's permitted use as set forth in this Article) relating to the Property, or the promotion of safety, care, cleanliness or good order therein, and all such amendments or new Rules shall be

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binding upon Tenant after five (5) days notice thereof to Tenant. All Rules shall be applied on a non-discriminatory basis, but nothing herein shall be construed to give Tenant or any other Person (as defined in Article 25) any claim, demand or cause of action against Landlord arising out of the violation of such Rules by any other tenant, occupant, or visitor of the Property, or out of the enforcement or waiver of the Rules by Landlord in any particular instance.

ARTICLE 7

SERVICES AND UTILITIES

Landlord shall provide the following services and utilities (the cost of which shall be included in Operating Expenses unless otherwise stated herein or in any separate rider hereto):

(A) Electricity for standard office lighting fixtures, and equipment and accessories customary for offices (up to 280 hours per month) where: (1) the connected electrical load of all of the same does not exceed an average of 4 watts per square foot of the Premises, and (2) the electricity will be at nominal 120 volts, single phase (or 110 volts, depending on available services in the Building).

(B) Heat and air-conditioning to provide a temperature required, in Landlord's reasonable opinion, in accordance with applicable Law, and consistent with other similarly situated buildings in downtown Minneapolis, for occupancy of the Premises under normal business operations, from 8:00 a.m. until 6:00 p.m. Monday through Friday, and Saturdays from 8:00 a.m. until 1:00 p.m., except on Holidays (as defined in Article 25). Landlord shall not be responsible for inadequate air-conditioning or ventilation to the extent the same occurs because Tenant uses any item of equipment consuming more than 500 watts at rated capacity without providing adequate air-conditioning and ventilation therefor.

(C) Water for drinking, lavatory and toilet purposes at those points of supply provided for nonexclusive general use of other tenants at the Property.

(D) Customary office cleaning and trash removal service Monday through Friday or Sunday through Thursday in and about the Premises.

(E) Operatorless passenger elevator service and freight elevator service (subject to reasonable scheduling by Landlord) in common with Landlord and other tenants and their contractors, agents and visitors.

(F) Landlord shall seek to provide such extra utilities or services as Tenant may from time to time request, if the same are reasonable and feasible for Landlord to provide and do not involve modifications or additions to the Property or existing Systems and Equipment (as defined in Article 25), and if Landlord shall receive Tenant's request within a reasonable period prior to the time such extra utilities or services are required. Landlord may comply with written or oral requests by any officer or employee of Tenant, unless Tenant shall notify Landlord of, or Landlord shall request, the names of authorized individuals (up to 3 for each floor on which the Premises are located) and procedures for written requests. Tenant shall, for such extra utilities or services, pay such charges as Landlord shall from time to time reasonably establish based upon Landlord's actual cost of delivery of the services, plus a reasonable administrative fee. All

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charges for such extra utilities or services shall be due at the same time as the installment of Base Rent with which the same are billed, or if billed separately, shall be due within twenty (20) days after such billing. Landlord's current charges for after-hour utilities are $18.00 per hour per floor of the Building for HVAC cooling and $7.00 per hour per floor of the Building for heating.

Landlord may install and operate meters or any other reasonable system for monitoring or estimating any services or utilities used by Tenant materially in excess of those required to be provided by Landlord under this Article (including a system for Landlord's engineer to reasonably estimate any such excess usage). If such system indicates such excess services or utilities, Tenant shall pay Landlord's reasonable charges for installing and operating such system and any supplementary air-conditioning, ventilation, heat, electrical or other systems or equipment (or adjustments or modifications to the existing Systems and Equipment), and Landlord's reasonable charges for such amount of excess services or utilities used by Tenant.

Landlord does not warrant that any services or utilities will be free from shortages, failures, variations, or interruptions caused by repairs, maintenance, replacements, improvements, alterations, changes of service, strikes, lockouts, labor controversies, accidents, inability to obtain services, fuel, steam, water or supplies, governmental requirements or requests, or other causes beyond Landlord's reasonable control. None of the same shall be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof, except as expressly provided herein to the contrary, or relieve Tenant from performance of Tenant's obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damages.

Notwithstanding any of the foregoing to the contrary, Landlord shall operate and maintain the Building in accordance with all applicable laws and regulations, the requirements of Landlord's insurance carriers, and standards from time to time prevailing for similarly situated office buildings of comparable age and character in downtown Minneapolis. Landlord shall maintain all common areas in a first class condition and in good working order and repair and shall be responsible for keeping all exterior common areas reasonably free and clear of snow, ice and rubbish. Tenant, its successors, permitted assigns, permitted subtenants and their employees shall have access to the Premises at all times, 24-hours per day, every day of the year during the Term, subject to compliance with Landlord's reasonable security measures.

Tenant shall be permitted to utilize a dual electrical power feed from the systems serving the 19th and 20th floors of the Building, which shall be installed at Tenant's expanse and pursuant to the provisions of Section 8 hereof.

Subject to matters beyond the reasonable control of Landlord, in the event that any of the utilities or services to be provided by Landlord which are necessary for Tenant's beneficial use of the Premises should be unavailable for a period of three (3) or more consecutive business days, and such unavailability materially interferes with Tenant's beneficial use of the Premises and as a result thereof, Tenant does not operate its business in all or a material portion of the Premises for such three (3) consecutive business day period, then Rent shall abate from the end of such three (3) consecutive business day period until the earlier of (i) the date when said utility or service is again available to Tenant, or (ii) the date when Tenant reopens for business in such portion of the Premises.

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Further, should a condition exist in the Premises as to which Landlord has the obligation of repair hereunder, and should such condition have an adverse and immediate material impact upon Tenant's ability to use the Premises for the purposes set forth in Article 6, Tenant may give notice to Landlord of such condition. If, within ten (10) business days of receipt of such notice by Landlord, Landlord has not commenced and continuously and diligently proceeded to rectify such condition, then Tenant shall have the right to separately contract for such repair and upon the successful completion of such repair, to invoice Landlord for the reasonable costs incurred by Tenant in such repair. Tenant shall not have the right to perform its own repairs if the cause of Landlord's delay in completion of such repairs is beyond the reasonable control of Landlord. Tenant shall not have the right to offset or deduct the cost of such repair from any Rent due under this Lease.

ARTICLE 8

ALTERATIONS AND LIENS

Tenant shall make no material additions, changes, alterations or improvements (the "Work") to the Premises or the Systems and Equipment (as defined in Article 25) pertaining to the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. For purposes of this provision an item of Work shall not be deemed "material" if the item will not affect or alter the Systems and Equipment and shall have a cost during any twelve (12) consecutive month period of less than $20,000, or shall involve purely decorative changes to the Premises (i.e. installation of wall or floor coverings). Landlord's consent shall also not be required for the installation or removal of any modular furnishings or alterations incidental to the installation or removal thereof. However, as to the foregoing, Tenant shall still provide Landlord with prior notice as set forth below of the Work to be performed. Landlord may impose reasonable requirements as a condition of such consent including without limitation the submission of plans and specifications for Landlord's prior written approval, obtaining necessary permits, posting bonds, obtaining insurance, prior approval of contractors, subcontractors and suppliers, prior receipt of copies of all contracts and subcontracts, contractor and subcontractor lien waivers, affidavits listing all contractors, subcontractors and suppliers, use of union labor (if Landlord uses union labor), affidavits from engineers acceptable to Landlord stating that the Work will not adversely affect the Systems and Equipment or the structure of the Property, and requirements as to the manner and times in which such Work shall be done. All Work shall be performed in a good and workmanlike manner and all materials used shall be of a quality comparable to or better than those in the Premises and Property and shall be in accordance with plans and specifications approved by Landlord, and Landlord may require that all such Work be performed under Landlord's supervision. In all cases, Tenant shall pay Landlord a reasonable fee to cover Landlord's overhead in reviewing Tenant's plans and specifications and performing any supervision of the Work. If Landlord consents or supervises, the same shall not be deemed a warranty as to the adequacy of the design, workmanship or quality of materials, and Landlord hereby expressly disclaims any responsibility or liability for the same. Landlord shall under no circumstances have any obligation to repair, maintain or replace any portion of the Work.

Tenant shall keep the Property and Premises free from any mechanic's, materialman's or similar liens or other such encumbrances in connection with any Work on or respecting the

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Premises not performed by or at the request of Landlord, and shall indemnify and hold Landlord harmless from and against any claims, liabilities, judgments, or costs (including attorneys' fees) arising out of the same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any Work on the Premises (or such additional time as may be necessary under applicable Laws), to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within thirty (30) days after written notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to the Property or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Property or Premises arising in connection with any Work on or respecting the Premises not performed by or at the request of Landlord shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Property and Premises.

ARTICLE 9

REPAIRS

Except for customary cleaning and trash removal provided by Landlord under Article 7, and damage covered under Article 10, Tenant shall keep the Premises in good and sanitary condition, working order and repair (including without limitation, carpet, wall-covering, doors, plumbing and other fixtures, equipment, alterations and improvements within and solely serving the Premises
[other than Systems and Equipment] whether installed by Landlord or Tenant). In the event that any repairs, maintenance or replacements are required, Tenant shall promptly arrange for the same either through Landlord for such reasonable charges as Landlord may from time to time establish, or such contractors as Landlord generally uses at the Property or such other contractors as Landlord shall first approve in writing, and in a first class, workmanlike manner approved by Landlord in advance in writing. If Tenant does not promptly make such arrangements, Landlord may, but need not, make such repairs, maintenance and replacements, and the costs paid or incurred by Landlord therefor shall be reimbursed by Tenant promptly after request by Landlord. Tenant shall indemnify Landlord and pay for any repairs, maintenance and replacements to areas of the Property outside the Premises, caused, in whole or in part, as a result of moving any furniture, fixtures, or other property to or from the Premises, or by Tenant or its employees, agents, contractors, or visitors (notwithstanding anything to the contrary contained in this Lease). Except as provided in the preceding sentence, or for damage covered under Article 10, Landlord shall keep the common areas of the Property in good and sanitary condition, working order and repair (the cost of which shall be included in Operating Expenses, as described in Article 25, except as limited therein).

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ARTICLE 10

CASUALTY DAMAGE

If the Premises or any common areas of the Property providing access thereto shall be damaged by fire or other casualty, Landlord shall use available insurance proceeds to restore the same. Such restoration shall be to substantially the condition prior to the casualty, except for modifications required by zoning and building codes and other Laws or by any Holder (as defined in Article 25), any other modifications to the common areas deemed desirable by Landlord (provided access to the Premises is not materially impaired), and except that Landlord shall not be required to repair or replace any of Tenant's furniture, furnishings, fixtures or equipment, or any alterations or improvements in excess of any work performed or paid for by Landlord under the initial Work Agreement attached hereto as Exhibit B or under any separate agreement signed by the parties in connection herewith. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof. However, Landlord shall allow Tenant a proportionate abatement of Rent during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease and not occupied by Tenant as a result thereof (unless Tenant or its employees or agents caused the damage and then only to the extent such Rent abatement is not covered by Landlord's insurance). Notwithstanding the foregoing to the contrary, Landlord may elect to terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of damage (such termination notice to include a termination date providing at least ninety (90) days for Tenant to vacate the Premises), if the Property shall be materially damaged by Tenant or its employees or agents, or if the Property shall be damaged by fire or other casualty or cause such that: (a) repairs to the Premises and access thereto cannot reasonably be completed within 180 days after the casualty without the payment of overtime or other premiums, (b) more than 40% of the Premises is affected by the damage, and fewer than 15 months remain in the Term, as it nay have been extended, or any material damage occurs to the Premises during the last 12 months of the Term, as it may have been extended, (c) any Holder (as defined in Article 25) shall require that the insurance proceeds or any portion thereof be used to retire the Mortgage debt (or shall terminate the ground lease, as the case may be), or (d) the cost of the repairs, alterations, restoration or improvement work would exceed 25% of the replacement value of the Building. Tenant agrees that Landlord's obligation to restore, and the abatement of Rent provided herein, shall be Tenant's sole recourse in the event of such damage, although if Landlord has not, within sixty (60) days after the date of damage, given notice to Tenant of its intent to perform or not perform repairs, Tenant shall have the right to terminate the Lease by notice to Landlord. The abatement of Rent under this provision shall be based upon the ratio of the portion of the Premises damaged or otherwise rendered untenantable to the total rentable square footage of the Premises at the time of such casualty. Tenant acknowledges that this Article represents the entire agreement between the parties respecting damage to the Premises or Property.

ARTICLE 11

INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS

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Tenant shall maintain during the Term Commercial General Liability insurance, with limits of not less than $2,000,000 per occurrence for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof). Such insurance shall be primary and any insurance carried by Landlord or any other insured shall be excess and noncontributory. Tenant shall also maintain during the Term workers' compensation insurance as required by statute, employer's liability insurance in an amount of not less than $500,000 per occurrence, and primary, noncontributory, "all-risk" property damage insurance covering Tenant's personal property, business records, fixtures and equipment, for damage or other loss caused by fire or other casualty or cause including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, explosion, business interruption, and other insurable risks in amounts not less than the full insurable replacement value of such property and full insurable value of such other interests of Tenant (subject to reasonable deductible amounts). Landlord shall, as part of Operating Expenses, maintain during the Term Commercial General Liability insurance, with limits of not less than $2,000,000 per occurrence for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof). Landlord shall also, as part of Operating Expanses, maintain during the Term workers' compensation insurance as required by statute, and primary, non-contributory, extended coverage or "all-risk" property damage insurance, in an amount equal to at least ninety percent (90%) of the full insurable replacement value of the Property (exclusive of the costs of excavation, foundations and footings, and such risks required to be covered by Tenant's insurance, and subject to reasonable deductible amounts), or such other amount necessary to prevent Landlord from being a co-insured, and such other coverage as Landlord shall deem appropriate or that may be required by any Holder (as defined in Article 25).

Tenant shall provide Landlord with certificates, evidencing such coverage (and, with respect to liability coverage, showing Landlord and such other parties that Landlord shall designate from time to time as additional insureds) prior to the Commencement Date, which shall state that such insurance coverage may not be changed or canceled without at least twenty (20) days prior written notice to Landlord, and shall provide renewal certificates to Landlord at least twenty (20) days prior to expiration of such policies. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. Any insurance policies hereunder may be "blanket polices," provided that payments made in connection with other properties covered by such blanket policies shall not diminish the insurance amounts required hereunder. All insurance required hereunder shall be provided by responsible insurers and Tenant's insurer shall have a rating of at least A- and IX in the then current edition of Best's Key Rating Insurance guide and shall otherwise be reasonably acceptable to Landlord. By this Article, Landlord and Tenant intend that their respective property loss risks shall be borne by responsible insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. The parties each hereby waive all rights and claims against such other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right of the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor.

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ARTICLE 12

CONDEMNATION

If the whole or any material part of the Premises or Property shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the reconstruction or remodeling of any material part of the Premises or such portion of the Property as would render the Premises no longer reasonably usable by Tenant, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease upon ninety (90) days notice, provided such notice is given no later than 180 days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. Tenant shall have reciprocal termination rights if the whole or any material part of the Premises is permanently taken, or if access to the Premises is (other than on a temporary basis where alternative access to the Premises is still available to Tenant)materially impaired. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Term, and for moving expenses (so long as such claim does not diminish the award available to Landlord or any Holder, and such claim is payable separately to Tenant). All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated.

ARTICLE 13

RETURN OF POSSESSION

At the expiration or earlier termination of this Lease or Tenant's right of possession, Tenant shall surrender possession of the Premises in the condition required under Article 9, ordinary wear and tear and casualty damage (provided that, with respect to any casualty damage, Tenant provides Landlord with any insurance proceeds received by Tenant for such casualty not attributable to Tenant's furniture, fixtures, and equipment, plus an amount equal to Tenant's deductible under its insurance) excepted, and shall surrender all keys, any key cards, and any parking stickers or cards, to Landlord, and advise Landlord as to the combination of any locks or vaults then remaining in the Premises, and shall remove all trade fixtures, equipment, furnishings and personal property. All improvements, fixtures and other items in or upon the Premises (except trade fixtures, equipment, furnishings and personal property belonging to Tenant), whether installed by Tenant or Landlord, shall be Landlord's property and shall remain upon the Premises, all without compensation, allowance or credit to Tenant. However, if prior to such termination or within ten (10) days thereafter Landlord so directs by notice, Tenant shall promptly remove such of the foregoing items as are designated in such notice and restore the Premises to the condition prior to the installation of such items; provided, Landlord shall not require removal of customary office improvements installed pursuant to any separate agreement signed by both parties in connection with entering this Lease, or installed by Tenant with Landlord's written approval (except as expressly required by Landlord in

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connection with granting such approval). However, under no circumstances shall Landlord require Tenant to remove improvements installed in conjunction with the initial occupancy by Tenant of any portion of the Premises, provided that such improvements were installed in conformance, in all material respects, with the approved Plans (as defined in Exhibit B). If Tenant shall fail to perform any repairs or restoration, or fail to remove any items from the Premises required hereunder, Landlord may do so, and Tenant shall pay Landlord the cost thereof upon demand. All property removed from the Premises by Landlord pursuant to any provisions of this Lease or any Law may be handled or stored by Landlord at Tenant's expense, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. All property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after expiration or earlier termination of this Lease or Tenant's right to possession, shall at Landlord's option be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without payment by Landlord. Unless prohibited by applicable Law, Landlord shall have a lien against such property for the costs incurred in removing and storing the same.

ARTICLE 14

HOLDING OVER

Unless Landlord expressly agrees otherwise in writing, Tenant shall pay Landlord 150% of the amount of Base Rent then applicable (or the highest amount permitted by Law, whichever shall be less), plus Tenant's Prorata Share of Taxes and Operating Expenses prorated on per diem basis for each day Tenant shall retain possession of the Premises or any part thereof after expiration or earlier termination of this Lease. If such holdover, without consent, continues for more than fifteen (15) days, then Tenant shall also be obligated for the payment of (a) amounts payable by Landlord to third parties on account of such holdover by Tenant, and (b) direct damages sustained by Landlord on account of such holdover by Tenant. The foregoing provisions shall not serve as permission for Tenant to holdover, nor serve to extend the Term (although Tenant shall remain bound to comply with all provisions of this Lease until Tenant vacates the Premises, and shall be subject to the provisions of Article 13). Notwithstanding the foregoing to the contrary, at any time before or after expiration or earlier termination of the Lease, Landlord may serve notice advising Tenant of the amount of Rent and other terms required, should Tenant desire to enter a month-to-month tenancy (and if Tenant shall hold over more than one full calendar month after such notice, Tenant shall thereafter be deemed a month-to-month tenant, on the terms and provisions of this Lease then in effect, as modified by Landlord's notice, and except that Tenant shall not be entitled to any renewal or expansion rights contained in this Lease or any amendments hereto).

ARTICLE 15

NO WAIVER

No provision of this Lease will be deemed waived by either party unless expressly waived in writing signed by the waiving party. No waiver shall be implied by delay or any other act or omission of either party. No waiver by either party of any provision of this Lease shall be deemed a waiver of such provision with respect to any subsequent matter relating to

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such provision, and Landlord's consent or approval respecting any action by Tenant shall not constitute a waiver of the requirement for obtaining Landlord's consent or approval respecting any subsequent action. Acceptance of Rent by Landlord shall not constitute a waiver of any breach by Tenant of any item or provision of this Lease. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. The acceptance of Rent or of the performance of any other term or provision from any Person other than Tenant, including any Transferee, shall not constitute a waiver of Landlord's right to approve any Transfer.

ARTICLE 16

ATTORNEYS' FEES AND JURY TRIAL

In the event of any litigation between the parties, the prevailing party shall be entitled to obtain, as part of the judgment, all reasonable attorneys' fees, costs and expenses incurred in connection with such litigation, except as may be limited by applicable Law. In the interest of obtaining a speedier and less costly hearing of any dispute, the parties hereby each irrevocably waive the right to trial by jury.

ARTICLE 17

PERSONAL PROPERTY TAXES, RENT TAXES AND OTHER TAXES

Tenant shall pay prior to delinquency all taxes, charges or other governmental impositions assessed against or levied upon Tenant's fixtures, furnishings, equipment and personal property located in the Premises. Tenant shall pay any rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the Rent or services herein. To the extent that any Work in the Premises (beyond the initial improvements installed in conjunction with Tenant's occupancy) have a value materially greater than the tenant improvements installed by the average tenant in the Building, and if the taxing authorities separately assess such additional improvements, Tenant shall reimburse Landlord for the tax associated with such additional improvements.

ARTICLE 18

REASONABLE APPROVALS

Whenever Landlord's approval or consent is expressly required under this Lease (including Article 21) or any other agreement between the parties, Landlord shall not unreasonably withhold or delay such approval or consent (reasonableness shall be a condition to Landlord's enforcement of such consent or approval requirement, and not a covenant), except for matters affecting the structure, safety or security of the Property, or the appearance of the Property from any common or public areas.

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ARTICLE 19

SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION

Subject to the provisions of a subordination, non-disturbance and attornment agreement in the form of Exhibit C attached hereto, to be entered into between Tenant and the Holder, this Lease is subject and subordinate to all Mortgages (as defined in Article 25) now or hereafter placed upon the Property, and all other encumbrances and matters of public record applicable to the Property. If any foreclosure proceedings are initiated by any Holder or a deed in lieu is granted (or if any ground lease is terminated), Tenant agrees, upon written request of any such Holder or any purchaser at foreclosure sale, to attorn and pay Rent to such party and to execute and deliver any instruments necessary or appropriate to evidence or effectuate such attornment (provided such Holder or purchaser shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant does not default and fail to cure within the time permitted hereunder). However, in the event of attornment, no Holder shall be: (i) liable for any act or omission of Landlord, or subject to any offsets or defenses which Tenant might have against Landlord (prior to such Holder becoming Landlord under such attornment), (ii) liable for any security deposit or bound by any prepaid Rent not actually received by such Holder, or
(iii) bound by any future modification of this Lease not consented to by such Holder under circumstances in which Landlord is required to obtain the consent of the Holder, but such consent has not been provided (with Tenant to be provided with notice of any such Holder refusal to grant consent when such consent is required). Any Holder (as defined in Article 25) may elect to make this Lease prior to the lien of its Mortgage, by written notice to Tenant, and if the Holder of any prior Mortgage shall require, this Lease shall be prior to any subordinate Mortgage. Tenant agrees to give any Holder by certified mail, return receipt requested, a copy of any notice of default served by Tenant upon Landlord, provided that prior to such notice Tenant has been notified in writing
(by way of service on Tenant of a copy of an assignment of leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the times permitted Landlord for cure under this Lease, any such Holder whose address has been provided to Tenant shall have an additional period of thirty (30) days in which to cure (or such additional time as may be required due to causes beyond such Holder's control, including time to obtain possession of the Property by power of sale or judicial action) subject to Tenant's right to exercise its remedies under Article 7, which Tenant may utilize whether or not Holder has obtained possession or control of the Property. Tenant shall execute such documentation as Landlord may reasonably request from time to time, in order to confirm the matters set forth in this Article in recordable form.

ARTICLE 20

ESTOPPEL CERTIFICATE

Tenant shall from time to time, within twenty (20) days after written request from Landlord, execute, acknowledge and deliver a statement (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect (or if this Lease is claimed not to be in force and effect, specifying the ground therefor) and any dates to which the Rent has been paid in advance, and the amount of any Security Deposit, (ii) acknowledging

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that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iii) certifying such other matters as Landlord may reasonably request, or as may be requested by Landlord's current or prospective Holders, insurance carriers, auditors, and prospective purchasers. Any such statement may be relied upon by any such parties. If Tenant shall fail to execute and return such statement within the time required herein, Tenant shall be deemed to have agreed with the matters set forth therein.

