CAPELLA EDUCATION CO (Form: S-1/A, Received: 06/06/2005 06:13:54)

As filed with the Securities and Exchange Commission on June 3, 2005

Registration No. 333-124119

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

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

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.

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 JUNE 3, 2005

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 have applied for quotation of shares of 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 9.

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.

TABLE OF CONTENTS


	Page

PROSPECTUS SUMMARY		1
RISK FACTORS		9
FORWARD-LOOKING STATEMENTS		28
USE OF PROCEEDS		29
DIVIDEND POLICY		29
CAPITALIZATION		30
DILUTION		32
SELECTED CONSOLIDATED FINANCIAL DATA		34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		37
BUSINESS		53
REGULATORY ENVIRONMENT		65
MANAGEMENT		76
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		91
PRINCIPAL AND SELLING SHAREHOLDERS		94
DESCRIPTION OF CAPITAL STOCK		100
SHARES ELIGIBLE FOR FUTURE SALE		105
U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK		107
UNDERWRITING		109
NOTICE TO CANADIAN RESIDENTS		112
LEGAL MATTERS		114
EXPERTS		114
WHERE YOU CAN FIND MORE INFORMATION		114
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1
Articles of Incorporation
Form of Amended and Restated Articles of Incorporation
Amended and Restated By-Laws
2005 Stock Incentive Plan
Employee Stock Ownership Plan
*
Form of Executive Severance Plan
Employee Stock Purchase Plan
Annual Incentive Plan Mangement Employees - 2005
Consent of Ernst & Young

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.

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. 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 March 31, 2005, we offered more than 675 online courses and 13 academic programs with 68 specializations to more than 12,700 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-year 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-year 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 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.

Capella University participates in the federal student financial aid programs authorized by Title IV of the Higher Education Act of 1965, as amended, or Title IV, which are administered by the Department of Education. To be certified to participate in Title IV programs, a school must receive and maintain authorization by the appropriate state educational agency, 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.

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, the number of post-secondary students enrolled as of the Fall of 2001 was 15.9 million and is 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 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 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 grow by approximately 30% in 2004 to reach 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:

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.

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.

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 Marketing Relationships. We currently have marketing relationships and tuition discount programs with approximately 80 corporations, various organizations and educational institutions of the U.S. Armed Forces and over 230 community colleges. Through these relationships and programs, we typically seek to recruit learners by enhancing Capella’s recognition among the individuals within each entity, in some cases through marketing efforts provided by the entity, as well as by offering tuition discounts to such individuals. We intend to increase enrollment from our existing marketing relationships and to increase the number of these relationships.

Risks Affecting Us

Our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors” immediately following this Prospectus Summary. In particular, our business would be adversely affected if:



	•	we are unable to comply with the extensive regulatory requirements to which our business is subject, including Title IV of the Higher Education Act and the regulations under that act, state laws and regulations, and accrediting agency requirements;



	•	we experience any learner, regulatory, reputational, instructional or other events that adversely affect our doctoral offerings, from which we currently derive a significant portion of our revenues and all of our operating profit;



	•	we are unable to manage future growth effectively;



	•	we are unable to develop new programs and expand our existing programs in a timely and cost-effective manner; or



	•	we are unable to attract and retain working adult learners to our programs in the highly competitive market in which we operate.

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, or accessible through, our website does not constitute part of, and is not incorporated into, this prospectus.

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.

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 summary consolidated statement of operations data for the three months ended March 31, 2004 and 2005, and the summary consolidated balance sheet data as of March 31, 2005, have been derived from our unaudited financial statements, which are included elsewhere in this prospectus. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of our financial position and operating results for the unaudited periods. The summary consolidated financial and operating data as of and for the three months ended March 31, 2005 are not necessarily indicative of the results that may be obtained for a full year.

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.


											Three Months Ended
			Year Ended December 31,								March 31,

			2002			2003		2004			2004		2005

			(In thousands, except per share and enrollment data)
Statement of Operations Data:
Revenues			$	49,556		$	81,785	$	117,689		$	26,488	$	34,610
Costs and expenses:
	Instructional costs and services			28,013			43,128		58,168			13,614		16,247
	Selling and promotional			15,860			21,446		34,247			8,088		9,621
	General and administrative			11,677			13,141		15,409			3,403		4,597

		Total costs and expenses		55,550			77,715		107,824			25,105		30,465

Operating income (loss)				(5,994	)		4,070		9,865			1,383		4,145
Other income, net				327			427		724			129		372

Income (loss) before income taxes				(5,667	)		4,497		10,589			1,512		4,517
Income tax expense (benefit)				—			104		(8,196	)		46		1,813

Net income (loss)			$	(5,667	)	$	4,393	$	18,785		$	1,466	$	2,704

Net income (loss) per common share:
	Basic		$	(3.70	)	$	2.63	$	9.34		$	0.77	$	1.29
	Diluted		$	(3.70	)	$	0.39	$	1.62		$	0.13	$	0.23
Weighted average number of common shares outstanding:
	Basic			1,532			1,669		2,011			1,910		2,092
	Diluted			1,532			11,154		11,599			11,330		11,845
Other Data:
Depreciation and amortization ^(a)			$	3,108		$	4,177	$	5,454		$	1,187	$	1,515
Net cash provided by operating activities			$	177		$	16,028	$	17,494		$	1,231	$	7,480
Capital expenditures			$	3,859		$	4,348	$	8,986		$	861	$	1,760
EBITDA ^(b)			$	(2,886	)	$	8,247	$	15,319		$	2,570	$	5,660
Enrollment ^(c)				6,380			9,115		12,013			9,919		12,775


										As of March 31, 2005
	As of December 31,
												Pro
	2002			2003			2004			Actual		Forma ^(d)

	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	22,060		$	41,190		$	49,980		$	55,635	$
Working capital ^(e)		15,340			27,516			37,935			42,541
Total assets		35,380			55,402			80,026			83,336
Total redeemable preferred stock		50,401			57,646			57,646			57,646
Shareholders’ equity (deficit)		(26,250	)		(20,416	)		(5	)		2,764


(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 use EBITDA as

a measure of operating performance. 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.


	We believe EBITDA is useful to an investor in evaluating our operating performance and liquidity because:


	•	it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.


	Our management uses EBITDA:



	•	as a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes; and



	•	in presentations to the members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry.


	The following table provides a reconciliation of net income (loss) to EBITDA:


										Three Months
	Year Ended December 31,									Ended March 31,

	2002			2003			2004			2004			2005

	(In thousands)
Net income (loss)	$	(5,667	)	$	4,393		$	18,785		$	1,466		$	2,704
Other income, net		(327	)		(427	)		(724	)		(129	)		(372	)
Income tax expense (benefit)		—			104			(8,196	)		46			1,813
Depreciation and amortization		3,108			4,177			5,454			1,187			1,515

EBITDA	$	(2,886	)	$	8,247		$	15,319		$	2,570		$	5,660


(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 as of March 31, 2005, 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 at an offering price of $ per share (the mid-point of the range set forth on the cover of this prospectus) 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.

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 64% 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. A significant percentage of our learners rely on the availability of Title IV program funds to cover their cost of attendance at Capella University and related educational expenses. Title IV programs include educational loans for our learners from both private lenders and the federal government at below-market interest rates that are guaranteed by the federal government in the event of default. Title IV programs also include several income-based grant programs for learners with the greatest economic need as determined in accordance with Department of Education regulations. 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.


	Our waiver from the 50% Rules, which would otherwise prevent our participation in Title IV programs, expires in June 2006 and may be terminated at any time, for cause, by the Department of Education.

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. As an exclusively online university, the so

called “50% Rules,” enacted in 1992, would otherwise preclude us from participating in Title IV programs. A related student eligibility provision of the 50% Rules has the effect of restricting students enrolled in courses delivered via telecommunications (including online courses) from receiving Title IV financial aid for certificate programs if they attend an institution that offers more certificate programs than degree 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 and the related student eligibility component 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, favorably amend the related student eligibility component of the 50% Rules, 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 are unable to participate in the Demonstration Program, Capella University would no longer be able to participate in Title IV programs and our learners would no longer be able to receive Title IV program funds, which would have a material adverse effect on our enrollments, revenues and results of operations.


	We must seek recertification to participate in Title IV programs no less than every six years, and may, in certain circumstances, be subject to review by the Department of Education prior to seeking recertification.