ARTICLE 21

ASSIGNMENT AND SUBLETTING

(A) TRANSFERS. Except as otherwise specifically provided herein, Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, as further described below: (i) assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, by operation of law or otherwise, (ii) sublet the Premises or any part thereof, or (iii) permit the use of the Premises by any Persons (as defined in Article 25) other than Tenant, its employees, its agents and invitees (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any Person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice shall include: (a) the proposed effective date (which shall not be less than 30 nor more than 180 days after Tenant's notice), (b) the portion of the Premises to be Transferred (herein called the "Subject Space"), (c) the terms of the proposed Transfer and the consideration therefor, the name and address of the proposed Transferee, and a copy of all documentation pertaining to the proposed Transfer, and (d) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, and any other reasonably required information to enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space, and such other information as Landlord may reasonable require. Any Transfer made without complying with this Article shall, be null, void and of no effect. Whether or not Landlord shall grant consent, Tenant shall pay $300.00 towards Landlord's review and processing expenses, as well as any reasonable legal fees incurred by Landlord, within thirty (30) days after written request by Landlord.

(B) APPROVAL. Landlord will not unreasonably withhold its consent (as provided in Article 18) to any proposed Transfer of the Subject Space to the Transferee on the terms specified in Tenant's notice. The parties hereby agree that it shall be reasonable under this Lease and under any applicable Law for Landlord to withhold consent to any proposed Transfer where one or more of the following applies (without limitation as to other reasonable grounds for withholding consent): (i) the Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Property, or would be a significantly less prestigious occupant of the Property than Tenant, (ii) the Transferee intends to use the Subject Space for purposes which are not permitted under this Lease, (iii) the Subject Space is not regular in shape with appropriate means of ingress and egress suitable for use in accordance with any applicable Law, (iv) the Transferee is either a government (or agency or instrumentality thereof) or an occupant of the Property, (v) the proposed Transferee

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does not have a reasonable financial condition in relation to the obligations to be assumed in connection with the Transfer, or (vi) Tenant has committed and failed to cure a Default at the time Tenant requests consent to the proposed Transfer.

(C) TRANSFER PREMIUM. If Landlord consents to a Transfer, and as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay Landlord fifty percent (50%) of any Transfer Premium derived by Tenant from such Transfer. "Transfer Premium" shall mean all rent, additional rent or other consideration paid by such Transferee in excess of the Rent payable by Tenant under this Lease (on a monthly basis during the Term, and on a per rentable square foot basis, if less than all of the Premises is transferred), after deducting the reasonable expenses incurred by Tenant for any changes, alterations and improvements to the Premises, any other economic concessions or services provided to the Transferee, and any customary brokerage commissions paid in connection with the Transfer. If part of the consideration for such Transfer shall be payable other than in cash, Landlord's share of such non-cash consideration shall be in such form as is reasonably satisfactory to Landlord. The percentage of the Transfer Premium due Landlord hereunder shall be paid within ten (10) days after Tenant receives any Transfer Premium from the Transferee.

(D) RECAPTURE. Notwithstanding anything to the contrary contained in this Article, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of Tenant's notice of any proposed Transfer, to indicate its intention to recapture the subject Space. Upon receipt of Landlord's notice indicating its intention to recapture the portion of the Premises subject to the proposed Transfer, Tenant may, upon delivery of notice to Landlord within five (5) business days thereafter, rescind its intention to proceed with the proposed Transfer. If Tenant does not so rescind, Landlord's recapture notice shall be deemed to cancel and terminate this Lease with respect to the Subject Space as of the date stated in Tenant's notice as the effective date of the proposed Transfer (or at Landlord's option, shall cause the Transfer to be made to Landlord or its agent, in which case the parties shall execute the Transfer documentation promptly thereafter). If this Lease shall be cancelled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same.

(E) TERMS OF CONSENT. If Landlord consents to a Transfer: (a) the terms and conditions of this Lease, including among other things, Tenant's liability for the Subject Space, shall in no way be deemed to have been waived or modified, (b) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (c) no Transferee shall succeed to any rights provided in this Lease or any amendment hereto to extend the Term of this Lease, expand the Premises, or lease additional space, any such rights being deemed personal to Tenant, (d) Tenant shall deliver to Landlord promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, and (e) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer. Landlord or its authorized representatives shall have the right at all reasonable

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times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall within thirty
(30) days after demand pay the deficiency, and if understated by more than 2%, Tenant shall pay Landlord's costs of such audit. Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease, Landlord shall have the right to:
(i) treat such sublease as canceled and repossess the Subject Space by any lawful means, or (ii) require that such subtenant attorn to and recognize Landlord as its landlord under any such sublease. If Tenant shall Default and fail to cure within the time permitted for cure under Article 23(A), Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such Default is cured.

(F) CERTAIN TRANSFERS. For purposes of this Lease, the term "Transfer" shall also include (a) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of a majority of the partners, or a transfer of a majority of partnership interests, within a twelve month period, or the dissolution of the partnership, and (b) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), the dissolution, merger, consolidation or other reorganization of Tenant, or within a twelve month period: (i) the sale or other transfer of more than an aggregate of 50% of the voting shares of Tenant (other than to immediate family members by reason of gift or death) or (ii) the sale, mortgage, hypothecation or pledge of more than an aggregate of 50% of Tenant's net assets. Notwithstanding any of the foregoing to the contrary, no Transfer shall be deemed to exist based upon: (i) Tenant's participation in a private placement or public offering of its securities (even if involving in excess of fifty percent (50%) of the voting shares of Tenant); or (ii) Tenant's providing an overall lien on its assets in conjunction with corporate financing, provided that same have no reasonable business purpose other than to circumvent Landlord's rights pursuant to this Article 21.

(G) RELATED ENTITIES. Notwithstanding anything to the contrary in this Article 21, Tenant may, upon not less than five (5) days prior written notice to Landlord, permit any corporations or other business entities which are controlled by, or under common control with Tenant, or a parent, subsidiary division or corporation controlled by or controlling Tenant, a successor corporation related to Tenant by merger or consolidation, or the purchaser of substantially all of Tenant's assets or stock (a "Related Entity") to sublet all or part of the Premises or receive an assignment of the Lease, provided that (i) Tenant shall not be in default under this Lease, (ii) prior to such subletting or assignment, as the case may be, Tenant furnishes Landlord with the name of any such Related Entity, together with a certification of Tenant, and such other proof as Landlord may reasonably request, that such subtenant or assignee, as the case may be, is a Related Entity of Tenant and continues to remain such during the Term. Landlord shall have the right, at any reasonable time, to examine such books and records of Tenant as may be necessary to establish that such sublessee or assignee, as the case may be, remains a Related Entity of Tenant. Such subletting or assignment shall not relieve Tenant of any of Tenant's liability or obligations under this Lease. For the purposes hereof, "control" shall mean the power to directly or indirectly direct or cause the direction of the management or policies of such corporation or entity.

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ARTICLE 22

RIGHTS RESERVED BY LANDLORD

Except to the extent expressly limited herein, Landlord reserves full rights to control the Property (which rights may be exercised without subjecting Landlord to claims for constructive eviction, abatement of Rent, damages or other claims of any kind), including more particularly, but without limitation, the following rights:

(A) To change the name or street address of the Property; install and maintain signs on the exterior and interior of the Property; retain at all times, and use in appropriate instances (subject to the limitations set forth in this Lease, keys to all doors within and into the Premises; grant to any Person the right to conduct any business or render any service at the Property, whether or not it is the same or similar to the use permitted Tenant by this Lease; and have access for Landlord and other tenants of the Property to any mail chutes located on the Premises according to the rules of the United States Postal Service.

(B) To enter the Premises at reasonable hours for reasonable purposes, including inspection and supplying cleaning service or other services to be provided Tenant hereunder, to show the Premises to current and prospective mortgage lenders, ground lessors, insurers, and prospective purchasers, tenants and brokers, at reasonable hours, and if Tenant shall abandon the Premises at any time, or shall vacate the same during the last 3 months of the Term, to decorate, remodel, repair, or alter the Premises.

(C) To limit or prevent access to the Property, shut down elevator service, activate elevator emergency controls, or otherwise take such action or preventative measures deemed necessary by Landlord for the safety of tenants or other occupants of the Property or the protection of the Property and other property located thereon or therein, in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other dangerous condition, or threat thereof.

(D) To decorate and to make alterations, additions and improvements, structural or otherwise, in or to the Property or any part thereof, and any adjacent building, structure, parking facility, land, street or alley (including without limitation changes and reductions in corridors, lobbies, parking facilities and other public areas and the installation of kiosks, planters, sculptures, displays, escalators, mezzanines, and other structures, facilities, amenities and features therein, and changes for the purpose of connection with or entrance into or use of the Property in conjunction with any adjoining or adjacent building or buildings, now existing or hereafter constructed). In connection with such matters, or with any other repairs, maintenance, improvements, or alterations, in or about the Property, Landlord may erect scaffolding and other structures reasonably required, and during such operations may enter upon the Premises and take into and upon or through the Premises, all materials required to make such repairs, maintenance, alterations or improvements, and may close public entry ways, other public areas, restrooms, stairways or corridors so long as such work does not unreasonably materially and permanently interfere with Tenant's access to or use of the Premises.

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In connection with entering the Premises to exercise any of the foregoing rights, Landlord shall: (a) provide reasonable advance written or oral notice to Tenant's on-site manager or other appropriate person (except in emergencies, or for routine cleaning or other routine matters), (b) take reasonable steps to minimize any interference with Tenant's business, and (c) not show the Premises to prospective tenants other than during the last nine (9) months of the Term (or otherwise with Tenant's specific consent).

ARTICLE 23

LANDLORD'S REMEDIES

(A) DEFAULT. The occurrence of any one or more of the following events shall constitute a "Default" by Tenant, which is not cured within any applicable time permitted for cure below, shall give rise to Landlord's remedies set forth in Paragraph (B), below: (i) failure by Tenant to make when due any payment of Rent, unless such failure is cured within ten (10) days after notice; (ii) failure by Tenant to observe or perform any of the terms or conditions of this Lease to be observed or performed by Tenant other than the payment of Rent, or as provided below, unless such failure is cured within thirty (30) days after notice, or such shorter period expressly provided elsewhere in this Lease (provided, if the nature of Tenant's failure is such that more time is reasonably required in order to cure, Tenant shall not be in Default if Tenant commences to cure within such period and thereafter reasonably seeks to cure such failure to completion); (iii) failure by Tenant to comply with the Rules, unless such failure is cured within five (5) days after notice (provided, if the nature of Tenant's failure is such that more time is reasonably required in order to cure, Tenant shall not be in Default if Tenant commences to cure within period and thereafter reasonably seeks to cure such failure to completion); (iv) the failure to take possession of the Premises within sixty (60) days after the Commencement Date; (v) (a) making by Tenant or any guarantor of this Lease ("Guarantor") of any general assignment for the benefit of creditors, (b) filing by or against Tenant or any Guarantor of a petition to have Tenant or such Guarantor adjudged a bankrupt or a petition for reorganization or arrangement under any Law relating to bankruptcy (unless, in the case of a petition filed against Tenant or such Guarantor, the same is dismissed within sixty (60) days,
(c) appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located on the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days, (d) attachment, execution or other judicial seizure of substantially all of Tenant's assets located on the Premises or of Tenant's interest in this Lease, (e) Tenant's or any Guarantor's convening of a meeting of its creditors or any class thereof for the purpose of effecting a moratorium upon or composition of its debts, or (f) Tenant's or any Guarantor's insolvency or admission of an inability to pay its debts as they mature; or (vi) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant or any Guarantor in connection with negotiating or entering this Lease or in connection with any Transfer under Article 21. Failure to comply with the same term or condition of this Lease, which failure is either monetary in nature or a material term or condition of this Lease, on four (4) occasions during any twelve (12) month period shall cause any failure to comply with such term or condition during the succeeding twelve month period, at Landlord's option, to constitute an incurable Default, if Landlord has given Tenant notice of each such failure within ten
(10) days after each such

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failure occurs. The notice and cure periods provided herein are in lieu of, and not in addition to, any notice and cure periods provided by Law.

(B) REMEDIES. If a Default occurs and is not cured within any applicable time permitted under Paragraph (A), Landlord shall have the rights and remedies hereinafter set forth, which shall be distinct, separate and cumulative with and in addition to any other right or remedy allowed under any Law or, other provisions of this Lease:

(i) Landlord may terminate this Lease, repossess the Premises by detainer suit, summary proceedings or other lawful means, and recover as damages a lump sum of money equal to: (a) any unpaid Rent as of the termination date including interest at the Default Rate calculated from the date each item of unpaid Rent was first payable hereunder (as defined in Article 25), plus (b) any unpaid Rent which would have accrued after the termination date, less such loss of Rent the Tenant proves could have been reasonably avoided, discounted to present value at an assumed interest rate equal to six percent (6%) per annum. Landlord shall also be entitled to recover all Costs of Reletting (as defined in Paragraph F). For purposes of computing the amount of Rent herein that would have accrued after the time of award, Tenant's Prorata Share of Taxes and Operating Expenses shall be projected, based upon the average rate of increase, if any, in such items from the Commencement Date through the time of award.

(ii) If applicable Law permits, Landlord may terminate Tenant's right of possession and repossess the Premises by detainer suit, summary proceedings or other lawful means, without terminating this Lease (and if such Law permits, and Landlord shall not have expressly terminated the Lease in writing, any termination shall be deemed a termination of Tenant's right of possession only). In such event, Landlord may recover: (a) any unpaid Rent as of the date possession is terminated, including interest at the Default Rate, (b) any unpaid Rent which accrues during the Term from the date possession is terminated through the time of award (or which may have accrued from the time of any earlier award obtained by Landlord through the time of award), including interest at the Default Rate calculated from the date each item of unpaid Rent was first payable hereunder, less any Net Re-Letting Proceeds (as defined in Paragraph F) received by Landlord during such period. Landlord shall also be entitled to recover all Costs of Reletting (as defined in Paragraph F). Landlord may bring suits for such amounts or portions thereof, at any time or times as the same accrue or after the same have accrued, and no suit or recovery of any portion due hereunder shall be deemed a waiver of Landlord's right to collect all amounts to which Landlord is entitled hereunder, nor shall the same serve as any defense to any subsequent suit brought for any amount not theretofore reduced to judgment.

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(C) MITIGATION OF DAMAGES. If Landlord terminates this Lease or Tenant's right to possession, Landlord shall use reasonable efforts to mitigate Landlord's damages, and Tenant shall be entitled to submit proof of such failure to mitigate as a defense to Landlord's claims hereunder. If Landlord has not terminated this Lease or Tenant's right to possession, Landlord shall have no obligation to mitigate, and may permit the Premises to remain vacant or abandoned; in such case, Tenant may seek to mitigate damages by attempting to sublease the Premises or assign this Lease (subject to Article 21).

(D) SPECIFIC PERFORMANCE, COLLECTION OF RENT AND ACCELERATION. Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Paragraph (B), above or any Law or other provision of this Lease), without prior demand or notice except as required by applicable Law: (i) to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof, and
ii) to sue for and collect any unpaid Rent which has accrued. Notwithstanding anything to the contrary contained in this Lease, to the extent not expressly prohibited by applicable Law, in the event of any Default by Tenant not cured within any applicable time for cure hereunder, Landlord may terminate this Lease or Tenant's right to possession in accordance with Paragraphs (B)(i) and (ii) above.

(E) LATE CHARGES AND INTEREST. Tenant shall pay, additional Rent, a service charge of Two Hundred Dollars ($200.00) for bookkeeping and administrative expenses, if Rent is not received within ten (10) days after its due date. In addition, any Rent paid more than five (5) days after due shall accrue interest from the due date at the Default Rate (as defined in Article 25), until payment is received by Landlord. Such service charge and interest payments shall not be deemed consent by Landlord to late payments, nor a waiver of Landlord's right to insist upon timely payments at any time, nor a waiver of any remedies to which Landlord is entitled as a result of the late payment of Rent.

(F) CERTAIN DEFINITIONS. "Net Re-Letting Proceeds" shall mean the total amount of rent and other consideration paid by any Replacement Tenants, less all Costs of Re-Letting, during a given period of time. "Costs of Re-Letting" shall include without limitation, all reasonable costs and expenses incurred by Landlord for any repairs, maintenance, changes, alterations and improvements to the Premises, brokerage commissions, advertising costs, reasonable attorneys' fees, any customary free rent periods or credits, tenant improvement allowances, take-over lease obligations and other customary, necessary or appropriate economic incentives required to enter leases with Replacement Tenants, and costs of collecting rent from Replacement Tenants. "Replacement Tenants" shall mean any Persons (as defined in Article 25) to whom Landlord relets the Premises or any portion thereof pursuant to this Article. The amount of `Net Re-Letting Proceeds' shall be increased by any amounts that Tenant reasonably demonstrates would have been received by Landlord with regard to the Premises, but which Landlord has not received due to its negligent actions.

(G) OTHER MATTERS. No re-entry or repossession, repairs, changes, alterations and additions, reletting, acceptance of keys from Tenant, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or accept a surrender of the Premises, nor shall the same operate to release

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Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord or its agent to Tenant. To the fullest extent permitted by Law, all rent and other consideration paid by any Replacement Tenants shall be applied: first, to the Costs of Re-Letting, second, to the payment of any Rent theretofore accrued, and the residue, if any, shall be held by Landlord and applied to the payment of other obligations of Tenant to Landlord as the same become due (with any remaining residue, after full discharge of Tenant's obligations, to be retained by Landlord). Rent shall be paid without any prior demand or notice therefor (except as expressly provided herein) and without any deduction, set-off or counterclaim, or relief from any valuation or appraisement laws. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant. Landlord shall be under no obligation to observe or perform any provision of this Lease on its part to be observed or performed which accrues after the date of any Default by Tenant hereunder not cured within the times permitted hereunder. The times set forth herein for the curing of Defaults by Tenant are of the essence of this Lease. Tenant hereby irrevocably waives any right otherwise available under any Law to redeem or reinstate this Lease.

ARTICLE 24

LANDLORD'S RIGHT TO CURE

If Landlord shall fail to perform any term or provision under this Lease required to be performed by Landlord, Landlord shall not be deemed to be in default hereunder nor subject to any claims for damages of any kind, unless such failure shall have continued for a period of thirty (30) days after written notice thereof by Tenant; provided, if the nature of Landlord's failure is such that more than thirty (30) days are reasonably required in order to cure, Landlord shall not be in default if Landlord commences to cure such failure within such thirty (30) day period, and thereafter diligently and continuously pursues such cure to completion. The aforementioned periods of time permitted for Landlord to cure shall be extended for any period of time during which Landlord is delayed in, or prevented from, curing due to fire or other casualty, strikes, lock-outs or other labor troubles, shortages of equipment or materials, governmental requirements, power shortages or outages, acts or omissions by Tenant or other Persons not under the control of Landlord, and other causes beyond Landlord's reasonable control. If Landlord shall fail to cure within the times permitted for cure herein, Landlord shall be subject to such remedies as may be available to Tenant (subject to the other provisions of this Lease); provided, in recognition that Landlord must receive timely payments of Rent and operate the Property, Tenant shall have no right to withhold, set-off, or abate Rent based solely upon Landlord's failure to cure.

ARTICLE 25

CAPTIONS, DEFINITIONS AND SEVERABILITY

The captions of the Articles and Paragraphs of this Lease are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation. If any term or provision of this Lease shall be found invalid, void, illegal, or unenforceable with respect to any particular Person by a court of competent jurisdiction, it

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shall not affect, impair or invalidate any other terms or provisions hereof, or its enforceability with respect to any other Person, the parties hereto agreeing that they would have entered into the remaining portion of this Lease notwithstanding the omission of the portion or portions adjudged invalid, void, illegal, or unenforceable with respect to such Person.

(A) "Building" shall mean the structure identified in Article I of this Lease.

(B) Intentionally omitted.

(C) "Default Rate" shall mean twelve percent (12%) per annum, or the highest rate permitted by applicable Law, whichever shall be less.

(D) "Holder" shall mean the holder of any Mortgage at the time in question, and where such Mortgage is a ground lease, such term shall refer to the ground lessor.

(E) "Holidays" shall mean all federally observed holidays, including New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and such other holidays as are from time to time determined by Landlord to be generally applicable to the Property, consistent with other similarly situated office buildings in downtown Minneapolis.

(F) "Landlord" and "Tenant" shall be applicable to one or more Persons as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine; and if there be more than one, the obligations thereof shall be joint and several. For purposes any provisions indemnifying or limiting the liability of Landlord, the term "Landlord" shall include Landlord's present and future partners, beneficiaries, trustees, officers, directors, employees, shareholders, principals, agents, affiliates, successors and assigns.

(G) "Law" shall mean all federal, state, county and local governmental and municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders and other such requirements, applicable equitable remedies and decisions by courts in cases where such decisions are considered binding precedents in the state in which the Property is located, and decisions of federal courts applying the Laws of such State.

(H) "Mortgage" shall mean all mortgages, deeds of trust, ground leases and other such encumbrances now or hereafter placed upon the Property or Building, or any part thereof, and all renewals, modifications, consolidations, replacements or extensions thereof, and all indebtedness now or hereafter secured thereby and all interest thereon.

(I) "Operating Expenses" shall mean all expenses, costs and amounts (other than Taxes) of every kind and nature which Landlord shall pay during any calendar year any portion of which occurs during the Term, because of or in connection with the ownership, management, repair, maintenance, restoration and operation of the Property, including without limitation, any amounts paid for:
(a) utilities for the Property, including but not limited to electricity, power, gas, steam, oil or other fuel, water, sewer, lighting, heating, air conditioning and ventilating, (b) permits, licenses and certificates necessary to operate, manage and lease

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the Property, (c) insurance applicable to the Property, not limited to the amount of coverage Landlord is required to provide under this Lease, (d) supplies, tools, equipment and materials used in the operation, repair and maintenance of the Property, (e) accounting, legal, inspection, consulting, concierge and other services, (f) any equipment rental (or installment equipment purchase or equipment financing agreements), or management agreements (including the cost of any management fee actually paid thereunder and the fair rental value of any office space provided thereunder, up to customary and reasonable amounts), (g) wages, salaries and other compensation and benefits (including the fair value of any parking privileges provided) for all persons engaged in the operation, maintenance or security of the Property, and employer's Social Security taxes, unemployment taxes or insurance, and any other taxes which may be levied on such wages, salaries, compensation and benefits, (h) payments under any easement, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs in any planned development, and
(i) operation, repair, and maintenance of all Systems and Equipment and components thereof (including replacement of components), janitorial service, alarm and security service, window cleaning, trash removal, elevator maintenance, cleaning of walks, parking facilities and building walls, removal of ice and snow, replacement of wall and floor coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other common or public areas or facilities, maintenance and replacement of shrubs, trees, grass, sod and other landscaped items, irrigation systems, drainage facilities, fences, curbs, and walkways, re-paving and re-striping parking facilities, and roof repairs. If the Property is not fully occupied during all or a portion of any calendar year, Landlord may, in accordance with sound accounting and management practices, determine the amount of variable Operating Expenses (i.e., those items which vary according to occupancy levels) that would have been paid had the Property been fully occupied, and the amount so determined shall be deemed to have been the amount of variable Operating Expenses for such year. Notwithstanding the foregoing, Operating Expenses shall not, however, include:

(i) depreciation, interest and amortization on Mortgages, and other debt costs or ground lease payments, if any; legal fees in connection with leasing, tenant disputes or enforcement of leases; real estate brokers' leasing commissions; improvements or alterations to tenant spaces; the cost of providing any service directly to and paid directly by, any tenant; any costs expressly excluded from Operating Expenses elsewhere in this Lease; costs of any items to the extent Landlord receives reimbursement from insurance proceeds or from a third party (such proceeds to be deducted from Operating Expenses in the year in which received);

(ii) capital expenditures, except those: (a) made primarily to reduce Operating Expenses, or to comply with any Laws or other governmental requirements, or (b) for replacements (as opposed to additions or new improvements) of non-structural items located in the common areas of the Property required to keep such areas in good condition; provided, all such permitted capital expenditures (together with reasonable financing charges) shall be amortized for purposes of this Lease over the shorter of: (i) their useful lives, or (ii) the period during which the reasonably estimated savings in Operating Expenses equals the expenditures, and

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(iii) the cost of marketing tenant spaces, costs incurred by Landlord in preparing rentable space for occupancy, payments of principal, penalties, fees or other charges (as well as interest) on any mortgages or other encumbrances on the Property or rent under any ground lease, wages, salaries or other compensation paid to any executive employee of Landlord or the property manager ranking above the on-site property manager, any cost or expense representing an amount paid for products or services to a person or entity related to or affiliated with Landlord which is in excess of the fair market value of such services and products, all costs resulting from the delivery to other tenants of the Building of services substantially greater in quantity or higher in quality than those delivered to Tenant, any bad debt expense or bad debt reserve or costs of correcting defects in the initial design or construction of the Building. The management fee payable shall not exceed 3% of the Building's gross rentals. Any refunds or rebates on account of insurance paid during the Term, for which Tenant paid Team's Prorata Share for same, shall be credited to Tenant's obligation for the payment of Operating Expenses, notwithstanding the time limits set forth in Article 3(F).

(J) "Person" shall mean an individual, trust, partnership, joint venture, association, corporation, and any other entity.

(K) "Property" shall mean the Building, and any common or public areas or facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways, landscaped areas, skywalks, parking garages and lots, and any and all other structures or facilities operated or maintained in connection with or for the benefit of the Building, and all parcels or tracts of land on which all or any portion of the Building or any of the other foregoing items are located, and any fixtures, machinery, equipment, apparatus, Systems and Equipment, furniture and other personal property located thereon or therein and used in connection therewith, whether title is held by Landlord or its affiliates. Possession of areas necessary for utilities, services, safety and operation of the Property, including the Systems and Equipment (as defined in Article 25), fire stairways, perimeter walls, space between the finished ceiling of the Premises and the slab of the floor or roof of the Property there above, and the use thereof together with the right to install, maintain, operate, repair and replace the Systems and Equipment, including any of the same in, through, under or above the Premises in locations that will not materially interfere with Tenant's use of the Premises, are hereby excepted and reserved by Landlord, and not demised to Tenant. If the Building shall be part of a complex, development or group of buildings or structures collectively owned or managed by Landlord or its affiliates or collectively managed by Landlord's managing agent, the Property shall, at Landlord's option also be deemed to include such other of those buildings or structures as Landlord shall from time to time designate, and shall initially include such buildings and structures (and related facilities and parcels on which the same are located) as Landlord shall have incorporated by reference to the total square footage of the Property in Article 1. However, no inclusion of other such buildings and structures (and related facilities and parcels on which the same are located) within the definition of Property (and the allocation of the costs of such other properties hereunder) shall increase the amount payable by Tenant hereunder for Taxes or Operating Expenses.

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(L) "Rent" shall have the meaning specified therefor in Article 3(G).

(M) "Systems and Equipment" shall mean any plant, machinery, transformers, duct work, cable, wires, and other equipment, facilities, and systems designed to supply heat, ventilation, air conditioning and humidity or any other services or utilities, or comprising or serving as any component or portion of the electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or fire/life/safety systems or equipment, or any other mechanical, electrical, electronic, computer or other systems or equipment for the Property.

(N) "Taxes" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary (including without limitation, real estate taxes, general and special assessments, transit taxes, water and sewer rents, taxes based upon the receipt of rent including gross receipts or sales taxes applicable to the receipt of rent or service or value added taxes (unless required to be paid by Tenant under Article 17), personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, Systems and Equipment, appurtenances, furniture and other personal property used in connection with the Property which Landlord shall pay during any calendar year, any portion of which occurs during the Term (without regard to any different fiscal year used by such government or municipal authority) because of or in connection with the ownership, leasing and operation of the Property. Notwithstanding the foregoing, there shall be excluded from Taxes all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Property). If the method of taxation of real estate prevailing at the time of execution hereof shall be, or has been altered, so as to cause the whole or any part of the taxes now, hereafter or heretofore levied, assessed or imposed on real estate to be levied, assessed or imposed on Landlord, wholly or partially, as a capital levy or otherwise, or on or measured by the rents received therefrom, then such new or altered taxes attributable to the Property shall be included within the term "Taxes," except that the same shall not include any enhancement of said tax attributable to other income of Landlord. Any expenses incurred by Landlord in attempting to protest, reduce or minimize Taxes shall be included in Taxes in the calendar year such expenses are paid. Tax refunds shall be deducted from Taxes in the year they are received by Landlord, but if such refund shall relate to taxes paid in a prior year of the Term, and the Lease shall have expired, Landlord shall mail Tenant's Prorata Share of such net refund (after deducting expenses and reasonable attorneys' fees), to Tenant's last known address. If Taxes to which such refund applied for any period during the Term or any extension thereof, shall be increased after payment thereof by Landlord, for any reason including without limitation or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Prorata Share of such increased Taxes. Tenant shall pay increased Taxes whether Taxes are increased as a result of increases in the assessment or valuation of the Property (whether based on a sale, change in ownership or refinancing of the Property or otherwise), increases in the tax rates, reduction or elimination of any rollbacks or other deductions available under currant law, scheduled reductions of any tax abatement, as a result of the elimination, invalidity or withdrawal of any tax abatement, or for any other cause whatsoever. Notwithstanding the foregoing, if any Taxes shall be paid based on assessments or bills by a governmental or municipal authority using a fiscal year other than a calendar year, Landlord may elect to

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average the assessments or bills for the subject calendar year, based on the number of months of such calendar year included in each such assessment or bill. Tenant's contribution to expenses and reasonable attorneys' fees associated with a contest as to the Taxes shall be equal to Tenant's Prorata Share applied to the total of such expenses and fees.

(O) "Tenant's Prorata Share" of Taxes and Operating Expenses shall be the rentable area of the Premises divided by the rentable area of the Property, excluding any parking facilities. Tenant acknowledges that the "rentable area of the Premises" under this Lease includes the usable area, without deduction for columns or projections, multiplied by a load or conversion factor, to reflect a share of certain areas, which may include lobbies, corridors, mechanical, utility, janitorial, boiler and service rooms and closets, restrooms, and other public, common and service areas. Except as provided expressly to the contrary herein, the "rentable area of the Property" shall include all rentable area of all space leased or available for lease at the Property, which Landlord may reasonably re-determine from time to time, to reflect re-configurations, additions or modifications to the Property. If the Property or any development of which it is a part, shall contain non-office uses, Landlord shall have the right to determine in accordance with sound accounting and management principles, Tenant's Prorata Share of Taxes and Operating Expenses for only the office portion of the Property or of such development, in which event, Tenant's Prorata Share shall be based on the ratio of the rentable area of the Premises to the rentable area of such office portion. Similarly, if the Property shall contain tenants who do not participate in all or certain categories of Taxes or Operating Expenses on a prorata basis, Landlord may exclude the amount of Taxes or Operating Expenses, or such categories of the same, as the case may be, attributable to such tenants, and exclude the rentable area of their premises, in computing Tenant's Prorata Share so long as such adjustments do not increase the amount of Taxes or Operating Expenses otherwise payable by Tenant hereunder had such tenants participated in all or certain categories of Taxes or Operating Expenses on a prorata basis. If the Property shall be part of or shall include a complex, development or group of buildings or structures collectively owned or managed by Landlord or its affiliates or collectively managed by Landlord's managing agent, Landlord may allocate Taxes and Operating Expenses within such complex, development or group, and between such buildings and structures and the parcels on which they are located, in accordance with sound generally acceptable accounting and management principles. In the alternative, Landlord shall have the right to determine, in accordance with sound accounting and management principles, Tenant's Prorata Share of Taxes and Operating Expenses based upon the totals of each of the same for all such buildings and structures, the land constituting parcels on which the same are located, and all related facilities, including common areas and easements, corridors, lobbies, sidewalks, elevators, loading areas, parking facilities and driveways and other appurtenances and public areas, in which event Tenant's Prorata Share shall be based on the ratio of the rentable area of the Premises to the rentable area of all such buildings. To the extent that the rentable square footage of the Premises changes during any calendar year (or other period during which the allocation of Taxes and Operating Expenses to tenants of the Building occurs), adjustments shall be made to Tenant's Prorata Share to properly account for the allocation of Taxes and Operating Expenses based upon the rentable area of the Premises prior to such change and the rentable area of the Premises thereafter.

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ARTICLE 26

CONVEYANCE BY LANDLORD AND LIABILITY

In case Landlord or any successor owner of the Property or the Building shall convey or otherwise dispose of any portion thereof in which the Premises are located, to another Person (and nothing herein shall be construed to restrict or prevent such conveyance or disposition), such other Person shall thereupon be and become landlord hereunder and shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord which first arise after the date of conveyance, including the return of any Security Deposit, and Tenant shall attorn to such other Person, and Landlord or such successor owner shall, from and after the date of conveyance, be free of all liabilities and obligations hereunder not then incurred. The liability of Landlord to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration, or any other matter relating to the Property or the Premises, shall be limited to the interest of Landlord in the Property (and the rental proceeds thereof). Tenant agrees to look solely to Landlord's interest in the Property (and the rental proceeds thereof) for the recovery of any judgment against Landlord, and Landlord shall not be personally liable for any such judgment or deficiency after execution thereon. The limitations of liability contained in this Article shall apply equally and inure to the benefit of Landlord's present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future general or limited partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust) have any liability for the performance of Landlord's obligations under this Lease. Notwithstanding the foregoing to the contrary, Landlord shall have personal liability for insured claims, beyond Landlord's interest in the Property (and rental proceeds thereof), to the extent of Landlord's liability insurance coverage available for such claims.

ARTICLE 27

INDEMNIFICATION

Except to the extent arising from the intentional or negligent acts of Landlord or Landlord's agents or employees, Tenant shall defend, indemnify and hold harmless Landlord from and against any and all claims, demands, liabilities, damages, judgments, orders, decrees, actions, proceedings, fines, penalties, costs and expenses, including without limitation, court costs and reasonable attorneys' fees arising from or relating to any loss of life, damage or injury to person, property or business occurring in or from the Premises, or caused by or in connection with any violation of this Lease or use of the Premises or Property by, or any other act or omission of, Tenant, any other occupant of the Premises, or any of their respective agents, employees, contractors or business invitees. Without limiting the generality of the foregoing, Tenant specifically acknowledges that the indemnity undertaking herein shall apply to claims in connection with or arising out of any "Work" as described in Article 8, the installation, maintenance, use or removal of any "Lines" located in or serving the Premises as described in Article 29, and the transportation, use, storage, maintenance, generation, manufacturing, handling, disposal, release or discharge of any "Hazardous Material" as

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described in Article 30 (whether or not any of such matters shall have been theretofore approved by Landlord), except to the extent that any of the same arises from the intentional or negligent acts of Landlord or Landlord's agents or employees. Notwithstanding any of the foregoing to the contrary, Tenant shall not in any way be required to indemnify or hold Landlord harmless against any damage or injury resulting from any material breach by Landlord of its obligations under this Lease, or resulting from the negligence or willful misconduct of Landlord, or its agents, servants, contractors or employees. Landlord shall defend, indemnify and hold Tenant harmless from and against any and all claims, demands, liabilities, damages, judgments, orders, decrees, actions, proceedings, fines, penalties, costs and expenses, including without limitation, court costs and reasonable attorneys' fees, arising in any way out of the negligence or intentional acts of Landlord, its agents, servants or employees, or from Landlord's violation of laws, ordinances, or governmental orders of any kind or resulting from Landlord's breach of the Lease, which breach is not cured within the applicable time period provided in the Lease.

ARTICLE 28

SAFETY AND SECURITY DEVICES, SERVICES AND PROGRAMS

The parties acknowledge that safety and security devices, services and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts, or ensure safety of persons or property. The risk that any safety or security device, service or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant's property and interests, and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses, as further described in Article 11. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by law. Landlord will permit the installation by Tenant of additional card key readers to provide access to the Premises from the elevator lobbies or common corridors and in the Building fire stairs, which readers may be connected to the Building card key access system. Tenant shall pay the costs of supplying, installing, maintaining and connecting such readers to the Building system, but no other charges shall be imposed upon Tenant with regard to the operation of that system. The Building will provide a reasonable number of access cards with programming free upon occupancy. Additional cards or changes will be implemented based upon the following costs:

(i) $6.00 to program or delete an existing card;

(ii) $16.00 for unreturned "lost" cards;

(iii) $6.00 to provide and program a new card; or

(iv) $22.00 for a replacement card and reprogramming.

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ARTICLE 29

COMMUNICATIONS AND COMPUTER LINES

Tenant may install, maintain, replace, remove or use any communications or computer wires, cables and related devices (collectively the "Lines") at the Property in or serving the Premises, provided: (a) Tenant shall obtain Landlord's prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of Article 8, (b) any such installation, maintenance, replacement, removal or use shall comply with all Laws applicable thereto and good work practices, and shall not interfere with the use of any then existing Lines at the Property, (c) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Property, as determined in Landlord's reasonable opinion, (d) if Tenant at any time uses any equipment that may create an electromagnetic field exceeding the normal insulation ratings of ordinary twisted pair riser cable or cause radiation higher than normal background radiation, the Lines therefor (including riser cables) shall be appropriately insulated to prevent such excessive electromagnetic fields or radiation, (e) as a condition to permitting the installation of new Lines, Landlord may require that Tenant remove existing Lines located in or serving the Premises, (f) Tenant's rights shall be subject to the rights of any regulated telephone company, and (g) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any Laws or represent a dangerous or potentially dangerous condition (whether such Lines were installed by Tenant or any other party), within three (3) days after written notice.

Landlord may (but shall not have the obligation to): (i) install new Lines at the Property (ii) create additional space for Lines at the Property, and
(iii) reasonably direct, monitor and/or supervise the installation, maintenance, replacement and removal of, the allocation and periodic re-allocation of available space (if any) for, and the allocation of excess capacity (if any) on, any Lines now or hereafter installed at the Property by Landlord, Tenant or any other party (but Landlord shall have no right to monitor or control the information transmitted through such Lines). Such rights shall not be in limitation of other rights that may be available to Landlord by Law or otherwise. If Landlord exercises any such rights, Landlord may charge Tenant for the costs directly and solely attributable to Tenant, or may include those costs and all other costs in Operating Expenses under Article 25 (including without limitation, costs for acquiring and installing Lines and risers to accommodate new Lines and spare Lines, any associated computerized system and software for maintaining records of Line connections, and the fees of any consulting engineers and other experts); provided, any capital expenditures included in Operating Expenses hereunder shall be amortized (together with reasonable finance charges) over the period of time prescribed by Article 25. Where used in this Lease, the term "reasonable finance charges" shall mean Landlord's approximate cost of funds at the applicable time, not to exceed twelve percent (12%) per annum.

Notwithstanding anything to the contrary contained in Article 13, Landlord reserves the right to require that Tenant remove any or all Lines installed by Tenant, or its contractors or agents, within or serving the Premises upon termination of this Lease, provided Landlord

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notifies Tenant prior to or within thirty (30) days following such termination. Any Lines not required to be removed pursuant to this Article shall, at Landlord's option, become the property of Landlord (without payment by Landlord). If Tenant fails to remove such Lines as required by Landlord, or violates any other provision of this Article, Landlord may, after twenty (20) days written notice to Tenant, remove such Lines or remedy such other violation, at Tenant's expense (without limiting Landlord's other remedies available under this Lease or applicable Law). Tenant shall not, without the prior written consent of Landlord in each instance, grant to any third party a security interest or lien in or on the Lines, and any such security interest or lien granted without Landlord's written consent shall be null and void. Except to the extent arising from the intentional or negligent acts of Landlord or Landlord's agents or employees, Landlord shall have no liability for damages arising from, and Landlord does not warrant that Tenant's use of any Lines will be free from the following (collectively called "Line Problems"): (x) any eavesdropping or wire-tapping by unauthorized parties, (y) any failure of any Lines to satisfy Tenant's requirements, or (z) any shortages, failures, variations, interruptions, disconnections, loss or damage caused by the installation, maintenance, replacement, use or removal of Lines by or for other tenants or occupants at the Property, by any failure of the environmental conditions or the power supply for the Property to conform to any requirements for the Lines or any associated equipment, or any other problems associated with any so some Lines by any other cause. Under no circumstances shall any Line Problems be deemed an actual or constructive eviction of Tenant, render Landlord liable to Tenant for abatement of Rent, or relieve Tenant from performance of Tenant's obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damage arising from any Line Problems. However, Landlord shall be required to use commercially reasonable efforts to resolve any Line Problems promptly upon notification from Tenant. Further, to the extent that Tenant's plans and specifications provided pursuant to the Work Agreement attached as Exhibit B specify the installation of Lines, Landlord's approval of such plans and specifications shall also be deemed an approval of the installation of the identified Lines.

ARTICLE 30

HAZARDOUS MATERIALS

Tenant shall not transport, use, store, maintain, generate, manufacture, handle, dispose, release or discharge any "Hazardous Material" (as defined below) upon or about the Property, nor permit Tenant's employees, agents, contractors, and other occupants of the Premises to engage in such activities upon or about the Property. However, the foregoing provisions shall not prohibit the transportation to and from, and use, storage, maintenance and handling within, the Premises of substances customarily used in offices (or such other business or activity expressly permitted to be undertaken in the Premises under Article 6), provided: (a) such substances shall be used and maintained only in such quantities as are reasonably necessary for such permitted use of the Premises, strictly in accordance with applicable Law and the manufacturers' instructions therefor, (b) such substances shall not be disposed of, released or discharged on the Property, and shall be transported to and from the Premises in compliance with all applicable Laws, and as Landlord shall reasonably require,
(c) if any applicable Law or Landlord's trash removal contractor requires that any such substances be disposed of separately from ordinary trash, Tenant shall make arrangements at Tenant's expense for such

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disposal directly with a qualified and licensed disposal company at a lawful disposal site (subject to scheduling and approval by Landlord), and shall ensure that disposal occurs frequently enough to prevent unnecessary storage of such substances in the Premises, and (d) any remaining such substances shall be completely, properly and lawfully removed from the Property upon expiration or earlier termination of this Lease.

Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Material on the Premises or the migration thereof from or to other property, (ii) any demands or claims made or threatened by any party against Tenant or the Premises relating to any loss or injury resulting from any Hazardous Material, (iii) any release, discharge or nonroutine, improper or unlawful disposal or transportation of any Hazardous Material on or from the Premises, and (iv) any matters where Tenant is required by Law to give a notice to any governmental or regulatory authority respecting any Hazardous Materials on the Premises. Landlord shall have the right (but not the obligation) to join and participate, as a party, in any legal proceedings or actions affecting the Premises initiated in connection with any environmental, health or safety Law. At such times as Landlord may reasonably request, Tenant shall provide Landlord with a written list identifying any Hazardous Material then used, stored, or maintained upon the Premises, the use and approximate quantity of each such material, a copy of any material safety data sheet ("MSDS") issued by the manufacturer therefor, written information concerning the removal, transportation and disposal of the same, and such other information as Landlord may reasonably require or as may be required by Law. The term "Hazardous Material" for purposes hereof shall mean any chemical, substance, material or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, material or waste or component thereof by any federal, state or local governing or regulatory body having jurisdiction, or which would trigger any employee or community "right-to-know" requirements adopted by any such body, or for which any such body has adopted any requirements for the preparation or distribution of an MSDS.

If any Hazardous Material is released, discharged or disposed of by Tenant or any other occupant of the Premises, or their employees, agents or contractors, on or about the Property in violation of the foregoing provisions, Tenant shall immediately, properly and in compliance with applicable Laws clean up and remove the Hazardous Material from the Property and any other affected property and clean or replace any affected personal property (whether or not owned by Landlord), at Tenant's expense. Such clean up and removal work shall be subject to Landlord's prior written approval (except in emergencies), and shall include, without limitation, any testing, investigation, and the preparation and implementation of any remedial action plan required by any governmental body having jurisdiction or reasonably required by Landlord. If Tenant shall fail to comply with the provisions of this Article within five (5) days after written notice by Landlord, or such shorter time as may be required by Law or in order to minimize any hazard to Persons or property, Landlord may (but shall not be obligated to) arrange for such compliance directly or as Tenant's agent through contractors or other parties selected by Landlord, at Tenant's expense (without limiting Landlord's other remedies under this Lease or applicable Law). If any Hazardous Material is released, discharged or disposed of on or about the Property and such release, discharge or disposal is not caused by Tenant or other occupants of the Premises, or their employees, agents or contractors, such release,

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discharge or disposal shall be deemed casualty damage under Article 10 to the extent that the Premises or common areas necessary for access to or use of the Premises are affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under Article 10.

ARTICLE 31

MISCELLANEOUS

(A) Each of the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, executors, administrators, guardians, custodians, successors and assigns, subject to the provisions of Article 21 respecting Transfers.

(B) At the request of either party, Landlord and Tenant shall execute a memorandum of lease which may be recorded by either party.

(C) This Lease shall be construed in accordance with the Laws of the state in which the Property is located.

(D) All obligations or rights of either party arising during or attributable to the period ending upon expiration or earlier termination of this Lease shall survive such expiration or earlier termination.

(E) Landlord agrees that, if Tenant timely pays the Rent and performs the terms and provisions hereunder, and, subject to all other terms and provisions of this Lease, Tenant shall hold and enjoy the Premises during the Term, free of lawful claims by any Person and Landlord shall warrant and defend Tenant in the quiet enjoyment and possession of the Premises during the Term.

(F) This Lease does not grant any legal rights to "light and air" outside the Premises nor any particular view or cityscape visible from the Premises.

(G) If the Commencement Date is delayed in accordance with Article 4 for more than three (3) months , Landlord may declare this Lease null and void, and if the Commencement Date is so delayed for more than six (6) months, this Lease shall thereupon become null and void without further action by either party.

ARTICLE 32

OFFER

The submission and negotiation of this Lease shall not be deemed an offer to enter the same by Landlord, but the solicitation of such an offer by Tenant. Tenant agrees that its execution of this Lease constitutes a firm offer to enter the same which may not be withdrawn for a period of 30 days after delivery to Landlord (or such other period as may be expressly provided in any other agreement signed by the parties). During such period and in reliance on the foregoing Landlord may, at Landlord's option (and shall, if required by applicable Law), deposit any security deposit and Rent, and proceed with any plans, specifications, alterations

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or improvements, and permit Tenant to enter the Premises, but such acts shall not be deemed an acceptance of Tenant's offer to enter this Lease, and such acceptance shall be evidenced only by Landlord signing and delivering this Lease to Tenant. However, if Landlord has not executed this Lease within fifteen (15) business days after its submittal, executed by Tenant, or such longer period (not to exceed thirty [30] days) as may be required solely to obtain the consent of Landlord's lender, Tenant shall have the right to rescind its execution of the Lease.

ARTICLE 33

NOTICES

Except as expressly provided to the contrary in this Lease, every notice or other communication to be given by either party to the other with respect hereto or to the Premises or Property, shall be in writing and shall not be effective for any purpose unless the same shall be served personally or by national air courier service, or United States certified mail, return receipt requested, postage prepaid, addressed, if to Tenant, at the address first set forth in the Lease, until the Commencement Date, and thereafter to Tenant at the Premises, Attention: Chief Financial Officer, and if to Landlord, at the address at which the last payment of Rent was required to be made and to JMB Realty Corporation at 900 North Michigan Avenue, Chicago, Illinois 60611, Attn: Legal Department and Kennedy-Wilson Properties, 900 North Michigan Avenue, Suite 1400, Chicago, Illinois 60611, Attn: Property Management Department, or such other address or addresses as Tenant or Landlord may from time to time designate by notice given as above provided. Every notice or other communication hereunder shall be deemed to have been given as of the third business day following the date of such mailing (or as of any earlier date evidenced by a receipt from such national air courier service or the United States Postal Service) or immediately if personally delivered. Notices not sent in accordance with the foregoing shall be of no force or effect until received by the foregoing parties at such addresses required herein.