An institution that is certified to participate in Title IV programs must seek recertification from the Department of Education at least every six years, or when it undergoes a change of control. The recertification process includes the electronic submission of a new “Application for Approval to Participate in the Federal Student Financial Aid Programs,” which includes information about the school’s administration, ownership, educational programs, and compliance with Department of Education regulations. The application is accompanied by financial statements and documentation of continued accreditation and state authorization. Our current certification expires on December 31, 2008 or earlier if the Demonstration Program is discontinued prior to that date and the 50% Rules are not repealed. Our application for recertification will be due for submission no later than September 30, 2008. The Department of Education may also review our continued certification to participate in Title IV programs in the event we expand our activities in certain ways, such as opening an additional location or, in certain cases, if we modify the academic credentials that we offer. In addition, the Department of Education may withdraw our certification without advance notice if it determines that we are not fulfilling material requirements for continued participation in Title IV programs. If the Department of Education did not renew or withdrew our certification to participate in Title IV programs, our learners would no longer be able to receive Title IV program funds, which 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.


	*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. Such authorization may be lost or withdrawn if Capella University fails to submit renewal applications and other required submissions to the state in a timely manner, or if Capella University fails to comply with material requirements under Minnesota statutes and rules for continued authorization. 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. 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 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 the following 13 states for all or some of its programs because we have determined that our activities in these states constitute a presence or otherwise require authorization or licensure by the respective state educational agencies:


State		Capella University activity constituting presence requiring licensure or authorization

Alabama		Agreement with a former provider of library services to Capella students; employment of one-full time individual at the offices of the former library services provider.
Arizona		State agency broadly interprets presence requiring licensure to include the offering of degree programs by distance education; Capella also conducts in-state seminars.
Arkansas		Agreement with Wal-Mart Stores, Inc. under which Wal-Mart employees located in Arkansas receive discounted tuition for certain Capella University programs.
Colorado		No determination of presence; authorization granted in order to have marketing and recruiting agents in the state.
Florida		In-state seminars of one week or more in duration.
Georgia		Direct marketing and recruiting activities in the state.
Illinois		State agency broadly interprets presence requiring authorization to include the offering of degree programs by distance education.
Kentucky		Direct marketing and recruiting activities in the state.
Ohio		Direct marketing and recruiting activities in the state for select programs.
Virginia		Direct marketing and recruiting activities in the state; agreements with community colleges.
Washington		Direct marketing and recruiting activities in the state; agreements with community colleges.
West Virginia		Direct marketing and recruiting activities in the state.
Wisconsin		State agency broadly interprets licensure requirements to cover all institutions serving residents of the state.

As of the last day of classes for the three months ended March 31, 2005, the number of learners in each of these states (other than Florida and Georgia) was less than 5% of our total enrollment. As of the last day of classes for the three months ended March 31, 2005, approximately 6% of our learners lived in Florida and approximately 7% lived in Georgia.

In some cases, the licensure or authorization is only for specific programs. In the majority of these states, Capella University has either determined that separate licensure or authorization for its certificate programs is not necessary, or has obtained such licensure or authorization. In four states (Florida, Georgia, Virginia and Wisconsin), Capella University is in the process of seeking either separate licensure or authorization for its certificate programs, or a waiver from such requirements, from the applicable state educational agency. 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 or authorization requirements, we may be subject to the loss of state licensure or authorization. Although we believe that the only state licensure or authorization that is necessary for Capella University to participate in Title IV programs is our authorization from the Minnesota Higher Education Services Office, loss of licensure or authorization 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 graduate from programs that do not 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. States have denied our graduates professional licensure because the Capella program from which they graduated did not have a sufficient number of residency hours, did not satisfy state coursework requirements or was not accredited by a specific third party (such as the American Psychological Association). 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 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 result in a loss of our eligibility 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. 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 64% 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 the Federal Family Education Loan, or 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. Capella University’s preliminary default rate on the FFEL program loans for the 2003 federal fiscal year was 1.8%. The Department of Education is expected to issue our final default rate for the 2003 federal fiscal year in the Fall of 2005. 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 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 March 31, 2005, learners seeking doctoral, master’s and bachelor’s degrees represented 46%, 39% 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 and for the three months ended March 31, 2005, doctoral learners accounted for approximately $67.5 million, or 57%, and $19.7 million, or 57%, respectively, of our revenues, and all of our operating profit. In contrast, our bachelor’s and master’s programs were not profitable in 2004 or in the first quarter of 2005. 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 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. Moreover, we believe that corporations are becoming more selective as to which online universities they will encourage their current employees to attend, as well as from which online universities they will hire prospective employees.

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 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 March 31, 2005. 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 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 Senior Vice President, Michael Offerman, is 57 years old and has been our Senior Vice President since joining the company in 2001. Mr. Offerman is also the President and Chief Executive Officer of Capella University. Our Senior Vice President, Business Management, Paul Schroeder, is 45 years old, has been our Senior Vice President, Business Management since 2004 and has been an executive officer of Capella since 2001. 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.


	Our learner population and revenues could decrease if the government tuition assistance offered to U.S. Armed Forces personnel are reduced or eliminated, if the tuition discounts which we offer to U.S. Armed Forces personnel are reduced or eliminated, or if our informal arrangements with any military bases deteriorate.

Active duty members of the U.S. Armed Forces are eligible to receive tuition assistance from the government, which they may use to pursue post-secondary degrees. We offer tuition discounts ranging from 10% to 15% to all members of the U.S. Armed Forces and immediate family members of active duty U.S. Armed Forces personnel. For the three months ended March 31, 2005, approximately 19% of our learners received a U.S. Armed Forces tuition discount. During 2004, we provided approximately $2.3 million of such discounts. We also have non-exclusive agreements with various educational institutions

of the U.S. Armed Forces pursuant to which we have agreed to accept credits towards a Capella University degree from certain military educational programs. These agreements generally may be terminated by either party upon 30 to 45 days notice. Additionally, we have informal arrangements with several military bases pursuant to which the bases make information about Capella University available to interested service members. Each of these informal arrangements are not binding on either party and either party could end the arrangement at any time. If our informal arrangement with any military base deteriorates or ends, our efforts to recruit learners from that base will be impaired. In the event that governmental tuition assistance programs to active duty members of the U.S. Armed Forces are reduced or eliminated, if our tuition discount program which we offer U.S. Armed Forces personnel is reduced or eliminated, or if our informal arrangements with any military base deteriorates, this could materially and adversely affect our 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 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. In Note 2 to our consolidated financial statements included elsewhere in this prospectus, we disclose the pro forma compensation expense that we would have recognized if we had accounted for our employee stock options

under the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), using the Black-Scholes option valuation model and making certain other assumptions. That calculation indicates that we would have recognized an additional $1.6 million, $1.8 million, and $2.4 million of compensation expense in 2002, 2003, and 2004, respectively. Estimates of option values using the Black-Scholes method and making certain other assumptions may not be indicative of results from the valuation methodologies we ultimately adopt and the assumptions we ultimately make for the purposes of SFAS 123R.


	*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 to ensure that we are continually monitoring the security of our technology infrastructure.


	*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 64% 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.

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.


	*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.


	*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.

In addition, we plan to file an S-8 registration statement under the Securities Act of 1933 shortly after the date of this prospectus to register shares of our common stock issuable under our stock incentive plans and our employee stock purchase plan. The S-8 registration statement will be effective upon filing with the SEC. As a result, after the effective date of the S-8 registration statement, shares issued under our stock incentive plans and employee stock purchase plan and covered by the S-8 registration statement will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates described in the section entitled “Shares Eligible for Future Sale — Registration on Form S-8” and, to the extent applicable, the lock-up agreements described in the section entitled “Underwriting.”

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 and shares issued under our stock incentive plans and employee stock purchase plans), 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 collectively control substantially all matters requiring shareholder approval and, in the case of certain of our principal shareholders, will have other unique rights that may afford them access to our management.

Our directors, executive officers and principal existing shareholders will beneficially own approximately shares, or %, of our common stock upon the completion of this offering. Our directors and executive officers will beneficially own in the aggregate approximately shares, or %, of our common stock after the offering, including approximately shares, or %, of our common stock beneficially owned by Stephen Shank, our Chief Executive Officer and Chairman of our Board of Directors. Forstmann Little & Co. Equity Partnership-VI, L.P. (Forstmann VI), Forstmann Little & Co. Equity Partnership-VII, L.P. (Forstmann VII) and Forstmann Little & Co. Subordinated Debt and Equity Buyout Partnership-VIII, L.P. (Forstmann VIII), which we refer to as the Forstmann Little entities in this prospectus, Cherry Tree Ventures IV, L.P., TCV V, L.P. and TCV Member Fund L.P., which we refer to as the entities affiliated with Technology Crossover Ventures in this prospectus, 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, 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, and Insight-Salmon River LLC, Insight Venture Partners IV, L.P., Salmon River Capital I LLC and Salmon River CIP LLC, which we refer to as the Salmon River and Insight entities in this prospectus, which we collectively refer to as our principal existing

shareholders, will beneficially own approximately shares, or %, of our common stock after the offering. In addition to their shareholdings, Forstmann VI will also have the right to designate one person for election to our board of directors after the offering. Moreover, Forstmann VI, Maveron Equity Partners 2000, LP, TH Lee, Putnam Investment Trust and TCV V, L.P. will also have the right to inspect our books and records, to visit and inspect any of our properties and to discuss our affairs, finances, and accounts with our officers, lawyers, and accountants after the offering. In addition, the Forstmann Little entities will also have the right to consult and advise management on our significant business issues after the completion of this offering, including management’s proposed annual operating plans. See “Principal and Selling Shareholders” for a more detailed discussion of the shareholdings of our directors, executive officers and principal existing shareholders, “Management — Board Representation Agreement” for a more detailed discussion of the Forstmann VI’s director designation right and “Management — Board Observation Rights; Inspection Rights” for a more detailed discussion of the inspection and consultation rights of certain of our principal existing shareholders.