ARTICLE 34

REAL ESTATE BROKERS

Tenant represents that Tenant has dealt only with CB Richard Ellis (whose commission, if any, shall be paid by Landlord pursuant to separate agreement) as broker, agent or finder in connection with this Lease and agrees to indemnify and hold Landlord harmless from all damages, judgments, liabilities and expenses (including reasonable attorneys' fees) arising from any claims or demands of any other broker, agent or finder with whom Tenant has dealt for any commission or fee alleged to be due in connection with its participation in the procurement of Tenant or the negotiation with Tenant of this Lease.

ARTICLE 35

SECURITY DEPOSIT

In lieu of a cash security deposit, Tenant shall furnish Landlord a security deposit in the form of an Irrevocable Letter of Credit (the "LC") for the benefit of Landlord in an amount

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equal to $1,000,000 (the "Security Deposit"), upon Tenant's execution and submission of this Lease. The LC shall be issued by national bank reasonably satisfactory to Landlord, with a branch office in Minneapolis. The LC shall provide that Landlord may draw on the LC solely by furnishing a sight draft in the amount demanded together with a statement certified by Landlord that Landlord is entitled to draw upon the LC in the amount being demanded. The Security Deposit in the form of the LC shall serve as security for the prompt, full and faithful performance by Tenant of the terms and provisions of this Lease. In the event that Tenant is in Default hereunder and fails to cure within any applicable time permitted under this Lease, or in the event that Tenant owes any amounts to Landlord upon the expiration of this Lease, or on account of Tenant's failure to renew an expiring LC as set forth below, Landlord may draw upon the LC, in whole or in part, and use or apply the whole or any part of the proceeds thereof for the payment of Tenant's obligations hereunder. The use or application of the proceeds of the LC or any portion thereof shall not prevent Landlord from exercising any other right or remedy provided hereunder or under any Law and shall not be construed as liquidated damage.

In the event the LC is drawn upon by Landlord, or the Security Deposit is otherwise reduced by such use or application, Tenant shall cause the LC to be increased back to the full amount provided for herein within ten (10) days after Landlord's written request for same. Landlord shall not be required to keep the proceeds of the LC separate from Landlord's general funds or pay interest thereon. To the extent Landlord draws upon an LC and any proceeds from such LC have not been applied against any sums due from Tenant under this Lease, then, upon delivery of a replacement LC to Landlord, Landlord shall promptly return such proceeds to Tenant. The LC, to the extent not drawn upon, shall be returned to Tenant within one sixty (60) days after Tenant has vacated the Premises in accordance with Article 13.

The initial LC shall be valid through at least until the first anniversary of the Commencement Date, and if the LC has an expiration date, Tenant shall cause the LC to be renewed no later than sixty (60) days prior to its expiration date. Any renewal shall be for at least a 12-month period. If Tenant fails to renew an expiring LC (and furnish Landlord the renewal document) at least sixty
(60) days prior to the expiration of an LC, Landlord shall provide notice to Tenant of such failure and its intent to draw upon the expiring LC. If Tenant fails to renew such expiring LC within ten (10) days after Landlord's notice to Tenant, Landlord shall be entitled to draw upon the LC in the full amount of the LC, in which event Landlord shall retain said money as a cash security deposit. Notwithstanding the foregoing, provided there is no Default under the Lease, on the first anniversary of the Commencement Date, Tenant shall be entitled to replace the LC with a LC in an amount equal to $750,000 but otherwise in compliance with the terms of this Article 35, and on the second anniversary of the Commencement Date, Tenant shall be entitled to replace the LC with a LC in an amount equal to $100,000 but otherwise in compliance with the terms of this Article 35.

ARTICLE 36

OPTION TO EXTEND TERM

Tenant is hereby granted one (1) option to extend the Term for an additional period of sixty (60) consecutive calendar months (the "Extension Period"), on the same terms and

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conditions in effect under the Lease immediately prior to the Extension Period, except that the monthly Base Rent during the Extension Period shall be equal to ninety percent (90%) of the Prevailing Rental Rate (as defined below), and Tenant shall have no additional options to extend the Term. The option to extend may be exercised only by giving Landlord written notice (the "Extension Notice") thereof no later than fifteen (15) months prior to the commencement of the Extension Period. Said exercise shall, at Landlord's election, be null and void if Tenant has received written notice that it is in default of a material term under this Lease and such default remains uncured (i) with respect to a monetary default, at the date of the Extension Notice, or (ii) with respect to any default, at the commencement of the Extension Period.

"Prevailing Rental Rate" means the average net rent per rentable square foot for lease renewals for periods approximately as long as the period in question, executed by tenants for similar uses and lengths of time for comparable space in similar multi-story buildings in the vicinity of the Building during the twelve (12) months immediately prior to the date upon which such Prevailing Rental Rate is to become effective, where such renewal rates were not set by the terms of such leases, subject to reasonable adjustments for comparable space on more or less desirable floors or areas of the property in question. In all cases, such rates shall take into consideration the location, quality and age of the building, floor level, extent (or lack) of leasehold improvements, rental abatements, lease takeovers/assumptions, moving expenses and other concessions for the benefit of the applicable tenant, term of the lease, distinction between "gross" and "net" leases, base year or amount allowed by the landlord for payment of building operating expenses (expense stop), the rentable area of the applicable space, and the time the particular rental rate under consideration became or is to become effective, or any other relevant term or condition, the intent of the parties being that the comparable net rental rates shall reflect the net return to the landlord on the applicable spaces after the deduction of all inducements provided in conjunction with the applicable lease.

Landlord shall deliver to Tenant written notice of Landlord's determination of the Prevailing Rental Rate within thirty (30) days after receipt of the Extension Notice. Tenant shall then have thirty (30) days to provide Landlord with unconditional and irrevocable written notice indicating that Tenant either (i) accepts Landlord's determination of the Prevailing Rental Rate, (ii) rescinds its right to extend the term, in which event this Article shall be of no further force and effect, or (iii) exercises its right to contest Landlord's determination of the Prevailing Rental Rate. In the event that Tenant elects to proceed pursuant to clause (i) or (iii) above, the parties shall execute an amendment to the Lease, setting forth the Prevailing Rental Rate, but an otherwise valid exercise of the option to extend the term contained herein shall be fully effective, whether or not such confirmatory documentation is executed.

If Tenant contests Landlord's determination of the Prevailing Rental Rate, the Prevailing Rental Rate shall be determined by arbitration, in accordance with the procedure set forth in Exhibit D attached hereto. Such determination shall be final and binding upon the parties. In recognition that the Prevailing Rental may not be determined until after the commencement of the Extension Period, Tenant shall pay, during the Extension Period until the Prevailing Rental Rate is determined, 100% of the amount of Rate then in effect (including Base Rent, and all other charges). If ninety percent (90%) of the Prevailing Rental Rate is determined to be greater than such amount, Tenant shall pay Landlord, within thirty

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(30) days after written request therefor, the difference between the amount required by such determination of the Prevailing Rental Rate, and the amount of Rent theretofor paid by Tenant during the Extension Period. If ninety percent (90%) of the Prevailing Rental Rate is determined to be less than such amount, Tenant shall be entitled to a credit against the next accruing payments of Rent due under this Lease equal to the difference between the amount required by such determination of the Prevailing Rental Rate, and the amount of Rent theretofor paid by Tenant during the Extension Period.

If Tenant shall fail to exercise the option herein provided, said option shall terminate, and shall be null and void and of no further force and effect. Tenant's exercise of said option shall not operate to cure any default by Tenant of any of the terms or provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such default. If the Lease or Tenant's right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the option herein provided, or if Tenant shall have subleased or assigned all or any portion of the Premises, then immediately upon such termination, sublease or assignment, the option herein granted to extend the Term, shall simultaneously terminate and become null and void. Such option is personal to Tenant. Under no circumstances whatsoever shall the assignee under a complete or partial assignment of the Lease, (other than a Related Entity) or a subtenant under a sublease of the Premises, have any right to exercise the option to extend granted herein. Time is of the essence of this provision.

ARTICLE 37

OPTION TO EXPAND

Subject to the terms of this option (the "Expansion Option"), Tenant shall have a one time right to lease the entire (but not a portion of) the eighteenth floor of the Building (the "18th Floor Space") in an "as is" condition, on the same terms and provisions then in effect under the Lease, except that (a) the rentable square footage of the 18th Floor Space shall be added to the rentable square footage of the Premises for the purposes of calculating Base Rate and Tenant's Prorata Share as of the Expansion Commencement Date (as defined below), and (b) Landlord shall reimburse Tenant for the cost of tenant improvements installed in the 18th Floor Space and the 17th Floor Space (as defined in Article 38) by Tenant, and the cost of related space planning, moving and consulting fees, up to an amount equal to the sum of $25.00 per square foot of rentable area of the 18th Floor Space multiplied by a fraction, the numerator of which shall be the number of full calendar months remaining in the Term as of the date Tenant takes possession of the 18th Floor Space for the purpose of occupying the same, up to a maximum of 60 and the denominator of which shall be
60. Such reimbursement shall be subject to the terms of a work agreement to be executed by Landlord and Tenant, which work agreement shall be similar in all material respects to the Work Agreement attached hereto as Exhibit B. This Expansion Option may be exercised only by giving Landlord irrevocable and unconditional written notice (the "Expansion Notice") thereof no later than October 1, 2001. The Expansion Notice shall specify the date on which Tenant desires to take possession of the 18th Floor Space, which date shall be no earlier than June 1, 2002 and no later than November 1, 2002. Landlord shall deliver the 18th Floor Space to Tenant no later than the date specified in the Expansion Notice, provided, however, that if no such date is specified in the Expansion Notice, or the date specified does not meet the criteria set forth

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above, then Landlord shall deliver possession of the 18th Floor Space to Tenant on the date Landlord reasonably determines based on the information contained in the Expansion Notice, which date shall be binding upon Tenant. If the 18th Floor Space is not occupied by a third party tenant at the time of the Expansion Notice (or thereafter prior to the Expansion Commencement Date), Landlord shall make the 18th Floor Space available for Tenant's performance of leasehold improvement work (without the imposition of Rent, unless Tenant opens for business in the Expansion Space prior to the Expansion Space Commencement Date, in which event Tenant's obligation to pay Rent for the Expansion Space shall commence as of the date it opens for business in the Expansion Space), subject to the condition that Tenant's inability to complete such work prior to the Expansion Commencement Date shall not delay that date.

The Lease as to the 18th Floor Space shall commence on the later of the date Landlord delivers possession of the 18th Floor Space to Tenant, or the date specified by Tenant in the Expansion Notice (the "Expansion Commencement Date"), and shall continue for the duration of the Term of the Lease. The 18th Floor Space shall be added to the Premises as of the Expansion Commencement Date. After Tenant validly exercises the expansion right provided herein, the parties shall execute an amendment to the Lease, adding the 18th Floor Space, or a new lease for the 18th Floor Space, or such other documentation as Landlord shall require, promptly after Landlord shall prepare the same, in order to confirm the leasing of such 18th Floor Space to Tenant, but an otherwise valid exercise of the expansion rights contained herein shall be fully effective, whether or not such confirmatory documentation is executed. The provisions set forth above as to calculation of Landlord reimbursement of Tenant expenses shall take into account (in determining any pro-ration) the Extension Period if Tenant has exercised its rights under Article 36 at the time any such allowance or reimbursement is to be paid. The amount to be paid or reimbursed shall equal the sum of $25.00 per rentable square foot (subject to pro-ration) even if Tenant does not expend that full sum on the 18th Floor Space, it being the intention of the parties that allowances or reimbursement amounts provided by Landlord with regard to the 18th Floor Space or the 17th Floor Space shall be made available to pay or reimburse costs incurred by Tenant with regard to the improvement of any portion of the 18th Floor Space and the 17th Floor Space or design, consulting, moving, cabling, or other costs applicable thereto. Landlord shall have no obligation to disburse such allowance or reimbursement funds until Tenant has executed a binding amendment to the Lease committing to occupancy of the applicable space, but otherwise such amounts shall be disbursed within thirty (30) days of application by Tenant with supporting documentation indicating the incurring of costs reimbursable under the Lease. To the extent that Tenant does not fully expend all of the amounts to be provided by Landlord hereunder, the excess (up to a maximum of $2.00 per rentable square foot) shall be applied to the next accruing payments of Rent payable under the Lease.

In addition, notwithstanding the fact that the Expansion Commencement Date shall be the date of delivery of the 18th Floor Space to Tenant, Tenant shall first be obligated for the payment of Rent on the 18th Floor Space on the earlier of: (i) November 1, 2002; or (ii) Tenant's first business use of any material portion of the 18th Floor Space. For purposes of this provision `business use' shall mean the conduct of business operations in the 18th Floor Space (other than construction, equipment, installation, and the moving and affixing of fixtures, furnishings and equipment).

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If Tenant shall fail to exercise the Expansion Option by delivery of the Expansion Notice on or before October 1, 2001, the Expansion Option stall be deemed to have lapsed and expired, and shall be of no further force or effect. Landlord may thereafter freely lease all or a portion of the 18th Floor Space to any other party, at any time, on any terms, in Landlord's sole discretion.

Tenant's exercise of such expansion right shall not operate to cure any Default by Tenant of any of the terms and provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such Default. The Expansion Option shall, at Landlord's election, be null and void, if Tenant has received written notice that it is in default of a material term under this Lease and such default remains uncured (i) with respect to a monetary default, at the date of the Expansion Notice, or (ii) with respect to any default, on the Expansion Commencement Date. If the Lease or Tenant's right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the Expansion Option, or, if Tenant shall have subleased or assigned all or any portion of the Premises, then immediately upon such termination, sublease or assignment, the Expansion Option shall simultaneously terminate and become null and void. Such right is personal to Tenant (and any Related Entity that is an assignee or sublessee of substantially all of the Premises). Tenant agrees that time is of the essence of this provision.

ARTICLE 38

RIGHT OF FIRST OFFER

During the initial Term of the Lease, Tenant shall have a right of first opportunity to lease any portion of the seventeenth (17th) floor of the Building (the "17th Floor Space"), prior to such portion of the 17th Floor Space being offered to a third party, when the same becomes legally available to lease, in an "as is" condition, on the same terms and provisions then in effect under the Lease, except that (a) if the Lease with respect to the 17th Floor Space commences on or before October 31, 2003, the monthly Base Rent for the 17th Floor Space shall be the amount of monthly Base Rent then in effect on a per rentable square foot basis under the Lease, and (b) if the Lease with respect to the 17th Floor Space commences after October 31, 2003, the monthly Base Rent for the 17th Floor Space shall be equal to Landlord's determination of the Prevailing Rental Rate. If Tenant elects to lease any portion of the 17th Floor Space pursuant to this Article 38, Landlord shall reimburse Tenant for the cost of tenant improvements installed in the 17th Floor Space and the 18th Floor Space by Tenant, and the cost of related space planning, moving and consulting fees, up to an amount equal to the sum of $25.00 per square foot of rentable area of such portion of the 17th Floor Space taken by Tenant multiplied by a fraction, the numerator of which shall be the number of full calendar months remaining in the Term up to a maximum of 60 as of the date Tenant takes possession of such portion of the 17th Floor Space for the purpose of occupying the same, and the denominator of which shall be 60. Such reimbursement shall be subject to the terms of a work agreement to be executed by Landlord and Tenant, which work agreement shall be similar in all material respects to the Work Agreement attached hereto as Exhibit B. After Tenant validly exercises the expansion right provided herein, the parties shall execute an amendment to the Lease, adding the 17th Floor Space, or a new lease for the 17th Floor Space, or such other documentation as Landlord shall require, promptly after Landlord shall prepare the same, in

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order to confirm the leasing of such 17th Floor Space to Tenant, but an otherwise valid exercise of the expansion rights contained herein shall be fully effective, whether or not such confirmatory documentation is executed. If Landlord determines that a new lease should be executed for the 17th Floor Space (or the 18th Floor Space), the new lease shall be consistent in all material respects with this Lease.

Landlord shall notify Tenant in writing within thirty (30) days after any portion of the 17th Floor Space becomes legally available to lease, or at Landlord's option, such earlier time as Landlord shall be in a position to project when such portion of the 17th Floor Space will be legally available to lease, advising Tenant of such projected date. Tenant shall then have ten (10) business days in which to provide Landlord with unconditional and irrevocable written notice exercising Tenant's right to lease such portion of the 17th Floor Space on the terms described above. If Tenant exercises the right to lease such portion of the 17th Floor Space, said lease shall commence the later of thirty
(30) days after Tenant's notice exercising the right, or the date such portion of the 17th Floor Space is available for occupancy, and shall continue for the duration of the Term of the Lease. The right to lease any portion of the 17th Floor Space shall, at Landlord's election, be null and void if Tenant has received written notice that it is in default of a material term under the Lease and such default remains uncured (i) with respect to a monetary default, at the date Tenant provides Landlord notice of its intent to lease the 17th Floor Space, or (ii) with respect to any default, at the commencement of the term for the 17th Floor Space.

If Tenant shall fail to exercise such expansion right as to any portion of the 17th Floor Space, after notice by Landlord of the availability of such space, as provided herein, such right as to such portion of the 17th Floor Space shall be deemed to have lapsed and expired, and shall be of no further force or effect. Landlord may thereafter freely lease such portion of the 17th Floor Space to any other party, at any time, on any terms, in Landlord's sole discretion.

If Tenant shall exercise the expansion right granted herein, Landlord does not guarantee that any portion of the 17th Floor Space will be available on the commencement date for the lease thereof, if the then existing occupants of such portion of the 17th Floor Space shall hold-over, or for any other reason despite Landlord's commercially reasonable efforts. In such event, Rent with respect to such portion of the 17th Floor Space shall be abated until Landlord legally delivers the same to Tenant, as Tenant's sole recourse. Tenant's exercise of such expansion right shall not operate to cure any Default by Tenant of any of the terms or provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such Default. If the Lease or Tenant's right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the right herein provided, or if Tenant shall have subleased or assigned all or any portion of the Promises, then immediately upon such termination, sublease or assignment, the expansion right herein granted shall simultaneously terminate and become null and void. Such right is personal to Tenant. Under no circumstances whatsoever shall the assignee under a complete or partial assignment of the Lease (other than a Related Entity that is an assignee or sublessee of substantially all of the Premises), or a subtenant under a sublease of the Premises, have any right to exercise the expansion right granted herein. Time is of the essence of this provision. Landlord shall not permit any existing tenants of the 17th Floor Space to extend their lease terms or grant any new

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lease or occupancy rights as to the 17th Floor Space unless and until Tenant shall have failed to exercise its right of first offer under this Article 38.

ARTICLE 39

PARKING

(A) During the Term, Landlord hereby grants to Tenant and persons designated by Tenant a license to use one (1) unreserved parking space in the Property's garage (the "Garage") for Tenant's employees for each 3,600 square feet of the Premises (the "Primary Spaces"). In addition, Landlord hereby grants to Tenant and persons designated by Tenant a license to use up to thirty five
(35)) additional unreserved parking spaces in the Garage for Tenant's employees from 6:00 p.m. to 6:00 a.m., and all day on Saturdays and Sundays (the "After Hour Spaces"). Tenant shall pay Landlord the monthly charges established from time to time by Landlord for parking in the Garage, payable in advance, with Tenant's payment of monthly Base Rent. The initial charge for the Primary Spaces is $250.00 per space per month and the initial charge for the After Hour Spaces is $35.00 per space per month. No deductions from the monthly charge shall be made for days on which the Garage is not used by Tenant. The charges for the Primary Spaces shall be based upon the charges typically imposed upon tenants of the Building utilizing such spaces during the business day, but the charges for the After Hour Spaces shall be fixed at $35.00 per space per month during the initial Term and subject to an increase based on the consumer price index thereafter.

(B) Tenant shall at all times comply with all applicable ordinances, rules, regulations, codes, laws, statutes and requirements of all federal, state, county and municipal governmental bodies or their subdivisions respecting the use of the Garage. Landlord reserves the right to adopt, modify and enforce reasonable Rules governing the use of the Garage from time to time, including any key-card, sticker or other identification or entrance system, and hours of operation. The rules set forth in this Article 39 are currently in effect. Landlord may refuse to permit any person who violates such rules to park in the Garage, and any violation of the rules shall subject the car to removal from the Garage.

(C) The parking spaces hereunder shall be provided on an unreserved "first-come, first served" basis. Tenant acknowledges that Landlord has or may arrange for the Garage to be operated by an independent contractor, not affiliated with Landlord. In such event, Tenant acknowledges that Landlord shall have no liability for claims arising through acts or omissions of such independent contractor, if such contractor is reputable, although Landlord shall use its commercially reasonable efforts to insure that Tenant has the full benefit of the parking rights granted hereunder. Except for intentional acts or negligence, Landlord shall have no liability whatsoever for any damage to property or any other items located in the Garage, nor for any personal injuries or death arising out of any matter relating to the Garage, and in all events, Tenant agrees to look first to its insurance carrier and to require that Tenant's employees look first to their respective insurance carriers for payment of any losses sustained in connection with any use of the Garage. Tenant hereby waives on behalf of its insurance carriers all rights of subrogation against Landlord or Landlord's agents. Landlord reserves the right to assign specific spaces, and to reserve spaces for visitors, small cars, handicapped persons and for other tenants, guests of tenants or other parties, and Tenant and persons designated by Tenant

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hereunder shall not park in any such assigned or reserved spaces. Landlord also reserves the right to close all or any portion of the Garage in order to make repairs or perform maintenance services, or to alter, modify, re-stripe or renovate the Garage, or if required by casualty, strike, condemnation, act of God, governmental law or requirement or other reason beyond Landlord's reasonable control. In such event, Landlord shall refund any prepaid parking rent hereunder, prorated on a per diem basis. If, for any other reason, Tenant or persons properly designated by Tenant, shall be denied access to the Garage, and Tenant or such persons shall have complied with this Article 39 and this Article 39 shall be in effect, Landlord's liability shall be limited to such parking charges (excluding tickets for parking violations) incurred by Tenant or such persons in utilizing alternative parking, which amount Landlord shall pay upon presentation of documentation supporting Tenant's claims in connection therewith.

(D) If Tenant shall default under the provisions of this Article 39, Landlord shall have the right to remove from the Garage any vehicles hereunder which shall have been involved or shall have been owned or driven by parties involved in causing such default, without liability therefor whatsoever. In addition, if Tenant shall default under this Article 39, Landlord shall have the right to cancel the Lease, as to this Article 39 only, on ten (10) business days' written notice, unless within such ten (10) day period, Tenant cures such default. Such cancellation right shall be cumulative and in addition to any other rights or remedies available to Landlord at law or equity, or provided under the Lease (all of which rights and remedies under the Lease are hereby incorporated herein, as though fully set forth).

(E) The following Rules shall govern the use of the Garage:

Rules

(i) Garage normal business hours shall be 6 A.M. to 8 P.M. or such other hours as Landlord shall determine from time to time taking into account Tenant's need for use of the After Hour Spaces as referenced above. Notwithstanding the foregoing, Tenant shall be permitted to park cars in the Garage overnight so long as such use is consistent with Tenant's permitted use of the After Hour Spaces or Primary Spaces referenced above.

(ii) Cars must be parked entirely within the stall lines painted on the floor, and only small cars may be parked in areas reserved for small cars.

(iii) All directional signs and arrows must be observed.

(iv) The speed limit shall be 5 miles per hour.

(v) Spaces reserved for handicapped parking must be used only by vehicles properly designated.

(vi) Parking is prohibited in all areas not expressly designated for parking, including without limitation:

(a) areas not striped for parking

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(b) aisles

(c) where "no parking" signs are posted

(d) ramps

(e) loading zones

(vii) Parking stickers, key cards or any other devices or forms of identification or entry supplied by Landlord shall remain the property of Landlord. Such devices must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of any unauthorized holder will be void.

(viii) Monthly fees shall be payable in advance prior to the first day of each month. Failure to do so will automatically suspend parking privileges and a charge at the prevailing daily parking rate will be due until Tenant has paid the delinquent charges. No deductions or allowances from the monthly rate will be made for days on which the Garage is not used by Tenant or its designees.

(ix) Garage managers or attendants are not authorized to make or allow any exceptions to these Rules.

(x) Every parker is required to park and lock his own car.

(xi) Loss or theft of parking identification, key cards or other such devices must be reported to Landlord or any garage manager immediately. Any parking devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. Lost or stolen devices found by Tenant or its employees must be reported to the office of the garage immediately.

(xii) Washing, waxing, cleaning or servicing of any vehicle by the customer and/or its agents is prohibited. Parking spaces may be used only for parking automobiles.

(xiii) By signing this Lease, Tenant agrees to acquaint all persons to whom Tenant assigns parking space of these rules

ARTICLE 40

SIGNAGE

Subject to the conditions of this Article, Tenant shall have the following signage rights: (i) Tenant's name to be prominently visible on the display case located on the skyway level of the Building , (ii) Tenant's name on the Building directory or directories, (iii) Tenant's name on a kiosk location in the first floor lobby of the Building, (iv) Tenant's name in the elevator lobby of each floor fully occupied by Tenant, and (v) by Building standard suite signage on multi-tenant floors. Landlord shall install, at Landlord's cost, the signage set forth in clauses (ii) and (v) above and shall maintain same, the cost of such maintenance to be included in Operating Expenses. All other signage shall be installed by Tenant, at Tenant's sole cost and

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expense. All aspects of the size, design, materials, exact location, etc. of all such signage shall be mutually agreed upon by Landlord and Tenant taking into account Landlord's intended image for the Building and the image Tenant wishes to convey as to its operation. Notwithstanding the foregoing, Tenant shall have the right to install on the single-tenant floors occupied by Tenant such signage, lettering, decal or design which does not otherwise conform with the uniform pattern of identification, subject to Landlord's approval (which approval shall not be unreasonably withheld, conditioned or delayed), which may include Tenant's logo, style and color. Tenant shall have reasonable discretion as to the design and installation of all signage in elevator lobbies on such single-tenant floors. To the extent that the specific signage rights granted to Tenant under this Article 40 are inconsistent with the Rules, the specific provisions of this Article shall control. Landlord shall also cooperate with Tenant as to Landlord's redesign of elevator numbering signage in the skyway level of common areas, to assist Tenant in maximizing visitor usage of the upper elevator bank by renumbering the high-rise bank to indicate `Floors 20-41' and the low-rise bank to indicate Floors 3-19, the cost of which shall be paid by Tenant. The signage rights provided in clauses (i) and (iii) above are personal to Tenant. Under no circumstance whatsoever shall the assignee under a complete or partial assignment of the Lease (other than a Related Entity) or a subtenant under a sublease of the Premises, have such signage rights. The signage shall be subject to such additional criteria as are set forth in Exhibit E attached hereto.

ARTICLE 41

SATELLITE DISH

(A) Landlord hereby grants Tenant the non-exclusive right to use a portion of the roof of the Building, in a location to be reasonably determined by Landlord or Landlord's rooftop manager, Omnitek, only for the purpose of installing the following (the "Item"): an 18" or smaller satellite dish, and for no other purpose.

(B) Tenant shall contact Omnitek, and enter into a separate written agreement with Omnitek regarding the installation of the Item and use of the roof, and to gain access to the roof for the purposes permitted hereunder. Landlord and Omnitek reserve the right to enter the roof, without notice, at any time for the purpose of inspecting the same, or making repairs, additions or alterations to the Building, or to exhibit the roof to prospective tenants, purchasers or others, or for any other reason not inconsistent with Tenant's rights hereunder. In connection with exercising such rights, Landlord or Omnitek may require Tenant to temporarily disconnect and/or move the Item, if necessary, and Tenant shall reasonably comply with any such request, provided, that Landlord has provided Tenant with the opportunity, and sufficient prior notice, to Tenant to set up a temporary, "back-up" satellite-dish. The exercise by Landlord or Omnitek of any of their respective rights under this paragraph shall not be deemed an eviction or disturbance of Tenant's use of the roof.

(C) Tenant shall not install the Item, or thereafter make any alterations, additions or improvements to the roof or the Item without Landlord's prior written consent, which shall not be unreasonably withheld. Omnitek, acting as Landlord's agent, shall approve or reject the proposed installation of the Item within a reasonable time after Tenant submits (1) plans and specifications for the installation of the Item, (2) copies of all required governmental and

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quasi-governmental permits, licenses, and authorizations which Tenant will obtain at its own expense, and (3) a certificate of insurance evidencing the coverage required herein. Omnitek may withhold approval if the installation or operation of the Item may damage the structural integrity of the Building, interfere with any service provided by Landlord, Omnitek or any occupant, reduce the amount of leaseable space in the Building, detract from the appearance of the Building, or for any other reasonable ground. Landlord may require that any installation or other work be done under the supervision of Landlord's employees or agents, and in a manner so as to avoid damage to the Building. All installation work shall be performed in a good and workmanlike manner, in accordance with all governmental requirements.

(D) Upon termination of the Lease, by expiration or otherwise, Tenant shall disconnect and remove the Item and fully repair and restore the roof to the same or better condition than prior to installation of the Item, ordinary wear and tear, and damage from fire or other casualty not the fault of Tenant excepted. Tenant shall promptly and properly repair (or at Landlord's option, pay Landlord's reasonable charges for repairing) during the Term and upon termination of the Lease or this Rider, any roof leaks or other damage or injury to the roof, or the Building (or contents thereof) caused by Tenant's use of the roof or its installation, use, maintenance or removal of the Item. If Tenant does not immediately repair any such leaks, damage or injury, or does not remove the Item when so required, Tenant hereby authorizes Landlord to make such repairs or remove and dispose of the Item and Tenant shall promptly pay Landlord's reasonable charges for doing so. Landlord shall not be liable for any property so disposed or removed by Landlord.

(E) Landlord does not represent or warrant that use of the roof hereunder will comply with any applicable federal, state, county or local laws or ordinances or the regulations of any of their agencies, or that the roof will be suitable for Tenant's purposes. Tenant agrees that Tenant has inspected the roof and agrees to accept the same hereunder "as is." Tenant shall at all times comply with any applicable federal, state, county or local laws or ordinances, pertaining to Tenant's use of the roof or the Item.

(F) Tenant shall indemnify and hold Landlord harmless from and against any and all loss, cost, claim, damage, liability or expense which Landlord may incur as a direct or indirect result of Tenant's use of the roof or Item, including but not limited to attorneys' fees, whether or not any legal action is instituted. This indemnity obligation shall include Landlord's partners, officers, directors, trustees, beneficiaries, affiliates and agents ("Indemnitees"). Tenant shall maintain comprehensive or commercial general liability insurance covering risks of bodily injury, death or property damage arising out of Tenant's use of the roof or Item, in the amount of at least $2,000,000 combined single limit per occurrence with a responsible insurance company reasonably satisfactory to Landlord, which policy shall include a contractual liability endorsement and shall include Landlord and the other Indemnitees (as defined above) as additional insureds. Tenant shall provide a certificate of such insurance to Landlord prior to using the roof, and such insurance policy shall not be cancelable without at least thirty (30) days written notice to Landlord. Landlord shall not be responsible for the Item in the event of loss or damage thereto from any cause whatsoever. Tenant, on behalf of its insurers, hereby waives any rights of subrogation against Landlord (or the "Indemnitees" defined above).

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(G) Tenant shall not use the roof or the Item so as to interfere in any way with the ability of Landlord or its tenants and occupants of the Building and neighboring properties to receive radio, television, telephone, microwave, short-wave, long-wave or other signals of any sort that are transmitted through the air or atmosphere, nor so as to interfere with the use of electric, electronic or other facilities, appliances, personal property and fixtures, nor so as to interfere in any way with the use of any antennas, satellite dishes or other electronic or electric equipment or facilities currently or hereafter located on the roof or any floor or area of the Building.

(H) If the roof, Building or Item are materially damaged by fire or other casualty, Tenant's right to use the roof may be terminated by Landlord as of the date of such damage, subject to any provisions hereof which by their terms or reasonable implication shall survive such termination. Landlord shall have no obligation to repair or restore the roof or Building. In the event of such damage, Tenant shall look solely to its insurers for any claims that Tenant may have in connection with such damage or destruction. However, if a portion of the roof remains available for communications use after any such casualty, Tenant shall be provided the opportunity to locate communications equipment otherwise complying with this Article 41 in the available area. This Article 41 shall be interpreted and implemented in all respects consistent with the intention that Tenant shall have reasonable use of the roof for communications purposes throughout the Term, as may be extended. The Landlord acknowledges that Tenant's ability to utilize the roof for communication purposes is an integral and essential element of Tenant's occupancy of the Building. To the extent Tenant is unable to reach agreement with Omnitek or its successor in operation of the roof, Landlord shall use commercially reasonably efforts to resolve such dispute so as to permit Tenant's continuing use of the roof in compliance with this Article 41.

ARTICLE 42

STORAGE AGREEMENT

(A) Upon Tenant's request, Landlord shall provide Tenant with an opportunity to lease storage space ("Storage Space") at the Property pursuant to the terms of this Article 42. The term of such lease shall commence on the date of delivery of the Storage Space to Tenant, and shall continue until the earlier to occur of the Expiration Date, or Tenant's abandonment of the Premises or abandonment of the Storage Space. Tenant shall pay to Landlord, in connection with its use of the Storage Space, an annual fee, payable in equal monthly installments, equal to $14.00 per square foot of the Storage Space, on or before the first day of each calendar month during the Term. Any initial or final partial month shall be prorated. Landlord reserves the right to increase such fee from time to time during the Term to such monthly rates for comparable storage space as Landlord may from time to time establish at the Property. In the event that Landlord so increases the monthly fee hereunder, Tenant shall have the right to cancel the Lease as to the Storage Space only, upon thirty
(30) days' notice, unless within such thirty (30) day period, Landlord revokes such increase in the fee.

(B) Tenant shall use the Storage Space for purposes of storing equipment, inventory or other items normally used in Tenant's business. All items stored in the Storage Space shall be elevated at least six (6) inches above the floor on wooden pallets, and shall be at least

48

eighteen (18) inches below the bottom of all sprinklers located in the ceiling of the Storage Space, if any. Any boxes shall not be stacked more than seven (7) feet high. Tenant shall not store anything in the Storage Space which is unsafe or which otherwise may create a hazardous condition, or which may increase Landlord's insurance rates, or cause a cancellation or modification of Landlord's insurance coverage. Without limitation, Tenant shall not store any flammable, combustible or explosive fluid, chemical or substance nor any perishable food or beverage products, except with Landlord's prior written approval. Landlord reserves the right to adopt and enforce reasonable rules and regulations governing the use of the Storage Space from time to time. Tenant shall properly and at all times comply with all applicable ordinances, rules, regulations, codes, laws, statutes and requirements of all federal, state, county and municipal governmental bodies or their subdivisions respecting the use of the Storage Space.

(C) Tenant shall not, without the prior written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber or permit any lien to attach to, or otherwise transfer its rights to the Storage Space, by operation of law or otherwise, nor sublet the Storage Space (other than to a Related Entity), nor permit the use thereof by any parties other than Tenant and its employees. Any such transfer (other than to a Related Entity) without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect. Landlord agrees not to unreasonably withhold consent to any such transfer.

(D) Landlord may, at its option, upon at least thirty (30) days' advance written notice to Tenant, change the Storage Space hereunder to other storage space at the Property comparable to the Storage Space herein. Tenant agrees to accept the Storage Space "as is," and Landlord shall have no obligation to maintain or repair the same. Tenant shall extend all of its insurance policies required under the Lease to include the Storage Space, and the property to be located therein. Upon request, Tenant shall provide Landlord with certificates or other satisfactory evidence of such insurance. Landlord shall have no liability whatsoever for any damage to property or any other items located in the Storage Space, nor for any personal injuries or death arising out of any matter relating to the Storage Space, and in all events, Tenant agrees to look first to its insurance carrier for payment of any losses sustained in connection with Tenant's use of the Storage Space. More particularly, but without limitation, Landlord shall have no liability for loss of or damage to any property by theft, vandalism, fire, explosion, falling plaster, steam, gas, electricity, water, rain, bursting of pipes, seepage, dampness, or any other cause. Tenant hereby waives on behalf of its insurance carriers all rights of subrogation against Landlord and its agents. If Tenant shall default under this Article 42, Landlord shall have the right to cancel the Lease as to the Storage Space only on ten (10) days' written notice, unless within such ten (10) day period, Tenant cures such default. Such cancellation right shall be cumulative and in addition to any other rights or remedies available to Landlord at law or equity, or provided under the Lease.

ARTICLE 43

ENTIRE AGREEMENT

This Lease, together with Rider One and Exhibits A through E (WHICH
COLLECTIVELY ARE HEREBY INCORPORATED WHERE REFERRED TO

49

HEREIN AND MADE A PART HEREOF AS THOUGH FULLY SET FORTH), contains all the terms and provisions between Landlord and Tenant relating to the matters set forth herein and no prior or contemporaneous agreement or understanding pertaining to the same shall be of any force or effect, except any such contemporaneous agreement specifically referring to and modifying this Lease, signed by both parties. Without limitation as to the generality of the foregoing, Tenant hereby acknowledges and agrees that Landlord's leasing agents and field personnel are only authorized to show the Premises and negotiate terms and conditions for leases subject to Landlord's final approval, and are not authorized to make any agreements, representations, understandings or obligations, binding upon Landlord, respecting the condition of the Premises or Property, suitability of the same for Tenant's business, or any other matter, and no such agreements, representations, understandings or obligations not expressly contained herein or in such contemporaneous agreement shall be of any force or effect. Neither this Lease, nor any Riders or Exhibits referred to above may be modified, except in writing signed by both parties.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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LANDLORD:

222 SOUTH NINTH STREET LIMITED
PARTNERSHIP,
a Minnesota limited partnership

By: OB JOINT VENTURE II,
an Illinois limited partnership,
Managing Partner

By: JMB/PIPER JAFFRAY TOWER
ASSOCIATES,
an Illinois general partnership,
Managing Partner

By: CARLYLE REAL ESTATE
PARTNERSHIP-XIV,
an Illinois limited partnership,
General Partner

By: JMB REALTY CORPORATION,
a Delaware corporation,
Corporate General Partner

By: /s/
    _____________________________________
            Vice President

TENANT:

CAPELLA EDUCATION COMPANY,
a Minnesota corporation

By: /s/ Paul F. Clifford
    ------------------------------------------------------
Its: VP & CFO
     -----------------------------------------------------

51

EXHIBIT 10.25

RIDER ONE

RULES

(1) On Saturdays, Sundays and Holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. the following day, or such other hours as Landlord shall determine from time to time, access to the Property and/or to the passageways, entrances, exits, shipping areas, halls, corridors, elevators or stairways and other areas in the Property may be restricted and access gained by use of a key to the outside doors of the Property, or pursuant to such security procedures Landlord may from time to time impose. All such areas, and all roofs, are not for use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Property and its tenants provided, however, that nothing herein contained shall be construed to prevent such access to persons with whom Tenant deals in the normal course of Tenant's business unless such persons are engaged in activities which are illegal or violate these Rules. No Tenant and no employee or invitee of Tenant shall enter into areas reserved for the exclusive use of Landlord, its employees or invitees.

(2) Tenant shall not paint, display, inscribe, maintain or affix any sign, placard, picture, advertisement, name, notice, lettering or direction on any part of the outside or inside of the Property, or on any part of the inside of the Premises which can be seen from the outside of the Premises, without the prior consent of Landlord, and then only such name or names or matter and in such color, size, style, character and material as may be first approved by Landlord in writing. Landlord reserves the right to remove at Tenant's expense all matter not so installed or approved without notice to Tenant.

(3) Tenant shall not in any manner use the name of the Property for any purpose other than that of the business address of Tenant, or use any picture or likeness of the Property, in any letterheads, envelopes, circulars, notices, advertisements, containers or wrapping material without Landlord's express consent in writing.

(4) Tenant shall not place anything or allow anything to be placed in the Premises near the glass of any door, partition, wall or window which may be unsightly from outside the Premises, and Tenant shall not place or permit to be placed any article of any kind on any window ledge or on the exterior walls. Blinds, shades, awnings or other forms of inside or outside window ventilators or similar devices, shall not be placed in or about the outside windows in the Premises except to the extent, if any, that the character, shape, color, material and make thereof is first approved by Landlord.

(5) Furniture, freight and other large or heavy articles, and all other deliveries may be brought into the Property only at times and in the manner designated by Landlord, in compliance with all Laws, and always at Tenant's sole responsibility and risk. Landlord may impose reasonable charges for use of freight elevators after or before normal business hours. All damage done to the Property by moving or maintaining such furniture, freight or articles shall be repaired by Landlord at Tenant's expense. Landlord may inspect items brought into the Property or Premises with respect to weight or dangerous nature. Landlord may require that all furniture,


equipment, cartons and similar articles removed from the Premises or the Property be listed and a removal permit therefor first be obtained from Landlord. Tenant shall not take or permit to be taken in or out of other entrances or elevators of the Property, any item normally taken, or which Landlord otherwise reasonably requires to be taken, in or out through service doors or on freight elevators. Tenant shall not allow anything (including without limitation, portable carts, signs, placards, and billboards) to remain in or obstruct in any way, any lobby, plaza, corridor, sidewalk, passageway, entrance, exit, hall, elevator, escalator, stairway, shipping area, or other area. Tenant shall move all supplies, furniture and equipment as soon as received directly to the Premises, and shall move all such items and waste that are at any time being taken from the Premises directly to the areas designated for disposal. Tenant shall cause trash and rubbish to be deposited only in receptacles approved or designated by Landlord. Any hand-carts used at the Property shall have rubber wheels and side guards and no other material handling equipment may be brought upon the Property except as Landlord shall approve in writing in advance.

(6) Tenant shall not overload any floor or part thereof in the Premises, or Property, including any public corridors or elevators therein bringing in or removing any large or heavy articles, and Landlord may direct and control the location of safes and all other heavy articles and require supplementary supports at Tenant's expense of such material and dimensions as Landlord may deem necessary to properly distribute the weight.

(7) Tenant shall not attach or permit to be attached additional locks or similar devices to any door or window, change existing locks or the mechanism thereof, or make or permit to be made any keys for any door other than those provided by Landlord. If Tenant requires more keys to a lock than are initially provided by Landlord pursuant to the Lease, Landlord will provide them upon payment of a reasonable charge to Landlord. Tenant, upon termination of its tenancy, shall deliver to Landlord all keys of offices, rooms and toilet rooms which have been furnished Tenant or which Tenant shall have had made, and in the event of loss of any keys so furnished shall pay Landlord therefor.

(8) If Tenant desires signal, communication, alarm or other utility or similar service connections installed or changed, Tenant shall not install or change the same without the prior approval of Landlord, and then only under Landlord's direction at Tenant's expense. Tenant shall not install in the Premises any equipment which requires more electric current than Landlord is required to provide under this Lease, without Landlord's prior approval, and Tenant shall ascertain from Landlord the maximum amount of load or demand for or use of electrical current which can safely be permitted in the Premises, taking into account the capacity of electric wiring in the Property and the Premises and the needs of tenants of the Property, and shall not in any event connect a greater load than such safe capacity.

(9) Tenant shall not obtain for use upon the Premises ice, drinking water, towel, janitor and other similar services, except from Persons approved by Landlord. Any Person engaged by Tenant to provide janitor or other services shall be subject to direction by the manager or security personnel of the Property.

(10) The toilet rooms, urinals, wash bowls and other such apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage


resulting from the violation of this Rule shall be borne by Tenant who, or whose employees or invitees shall have caused it.

(11) The janitorial closets, utility closets, telephone closets, broom closets, electrical closets, storage closets, and other such closets, rooms and areas shall be used only for the purposes and in the manner designated by Landlord, and may not be used by tenants, or their contractors, agents, employees, or other parties without Landlord's prior written consent.

(12) Landlord reserves the right to exclude or expel from the Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules. Tenant shall not at any time manufacture, sell, use or give away, any spirituous, fermented, intoxicating or alcoholic liquors on the Premises, nor permit any of the same to occur (except in connection with occasional social or business events conducted in the Premises which do not violate any Laws nor bother or annoy any other tenants). Tenant shall not at any time sell, purchase or give away, food in any form by or to any of Tenant's agents or employees or any other parties on the Premises, nor permit any of the same to occur (other than in lunch rooms or kitchens for employees as may be permitted or installed by Landlord, which does not violate any Laws or bother or annoy any other tenant), nor permit any video, electronic or pinball machines on the Premises. If any food or beverages shall be permitted to be sold or consumed on the Premises, Landlord may require that Tenant engage a responsible pest and rodent control service approved by Landlord on such regular basis as Landlord reasonably requires.

(13) Tenant shall not make any room-to-room canvass to solicit business or information or to distribute any article or material to or from other tenants or occupants of the Property and shall not exhibit, sell or offer to sell, use, rent or exchange any products or services in or from the Premises unless ordinarily embraced within Tenant's use of the Premises specified in the Lease. No leaflets or other materials may be distributed or placed on vehicles in any parking area or facility.

(14) Tenant shall not waste electricity, water, heat or air conditioning or other utilities or services, and agrees to cooperate fully with Landlord to assure the most effective and energy efficient operation of the Property and shall not allow the adjustment (except by Landlord's authorized Property personnel) of any controls. Tenant shall keep corridor doors closed and shall not open any windows, except that if the air circulation shall not be in operation, windows which are openable may be opened with Landlord's consent. As a condition to claiming any deficiency in the air-conditioning or ventilation services provided by Landlord, Tenant shall close any blinds or drapes in the Premises to prevent or minimize direct sunlight.

(15) Tenant shall conduct no auction, fire or "going out of business sale" or bankruptcy sale in or from the Premises, and such prohibition shall apply to Tenant's creditors.

(16) Tenant shall cooperate and comply with any reasonable safety or security programs, including fire drills and air raid drills, and the appointment of "fire wardens" developed by Landlord for the Property, or required by Law. Before leaving the Premises unattended, Tenant shall close and securely lock all doors or other means of entry to the


Premises and shut off all lights and water faucets in the Premises (except heat to the extent necessary to prevent the freezing or bursting of pipes).

(17) Tenant will comply with all municipal, county, state, federal or other government laws, statutes, codes, regulations and other requirements in its use of the Premises and the Building, including without limitation, environmental, health, safety and police requirements and regulations respecting the Premises, now or hereinafter in force, at its sole cost, and will not use the Premises for any immoral purposes.