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. These shareholders may also use their contractual rights, including access to management, and their large ownership position to address their own interests, which may be different from those of investors in this offering.


	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 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 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. 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;



	•	hire a director of investor relations and hire investor relations support personnel; and



	•	hire additional personnel to perform internal accounting functions, including tax accounting functions.

If we fail to take some of these actions, in particular with respect to our internal audit and accounting functions and our compliance function, our ability to timely and accurately report our financial results could be impaired.

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.

Our auditors concluded that, as of December 31, 2004, there was a reportable condition in our internal controls relating to accounting for income taxes.

Under standards established by the American Institute of Certified Public Accountants, we had a reportable condition related to our internal controls as of December 31, 2004. Under such standards, “reportable conditions” involve matters coming to the auditor’s attention relating to significant deficiencies in the design or operation of internal controls that, in the auditor’s judgment, could adversely affect the organization’s ability to initiate, record, process, and report financial data consistent with the assertions of management in the consolidated financial statements. Our independent auditors concluded, and management agreed, that this reportable condition would likely rise to the level of a “significant deficiency” as defined in Auditing Standard No. 2, which was issued by the Public Company Accounting Oversight Board in March 2004, and to which we will be subject once we become a public company. Under Auditing Standard No. 2, a “significant deficiency” is defined as a deficiency in internal control that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected. This probable significant deficiency was determined to exist based on the need to increase our existing income tax accounting resources to handle the additional complexity in our tax accounting as a result of the reversal of our deferred tax asset valuation allowance in 2004. We sought and obtained additional technical assistance from a third party tax advisor in preparing the final income tax provisions for 2004, at which time all identified errors were corrected in our financial statements for the year ended December 31, 2004. However, our remediation of this probable significant deficiency is only a temporary solution. We are in the process of enhancing our income tax accounting capability by continuing to use a third party tax advisor and are considering whether to hire an

internal manager of tax accounting, both of which will increase our costs. We cannot assure you that the measures we will take will be sufficient to address this matter on a long-term basis or avoid other significant deficiencies in the future.


	*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 are required to comply with Section 404 by no later than December 31, 2006. With the assistance of outside consultants who specialize in preparing companies to comply with Section 404 of the Sarbanes Oxley Act of 2002, we began our process evaluation and subsequent remediation work in the second half of 2004. In connection with our evaluation, we have identified a number of control deficiencies, some of which have been remedied. In 2005, we are continuing our remediation work and have begun testing of key controls. 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 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 materially affect, 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.

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.

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 branding, marketing and recruiting efforts using broader-reaching advertising media, capital expenditures, developing new courses and programs and acquisitions complementary to our business. Acquisitions complementary to our business may include buying companies or assets that would expand our portfolio of academic offerings or enhance the delivery of our programs. 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.

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of March 31, 2005:


	•	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, the midpoint of the range set forth on the cover page of this prospectus and after deducting underwriting discounts and estimated expenses payable by us); 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
			March 31, 2005

			Actual		Pro Forma

			(In thousands,
			except share and
			per share amounts)
Cash, cash equivalents and short-term investments			$	55,635

Debt:
	Line of credit ^(a)			—
	Capital lease obligations			196

		Total debt		196

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: 1,536,351 authorized, none issued and outstanding, actual; 10,000,000 shares authorized, none issued and outstanding, pro forma			—
	Common stock: $0.10 par value; 15,000,000 shares authorized, 2,100,802 shares issued and outstanding, actual; 100,000,000 shares authorized, shares issued and outstanding, pro forma ^(b)			210


			As of
			March 31, 2005

			Actual			Pro Forma

			(In thousands,
			except share and
			per share amounts)
	Additional paid-in capital			5,275
	Deferred compensation			(46	)
	Accumulated deficit			(11,235	)

		Total shareholders’ equity (deficit)		2,764

Total capitalization			$	60,606



(a)	At March 31, 2005, 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, Stock Option Plans and Other Incentive Plans.”

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 as of March 31, 2005, was $2,764,000 or $ per share of common stock. Net tangible book value 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 March 31, 2005. 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 March 31, 2005, 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 March 31, 2005, 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 March 31, 2005	$
	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 March 31, 2005, 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)

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 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 March 31, 2005. 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.”

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 selected 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 selected consolidated statement of operations data for the three months ended March 31, 2004 and 2005 and the selected balance sheet data as of March 31, 2005, have been derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of our financial position and operating results for the unaudited periods. The selected consolidated financial and operating data as of and for the three months ended March 31, 2005 are not necessarily indicative of the results that may be obtained for a full year.

The following table also sets forth summary unaudited consolidated pro forma balance sheet data as of March 31, 2005, 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.


																	Three Months Ended
			Year Ended December 31,														March 31,

			2000			2001			2002			2003		2004			2004		2005

			(In thousands, except per share and enrollment data)
Statement of Operations Data:
Revenues			$	15,896		$	29,806		$	49,556		$	81,785	$	117,689		$	26,488	$	34,610
Costs and expenses:
	Instructional costs and services			12,751			20,489			28,013			43,128		58,168			13,614		16,247
	Selling and promotional			8,330			13,629			15,860			21,446		34,247			8,088		9,621
	General and administrative			6,848			9,382			11,677			13,141		15,409			3,403		4,597

		Total costs and expenses		27,929			43,500			55,550			77,715		107,824			25,105		30,465

Operating income (loss)				(12,033	)		(13,694	)		(5,994	)		4,070		9,865			1,383		4,145
Other income, net				1,332			731			327			427		724			129		372

Income (loss) before income taxes				(10,701	)		(12,963	)		(5,667	)		4,497		10,589			1,512		4,517
Income tax expense (benefit)				—			—			—			104		(8,196	)		46		1,813

Net income (loss)			$	(10,701	)	$	(12,963	)	$	(5,667	)	$	4,393	$	18,785		$	1,466	$	2,704

Net income (loss) per common share:
	Basic		$	(7.61	)	$	(8.71	)	$	(3.70	)	$	2.63	$	9.34		$	0.77	$	1.29
	Diluted		$	(7.61	)	$	(8.71	)	$	(3.70	)	$	0.39	$	1.62		$	0.13	$	0.23
Weighted average number of common shares outstanding:
	Basic			1,406			1,489			1,532			1,669		2,011			1,910		2,092
	Diluted			1,406			1,489			1,532			11,154		11,599			11,330		11,845


														Three Months Ended
	Year Ended December 31,													March 31,

	2000			2001			2002			2003		2004		2004		2005

	(In thousands, except per share and enrollment data)
Other Data:
Depreciation and amortization ^(a)	$	985		$	2,044		$	3,108		$	4,177	$	5,454	$	1,187	$	1,515
Net cash provided by (used in) operating activities	$	(7,895	)	$	(9,249	)	$	177		$	16,028	$	17,494	$	1,231	$	7,480
Capital expenditures	$	4,477		$	5,283		$	3,859		$	4,348	$	8,986	$	861	$	1,760
EBITDA ^(b)	$	(11,048	)	$	(11,650	)	$	(2,886	)	$	8,247	$	15,319	$	2,570	$	5,660
Enrollment ^(c)		2,111			3,757			6,380			9,115		12,013		9,919		12,775


																As of March 31, 2005
	As of December 31,
																		Pro
	2000			2001			2002			2003			2004			Actual		Forma ^(d)

	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	25,368		$	10,655		$	22,060		$	41,190		$	49,980		$	55,635	$	—
Working capital ^(e)		22,268			6,203			15,340			27,516			37,935			42,541
Total assets		32,763			23,882			35,380			55,402			80,026			83,336
Total redeemable preferred stock		35,150			34,985			50,401			57,646			57,646			57,646
Shareholders’ equity (deficit)		(8,318	)		(20,999	)		(26,250	)		(20,416	)		(5	)		2,764


(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 use EBITDA as a measure of operating performance. 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.


	We believe EBITDA is useful to an investor in evaluating our operating performance and liquidity because:


	•	it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.