(18) Tenant shall not (i) carry on any business, activity or service except those ordinarily embraced within the permitted use of the Premises specified in the Lease and more particularly, but without limiting the generality of the foregoing, shall not (ii) install or operate any internal combustion engine, boiler, machinery, refrigerating, heating or air conditioning equipment in or about the Premises, (iii) use the Premises for housing, lodging or sleeping purposes or for the washing of clothes, (iv) place any radio or television antennae other than inside of the Premises, (v) operate or permit to be operated any musical or sound producing instrument or device which may be heard outside the Premises, (vi) use any source of power other than electricity,
(vii) operate any electrical or other device from which may emanate electrical or other waves which may interfere with or impair radio, television, microwave, or other broadcasting or reception from or in the Property or elsewhere, (viii) bring or permit any bicycle or other vehicle, or dog (except in the company of a blind person or except where specifically permitted) or other animal or bird in the Property, (ix) make or permit objectionable noise or odor to emanate from the Premises, (x) do anything in or about the Premises tending to create or maintain a nuisance or do any act tending to injure the reputation of the Property, (xi) throw or permit to be thrown or dropped any article from any window or other opening in the Property, (xii) use or permit upon the Premises anything that will invalidate or increase the rate of insurance on any policies of insurance now or hereafter carried on the Property or violate the certificates of occupancy issued for the premises or the Property, (xiii) use the Premises for any purpose, or permit upon the Premises anything, that may be dangerous to persons or property (including but not limited to flammable oils, fluids, paints, chemicals, firearms or any explosive articles or materials) nor
(xiv) do or permit anything to be done upon the Premises in any way tending to disturb any other tenant at the Property or the occupants of neighboring property.

(19) If the Property shall now or hereafter contain a building garage, parking structure or other parking area or facility, the following Rules shall apply in such areas or facilities:

(i) Parking shall be available in areas designated generally for tenant parking, for such daily or monthly charges as Landlord may establish from time to time, or as may be provided in any Parking Agreement attached hereto (which, when signed by both parties as provided therein, shall thereupon become effective). In all cases, parking for Tenant and its employees and visitors shall be on a "first come, first served," unassigned basis, with Landlord and other tenants at the Property, and their employees and visitors, and other Persons (as defined in Article 25 of the Lease) to whom Landlord shall grant the right or who shall otherwise have the right to use the same, all subject to these Rules, as the same may be amended or supplemented, and applied on a non-discriminatory basis, all as further described in Article 6 of the Lease. Notwithstanding the foregoing to


the contrary, Landlord reserves the right to assign specific spaces, and to reserve spaces for visitors, small cars, handicapped individuals, and other tenants, visitors of tenants or other Persons, and Tenant and its employees and visitors shall not park in any such assigned or reserved spaces. Landlord may restrict or prohibit full size vans and other large vehicles.

(ii) In case of any violation of these provisions, Landlord may refuse to permit the violator to park, and may remove the vehicle owned or driven by the violator from the Property without liability whatsoever, at such violator's risk and expanse. Landlord reserves the right to close all or a portion of the parking areas or facilities in order to make repairs or perform maintenance services, or to alter, modify, re-stripe or renovate the same, or if required by casualty, strike, condemnation, act of God, Law or governmental requirement, or any other reason beyond Landlord's reasonable control. In the event access is denied for any reason, any monthly parking charges shall be abated to the extent access is denied, as Tenant's sole recourse. Tenant acknowledges that such parking areas or facilities may be operated by an independent contractor not affiliated with Landlord, and Tenant acknowledges that in such event, Landlord shall have no liability for claims arising through acts or omissions of such independent contractor, if such contractor is reputable.

(iii) Hours shall be 6 A.M. to 8 P.M., Monday through Friday, and 8:00 A.M. to 1:00 P.M. on Saturdays, or such other hours as may be reasonably established by Landlord or its parking operator from time to time; cars must be parked entirely within the stall lines, and only small cars may be parked in areas reserved for small cars; all directional signs and arrows must be observed; the speed limit shall be 5 miles per hour; spaces reserved for handicapped parking must be used only by vehicles properly designated; every parker is required to park and lock his own car; washing, waxing, cleaning or servicing of any vehicle is prohibited; parking spaces may be used only for parking automobiles; parking is prohibited in areas: (a) not striped or designated for parking, (b) aisles, (c) where "no parking" signs are posted, (d) on ramps, and (e) loading areas and other specially designated areas. Delivery trucks and vehicles shall use only those areas designated therefor.


EXHIBIT 10.25

EXHIBIT B

JMB 105E (2/89)
WORK AGREEMENT
TENANT PERFORMANCE

WORK AGREEMENT

1. The Work. Under the Lease, Tenant has agreed to accept the Premises "as is," without any obligations for the performance of improvements or other work by Landlord, and Tenant desires to perform certain improvements thereto (the "Work"). Such Work shall be in accordance with the provisions of this Work Agreement, and to the extent not expressly inconsistent herewith, in accordance with the provisions of the Lease, including without limitation, Article 8 thereof. Performance of the Work shall not serve to abate or extend the time for the commencement of Rent under the Lease, except to the extent Landlord delays approvals beyond the times permitted below.

2. Cost of the Work. Except as provided hereinafter, Tenant shall pay all costs (the "Costs of the Work") associated with the Work whatsoever, including without limitation, all permits, inspection fees, fees of space planners, architects, engineers, and contractors, utility connections, cabling, the cost of all labor and materials, bonds, insurance, and any structural or mechanical work, additional HVAC equipment or sprinkler heads, or modifications to any building mechanical, electrical, plumbing or other systems and equipment or relocation of any existing sprinkler heads, either within or outside the Premises required as a result of the layout, design, or construction of the Work.

Of the Costs of the Work, Landlord shall reimburse Tenant the amount of $25.00 per square foot of rentable area of the Premises (the "Improvement Allowance"), which costs may include Tenant's costs incurred in preparing space plans for the Premises, consulting and project management fees in relation to the Work, and Tenant's costs of moving into the Premises. Landlord shall fund the Improvement Allowance in installments, on a monthly basis, based on applications for payment and releases of lien rights, submitted by Tenant on Landlord's standard for use by contractors requesting progress payments, together with such lien releases and affidavits of payments by Tenant's general contractor and subcontractors contemplated therein, and such other documentation as Landlord may reasonably require. Landlord may issue checks to fund the Improvement Allowance jointly to Tenant, its general contractor, and, at Landlord's option, to any subcontractors or suppliers.

Tenant shall be entitled to use a portion of any unused Improvement Allowance, not to exceed $2.00 per square foot of rentable area of the Premises, towards the first accruing payments of Base Rent under the Lease. If all or any portion of any Improvement Allowance above $2.00 per square foot of rentable area of the Premises shall not be used, Landlord shall be entitled to such savings and Tenant shall receive no credit therefor.

3. Space Plan and Specifications.


A. No later than ten (10) days after the date of this Work Agreement set forth above, Tenant shall submit two (2) sets of a "Space Plan" (as described in Section 16) to Landlord for approval.

B. Landlord shall, within ten (10) days after receipt thereof, either approve said Space Plan, or disapprove the same advising Tenant of the reasons for such disapproval. In the event Landlord disapproves said Space Plan, Tenant shall modify the same, taking into account the reasons given by Landlord for said disapproval, and shall submit two sets of the revised Space Plan to Landlord within five (5) days after receipt of Landlord's initial disapproval.

4. Working Drawings and Engineering Report.

A. No later than ten (10) days after receipt of Landlord's approval of the Space Plan, Tenant shall submit to Landlord for approval two (2) sets of "Working Drawings" (as defined in Section 16), and a report (the "Engineering Report") from Tenant's mechanical, structural and electrical engineers indicating any special heating, cooling, ventilation, electrical, heavy load or other special or unusual requirements of Tenant.

B. Landlord shall, within twenty (20) working days after receipt thereof, either approve the Working Drawings and Engineering Report, or disapprove the same advising Tenant of the reasons for disapproval. If Landlord disapproves of the Working Drawings or Engineering Report, Tenant shall modify and submit revised Working Drawings, and a revised Engineering Report, taking into account the reasons given by Landlord for disapproval, within five (5) days after receipt of Landlord's initial disapproval.

5. Landlord's Approval. Landlord shall not unreasonably withhold approval of any Space Plans, Working Drawings, or Engineering Report submitted hereunder if they provide for a customary office layout with finishes and materials generally conforming to building standard finishes and materials currently being used by Landlord at the Property, are compatible with the Property's shell and core construction, and if no modifications will be required for the Property electrical, heating, air-conditioning, ventilation, plumbing, fire protection, life safety, or other systems or equipment, and will not require any structural modifications to the Property, whether required by heavy loads or otherwise.

6. Space Planners, Architects, Engineers. The Space Plan, Working Drawings, Engineering Report and the Work, shall be prepared and performed by such space planners, architects, engineers, and contractors as Landlord customarily engages or recommends for use at the Property; provided, Tenant may substitute another licensed, bonded, reputable and qualified space planner, architect, engineer or contractor, who will work in harmony with each other and those of Landlord so as to ensure proper maintenance of good labor relationships, and in compliance with all applicable labor agreements existing between trade unions and the relevant chapter of the Association of General Contractors of America. Such substitutions may be made only with Landlord's prior written approval. Such approval shall be granted or denied within fifteen
(15) days after Landlord receives from Tenant a written request for such substitution, containing a reasonable designation of the proposed party's background, references and qualifications. Any such substitution shall not serve to delay the times for submission of the


Space Plan, Working Drawings and Engineering Report required herein, except to the extent that Landlord delays granting or denying approval beyond the aforementioned fifteen (15) day period.

7. Change Orders. No material changes, modifications, alterations or additions to the approved Space Plan or Working Drawings may be made without the prior written consent of Landlord after the written request therefor by Tenant. In the event that the Premises are not constructed in accordance with said approved Space Plan and Working Drawings, then Tenant shall not be permitted to occupy the Premises until the Premises reasonably comply in all respects with said approved Space Plan and Working Drawings; in such case, the Rent shall nevertheless commence to accrue and be payable as otherwise provided in the Lease.

8. Compliance. The Work shall comply in all respects with the following:
(a) the Building Code of the City and State in which the Building is located and State, County, City or other laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other such person, (b) applicable standards of the National Board of Fire Underwriters and National Electrical Code, and (c) building material manufacturer's specifications.

9. Guarantees. Each contractor, subcontractor and supplier participating in the Work shall guarantee that the portion thereof for which he is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. Every such contractor, subcontractor and supplier shall be responsible for the replacement or repair, without any additional charge, of all work done or furnished in accordance with its contract which shall become defective within one (1) year after completion thereof. The correction of such work shall include, without additional charge, all additional expenses and damages in connection with such removal or replacement of all or any part of the Work and/or the Property and/or common areas, or work which may be damaged or disturbed thereby. All such warranties or guarantees as to materials or workmanship of or with respect to the Work shall be contained in the contract or subcontract which shall be written such that said warranties or guarantees shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give Landlord any assignment or other assurances necessary to effect such right of direct enforcement. Copies of all contracts and subcontracts shall be furnished to Landlord promptly after the same are entered.

10. Performance.

A. The Work shall be commenced within fifteen (15) days after Landlord approves the Working Drawings, and shall thereafter be diligently prosecuted to completion, subject to delays for reasons beyond Tenant's control (except financial matters). All Work shall conform with the Working Drawings approved by Landlord in writing, and Landlord may periodically inspect the Work for such compliance. The Work shall be coordinated under Landlord's direction with the work being done or to be performed for or by other tenants in the Property so that the Work will not interfere with or delay the completion of any other construction work in the Property.


B. The Work shall be performed in a thoroughly safe, first-class and workmanlike manner in conformity with the approved Space Plan and Working Drawings, and shall be in good and usable condition at the date of completion.

C. Tenant shall be required to obtain and pay for all necessary permits and/or fees with respect to the Work, and the same shall be shown to Landlord prior to commencement of the Work.

D. Each contractor and subcontractor shall be required to obtain prior written approval from Landlord for any space outside the Premises within the Property, which such contractor or subcontractor desires to use for storage, handling, and moving of his materials and equipment, as well as for the location of any facilities for his personnel.

E. The contractors and subcontractors shall be required to remove from the Premises and dispose of, at least once a week and more frequently as Landlord may direct, all debris and rubbish caused by or resulting from the construction. Upon completion of the Work, the contractors and subcontractors shall remove all surplus materials, debris and rubbish of whatever kind remaining within the Property which has been brought in or created by the contractors and subcontractors in the performance of the Work. If any contractor or subcontractor shall neglect, refuse or fail to remove any such debris, rubbish, surplus material or temporary structures within two (2) days after notice to Tenant from Landlord with respect thereto, Landlord may cause the same to be removed by contract or otherwise as Landlord may determine expedient, and charge the cost thereof to Tenant as additional Rent under the Lease.

F. Tenant shall obtain and furnish Landlord all approvals with respect to electrical, water and telephone work as may be required by the respective company supplying the service. Tenant shall obtain utility service, including meter, from the utility company supplying service, unless Landlord elects to supply service and/or meters.

G. Landlord shall have the right to require Tenant to furnish bonds or other security in form and amount reasonably satisfactory to Landlord for the prompt and faithful performance and payment for the Work. However, Landlord shall not require a bond or other security if Landlord reasonably concludes that the Tenant's contractor is financially responsible. Landlord shall identify any bonding requirements at the time Tenant requests approval of the identity of its general contractor.

H. Landlord's acceptance of the Work as being complete in accordance with the approved Space Plan and Working Drawings shall be subject to Landlord's inspection and written approval. Tenant shall give Landlord five (5) days' prior written notification of the anticipated completion of the Work.

I. Intentionally Omitted.

J. Tenant shall, at its cost and expense construct, purchase, install and perform any and all items of the Work, stock its merchandise and employ its personnel so as to obtain any governmentally required certificate of occupancy and to occupy the Premises as soon as possible, and in all cases on or before the date required therefor hereunder or under the Lease.


K. If an expansion joint occurs within the Premises, Tenant shall install finish floor covering to or covering such joint in a workmanlike manner, and Landlord shall not accept responsibility for any finish floor covering applied to or installed over the expansion joint.

L. Copies of "as built" drawings shall be provided to Landlord no later than thirty (30) days after completion of the Work.

M. Landlord's approval of Tenant's plans and specifications, and Landlord's recommendations or approvals concerning contractors, subcontractors, space planners, engineers or architects, shall not be deemed a warranty as to the quality or adequacy of the Work, or the design thereof, or of its compliance with Laws, codes and other legal requirements.

N. Tenant shall conduct its labor relations and relations with employees so as to avoid strikes, picketing and boycotts of, on or about the Premises or Property. If any employees strike, or if picket lines or boycotts or other visible activities objectionable to Landlord are established, conducted or carried out against Tenant, its employees, agents, contractors, subcontractors or suppliers, in or about the Premises or Property, Tenant shall immediately close the Premises and remove or cause to be removed all such employees, agents, contractors, subcontractors and suppliers until the dispute has been settled.

O. Landlord shall not be responsible for any disturbance or deficiency created in the air conditioning or other mechanical, electrical or structural facilities within the Property or Premises as a result of the Work. If such disturbances or deficiencies result, Tenant shall correct the same and restore the services to Landlord's reasonable satisfaction, within a reasonable time.

P. If performance of the Work shall require that additional services or facilities (including without limitation, extra or after-hours elevator usage or cleaning services) be provided, Tenant shall pay Landlord's reasonable charges therefor.

Q. Tenant's contractors shall comply with the rules of the Property and Landlord's requirements respecting the hours of availability of elevators and manner of handling materials, equipment and debris. Demolition must be performed after 6:00 p.m. on weekends. Delivery of materials, equipment and removal of debris must be arranged to avoid any inconvenience or annoyance to other occupants. The Work and all cleaning in the Premises must be controlled to prevent dirt, dust or other matter from infiltrating into adjacent tenant or mechanical areas.

R. Landlord may impose reasonable additional requirements from time to time in order to ensure that the Work, and the construction thereof does not disturb or interfere with any other tenants of the Property, or their visitors, contractors or agents, nor interfere with the efficient, safe and secure operation of the Property.

11. Insurance. All contractors and sub-contractors shall carry Worker's Compensation Insurance covering all of their respective employees in the statutory amounts. Employer's Liability Insurance in the amount of at least $500,000 per occurrence, and comprehensive general liability insurance of at least $3,000,000 combined single limit for bodily injury, death, or property damage; and the policies therefor shall cover Landlord and Tenant as additional


insureds, as well as the contractor or subcontractor. Tenant shall carry builder's risk insurance coverage respecting the construction and improvements to be made by Tenant, in the amount of the anticipated cost of construction of the Work (or any guaranteed maximum price). All insurance carriers hereunder shall be rated at least A and X in Best's Insurance Guide. Certificates for all such insurance shall be delivered to Landlord before the construction is commenced or contractor's equipment is moved onto the Property. All policies of insurance must require that the carrier give Landlord twenty (20) days' advance written notice of any cancellation or reduction in the amounts of insurance. In the event that during the course of the Work any damage shall occur to the construction and improvements being made by Tenant, then Tenant shall repair the same at Tenant's cost.

12. Signage. Notwithstanding anything contained herein to the contrary, Landlord may cause signage of building standard material and design to be placed on or near the door of the Premises in accordance with Article 41 of the Lease.

13. Asbestos. If the Property was constructed at a time when asbestos was commonly used in construction, Tenant acknowledges that asbestos-containing materials ("ACM") may be present at the Property, and that airborne asbestos fibers may involve a potential health hazard unless proper procedures are followed. In such case, before commencing the Work, Tenant and its contractor shall consult with Landlord and Landlord's asbestos consultant concerning appropriate procedures to be followed. Landlord shall, at Tenant's expense, undertake any necessary initial asbestos-related work, before Tenant commences the Work. During performance of the Work, Tenant shall require that its contractor comply with all laws, rules, regulations and other governmental requirements, as well as all directives of Landlord's asbestos consultant as Tenant's attorney-in-fact for purposes of supervising and directing any asbestos-related aspects of the Work (but such appointment shall not relieve Tenant from its obligations hereunder, nor impose any affirmative requirement on Landlord to provide such supervision or direction).

14. Liens. Tenant shall keep the Property and Premises free from any mechanic's, materialmen's or similar liens or other such encumbrances in connection with the Work, and shall indemnify and hold Landlord harmless from and against any claims, liabilities, judgments, or costs (including attorneys' fees) arising in connection therewith. Tenant shall give Landlord notice at least five (5) business days prior to the commencement of the Work (or such additional time as may be necessary under applicable laws), to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within thirty (30) days after written notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount paid shall be deemed additional rent under the Lease payable upon demand, without limitation as to other remedies available to Landlord under the Lease. Nothing contained herein shall authorize Tenant to do any act which shall subject landlord's title to the Property or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Property or Premises arising in connection with the Work shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Property and Premises.


15. Indemnity. Tenant shall indemnify, defend and hold harmless Landlord (and Landlord's principals, partners, agents, trustees, beneficiaries, offices, employees and affiliates) from and against any claims, demands, losses, damages, injuries, liabilities, expenses, judgments, liens, encumbrances, orders and awards, together with attorneys' fees and litigation expenses arising out of or in connection with the Work, or Tenant's failure to comply with the provisions hereof or any failure by Tenant's contractors, subcontractors or their employees to comply with the provisions hereof, except to the extent caused by Landlord's intentional or negligent acts.

16. Certain Definitions.

A. "Space Plan" herein means a floor plan, drawn to scale, showing: (1) demising walls, corridor doors, interior partition walls and interior doors, including any special walls, glass partitions or special corridor doors, (2) any restrooms, kitchens, computer rooms, file rooms and other special purpose rooms, and any sinks or other plumbing facilities, or other special facilities or equipment, (3) any communications system, indicating telephone and computer outlet locations, and (4) any other details or features required to reasonably delineate the Work to be performed.

B. "Working Drawings" herein means fully dimensioned architectural construction drawings and specifications, and any required engineering drawings (including mechanical, electrical, plumbing, air-conditioning, ventilation and heating), and shall include any applicable items described above for the Space Plan, and if applicable: (1) electrical outlet locations, circuits and anticipated usage therefor, (2) reflected ceiling plan, including lighting, switching and any special ceding specifications, (3) duct locations for heating, ventilating and air-conditioning equipment, (4) details of all millwork, (5) dimensions of all equipment and cabinets to be built in, (6) furniture plan showing details of space occupancy, (7) keying schedule, (8) lighting arrangement, (9) location of print machines, equipment in lunch rooms, concentrated file and library loadings and any other equipment or systems (with brand names wherever possible) which require special consideration relative to air-conditioning, ventilation, electrical, plumbing, structural, fire protection, life-fire-safety system, or mechanical systems, (10) special heating, ventilating and air conditioning equipment and requirements, (11) weight and location of heavy equipment, and anticipated loads for special usage rooms, (12) demolition plan, (13) partition construction plan, (14) type and color of floor and wall-coverings, wall paint and any other finishes, and any other details or features required to completely delineate the Work to be performed.

17. Taxes. Tenant shall pay prior to delinquency all taxes, charges or other governmental impositions (including without limitation, any real estate taxes or assessments, sales tax or value added tax) assessed against or levied upon Tenant's fixtures, furnishings, equipment and personal property located in the Premises and the Work to the Premises under this Work Agreement.

18. INCORPORATED INTO LEASE; DEFAULT. THE PARTIES AGREE THAT THE PROVISIONS OF THIS WORK AGREEMENT ARE HEREBY INCORPORATED BY THIS REFERENCE INTO THE LEASE FULLY AS THOUGH SET FORTH THEREIN. In the event of any express inconsistencies between the Lease and this Work


Agreement, the latter shall govern and control. If Tenant shall default under this Work Agreement, and fail to cure within ten (10) business days (provided, if the nature of Tenant's default is such that more time is reasonably required in order to cure, Tenant shall not be in default if Tenant commences to cure within such period and thereafter diligently and reasonably pursues such cure to completion), Landlord may order that all Work being performed in the Premises be stopped immediately, and that no further deliveries to the Premises be made, until such default is cured, without limitation as to Landlord's other remedies. Any amounts payable by Tenant to Landlord hereunder shall be paid as additional rent under the Lease. Any default by the other party hereunder shall constitute a default under the Lease and shall be subject to the remedies and other provisions applicable thereto under the Lease. If Tenant shall default under the Lease or this Work Agreement and fail to cure the same within the time permitted for cure under the Lease, at Landlord's option, all amounts paid or incurred by Landlord towards the Improvement Allowance shall become immediately due and payable as additional rent under the Lease.


EXHIBIT 10.25

EXHIBIT C

SUBORDINATION, NON-DISTURBANCE

AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this "AGREEMENT") is made by and between TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, a New York corporation with offices at 730 Third Avenue, New York, New York 10017 ("LENDER") and _____________________________, a [an] [individual] name of state [corporation] [limited liability company] [general partnership]
[limited partnership] [d/b/a ________________] with its principal place of business at ____________________ ("TENANT").

RECITALS:

A. Lender has made or is about to make a loan (together with all advances and increases, the ("LOAN") to 222 South Ninth Street Limited Partnership, a Minnesota limited partnership ("BORROWER").

B. Borrower, as landlord, and Tenant have entered into a lease dated __________________________ as amended by amendments dated ________________ __________ (the "LEASE") which leased to Tenant [Suite No. ___________] [Floor _______] (the "LEASED SPACE") located in the "Property" (defined below).

C. The Loan is secured by the Second Amendment to Agreement for Extension, Supplement and Restatement of Mortgage dated May 29, 1992 recorded in the official records of the County of Hennepin, State of Minnesota (together with all advances, increases, amendments or consolidations, the "MORTGAGE").

D. The Mortgage encumbers the real property, improvements and fixtures located at 222 South Ninth Street in the City of Minneapolis, County of Hennepin, State of Minnesota, commonly known as the Piper Jaffray Tower and described on Exhibit "A" (the "PROPERTY").

IN CONSIDERATION of the mutual agreements contained in this Agreement, Lender and Tenant agree as follows:

1. The Lease and all of Tenant's rights under the Lease are and will remain subject and subordinate to the lien of the Mortgage and all of the Lender's rights under the Mortgage and Tenant will not subordinate the Lease to any other lien against the Property without Lender's prior consent.

2. This Agreement constitute notice to Tenant of the Mortgage and the Assignment and, upon receipt of notice from Lender, Tenant will pay the Rent as and when due under the Lease to Lender and the payments will be credited against the Rent due under the Lease.