Our management uses EBITDA:



	•	as a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes; and



	•	in presentations to the members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry.


	The following table provides a reconciliation of net income (loss) to EBITDA:


																Three Months
	Year Ended December 31,															Ended March 31,

	2000			2001			2002			2003			2004			2004			2005

	(In thousands)
Net income (loss)	$	(10,701	)	$	(12,963	)	$	(5,667	)	$	4,393		$	18,785		$	1,466		$	2,704
Other income, net		(1,332	)		(731	)		(327	)		(427	)		(724	)		(129	)		(372	)
Income tax expense (benefit)		—			—			—			104			(8,196	)		46			1,813
Depreciation and amortization		985			2,044			3,108			4,177			5,454			1,187			1,515

EBITDA	$	(11,048	)	$	(11,650	)	$	(2,886	)	$	8,247		$	15,319		$	2,570		$	5,660


(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 as of March 31, 2005, 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 at an offering price of $ per share (the mid-point of the range set forth on the cover of this prospectus) 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.

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 March 31, 2005, we offered more than 675 courses and 13 degree programs with 68 specializations at the graduate and undergraduate levels to more than 12,700 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, and the three months ended March 31, 2005, 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

of federal and other funding, the length of our educational programs, the seasonality of our enrollments and general economic conditions.

The following is a summary of our learners by degree level as of the last day of classes for the years ended December 31, 2002, 2003 and 2004, and the three months ended March 31, 2004 and 2005:


								For the Three
		For the Years Ended						Months Ended
		December 31,						March 31,

		2002		2003		2004		2004		2005

Doctoral			3,187		4,251		5,611		4,648		5,795
Master’s			2,603		3,695		4,543		3,869		5,026
Bachelor’s			590		1,169		1,859		1,402		1,954

	Total		6,380		9,115		12,013		9,919		12,775

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 64%, 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.

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, and information technology costs that are attributable to the marketing of Capella University and the 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 March 31, 2005, learners seeking doctoral, master’s and bachelor’s degrees represented approximately 46%, 39% 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 and the three months ended March 31, 2005, 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 or in the first three months of 2005. 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-recurring 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 results of operations in future periods will include income tax expense, not benefit, and that our annual effective tax rate for 2005 will be in the range of 39% to 41%.

Stock option expense. In December 2004, the FASB issued SFAS 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 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 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, and for the three months ended March 31, 2005. 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. During the three months ended March 31, 2004 and 2005, we recognized bad debt expense of $0.2 million and $0.4 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 $6.1 million as of March 31, 2005. Our impairment loss calculation is subject to uncertainties because management 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, particularly recent sales of our stock by investors and our annual independent valuation of our common stock prepared for purposes of valuing our contributions to our Employee Stock Ownership Plan (ESOP).

More specifically, the practices we use to value the underlying common stock for purposes of stock option accounting rely heavily upon independent third party transactions relating to our preferred stock, to the extent such transactions are significant and occur in the general timeframe of our stock option issuances. We issued options in October and December of 2004 that were priced at $20.00 per share of common stock. In November 2004, Insight-Salmon River LLC purchased 1,022,222 shares of our Class D convertible preferred stock at a price of $20.00 per share and subsequently transferred 272,222 shares of our Class D preferred stock to Salmon River Capital I LLC. In December 2004, the entities affiliated with Technology Crossover Ventures and the Maveron entities purchased 1.71 million and 0.35 million shares, respectively, of our classes E and G redeemable convertible preferred stock at a price of $20.83 and $20.00 per share, respectively, from the Forstmann Little entities.

We use a combination of other valuation techniques to estimate the fair value of our common stock to the extent that we do not have significant third party stock transactions that have occurred in the general timeframe of the stock option issuances. These valuation techniques generally include, as a baseline, the use of the annual valuation of our common stock that is performed by an unrelated valuation specialist as of December 31st of each year for purposes of valuing our ESOP contributions. The results of this valuation as of December 31, 2003 and 2004 were $13.62 per share and $20.00 per share, respectively. This annual baseline ESOP valuation is adjusted for subsequent changes in our interim earnings per share, changes in growth in our interim earnings per share, and changes in the market value and operating performance of our peer group of public post-secondary education companies, among others. Each of these factors, the most significant of which is the growth in our earnings, has contributed to the difference between the fair value of our stock at the dates of our stock option issuances over the past twelve months, and the estimated offering price. We believe the availability of significant third party transactions in our preferred stock over the past year, along with our annual ESOP valuation and ability to measure and reasonably value subsequent changes in value due to growth in our earnings, has provided a reasonable basis for valuing our common stock.

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:


											Three Months
		Year Ended December 31,									Ended March 31,

		2002			2003			2004			2004			2005

		(In thousands, except per share information)
Net income (loss) as reported		$	(5,667	)	$	4,393		$	18,785		$	1,466		$	2,704
Deferred compensation expense included in net income (loss) as reported			39			37			4			4			4
Compensation expense determined under the fair-value-based method			(1,623	)		(1,779	)		(2,383	)		(567	)		(545	)

Pro forma net income (loss)		$	(7,251	)	$	2,651		$	16,406		$	903		$	2,163

Net income (loss) per common share:
	Basic — as reported	$	(3.70	)	$	2.63		$	9.34		$	0.77		$	1.29
	Basic — pro forma	$	(4.76	)	$	1.59		$	8.16		$	0.47		$	1.03
	Diluted — as reported	$	(3.70	)	$	0.39		$	1.62		$	0.13		$	0.23
	Diluted — pro forma	$	(4.76	)	$	0.24		$	1.43		$	0.08		$	0.18

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 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 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.

Results of Operations

The following table sets forth statements of operations data as a percentage of revenues for each of the periods indicated:


												Three Months
			Year Ended December 31,									Ended March 31,

			2002			2003			2004			2004			2005

Revenues				100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
	Instructional costs and services			56.5			52.7			49.5			51.4			46.9
	Selling and promotional			32.0			26.2			29.1			30.5			27.8
	General and administrative			23.6			16.1			13.1			12.9			13.3

		Total costs and expenses		112.1			95.0			91.7			94.8			88.0

Operating income (loss)				(12.1	)		5.0			8.3			5.2			12.0
Other income, net				0.7			0.5			0.6			0.5			1.1

Income (loss) before income taxes				(11.4	)		5.5			8.9			5.7			13.1
Income tax expense (benefit)				0.0			0.1			(7.0	)		0.2			5.2

Net income (loss)				(11.4	)%		5.4	%		15.9	%		5.5	%		7.8	%


	*Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004*

Revenues. Our revenues for the three months ended March 31, 2005, were $34.6 million, representing an increase of $8.1 million, or 30.7%, as compared to revenues of $26.5 million for the three months ended March 31, 2004. This increase was primarily due to an increase in enrollments as well as increases in tuition in 2005 as compared to 2004, partially offset by a larger proportion of bachelor’s and

master’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 three months ended March 31, 2005, were $16.2 million, representing an increase of $2.6 million, or 19.3%, as compared to instructional costs and services expenses of $13.6 million for the three months ended March 31, 2004. 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 4.5 percentage points to 46.9% for the three months ended March 31, 2005, as compared to 51.4% for the three months ended March 31, 2004. This improvement in 2005 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 three months ended March 31, 2005, were $9.6 million, representing an increase of $1.5 million, or 18.9%, as compared to selling and promotional expenses of $8.1 million for the three months ended March 31, 2004. This increase was primarily attributable to an increase in recruitment personnel, an increase in costs associated with establishing additional marketing relationships and an increase in the cost of online advertising. Our selling and promotional expenses as a percentage of revenues decreased by 2.7 percentage points to 27.8% for the three months ended March 31, 2005, from 30.5% for the three months ended March 31, 2004, primarily as a result of improved efficiency of our advertising and recruitment functions.

General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2005, were $4.6 million, representing an increase of $1.2 million, or 35.1%, as compared to general and administrative expenses of $3.4 million for the three months ended March 31, 2004. This increase was primarily attributable to an increase in administrative costs resulting from investments to further develop our corporate infrastructure and an increase in bad debt expense. During the first three months of 2005, we made further investments in corporate infrastructure through additions of personnel, primarily in the finance department, in preparation for becoming a public company. A $0.2 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 increased by 0.4 percentage points to 13.3% for the three months ended March 31, 2005, from 12.9% for the three months ended March 31, 2004, as a result of the factors described above.

Other income, net. Other income, net increased by $0.2 million, or greater than 100%, to $0.4 million for the three months ended March 31, 2005, from $0.1 million for the three months ended March 31, 2004. The increase was primarily due to higher interest rates and higher average cash and short-term investment balances during the first quarter of 2005.

Income tax expense (benefit). We recognized tax expense for the three months ended March 31, 2005, of $1.8 million, or at an effective tax rate of approximately 40.1%. Our tax expense for the three months ended March 31, 2004, was effectively zero as we utilized net operating loss carryforwards that were fully reserved for in prior periods. We expect that our estimated annual effective income tax rate for 2005 will be in the range of 39% to 41%.

Net income. Net income was $2.7 million for the three months ended March 31, 2005, compared to net income of $1.5 million for the three months ended March 31, 2004, an increase of $1.2 million. Net income as a percentage of revenues increased by 2.3 percentage points to 7.8% for the three months ended March 31, 2005, from 5.5% for the three months ended March 31, 2004, as a result of the factors discussed above.


	*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 $58.2 million, representing an increase of $15.0 million, or 34.9%, as compared to instructional costs and services expenses of $43.1 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 3.2 percentage points to 49.5% for the year ended December 31, 2004, as compared to 52.7% 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 $34.2 million, representing an increase of $12.8 million, or 59.7%, as compared to selling and promotional expenses of $21.4 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 2.9 percentage points to 29.1% for the year ended December 31, 2004, from 26.2% 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 $15.4 million, representing an increase of $2.3 million, or 17.3%, as compared to general and administrative expenses of $13.1 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 3.0 percentage points to 13.1% for the year ended December 31, 2004, from 16.1% 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 non-recurring, non-cash 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 results of operations in future periods will include income tax expense, not benefit, and 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 $43.1 million, representing an increase of $15.1 million, or 54.0%, as compared to instructional costs and services expenses of $28.0 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 3.8 percentage points to 52.7% for the year ended December 31, 2003, as compared to 56.5% 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 $21.4 million, representing an increase of $5.6 million, or 35.2%, as compared to selling and promotional expenses of $15.9 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 5.8 percentage points to 26.2% for the year ended December 31, 2003, as compared to 32.0% 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 $13.1 million, representing an increase of $1.5 million, or 12.5%, as compared to general and administrative expenses of $11.7 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 7.5 percentage points to 16.1% of revenues for the year ended December 31, 2003, from 23.6% 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 tables set forth certain unaudited financial and operating data in each quarter during the years ended December 31, 2003 and 2004, and the first quarter of the year ending December 31, 2005. 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


		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


		First Quarter

		(In thousands, except
		per share and
		enrollment data)
2005
Revenues		$	34,610
Operating income			4,145
Net income			2,704
Net income per common share:
	Basic	$	1.29
	Diluted	$	0.23
Enrollment			12,775

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. Additionally, our revenues for the first quarter of 2005 were lower than our revenues for the fourth quarter of 2004, partially due to a decrease of approximately $1.0 million in seminar tuition revenue. 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. Our operating income (loss) and net income (loss) for the third and fourth quarters of 2003 were significantly below our results for the previous two quarters. In addition to the factors described above, our income for those periods as well as for the first and second quarter of 2004 were negatively impacted by our investment in strategic initiatives, including an accelerated development of our four-year undergraduate program, brand research and infrastructure investments to facilitate growth in marketing relationships.

Liquidity and Capital Resources


	*Liquidity*

We financed our operating activities and capital expenditures during the three months ended March 31, 2005 and 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 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.


	*Operating Activities*

Net cash provided by operating activities during the three months ended March 31, 2005, was $7.5 million, an increase of $6.2 million from $1.2 million during the three months ended March 31, 2004. The increase was primarily due to a $1.2 million increase in net income, a $1.6 million increase in non-cash related expenses for deferred income taxes, a $1.8 million decrease in accounts receivable, and a $2.5 million increase in accrued liabilities, offset by a $1.0 million decrease in accounts payable due to the timing of vendor payments.

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 $3.7 million and $2.4 million for the three months ended March 31, 2005 and 2004, respectively. 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 $2.0 million and $1.5 million during the three months ended March 31, 2005 and 2004, respectively. 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 $1.8 million and $0.9 million for the three months ended March 31, 2005 and 2004, respectively. 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.


	*Financing Activities*

Net cash provided by financing activities for the three months ended March 31, 2004, was $0.2 million. Net cash used in financing activities for the three months ended March 31, 2005, was $0.1 million. The financing activities during these periods were primarily related to stock option exercises and payments on our capital lease obligations.

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 2,184,540 shares of our Class G redeemable convertible preferred stock, or Class G preferred stock. 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. We sold the remaining 683,452 shares of Class G preferred stock at a price per share of $11.12 and 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. We received proceeds from the exercise of stock options of $0.06 million during the three months ended March 31, 2005.

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 or the three months ended March 31, 2005. 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 and as of March 31, 2005, consisted of cash, cash equivalents, and short-term investments rated AA or higher, further limiting our credit and market risk related to investments.


	*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 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.

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 March 31, 2005, we offered more than 675 online courses and 13 academic programs with 68 specializations to more than 12,700 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

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 grow by approximately 30% in 2004 to reach 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.

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

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 Marketing 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 marketing relationships and tuition discount programs with approximately 80 corporations, various organizations and educational institutions of the U.S. Armed Forces and over 230 community colleges. Through these relationships and programs, we typically seek to recruit learners by enhancing Capella’s recognition among the individuals within each entity, in some cases through marketing efforts provided by the entity, as well as by offering tuition discounts to such individuals. Additionally, our relationships with educational institutions often allow learners to obtain credits towards a Capella University degree for certain courses they have taken at these institutions. We intend to increase enrollment from our existing market 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 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.


	*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

________________________________________________________________________________

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.

We also offer certificate programs, which consist of a series of courses focused on a particular area of study, for learners who seek to enhance their skills and knowledge. Online certificate courses can be taken as part of an undergraduate or graduate degree program or on a standalone basis. The duration of our certificate programs ranges from two quarters to approximately two years.

We are in the process of phasing out our certificate offerings. There are currently 155 learners participating in our certificate programs. We anticipate that by December 31, 2007, we will no longer offer most of the certificate programs currently offered. However, we do intend to continue to offer, on a limited basis, selected certificate programs in education and psychology.


	*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 760 faculty members as of March 31, 2005, 114 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. 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 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.

Marketing Relationships and Programs. Our corporate, U.S. Armed Forces and educational relationships and discount programs 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 academic programs can provide, both for the individuals in their organization and for the organization itself.



	•	Corporate Relationships. We developed our corporate alliance program to offer education opportunities to employees of large companies. Pursuant to these arrangements, program participants make information about Capella University available to their employees. In return, we provide a tuition discount to participants’ employees and their immediate family members. Our corporate alliance program agreements are non-exclusive written agreements that generally have three year terms with automatic renewal provisions, but the parties may generally terminate the agreements at any time on 60 to 90 days prior notice. Through our corporate alliance programs, we presently have learners from approximately 80 corporations.



	•	U.S. Armed Forces Relationships and Discount Program. We offer a discount on tuition to all members of the U.S. Armed Forces and immediate family members of active duty U.S. Armed Forces personnel. We also have arrangements with various educational institutions of the U.S. Armed Forces pursuant to which we have agreed to accept credits from certain military educational programs earned by learners who meet our transfer requirements, which they can apply toward a Capella degree. As part of these arrangements, several of these educational institutions make information about Capella University available to their members. In addition, we have arrangements with the Army National Guard, the U.S. Coast Guard Institute and several military bases pursuant to which these organizations make information about Capella University available to interested service members. Our arrangements with the various educational institutions, the Army National Guard and the U.S. Coast Guard Institute are non-exclusive written agreements with varying terms that may generally be terminated by either party upon 30 to 45 days prior notice. Our arrangements with military bases are established through informal relationships between us and the respective base. For the three months ended March 31, 2005, approximately 19% of our learners received a U.S. Armed Forces tuition discount.



	•	Educational Relationships. We developed our educational alliance program to allow graduates of community colleges to transfer into our programs and to recruit community college faculty to attend our graduate 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 agreements are non-exclusive written agreements that generally have a one year term which automatically renews in annual increments, but generally either party may terminate the agreement at any time upon 30 to 60 days prior notice.

For the three months ended March 31, 2005, approximately 33% of our learners received a discount in connection with one of our marketing relationships or programs described above.

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 the three months ended March 31, 2005, our enrollment was 12,775 learners. Of the learners that responded to our demographic survey, approximately 61% were female and approximately 33% were minorities. Our learner population is geographically distributed throughout the United States.

The following is a summary of our learners by degree level as of the last day of classes in the three months ended March 31, 2005:


	Enrollment

	Number
Degree Level	of Learners		% of Total

Doctoral		5,795		45.4	%
Master’s		5,026		39.3
Bachelor’s		1,954		15.3

Total		12,775		100.0	%


	*Tuition and Fees*


	*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.

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 March 31, 2005, 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 March 31, 2005, 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.

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.

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 64% 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 Title IV programs.