3. Tenant does not have and will not acquire any right or option to purchase any portion of or interest in the Property.


4. Tenant and Lender agree that if Lender exercises its remedies under the Mortgage or the Assignment and if Tenant is not then in default under this Agreement and if Tenant is not then in default beyond any applicable grace and cure periods under the Lease:

(a) Lender will not name Tenant as a party to any judicial or non-judicial foreclosure or other proceeding to enforce the Mortgage unless joinder is required under applicable law but in such case Lender will not seek affirmative relief against Tenant, the Lease will not be terminated and Tenant's possession of the Leased Space will not be disturbed;

(b) If Lender or any other entity (a "SUCCESSOR LANDLORD") acquires the Property through foreclosure, by other proceeding to enforce the Mortgage or by deed-in-lieu of foreclosure (a "FORECLOSURE"), Tenant's possession of the Leased Space will not be disturbed and the Lease will continue in full force and effect between Successor Landlord and Tenant; and

(c) If, notwithstanding the foregoing, the Lease is terminated as a result of a Foreclosure, a lease between Successor Landlord and Tenant will be deemed created, with no further instrument required, on the same terms as the Lease except that the term of the replacement lease will be the then unexpired term of the Lease. Successor Landlord and Tenant will execute a replacement lease at the request of either. In the event of any attornment hereunder or execution of any replacement lease, Tenant's term extension and expansion rights under the Lease shall still be applicable to its continuing tenancy.

5. Upon Foreclosure, Tenant will recognize and attorn to Successor Landlord as the landlord under the Lease for the balance of the term. Tenant's attornment will be self-operative with no further instrument required to effectuate the attornment except that at Successor Landlord's request, Tenant will execute instruments reasonably satisfactory to Successor Landlord confirming the attornment.

6. Successor Landlord will not be:

(a) liable for any act or omission of any prior landlord under the Lease occurring before the date of the Foreclosure except for repair and maintenance obligations of a continuing nature imposed on the landlord under the Lease.

(b) required to credit Tenant with any Rent paid more than one (1) month in advance or for any security deposit unless such Rent or security deposit has been received or escrowed by Successor Landlord;

(c) bound by any amendment, renewal or extension of the Lease that is inconsistent with the terms of this Agreement or is not in writing and signed both by Tenant and Landlord;

(d) bound by any reduction of the Rent unless the reduction is in connection with an extension or renewal of the Lease at prevailing market terms or was made with Lender's prior consent;


(e) bound by any reduction of the term(1) of the Lease or any termination, cancellation or surrender of the Lease unless the reduction, termination, cancellation or surrender occurred during the last six (6) months of the term or is made with Lender's prior consent, or such termination, cancellation or surrender is specifically provided for in the Lease;

(f) bound by any amendment, renewal or extension of the Lease entered into after the date of the Mortgage without Lender's prior consent if the Leased Space represents 50% or more of the net rentable area of the building in which the Leased Space is located;

(g) subject to any credits, offsets, claims, counterclaims or defenses that Tenant may have that arose prior to the date of the Foreclosure or liable for any damages Tenant may suffer as a result of any misrepresentation, breach of warranty or any act of or failure to act by any party other than Successor Landlord;

(h) bound by any obligation to make improvements to the Property to make any payment or give any credit or allowance to Tenant provided for in the Lease or to pay any leasing commissions arising out of the Lease, except that Successor Landlord will be:

i. bound by any such obligations provided for in the Lender-approved form lease;

ii. bound by any such obligations if the overall economic terms of the Lease (including the economic terms of any renewal options) represented market terms for similar space in properties comparable to the Property when the Lease was executed; and

iii. bound to comply with the casualty and condemnation restoration provisions included in the Lease provided that Successor Landlord receives the insurance or condemnation proceeds;

iv. bound by any such obligations to make improvements to the Leased Space specifically provided for in the Lease;

or

(i) liable for obligations under the Lease with respect to any off-site property or facilities for the use of Tenant (such as off-site leased space or parking) unless Successor Landlord acquires in the Foreclosure the right, title or interest to the off-site property.

7. Lender will have the right but not the obligation, to cure any default by Borrower, as landlord, under the Lease. Tenant will notify Lender of any default that would entitle Tenant to terminate the Lease or abate the Rent and any notice of termination or abatement will not be effective unless Tenant has so notified Lender of the default and Lender has had a 30-day cure period (or such longer period as may be necessary if the default is not susceptible to cure within thirty (30) days) commencing on the latest to occur of the date on which (i) the cure period under the Lease expires; (ii) Lender receives the notice required by this paragraph; and (iii) Successor Landlord obtains possession of the Property if the default is not susceptible to cure without possession.


(1) For purposes of this subparagraph "the term of the Lease" includes any renewal term after the right to renew has been exercised.


8. All notices, requests or consents required or permitted to be given under this Agreement must be in writing and set by certified mail, return receipt requested or by nationally recognized overnight delivery service providing evidence of the date of delivery, with all charges prepaid, addressed to the appropriate party at the address set forth above.

9. Any claim by Tenant against Successor Landlord under the Lease or this Agreement will be satisfied solely out of Successor Landlord's interest in the Property and Tenant will not seek recovery against or out of any other assets of Successor Landlord. Successor Landlord will have no liability or responsibility for any obligations under the Lease that arise subsequent to any transfer of the Property by Successor Landlord.

10. This Agreement is governed by and will be construed in accordance with the laws of the state in which the Property is located.

11. Lender and Tenant waive trial by jury in any proceeding brought by, or counterclaim asserted by, Lender or Tenant relating to this Agreement.

12. If there is a conflict between the terms of the Lease and this Agreement, the terms of this Agreement will prevail as between Successor Landlord and Tenant.

13. This Agreement binds and inures to the benefit of Lender and Tenant and their respective successors, assigns, heirs, administrators, executors, agents and representatives.

14. This Agreement contains the entire Agreement between Lender and Tenant with respect to the subject matter of this Agreement, may be executed in counterparts that together constitute a single document and may be amended only by a writing signed by Lender and Tenant.

15. Tenant certifies that: the Lease represents the entire agreement between the landlord under the Lease and Tenant regarding the Leased Space; the Lease is in full force and effect; neither party is in default under the Lease beyond any applicable grace and cure periods and no event has occurred which with the giving of notice or passage of time would constitute a default under the Lease; Tenant has entered into occupancy and is open and conducting business in the Leased Space; and all conditions to be performed to date by the landlord under the Lease have been satisfied.


IN WITNESS WHEREOF, Lender and Tenant have executed and delivered this Agreement as of ________, 2000.

TEACHERS INSURANCE AND ANNUITY

ASSOCIATION OF AMERICA, a New

York corporation

By:______________________________

Name:____________________________

Title:___________________________

NAME OF TENANT,

a [an] [individual] [corporation] [limited liability
company] [general partnership] [limited
partnership] [d/b/a________________________]

By:______________________________
Name:____________________________
Title:___________________________


ACKNOWLEDGMENT

State of ___________________

County of __________________

On this the ___day of __________________, 200_ before me, the undersigned officer, personally appeared __________________ who acknowledged himself to be the ___________________ I of ______________________, a corporation, and that he, as such ___________________ being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as ________________________.

In witness whereof I hereunto set my hand and official seal.



Title of Officer


EXHIBIT 10.25

EXHIBIT A TO SNDA

LEGAL DESCRIPTION

PARCEL I

Lots 3, 4, and 5, and Block 3, Brown and Jackin's Addition to Minneapolis; and all of Block 3, Snyder and Co.'s 1st Addition to Minneapolis, according to the plats thereof on file or of record in the Office of the County Recorder, Hennepin County, Minnesota.

PARCEL II

A permanent and exclusive easement appurtenant to Parcel I for the construction, operation, maintenance and repair of a pedestrian skywalk corridor, granted by the Woman's Christian Association of Minneapolis, a Minnesota non-profit corporation, by Skyway Easement Agreement, dated May 2, 1984, by and between Woman's Christian Association of Minneapolis, as grantor, and OB Joint Venture, a South Dakota general partnership, as grantee, recorded on November 20, 1984, in the Office of the County Recorder, Hennepin County, Minnesota, as document No. 4944804, as amended by Amendment to Skyway Easement Agreement dated July 10, 1984, recorded on November 15, 1984, in the Office of the County Recorder, Hennepin County, Minnesota, as Document No. 4943671.

PARCEL III

A permanent and exclusive easement appurtenant to Parcel I for the construction, operation, maintenance and repair of a pedestrian skywalk corridor, granted by St. Olaf's Catholic Church of Minneapolis, Minnesota, a Minnesota religious corporation, by Skyway Encroachment easement dated May 5, 1984, by and between St. Olaf's Catholic Church of Minneapolis, as grantor, and OB Joint Venture, a South Dakota general partnership, as grantee, recorded on November 20, 1984, in the Office of the Recorder of Hennepin County, Minnesota, as Document No. 4944803.

PARCEL IV

A permanent easement appurtenant to Parcel I for access and for the construction, operation, maintenance and repair of a pedestrian skywalk corridor, granted by Energy Center Partners, a Limited Partnership, a Minnesota limited partnership, OB Joint Venture, a South Dakota partnership, Campbell-Mithun, Inc., a Minnesota corporation, LHDL Realty Limited Partnership, a Minnesota limited partnership, Piper Jaffray Incorporation, a Delaware corporation, and 222 South Ninth Street Limited Partnership, a Minnesota limited partnership, recorded on November 1, 1984, in the Office of the County Recorder, Hennepin County, Minnesota, as Document No. 4939810.

PARCEL V

A permanent easement appurtenant to Parcel I for access and for the construction, operation, maintenance and repair of a pedestrian skywalk corridor, granted by Marina Management Company, N.V., a Netherlands Antilles corporation, OB Joint Venture, a South Dakota


partnership, Campbell-Mithun, Inc., a Minnesota corporation, LHDL Realty Limited Partnership, a Minnesota limited partnership, Piper Jaffray Incorporation, a Delaware corporation, and 222 South Ninth Street Limited Partnership, a Minnesota limited partnership, recorded on July 31, 1984, in the Office of the County Recorder, Hennepin County, Minnesota, as Document No. 4911964.


EXHIBIT 10.25

EXHIBIT D

DISPUTE RESOLUTION MECHANISM

PREVAILING RENTAL RATE

(a) If Tenant does not agree with Landlord's determination of the Prevailing Rental Rate (a "Rent Dispute"), Tenant shall give notice to Landlord of such disagreement ("Disagreement Notice") within the time period provided in the applicable provision of the Lease (the "Disagreement Notice Period") after receipt of Landlord's notice of its determination of teh Prevailing Rental Rate pursuant to the applicable provision. If Tenant fails to timely provide a Disagreement Notice, then Tenant shall be bound by Landlord's determination of the Prevailing Rental Rate. If Tenant does provide Landlord with such a Disagreement Notice, Tenant shall include in its Disagreement Notice the basis for its disagreement.

(b) If Tenant gives Landlord a Disagreement Notice within the applicable Disagreement Notice Period, each party will choose a qualified third party to participate in resolution of the dispute. As to Rent Disputes, each such party (and the third party to be designated, as referenced below) shall be a real estate appraiser in the Minneapolis metropolitan area who shall be a member in good standing of the American Institute of Real Estate Appraisers (or a successor organization or, if no such organization exists, then persons of similar professional qualifications), and shall have had no business or professional relationship with the party designating that person within the prior three (3) years. Each party will give notice of the name and address of such person to the other within ten (10) days after Tenant delivers the Disagreement Notice. Those two (2) persons shall within five (5) days after designation select a third person with the same credentials, who shall not have had any business or professional relationship with either party during the prior three (3) years, or if they cannot agree on a third person within such five (5) day period, either person may request that the American Institute of Real Estate Appraisers (or a successor organization or, if no such organization exists, then persons of similar professional qualifications) appoint such third person. The three (3) persons (singularly, the "Expert" and collectively, the "Experts") shall make a determination as to the resolution of the Dispute as expeditiously as possible thereafter and in any event within thirty (30) days after the selection of the third Expert. The determination of the Experts shall be made as follows:

(i) At least five (5) days prior to the commencement of the Experts' deliberations, each party shall submit to the Experts and the other party all information deemed relevant by that party to the determination by the Experts of the Dispute (this shall include disclosure by Landlord of the terms of leases and renewals in the Building in the prior twelve (12) month period), and each Expert will independently determine its position as to resolution of the Dispute and then all will meet and contemporaneously disclose to the others their respective determinations. The Experts shall be instructed to express their results in a fixed base rent amount per rentable square foot over the applicable period as to which the Prevailing Rental Rate is to be determined


(ii) If neither the highest nor the lowest determination differs from the middle determination by more than ten percent (10%) of such middle determination, then the resolution of the Dispute shall be the average of all three determinations.

(iii) If subparagraph (ii) does not apply, then the resolution of the Dispute shall be the average of the two determinations closest by dollar amount.

(iv) The Experts shall promptly notify Landlord and Tenant of each of their separate determinations and the resulting Dispute resolution. The determination of the Experts shall be final, binding and conclusive upon Landlord and Tenant.

(c) Each party will pay any and all fees and expenses incurred in connection with such party's Expert and the fees and expenses for the third Expert will be borne equally by the parties.


EXHIBIT 10.25

EXHIBIT E

SIGNAGE CRITERIA

Skyway Display Case

The Skyway Display Case shall be an architecturally unique internally illuminated glass front display case. Glass front shall be comprised of 16'0" of Herculite glass with a pair of swinging glass doors with chrome trim to match the base building architectural details. The sill height shall be 30-1/2" above the finished floor, with an internal height of 5'9". The back of the display case shall be finished with a neutral fabric. There shall be recessed slot brackets to accommodate shelving. Within the case may be an electric scrolling message board. The location of the display case shall be opposite of D. Brian's Deli in the west skyway entrance. The existing display case shall be provided to Tenant in its "as is" condition. Modifications of the display case, except to conform with the foregoing criteria, shall be subject to approval by Landlord.

Lobby Display

The lobby display kiosk shall be no larger than 32" wide (square) and a maximum of 7' 0" in height from the floor. Finishes and materials utilized in the construction of the kiosk shall harmonize with the existing building finishes and materials. The kiosk shall be non-illuminated. An interactive touch screen or monitor shall be permitted with the provision that there shall be no sound producing equipment. The kiosk shall be constructed to be able to be moved by one person without the need of any special equipment. The kiosk shall be constructed to comply with all OSHA and ANSI standards to prevent tipping and all ADA requirements. The location of the kiosk shall be subject to approval by Landlord.

All designs shall be submitted to Landlord for approval.


AMENDMENT NO. 1 TO LEASE AGREEMENT

This Amendment No. 1 to Lease Agreement ("Amendment") is made effective as of December 5, 2001, between ND PROPERTIES, INC. ("Landlord") and CAPELLA EDUCATION COMPANY ("Tenant").

A. Landlord's predecessor in interest and Tenant entered into a written Office Lease dated June 28, 2000 ("Lease"), relating to the premises currently consisting of approximately 68,768 rentable square feet ("Current Premises") and comprised of the entire rentable area of the 16th, 19th and 20th floors of the building located at 222 South Ninth Street, Minneapolis, Minnesota (the "Building").

B. The Lease has not previously been amended or modified.

C. Landlord and Tenant desire to expand the Premises and to otherwise amend the Lease as provided in this Amendment.

FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are expressly acknowledged, Landlord and Tenant agree as follows:

1. Effect. The Lease is hereby amended to the extent necessary to give effect to this Amendment, and the terms of this Amendment shall supersede any contrary terms in the Lease. All references in the Lease to "this Lease" shall be deemed to refer to the Lease as amended by this Amendment. In all other respects, the terms and conditions of the Lease shall remain unmodified and in effect. Unless otherwise defined herein, capitalized terms shall have the same meaning as provided in the Lease.

2. Expansion Option. The Expansion Option under Article 37 of the Lease was not exercised and has lapsed. Accordingly, said Article 37 is hereby entirely deleted from the Lease.

3. 18th Floor Initial Space.

A. For purposes of this Amendment:

(1) "18th Floor Initial Space" shall mean the space consisting of an agreed 11,356 rentable square feet on the 18th floor of the Building as shown on the attached Exhibit A.

(2) "18th Floor Initial Space Delivery Date" shall mean the date Landlord makes the 18th Floor Initial Space available to Tenant for the commencement of Tenant's performance of leasehold improvement work. The 18th Floor Initial Space Delivery Date is estimated to occur on September 1, 2002, except that Landlord shall make such space available to Tenant on such earlier date as Landlord reasonably determines the space is available.

(3) "18th Floor Initial Space Commencement Date" shall mean the earlier of:

(a) the later of (i) November 1, 2002, or (ii) the date which is sixty (60) days after the 18th Floor Initial Space Delivery Date; or

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(b) Tenant's first business use of any material portion of the 18th Floor Initial Space.

(4) "Business use" shall mean the conduct of business operations in the applicable space (other than construction, equipment, installation, and the moving and affixing of fixtures, furnishings and equipment).

B. Effective as of the 18th Floor Initial Space Commencement Date, (1) the 18th Floor Initial Space shall be added to and constitute a part of the Premises; (2) the term "Premises" shall be modified to mean and include the 18th Floor Initial Space and the entire rentable areas on the 16th, 19th and 20th floors of the Building; (3) the rentable area of the Premises shall be 80,124 rentable square feet; and (4) except as otherwise provided in this Amendment, the 18th Floor Initial Space shall be part of the Premises for the remaining Term of the Lease (including any extension or renewal thereof) and shall be subject to all of the terms and conditions of the Lease currently in effect.

C. In addition to Rent for the Current Premises as provided in the Lease, Tenant shall pay Rent for the 18th Floor Initial Space as follows:

(1) Commencing on the 18th Floor Initial Space Commencement Date and continuing through November 30, 2005, Tenant shall pay Base Rent for the 18th Floor Initial Space determined at an annual rate per rentable square foot and payable in advance in monthly installments as follows:

                                Annual         Monthly         Base Rent
Period                        Base Rent       Base Rent     Per Square Foot
------                       -----------     ----------     ---------------
18th Floor Initial Space
Commencement Date
through 10/31/02, if any     $147,628.00     $12,302.33         $13.00
11/1/02-10/31/03             $150,467.00     $12,538.92         $13.25
11/1/03-10/31/04             $153,306.00     $12,775.50         $13.50
11/1/04-11/30/05             $156,145.00     $13,012.08         $13.75

(2) Commencing on the 18th Floor Initial Space Commencement Date and continuing through the remaining Term: (a) the rentable square footage of the Premises for purposes of calculation of Tenant's Prorata Share shall be increased by 11,356 rentable square feet; and (b) Tenant shall pay Tenant's Prorata Share of Taxes and Operating Expenses for the 18th Floor Initial Space at the same rate as then payable for the Premises and subject to the same adjustments as provided in the Lease.

Rent for the 18th Floor Initial Space shall be paid at the same time and in the same manner as provided in the Lease for payment of Rent for the Current Premises. If the 18th Floor Initial Space Commencement Date is not the first day of a calendar month, to Base Rent and Tenant's Prorata Share of Taxes and Operating Expenses for the 18th Floor Initial Space for such partial month shall be prorated daily and paid in advance. If the Extension Option is exercised as provided in Article 36 of the Lease, the Rent and other economic terms for the 18th Floor Initial Space shall be determined as provided in said Article for any Extension Period.

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D. Landlord will deliver possession of the 18th Floor Initial Space to Tenant on the 18th Floor Initial Space Delivery Date for the purpose of allowing Tenant or its contractor(s) to undertake demolition, construction and improvement work in such space. If the 18th Floor Initial Space Delivery Date is delayed beyond September 1, 2002, despite Landlord's commercially reasonable efforts to deliver the 18th Floor Initial Space, Landlord shall not be liable for any such delay, the Lease shall not be impaired, and the Term of the Lease shall not be affected or extended thereby.

If Landlord has reason to believe that it will not be able to deliver the 18th Floor Initial Space to Tenant on or before September 1, 2002, Landlord shall promptly provide Tenant with notice as to the status of the space and the anticipated delivery date. Such notice shall be provided to Tenant promptly after Landlord's determination that a delay will occur and in any event on or before August 1, 2002 (if Landlord has then determined a delay will occur). Following any such notice to Tenant, Landlord shall continue to utilize commercially reasonable efforts to deliver the 18th Floor Initial Space as soon as possible. If the 18th Floor Initial Space Delivery Date is delayed beyond September 1, 2002, the 60-day period specified in Section 3A(3)(a)(ii) above shall be extended by an additional five (5) business days to complete construction in the 18th Floor Initial Space.

At all times subsequent to the delivery of possession of the 18th Floor Initial Space, Tenant's use and occupancy of, and duties and obligations with respect to, the 18th Floor Initial Space shall be in accordance with all of the terms and conditions of the Lease; provided, however, that Tenant shall not be required to pay any Base Rent, Taxes or Operating Expenses with respect to the 18th Floor Initial Space before the 18th Floor Initial Space Commencement Date. Except as provided in the following Section 3E, the 18th Floor Initial Space will be delivered to Tenant in an "as is" condition, and Landlord will have no obligation to make any repair, alteration or improvement thereto or to provide any allowances or inducements.

E. So long as Tenant is not then in default under this Amendment or the Lease (beyond any applicable cure period), Landlord will provide a one-time allowance (the "Improvement Allowance") in the amount of $175,071.67 (based an $25.00 per rentable square foot in the 18th Floor Initial Space times a fraction, the numerator of which is 37 and the denominator of which is 60) for the cost of tenant improvements installed in such space. The Improvement Allowance will be used for paying the costs of demolition of existing improvements and constructing new tenant improvements within the 18th Floor Initial Space as well as for any modifications required to existing improvements above and below the ceiling; architectural, mechanical and engineering work drawings; consulting and project management fees in relation to the work; Tenant's costs of moving into the space; and telecommunications cabling relating to the space. The Improvement Allowance will be disbursed, and Tenant will perform Tenant's Work in the 18th Floor Initial Space, in accordance with all of the terms and conditions of Exhibit B to the Lease, which Exhibit B is hereby incorporated herein by reference subject to the following modifications: (1) all references in such Exhibit B to the "Premises" shall be deemed to refer to the 18th Floor Initial Space; (2) all references in such Exhibit B to the "Improvement Allowance" shall be deemed to refer to the Improvement Allowance as provided in this Section 3E; and (3) the date for Tenant submitting a Space Plan for the Tenant's Work under Section 3A of such Exhibit B shall be July 1, 2002, unless Landlord shall have provided to Tenant a notice of delay in delivery as provided in Section 3D above, in which case the Space

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Plan shall be due no later than forty-five (45) days prior to the date of anticipated delivery identified in Landlord's notice. To the extent that Tenant does not fully expand the entire Improvement Allowance, the excess (up to a maximum of $2.00 per rentable square feet in the 18th Floor Initial Space) shall be applied to the payments of Rent next coming due after the 18th Floor Initial Space Commencement Date. If Landlord will require a demising wall between the 18th Floor Initial Space and the 18th Floor Remainder Space, such demising wall shall be constructed by Landlord before or simultaneously with Tenant's Work at Landlord's expense.

F. Within twenty (20) days after written request by Landlord, Landlord and Tenant shall execute and deliver an instrument in form reasonably satisfactory to Landlord confirming the 18th Floor Initial Space Commencement Date and such other matters relating to this Amendment as reasonably requested by Landlord from time to time.

4. 18th Floor Remainder Space.

A. For purposes of this Amendment:

(1) "18th Floor Remainder Space" shall mean the space consisting of an agreed 11,356 rentable square feet on the 18th floor of the Building as shown on the attached Exhibit A.

(2) "18th Floor Remainder Space Commencement Date" shall mean the earlier of (a) May 1, 2003, or (b) Tenant's first business use of any material portion of the 18th Floor Remainder Space.