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 or 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 or authorized in these states because we have determined that our activities in each state constitute a presence requiring licensure or authorization by the state educational agency. In some cases, the licensure or authorization is only for specific programs. In the majority of these states, Capella University has either determined that separate licensure or authorization for its certificate programs is not necessary, or has obtained such licensure or authorization. In four states (Florida, Georgia, Virginia and Wisconsin), Capella University is in the process of seeking either separate licensure or authorization for its certificate programs, or a waiver from such requirements, from the pertinent 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 or otherwise subject us to the jurisdiction of the respective state educational agency, we may, from time to time, need to seek licensure or authorization 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 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.

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.

When we learn that a state has refused to grant licensure to one of our graduates, we take one or more of the following actions. In certain instances, where we believe the state’s refusal to license one of our graduates may be incorrect, we assist learners by providing clarifying information to the state. In other cases, such as where a state will not license one of our learners because a Capella program is not accredited by a specific third party, we convey that information to prospective learners before they enroll in such program. In all cases, we semi-annually remind our learners that they need to communicate directly with the state in which they intend to seek licensure to fully understand the licensing requirements of that state.

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 FFEL program and (2) the Federal Pell Grant, or Pell, program. In 2004, approximately 64% 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 63% 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 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 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 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. A related student eligibility provision of the 50% Rules has the effect of restricting students enrolled in courses delivered via telecommunications (including online courses) from receiving Title IV financial aid for certificate programs if they attend an institution that offers more certificate programs than degree programs. 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-offering 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. Similarly, students enrolled in courses delivered online at predominantly degree-offering institutions may receive Title IV financial aid for both degree programs and certificate programs of one year or longer. However, Capella University and its learners would not qualify for eligibility under the less restrictive limitation because it currently offers more certificate programs than degree programs, and because more than 49% of its courses are offered online. Because 100% of Capella University’s courses are online courses and 100% of its learners are enrolled in online courses, the 50% Rules and the related student eligibility component of 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 specific statutory and regulatory requirements in order 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 and the related student eligibility component of 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 and the related student eligibility component 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, favorably amend the related student eligibility component of the 50% Rules, and 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 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 students;


	•	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 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 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 64% 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. Capella University’s preliminary default rate on FFEL program loans for the 2003 federal fiscal year was 1.8%. Preliminary default rates for other four-year degree-granting proprietary institutions for the 2003 federal fiscal year are not available to Capella. However, the Department of Education is expected to issue default rates for us and other four-year degree-granting proprietary institutions in the Fall of 2005. If our default rate exceeds 40%, we may lose our eligibility to participate in some or all Title IV programs.

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 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 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 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 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 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.

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.

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 2003 to 2004, Mr. Schroeder served as our Senior Vice President, Business Technology and 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 2005. From 2004 to 2005, Ms. Nordin served as our Vice President of Service Operations. 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 2000 to 2002, Mr. Thom served as Vice President, Government Solutions at Datacard Group. From 1994 to 2000, 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 2000. From 1999 to 2000, Ms. Rausch served as our Director, Human Resources. From

1985 to 1999, Ms. Rausch served as Director and Manager of Human 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., an investment firm. From 1997 to 1999, Mr. Lewis was a Managing Director of Warburg Pincus, a private equity/venture capital firm with which he was associated for over a decade. 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 since May 2005, has been serving as a member of the board of directors of TRW Automotive Holdings Corp., an NYSE-listed global supplier of automotive components. 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.

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.S. 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 the Forstmann Little entities; Frederick M. Wynn, Jr., an affiliate of the Putnam entities; 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 position 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. Mr. Lister serves as a board observer at the discretion of our board, and we anticipate that our board will terminate Mr. Lister’s board observation position 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. Mr. Christianson has expressed his intention to resign as a member of our board following this offering.

After the offering, the governance committee of the board of directors will assist the board in identifying, recruiting and evaluating new director candidates to fill any vacancy or newly created directorship, whether for election by directors between meetings of shareholders or nomination for election by shareholders at an annual meeting of shareholders, including determining director selection criteria, initiating a director search process, screening and evaluating director candidates and making recommendations to the board. The board will then conduct such additional screening and evaluation as it deems appropriate.

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 VI, 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;

	(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 VI, all director designation rights specified above will terminate upon the completion of this offering. The director designation right of Forstmann VI will terminate when the Forstmann Little entities collectively own less than 5% of our outstanding capital stock. The agreement to vote in the manner directed by Stephen Shank contained in the board representation agreement will also terminate upon the completion of this offering. We expect that all of our current board members, except for Mr. Christianson, will continue as board members immediately following this offering. Mr. Christianson has expressed his intention to resign as a member of our board following 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, 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 each of Forstmann VII and Forstmann VIII, are 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. Forstmann VII and Forstmann VIII do not have board observation rights if either Forstmann VII or Forstmann VIII 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 rights of Forstmann VII and Forstmann VIII do not apply because Forstmann VII and Forstmann VIII do not collectively hold the requisite number of Class G preferred shares. Under the agreement, the Putnam entities and

Forstmann VII and Forstmann VIII entities also have the right to consult and advise management on our significant business issues, including, among other things, management’s proposed annual operating plans. Our management has no obligation to follow the advice of the Putnam entities and Forstmann VII and Forstmann VIII and we will not compensate any of the Putnam entities or Forstmann VII and Forstmann VIII for their advice under the agreement.

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 the completion of this offering. Currently, the board observation rights of Forstmann VII and Forstmann VIII do not apply because Forstmann VII and Forstmann VIII do not collectively hold the requisite amount of Class G preferred stock. Each of Forstmann VII and Forstmann VIII will retain the right to consult and advise management on our significant business issues, including management’s proposed annual operating plans, after the completion of this offering.

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 VI 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 VI already has a board representation right pursuant to a separate agreement. Currently, the board observation right of Forstmann VI 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 VI 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. Forstmann VI will retain the right to consult and advise management on our significant business issues, including management’s proposed annual operating plans, after completion of this offering.

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 VI, Maveron Equity Partners 2000, LP, TH Lee, Putnam Investment Trust, TCV V, L.P. and certain other investor parties. 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 VI, 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, to inspect our books and records and to discuss our affairs, finances, and accounts with our officers, lawyers, and accountants, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times as such investor may reasonably request. The investor party requesting such inspection will bear the expenses associated with such inspection. Each of the investor parties named above currently has the right to visit and inspect any of our properties.

After the Offering. The investor parties to the investor rights agreement will retain their 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 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 Mr. Christianson) is “independent,” as defined under and required by the rules of The Nasdaq National Market and the federal securities laws. The board of directors has determined that each of Messrs. Tukua and Taylor qualifies as an “audit committee financial expert,” as defined under the rules of the federal securities laws.

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 Mr. Shank) is “independent,” as defined under and required by the rules of The Nasdaq National Market. Concurrently with the completion of this offering, Mr. Shank will resign as a member of the governance committee.

Executive Committee. Our executive committee consists of Messrs. Smith (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 Mr. 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 chair of the executive committee. 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 $32,500 as fees related to their board and board committee services. Chairs for the governance

committee and the compensation committee will be paid an additional annual cash retainer of $5,000 and the chair for the audit committee will be paid an additional cash retainer of $7,500. 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 $32,500. 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.

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)

17.72

07/27/2014

5,643

^(c)

19.49

07/27/2009

Michael J. Offerman

15,211

^(d)

17.72

07/27/2014

Paul A. Schroeder

15,211

^(e)

17.72

07/27/2014

Heidi K. Thom

25,000

^(f)

17.72

07/27/2014

Scott M. Henkel

35,000

^(g)

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

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, all of which have vested. 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 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, all of which have vested. 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, 25,000 shares of which have vested and 12,500 shares of which will vest on each of June 30, 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 effective as of February 1, 2003, and as amended on May 11, 2005, 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. Currently, the participants include our Chief Executive Officer and Chairman of the Board of Directors, senior vice president level employees, vice president level employees and approximately 30 employees who report to the senior vice president and vice president level employees and who are classified as corporate director level employees.

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 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. The plan 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 plan provides 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 plan 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. The Capella Education Company Annual Incentive Plan for Management Employees — 2005, referred to as the Bonus Plan, was recommended by the compensation committee and adopted by the board of directors in May 2005. The Bonus Plan sets forth the terms for cash incentive payments to our management-level employees based on our financial performance in 2005. Awards to our named executives under the Bonus Plan are in lieu of, and not in addition to, the incentive compensation target award amount included as part of their employment agreements. 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 three stock plans: (1) the Capella Education Company 1999 Stock Option Plan; (2) the Learning Ventures International, Inc. 1993 Stock Option Plan; and (3) the Capella Education Company 2005 Stock Incentive Plan.