(3) "Expansion Option Exercise Date" means the earlier of (a) May 31, 2002, or (b) ten (10) business days after Landlord gives an Early Exercise Call Notice as defined in the following Section 4B.

B. In the event that, prior to May 31, 2002, Landlord (i) executes one or more leases or amendments under which one or more third party tenants will occupy all of the rentable areas on the 8th, 9th, and 10th floors of the Building, and (ii) executes one or more leases, amendments or letters of intent under which one or more third party tenants will occupy all of the rentable areas on the 17th floor of the Building and all of the 18th Floor Remainder Space with such tenant(s) under (i) and (ii) to occupy on or before May 1, 2003, then Landlord may give written notice to Tenant requiring an early exercise of the Expansion Option as to the 18th Floor Remainder Space ("Early Exercise Call Notice"). Tenant shall have ten (10) business days thereafter in which to exercise the Expansion Option by giving Tenant's Expansion Option Exercise Notice. If Tenant so exercises the Expansion Option based on the Early Exercise Call Notice, to 18th Floor Remainder Space Commencement Date shall remain the same. If Tenant shall fail to so exercise the Expansion Option based on the Early Exercise Call Notice, the Expansion Option shall be deemed to have lapsed and expired, and shall be of no further force or effect. Nothing herein shall be deemed to impair or waive Tenant's right of first offer as to the 17th Floor Space under Article 38 of the Lease.

C. Subject to the terms of this option (the "Expansion Option"), Tenant shall have a one time right to lease all, but not less than all, of the 18th Floor Remainder Space in an "as is" condition, on the same terms and conditions then in effect under the Lease, except that (1) the

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rentable square footage of the 18th Floor Remainder Space shall be added to the rentable square footage of the Premises for the purposes of calculating Base Rent and Tenant's Prorata Share as of the 18th Floor Remainder Space Commencement Date, and (2) Landlord shall reimburse Tenant for the cost of tenant improvements installed in the 18th Floor Remainder Space by Tenant, and the cost of related space planning, moving and consulting fees, up to an amount equal to $146,681.67 (based on $25.00 per rentable square feet in the 18th Floor Remainder Space multiplied by a fraction, the numerator of which is 31 and the denominator of which is 60). Such reimbursement shall be subject to the terms of a work agreement to be executed by Landlord and Tenant, which work agreement shall be similar in all material respects to the Work Agreement attached to the Lease as Exhibit B. This Expansion Option may be exercised only by giving Landlord irrevocable and unconditional written notice (the "Expansion Option Exercise Notice") thereof no later than the Expansion Option Exercise Date. If the 18th Floor Remainder Space is not occupied by a third party tenant at the time of the Expansion Option Exercise Notice (or thereafter prior to the 18th Floor Remainder Space Commencement Date), Landlord shall make the 18th Floor Remainder Space available for Tenant's performance of leasehold improvement work (without the imposition of Rent, unless Tenant opens for business in the 18th Floor Remainder Space prior to the 18th Floor Remainder Space Commencement Date, in which event Tenant's obligation to pay Rent for the 18th Floor Remainder Space shall commence as of the date it opens for business in the 18th Floor Remainder Space), subject to the condition that Tenant's inability to complete such work prior to the 18th Floor Remainder Space Commencement Date shall not delay that date. In any event, Landlord shall permit Tenant no less than sixty
(60) days for the construction of tenant improvements in the 18th Floor Remainder Space after the delivery of such space to Tenant and prior to the occurrence of the 18th Floor Remainder Space Commencement Date. In the event that the 18th Floor Remainder Space is delivered to Tenant after March 1, 2003, the date for purposes of Section 4A(2)(a) above shall be adjusted to the date which is sixty (60) days after the 18th Floor Remainder Space is delivered to Tenant.

D. As of the 18th Floor Remainder Space Commencement Date, the lease shall commence as to the 18th Floor Remainder Space and shall continue for the duration of the Term of the Lease (including any extensions or renewals thereof); the 18th Floor Remainder Space shall be added to the Premises; and Tenant shall be obligated for the payment of Rent on the 18th Floor Remainder Space. After Tenant validly exercises the Expansion Option, the parties shall execute an amendment to the Lease, adding the 18th Floor Remainder Space, and such other documentation as Landlord shall require, promptly after Landlord shall prepare the same, in order to confirm the leasing of the 18th Floor Remainder Space to Tenant, but an otherwise valid exercise of the Expansion Option shall be fully effective, whether or not such confirmatory documentation is executed. Landlord shall have no obligation to disburse any allowance or reimbursement funds until Tenant has executed a binding amendment to the Lease committing to occupancy of the applicable space, but otherwise such amounts shall be disbursed within thirty (30) days of application by Tenant with supporting documentation indicating the incurring of costs reimbursable under the Work Agreement. To the extent that Tenant does not fully expend all of the amounts to be provided by Landlord hereunder, the excess (up to a maximum of $2.00 per rentable square foot) shall be applied to the payments of Rent next accruing after the 18th Floor Remainder Space Commencement Date.

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E. If Tenant shall fail to exercise the Expansion Option by delivery of the Expansion Option Exercise Notice on or before the Expansion Option Exercise Date, the Expansion Option shall be deemed to have lapsed and expired, and shall be of no further force or effect. Landlord may thereafter freely lease all or a portion of the 18th Floor Remainder Space to any other party, at any time, on any terms, in Landlord's sole discretion. At any time following the lapse of the Expansion Option, Landlord may, at its expense, construct a common corridor on the 18th Floor in compliance with applicable laws, incorporate a portion of the 18th Floor Initial Space in such common corridor, and construct a demising wall and entrances as necessary to separate the 18th Floor Initial Space from such common corridor. The specific size, location, and configuration of the common corridor shall be as reasonably determined by Landlord based on applicable legal requirements and reasonable third-party, market leasing considerations, but in any event such common corridor shall be constructed directly adjacent to the Building's service core. To the extent that leasehold improvements previously installed by Tenant must reasonably be altered or restored as a result of the installation of the common corridor (i.e., relocation of entry doors, reasonable reconfiguration of interior space, and the like), Landlord shall pay the reasonable and direct costs payable to third party architects, designers, contractors, and engineers for such alterations and restoration, and the parties shall reasonably cooperate to implement such alterations and restoration work so as to cause minimal disruption to Tenant's business operation. Regardless of the construction of such common corridor, the 18th Floor Initial Space shall be deemed to include an agreed 11,365 rentable square feet, and Tenant shall pay Rent for the 18th Floor Initial Space based on an agreed 11,365 rentable square feet.

F. Tenant's exercise of the Expansion Option shall not operate to cure any Default by Tenant of any of the terms and provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such Default. The Expansion Option shall, at Landlord's election, be null and void if Tenant has received written notice that it is in default of a material term under the Lease and such default remains uncured (i) with respect to a monetary default, at the date of the Expansion Option Exercise Notice, or (ii) with respect to any default, on the 18th Floor Remainder Space Commencement Date. If the Lease or Tenant's right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the Expansion Option, or, if Tenant shall have subleased or assigned all or any portion of the Premises to a party other than a Related Entity, then immediately upon such termination, sublease or assignment, the Expansion Option shall simultaneously terminate and become null and void. Such right is personal to Tenant (and any Related Entity that is an assignee or sublessee of substantially all of the Premises). Tenant agrees that time is of the essence of this provision.

G. Within twenty (20) days after written request by Landlord, Tenant shall execute and deliver an instrument in form reasonably satisfactory to Landlord confirming the exercise or termination of the Expansion Option, the 18th Floor Remainder Space Commencement Date, and such other matters relating to this Amendment as reasonably requested by Landlord.

5. Tenant's Representations. Tenant hereby represents to Landlord that there has been no assignment of the Lease and no sublease of all or any portion of the Premises, there are no existing defenses or offsets which Tenant has against enforcement of the Lease, and Landlord and Tenant are not in default under the Lease.

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6. Brokers. Landlord and Tenant each represents that it has not engaged or dealt with any real estate broker, agent or finder with respect to this Amendment, except for Kennedy-Wilson Minnesota Management, Inc., representing Landlord, and CB Richard Ellis, Inc., representing Tenant. If this transaction is consummated, Landlord shall be responsible to pay a commission to both such brokers pursuant to a separate written agreement. Landlord and Tenant shall indemnify and hold each other harmless from all claims, liability or expense (including reasonable attorneys fees) in connection with any claim for broker's, finder's or other fees or commissions as a result of such party's actions or alleged actions.

7. Entire Agreement. The Lease, including, without limitation, this Amendment and all exhibits which are attached hereto and hereby incorporated by reference, constitutes the entire agreement between Landlord and Tenant with respect to the subject matter hereof. Tenant acknowledges that it has not been induced to enter into this Amendment by any agreements or representations which are not set forth in this Amendment. This Amendment shall not be effective until execution and delivery by both Landlord and Tenant.

By signing this Amendment, the parties agree to the above terms.

LANDLORD:                                     TENANT:

ND PROPERTIES, INC.                           CAPELLA EDUCATION COMPANY

By: /s/ Robert D. Loverro                     By: /s/ Paul Schroeder
    -----------------------------------           ------------------------------
Name:  Robert D. Loverro                      Name:  Paul Schroeder
Title: Asst. Secy                             Title: SVP & CFO

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August 29, 2002

Ms. Linda Solberg
KENNEDY-WILSON MINNESOTA MANAGEMENT
222 South Ninth Street
Suite 390
Minneapolis, MN 55402

RE: CAPELLA SECOND HALF EXPANSION -18th FLOOR

Dear Linda:

On behalf of Capella, I am pleased to present this letter of notification of Capella's desire to expand onto the second half of the 18th floor and a revised rent commencement date for the first half of the 18th floor. Final board approval is necessary for all Lease amendments. This proposal is approved by the CEO and CFO of Capella however, final approval will not be made until the board meeting on October 24, 2002. The terms and conditions that Capella would be willing to proceed with are as follows:

1ST HALF -18TH FLOOR

   Premises:                    11,356 square feet
   Space Delivery Condition:    Capella to terminate existing wiring at the
                                floor only
   Rent Commencement Date:      January 1, 2003
   Annual Net Rent Rate:        1/1/03  - 10/31/03:  $13.25
                                11/1/03 - 10/31/04:  $13.50
                                11/1/04 - 11/30/05:  $13.75
   Tenant Improvement
   Allowance:                   $25.00 per rentable square foot ($283,900.00)

2ND HALF -18TH FLOOR

   Premises:                    11,356 square feet
   Space Delivery Condition:    Capella to terminate existing wiring at the
                                floor only
   Rent Commencement Date:      November 1, 2003
   Annual Net Rent Rate:        11/1/03 - 10/31/04:  $13.50
                                11/1/04 - 10/31/05:  $13.75
   Tenant Improvement
   Allowance:                   $22.00 per rentable square foot ($249,832.00)


Capella is compiling information for a request for proposal on a potential term extension. To better understand the buildings position please describe the incentives that would be made available to Capella (ie. immediate rent reduction, free rent, expansion opportunities, tenant improvements, rental rate structure, etc.).

We look forward to a positive response to our proposal. Please acknowledge your acceptance by signing below. After the board meeting we will be able to move to a lease amendment.

Non Binding: This letter is meant for discussion purposes only. No party shall have any legal rights or obligations with respect to any other party because of the existence of this letter. No party shall fail to take any action in detrimental reliance on this letter. Only a fully executed lease between Landlord and Tenant shall constitute a binding agreement.

Best regards,

/s/ P S Rickert

Paige S. Rickert

c: Carla Bustom/Capella Education Company

Capella Education Company
AGREED AND ACCEPTED:

By: /s/ Paul Schroeder
    --------------------------------------

Its:  SVP & CFO

Date: 8/29/02

ND Properties, Inc.
AGREED AND ACCEPTED:

By: _____________________________________

Its: _____________________________________

Date:_____________________________________


AMENDMENT NO. 2 TO LEASE AGREEMENT

This Amendment No. 2 to Lease Agreement ("Amendment") is made effective as of October 28, 2002, between ND PROPERTIES, INC., registered in Minnesota as ND PROPERTIES OF DELAWARE, INC. ("Landlord") and CAPELLA EDUCATION COMPANY ("Tenant").

A. Landlord's predecessor in interest and Tenant entered into a written Office Lease dated June 28, 2000 ("Lease"), relating to the premises currently consisting of approximately 80,124 rentable square feet ("Current Premises") and comprised of the 11,356 rentable square feet on the 18th floor and the entire rentable area of the 16th, 19th and 20th floors of the building located at 222 South Ninth Street, Minneapolis, Minnesota (the "Building").

B. The Initial Lease was previously amended by Amendment No. 1 to Lease Agreement dated December 5, 2001 ("Amendment No. 1"), which, among other matters, amended and expanded the Premises by adding approximately 11,356 rentable square feet on the 18th floor of the Building ("18th Floor Initial Space").

C. Landlord and Tenant desire to further expand the Premises and to otherwise amend the Lease as provided in this Amendment.

FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are expressly acknowledged, Landlord and Tenant agree as follows:

1. Effect. The Lease is hereby amended to the extent necessary to give effect to this Amendment, and the terms of this Amendment shall supersede any contrary terms in the Lease. All references in the Lease to "this Lease" shall be deemed to refer to the Lease as amended by this Amendment. In all other respects, the terms and conditions of the Lease shall remain unmodified and in effect. Unless otherwise defined herein, capitalized terms shall have the same meaning as provided in the Lease.

2. Expansion Option. This Amendment is made in fulfillment of the Expansion Option under Section 4 of Amendment No. 1, and said Section 4 is hereby entirely deleted from the Lease.

3. 18th Floor Remainder Space.

A. For purposes of this Amendment:

(1) "18th Floor Remainder Space" shall mean the space consisting of an agreed 11,356 rentable square feet on the 18th floor of the Building as shown on the attached Exhibit A.

(2) "18th Floor Remainder Space Delivery Date" shall mean the date Landlord makes the 18th Floor Remainder Space available to Tenant for the commencement of Tenant's performance of leasehold improvement work. The 18th Floor Remainder Space Delivery Date is estimated to occur on or about October 1, 2002.

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(3) "18th Floor Remainder Space Commencement Date" shall mean the earlier of:

(a) the later of (i) August 1, 2003, or (ii) the date which is sixty
(60) days after the 18th Floor Remainder Space Delivery Date; or

(b) Tenant's first business use of any material portion of the 18th Floor Remainder Space.

(4) "Business use" shall mean the conduct of business operations in the applicable space (other than construction, equipment installation, and the moving and affixing of fixtures, furnishings and equipment).

B. Effective as of the 18th Floor Remainder Space Commencement Date,
(1) the 18th Floor Remainder Space shall be added to and constitute a part of the Premises; (2) the term "Premises" shall be modified to mean and include the entire rentable areas on the 16th, 18th, 19th and 20th floors of the Building;
(3) the rentable area of the Premises shall be 91,480 rentable square feet; and
(4) except as otherwise provided in this Amendment, the 18th Floor Remainder Space shall be part of the Premises for the remaining Term of the Lease (including any extension or renewal thereof) and shall be subject to all of the terms and conditions of the Lease currently in effect.

C. In addition to Rent for the Current Premises as provided in the Lease, Tenant shall pay Rent for the 18th Floor Remainder Space as follows:

(1) Commencing on the 18th Floor Remainder Space Commencement Date and continuing through November 30, 2005, Tenant shall pay Base Rent for the 18th Floor Remainder Space determined at an annual rate per rentable square foot and payable in advance in monthly installments as follows:

                                Annual         Monthly        Base Rent
Period                         Base Rent      Base Rent    Per Square Foot
------                        -----------    ----------    ---------------
18th Floor Remainder Space
Commencement Date
through 10/31/03              $150,467.00    $12,538.92        $13.25
11/1/03-10/31/04              $153,306.00    $12,775.50        $13.50
11/1/04-11/30/05              $156,145.00    $13,012.08        $13.75

(2) Commencing on the 18th Floor Remainder Space Commencement Date and continuing through the remaining Term: (a) the rentable square footage of the Premises for purposes of calculation of Tenant's Prorata Share shall be increased by 11,356 rentable square feet; and (b) Tenant shall pay Tenant's Prorata Share of Taxes and Operating Expenses for the 18th Floor Remainder Space at the same rate as then payable for the Premises and subject to the same adjustments as provided in the Lease.

Rent for the 18th Floor Remainder Space shall be paid at the same time and in the same manner as provided in the Lease for payment of Rent for the Current Premises. If the 18th Floor Remainder Space Commencement Date is not the first day of a calendar month, the Base Rent and Tenant's Prorata Share of Taxes and Operating Expenses for the 18th Floor Remainder

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Space for such partial month shall be prorated daily and paid in advance. If the Extension Option is exercised as provided in Article 36 of the Lease, the Rent and other economic terms for the 18th Floor Remainder Space shall be determined as provided in said Article for any Extension Period.

D. Landlord will deliver possession of the 18th Floor Remainder Space to Tenant on the 18th Floor Remainder Space Delivery Date for the purpose of allowing Tenant or its contractor(s) to undertake demolition, construction and improvement work in such space. If the 18th Floor Remainder Space Delivery Date is delayed despite Landlord's commercially reasonable efforts to deliver the 18th Floor Remainder Space, Landlord shall not be liable for any such delay, the Lease shall not be impaired, and the Term of the Lease shall not be affected or extended thereby.

At all times subsequent to the delivery of possession of the 18th Floor Remainder Space, Tenant's use and occupancy of, and duties and obligations with respect to, the 18th Floor Remainder Space shall be in accordance with all of the terms and conditions of the Lease; provided, however, that Tenant shall not be required to pay any Base Rent, Taxes or Operating Expenses with respect to the 18th Floor Remainder Space before the 18th Floor Remainder Space Commencement Date. Except as provided in the following Section 3E, the 18th Floor Remainder Space will be delivered to Tenant in an "as is" condition, and Landlord will have no obligation to make any repair, alteration or improvement thereto or to provide any allowances or inducements.

E. So long as Tenant is not then in default under this Amendment or the Lease (beyond any applicable cure period), Landlord will provide a one-time allowance (the "Improvement Allowance") in the amount of $132,486.67 (based on $25.00 per rentable square feet in the 18th Floor Remainder Space multiplied by a fraction, the numerator of which is 28 and the denominator of which is 60) for the cost of tenant improvements installed in such space. The Improvement Allowance will be used for paying the costs of demolition of existing improvements and constructing new tenant improvements within the 18th Floor Remainder Space as well as for any modifications required to existing improvements above and below the ceiling; architectural, mechanical and engineering work drawings; consulting and project management fees in relation to the work; Tenant's costs of moving into the space; and telecommunications cabling relating to the space. The Improvement Allowance will be disbursed, and Tenant will perform Tenant's Work in the 18th Floor Remainder Space, in accordance with all of the terms and conditions of Exhibit B to the Lease, which Exhibit B is hereby incorporated herein by reference subject to the following modifications: (1) all references in such Exhibit B to the "Premises" shall be deemed to refer to the 18th Floor Remainder Space; (2) all references in such Exhibit B to the "Improvement Allowance" shall be deemed to refer to the Improvement Allowance as provided in this Section 3E; and (3) the date for Tenant submitting a Space Plan for the Tenant's Work under Section 3A of such Exhibit B shall be January 1, 2003. The work in the 18th Floor Remainder Space shall be coordinated with the work being performed in the 18th Floor Initial Space, and the Improvement Allowance under this Amendment or under Amendment No. 1 may be applied toward the cost of work in connection with either the 18th Floor Initial Space or the 18th Floor Remainder Space. To the extent that Tenant does not fully expend the entire Improvement Allowance, the excess (up to a maximum of $2.00 per rentable square feet in the 18th Floor Remainder Space) shall be applied

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to the payments of Rent next coming due after the 18th Floor Remainder Space Commencement Date.

F. Within twenty (20) days after written request by Landlord, Landlord and Tenant shall execute and deliver an instrument in form reasonably satisfactory to Landlord confirming the 18th Floor Remainder Space Commencement Date and such other matters relating to this Amendment as reasonably requested by Landlord from time to time.

4. Tenant's Representations. Tenant hereby represents to Landlord that there has been no assignment of the Lease and no sublease of all or any portion of the Premises, there are no existing defenses, claims or offsets which Tenant has against Landlord or against enforcement of the Lease, and Landlord and Tenant are not in default under the Lease.

5. Brokers. Landlord and Tenant each represents that it has not engaged or dealt with any real estate broker, agent or finder with respect to this Amendment, except for Kennedy-Wilson Minnesota Management, Inc., representing Landlord, and CB Richard Ellis, Inc., representing Tenant. If this transaction is consummated, Landlord shall be responsible to pay a commission to both such brokers pursuant to a separate written agreement. Landlord and Tenant shall indemnify and hold each other harmless from all claims, liability or expense (including reasonable attorneys fees) in connection with any claim for broker's, finder's or other fees or commissions as a result of such party's actions or alleged actions.

6. Entire Agreement. The Lease, including, without limitation, this Amendment and all exhibits which are attached hereto and hereby incorporated by reference, constitutes the entire agreement between Landlord and Tenant with respect to the subject matter hereof. Tenant acknowledges that it has not been induced to enter into this Amendment by any agreements or representations which are not set forth in this Amendment. This Amendment shall not be effective until execution and delivery by both Landlord and Tenant.

By signing this Amendment, the parties agree to the above terms.

LANDLORD:                                         TENANT:

ND PROPERTIES, INC., registered in                CAPELLA EDUCATION COMPANY
Minnesota as ND PROPERTIES OF
DELAWARE, INC.

By /s/ James P. Garafalo                          By /s/ Paul A. Schroeder
   -----------------------------------------         ---------------------------
 Name:  James P. Garafalo                          Name:  Paul A. Schroeder
 Title: Assistant Secretary                        Title: SVP & CFO
Date Signed:__________________________, 2002      Date Signed: 10/28, 2002

4

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

Capella University, Inc.
Aprisa, Inc.


EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated February 4, 2005 (except for the Stock-Based Compensation section of Note 2, as to which the date is April 14, 2005) in the Registration Statement (Form S-1) and related Prospectus of Capella Education Company for the registration of its common stock.

                                               /s/ Ernst & Young LLP

Minneapolis, Minnesota
April 14, 2005


EXHIBIT 24.1

POWERS OF ATTORNEY

The undersigned director and/or officer of Capella Education Company, a Minnesota corporation, does hereby make, constitute and appoint Stephen G. Shank and Lois M. Martin, and either of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution and re-substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of said Company to a Registration Statement or Registration Statements, on Form S-1 or other applicable form, including any Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"), and all amendments, including post-effective amendments, thereto, to be filed by said Company with the Securities and Exchange Commission, Washington, D.C., in connection with the registration under the Securities Act of shares of Common Stock of said Company to be issued pursuant to a public offering, and to file the same, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and either of them full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted.

IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand this 15th day of April, 2005.

          /s/ Stephen G. Shank                          /s/ Tony J. Christianson
---------------------------------------------   ---------------------------------------------
              Stephen G. Shank                              Tony J. Christianson


           /s/ Lois M. Martin                             /s/ Gordon A. Holmes
---------------------------------------------   ---------------------------------------------
               Lois M. Martin                                 Gordon A. Holmes


          /s/ Joseph C. Gaylord                            /s/ Jody G. Miller
---------------------------------------------   ---------------------------------------------
              Joseph C. Gaylord                                Jody G. Miller


           /s/ S. Joshua Lewis                            /s/ Jeffrey W. Taylor
---------------------------------------------   ---------------------------------------------
               S. Joshua Lewis                                Jeffrey W. Taylor


          /s/ James A. Mitchell                           /s/ Darrell R. Tukua
---------------------------------------------   ---------------------------------------------
              James A. Mitchell                               Darrell R. Tukua


           /s/ David W. Smith                           /s/ Jon Q. Reynolds, Jr.
---------------------------------------------   ---------------------------------------------
               David W. Smith                               Jon Q. Reynolds, Jr.