Capella Education Company 2005 Stock Incentive Plan. The Capella Education Company 2005 Stock Incentive Plan, referred to as the 2005 Plan, was recommended by the compensation committee in May 2005 and adopted and approved by our board of directors and our shareholders in May 2005. The 2005 Plan authorizes the granting of stock-based awards to our officers, directors, employees, consultants and advisors. We have reserved an aggregate of 1,613,000 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 April 30, 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 1,390,954 shares are outstanding. Our board of directors approved a resolution in May 2005 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) for issuance under the 1993 Plan 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 April 30, 2005, we had granted options to purchase a total of 1,682,877 shares of our common stock (excluding cancelled or expired options) under the 1993 Plan at exercise prices of $1.00 to $15.65 per share, of which options to purchase 198,745 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, as amended, 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. An employee is also eligible to share in the ESOP contribution for a year in which he or she died, became disabled or retired, as defined by the ESOP in that 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. Prior to termination, participants may receive distributions from the ESOP in accordance with statutory diversificatory requirements. 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.

Employee Stock Purchase Plan. The Capella Education Company Employee Stock Purchase Plan, referred to as the ESPP, was recommended by the compensation committee in May 2005 and adopted and approved by our board of directors and our shareholders in May 2005. We have reserved an aggregate of 450,000 shares of our common stock for issuance under the ESPP. The ESPP permits eligible employees to utilize up to 10% of their compensation to purchase our common stock at a price of no less than 85% of the fair market value per share of our common stock at the beginning or the end of the relevant offering period, whichever is less. The compensation committee of our board of directors will administer the ESPP. In order to avoid adverse accounting implications for the company, the compensation committee is presently considering the offering of stock under the ESPP at a price of 95% of the fair market value of our stock measured only at the end of the relevant offering period. The compensation committee is also considering imposing an annual $15,000 cap on the amount of funds that eligible employees may utilize to purchase shares under the plan. Our board of directors may amend or terminate the plan.

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.

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 1,501,088 shares of Class G preferred stock. In addition, concurrently with the exchange, we sold 683,452 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 VII and VIII ⁽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

preferred stock to the entities affiliated with Technology Crossover Ventures 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 Capella from 1998 to 2003.

(g) Russell A. Gullotti was a director of Capella from 2001 to 2004.

(h) Joseph C. Gaylord was an executive officer of Capella from 2003 to 2004.

(i) 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 Forstmann VII and Forstmann VIII. Forstmann VII and Forstmann VIII originally obtained 674,460.20 shares of Class G preferred stock pursuant to the exchange agreement described in footnote (b) above. Forstmann VII and Forstmann VIII subsequently transferred 369,023 shares of Class G preferred stock to the entities affiliated with Technology Crossover Ventures 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 Forstmann VII and Forstmann VIII.

Board Representation Agreement. In January 2003, we entered into a board representation agreement in connection with the offering of our Class G preferred stock. Under this agreement, we and certain of our shareholders have agreed to take all necessary or desirable action (including voting of shares) to cause persons designated in accordance with the agreement to be elected to our board of directors. With the exception of Forstmann VI, these rights expire upon completion of this offering. The parties to this agreement include certain parties with relationships with Capella, including certain of our directors, executive officers and holders of more than 5% of our voting securities, and certain immediate family members of these related parties. The following is a list of the related parties who are parties to the agreement:



Directors:		Stephen Shank (Mr. Shank is also an executive officer of the company and beneficially holds more than 5% of our voting securities), David Smith and Joshua Lewis (Mr. Lewis also beneficially holds more than 5% of our voting securities)



Executive Officers:		Elizabeth Rausch, Michael Offerman and Paul Schroeder



5% Shareholders:		Cherry Tree Ventures IV, the Forstmann Little entities, the Maveron entities, the Putnam entities, the entities affiliated with Technology Crossover Ventures, as transferees of Forstmann VII and Forstmann VIII and Insight-Salmon River LLC, as transferee of NCS Pearson, Inc. (NCS Pearson)



Immediate Family Members of the Related Parties:		Judy Shank, Susan Shank, Mary Retzlaff and The S. Joshua and Teresa D. Lewis Issue Trust

The board representation agreement is described in further detail under the heading “Management — 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. Under this

agreement, we have granted certain of our shareholders certain registration rights and inspection rights. The parties to this agreement include certain parties with relationships with Capella, including certain of our directors, executive officers and holders of more than 5% of our voting securities. The following is a list of the related parties who are parties to the agreement:



Directors:		Stephen Shank (Mr. Shank is also an executive officer of the company and beneficially holds more than 5% of our voting securities), David Smith and Joshua Lewis (Mr. Lewis also beneficially holds more than 5% of our voting securities)



Executive Officers:		Elizabeth Rausch, Michael Offerman and Paul Schroeder



5% Shareholders:		The Forstmann Little entities, the Maveron entities, the Putnam entities and the entities affiliated with Technology Crossover Ventures, as transferees of Forstmann VII and VIII and Stephen Shank.

Certain of these registration and inspection rights will continue after the offering. The investor rights agreement is described in further detail under the heading “Management — 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 granted registration rights to NCS Pearson 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, a holder of more than 5% of our voting securities. 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 described in further detail under the heading “Description of Capital Stock — Registration and Other Rights.”

Founder Stock Sales and Transfers. On February 11, 2005, Mr. Stephen G. Shank, our founder, Chairman and Chief Executive Officer, sold 14,967 shares of Class G preferred stock and 34,966 shares of Class B preferred stock to the entities affiliated with Technology Crossover Ventures in exchange for an aggregate purchase price of $998,660, or $20.00 per share, and 3,018 shares of Class G preferred stock and 7,049 shares of Class B preferred stock to the Maveron entities in exchange for an aggregate purchase price of $201,340, or $20.00 per share. 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.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of April 30, 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 9,178,635 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 April 30, 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.


						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 entities ^(c)		1,106,546		9.8%
Cherry Tree Ventures IV, L.P. ^(d)		1,748,000		15.5%
Entities affiliated with Technology Crossover Ventures ^(e)		1,858,959		16.5%
Putnam entities ^(f)		674,459		6.0%
Maveron entities ^(g)		1,049,248		9.3%
Salmon River and Insight entities ^(h)		1,178,269		10.4%
*Directors and Named Executive Officers*
Stephen G. Shank ⁽ⁱ⁾		2,392,223		21.0%
Michael J. Offerman ^(j)		84,542		*
Paul A. Schroeder ^(k)		111,906		1.0%
Heidi K. Thom ^(l)		25,000		*
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)		1,216,740		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)		1,858,959		16.5%
All directors and executive officers as a group (18 persons)		7,788,362		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 11,284,312 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) 875,510 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VI; (2) 144,397 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VII; and (3) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VIII. Each of Forstmann VI, Forstmann VII and Forstmann VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Forstmann VI and Forstmann VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of Forstmann 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 McKay. Accordingly, each of the individuals named above, other than Messrs. Holmes and McKay for the reasons described below, may be deemed the beneficial owner of shares owned by

Forstmann VI, Forstmann VII and Forstmann 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 Forstmann 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 Forstmann VII or Forstmann VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares. The address of Forstmann VI, Forstmann VII and Forstmann 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 1,818,210 shares of common stock issuable upon conversion of preferred stock owned by TCV V, L.P.; and (2) 119 shares of common stock and 34,341 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 887,691 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 34,350 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 125,915 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 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 98104.

(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) 146,047 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.

(j) Includes 4,496 shares of common stock issuable upon conversion of preferred stock and 80,046 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 25,000 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 VII; and (2) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VIII. Each of Forstmann VI, Forstmann VII and Forstmann VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Forstmann VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of Forstmann 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 Forstmann VII and Forstmann VIII, and have shared voting and investment powers with respect to the shares owned by Forstmann VII and Forstmann 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 Forstmann VII or Forstmann 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) 146,047 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 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.

DESCRIPTION OF CAPITAL STOCK

We are authorized to issue 100,000,000 shares of common stock, $0.10 par value per share, and 13,000,000 shares of preferred stock .

Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.10 par value per share, and 10,000,000 shares of undesignated capital 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 April 30, 2005, and including the conversion of all outstanding convertible and redeemable convertible preferred stock into common stock, there were 11,284,312 shares of common stock outstanding, held of record by approximately 116 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 9,178,635 shares of common stock. All shares of our Class F preferred stock were exchanged for 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 April 30, 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 was exercisable immediately upon issuance. Legg Mason Wood Walker exercised the warrant on May 9, 2005.

Registration and Other Rights

As of April 30, 2005, the holders of 4,877,420 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 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. NCS Pearson’s rights to request inclusion of shares in a registration statement are subject to the right of the underwriters of the offering to reduce the number of shares included if, in the good faith judgment of the underwriters, inclusion of the shares would jeopardize the success of the offering. The registration rights under the agreement will terminate on June 30, 2005. 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

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stock to Insight-Salmon River LLC. 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 described above may be assigned to Insight-Salmon River LLC at such time as Insight-Salmon River LLC 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 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. The holders’ rights to request inclusion of shares in a registration statement are subject to the right of the underwriters of the offering to reduce the number of shares included if, in the good faith judgment of the underwriters, inclusion of the shares would jeopardize the success of the offering. The registrable shares covered under the investor rights agreement will cease to be registrable under the agreement (a) when such registrable shares are sold pursuant a registration statement, Section 4(1) of the Securities Act, or Rule 144 under the Securities Act, (b) at such time as such registrable shares are eligible for sale under Rule 144(k) of the Securities Act or (c) when such registrable shares are sold and/or transferred not in accordance with the transfer provisions of the agreement. Of the total 4,877,420 registrable shares covered under the agreement, 747,936 registrable shares are currently held by non-affiliates of the company and 4,129,484 shares are currently held by persons who may be deemed to be our affiliates. 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 April 20, 2000, 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 registration rights, which may require us to include shares of our common stock issuable upon conversion of the warrants in our registration statement. Legg Mason Wood Walker’s rights to request inclusion of shares in a registration statement are subject to the right of the underwriters of the offering to reduce the number of shares included if, in the good faith judgment of the underwriters, inclusion of the shares would jeopardize the success of the offering. The piggyback registration rights under the first warrant terminate on June 30, 2007, and the piggyback registration rights under the 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 Bylaws with Anti-Takeover Implications

In connection with this offering, we intend to amend and restate our articles of incorporation. Certain provisions of Minnesota law, our amended and restated articles of incorporation and our amended and restated bylaws may be deemed to have an anti-takeover effect or may delay, defer or prevent a tender

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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 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

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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 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 our chief executive officer, chief financial officer, our 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


	•	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 provide that we will, under certain circumstances and subject to certain limitations, indemnify any of our directors, officers or employees 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 have applied for quotation of shares of our common stock 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 on 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 incentive plans and under our ESPP. 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 incentive plans, including upon the exercise of stock options, and shares issued under our ESPP 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 April 30, 2005:



	•	198,745 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 196,245 of shares had vested;



	•	1,390,954 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 614,380 of shares had vested;



	•	1,613,000 shares of common stock were reserved pursuant to our 2005 Plan for future issuance under this plan; and



	•	450,000 shares of common stock were reserved pursuant to our ESPP for future employee purchases under this plan.

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

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 our 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 have applied for quotation of shares of our common stock on The Nasdaq National Market under the symbol “CAPU.”

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;

110


	•	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 our 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.

111

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 was 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.

112

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.

113

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.

114

CAPELLA EDUCATION COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004, and March 31, 2005 (unaudited)		F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004, and the three months ended March 31, 2004 and 2005 (unaudited)		F-4
Consolidated Statement of Shareholders’ Equity (Deficit) for the years ended December 31, 2002, 2003 and 2004, and the three months ended March 31, 2005 (unaudited)		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004, and the three months ended March 31, 2004 and 2005 (unaudited)		F-6
Notes to Consolidated Financial Statements		F-7

F-1

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, and Note 18, as to which the date is May 11, 2005

F-2

Capella Education Company

Consolidated Balance Sheets


			As of						As of
			December 31,						March 31, 2005

			2003			2004			Actual			Pro Forma

									(Unaudited)			(Unaudited)
			(In thousands, except per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,340		$	5,480		$	9,173
	Restricted cash									391
	Short-term investments			39,850			44,500			46,462
	Accounts receivable, net of allowance of $713 in 2003, $1,065 in 2004 and $1,116 in 2005			2,976			5,878			5,278
	Prepaid expenses and other current assets			1,151			3,056			2,677
	Deferred income taxes			—			1,398			1,486

Total current assets				45,317			60,312			65,467
Restricted cash				471			391			—
Property and equipment, net				9,614			12,126			12,357
Deferred income taxes				—			7,197			5,512

Total assets			$	55,402		$	80,026		$	83,336

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	2,522		$	3,144		$	1,818
	Accrued liabilities			10,672			12,253			14,093
	Income taxes payable			—			140			122
	Deferred revenue			4,027			6,526			6,697
	Current portion of capital lease obligations			580			314			196

Total current liabilities				17,801			22,377			22,926
Capital lease obligations				371			8			—

Total liabilities				18,172			22,385			22,926
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			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			22,661			—

Total redeemable preferred stock				57,646			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			2,810			—
	Class B Convertible Preferred Stock, $2.50 par value:
		Authorized shares – 1,180
		Issued and outstanding shares – 460		1,150			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			4,600			—
	Common stock, $0.10 par value:
		Authorized shares – 15,000
		Issued and outstanding shares – 1,826 in 2003, 2,074 in 2004 and 2,101 in 2005		183			208			210			1,128
	Additional paid-in capital			3,569			5,166			5,275			70,563
	Deferred compensation			(4	)		—			(46	)		(46	)
	Accumulated deficit			(32,724	)		(13,939	)		(11,235	)		(11,235	)

Total shareholders’ equity (deficit)				(20,416	)		(5	)		2,764			60,410

Total liabilities, redeemable preferred stock and shareholders’ equity (deficit)			$	55,402		$	80,026		$	83,336		$	83,336

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

F-3

Capella Education Company

Consolidated Statements of Operations


										Three Months Ended
		Year Ended December 31,								March 31,

		2002			2003		2004			2004		2005

										(Unaudited)
		(In thousands, except per share amounts)
Revenues		$	49,556		$	81,785	$	117,689		$	26,488	$	34,610
Costs and expenses
Instructional costs and services			28,013			43,128		58,168			13,614		16,247
Selling and promotional			15,860			21,446		34,247			8,088		9,621
General and administrative			11,677			13,141		15,409			3,403		4,597

	Total costs and expenses		55,550			77,715		107,824			25,105		30,465

Operating income (loss)			(5,994	)		4,070		9,865			1,383		4,145
Other income, net			327			427		724			129		372

Income (loss) before income taxes			(5,667	)		4,497		10,589			1,512		4,517
Income tax expense (benefit)			—			104		(8,196	)		46		1,813

Net income (loss)		$	(5,667	)	$	4,393	$	18,785		$	1,466	$	2,704

Net income (loss) per common share:
	Basic	$	(3.70	)	$	2.63	$	9.34		$	0.77	$	1.29

	Diluted	$	(3.70	)	$	0.39	$	1.62		$	0.13	$	0.23

Weighted average number of common shares outstanding:
	Basic		1,532			1,669		2,011			1,910		2,092

	Diluted		1,532			11,154		11,599			11,330		11,845

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

F-4

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	)
Exercise of stock options (unaudited)														24			2		59									61
Amortization of deferred compensation (unaudited)																						4						4
Issuance of restricted stock (unaudited)														3			0		50			(50	)					—
Net income (unaudited)																									2,704			2,704

Balance at March 31, 2005 (unaudited)		2,810	$	2,810		460	$	1,150		1,022	$	4,600		2,101		$	210	$	5,275		$	(46	)	$	(11,235	)	$	2,764

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

F-5

Capella Education Company

Consolidated Statements of Cash Flows


												Three Months Ended
			Year Ended December 31,									March 31,

			2002			2003			2004			2004			2005

												(Unaudited)
			(In thousands)
Operating activities
Net income (loss)			$	(5,667	)	$	4,393		$	18,785		$	1,466		$	2,704
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Provision for bad debts			3,001			616			1,376			246			437
	Depreciation and amortization			3,108			4,177			5,454			1,187			1,515
	Gain on disposal of assets			—			—			—			—			(35	)
	Asset impairment			223			359			1,020			—			49
	Noncash equity-related expense			506			578			1,135			244			412
	Deferred income taxes			—			—			(8,445	)		—			1,597
	Changes in operating assets and liabilities:
		Accounts receivable		(2,067	)		(271	)		(4,278	)		(1,653	)		163
		Prepaid expenses and other assets		359			(348	)		(1,905	)		(703	)		379
		Accounts payable		(455	)		1,420			622			(300	)		(1,326	)
		Accrued liabilities		(626	)		4,682			1,091			(1,068	)		1,432
		Income taxes payable		—			—			140			—			(18	)
		Deferred revenue		1,795			422			2,499			1,812			171

Net cash provided by operating activities				177			16,028			17,494			1,231			7,480
Investing activities
Capital expenditures				(3,859	)		(4,348	)		(8,986	)		(861	)		(1,760	)
Purchases of short-term investments				(23,175	)		(53,000	)		(39,700	)		(7,000	)		(1,962	)
Sales of short-term investments				11,225			30,600			35,050			5,500			—

Net cash used in investing activities				(15,809	)		(26,748	)		(13,636	)		(2,361	)		(3,722	)
Financing activities
Payments of capital lease obligations				(136	)		(469	)		(629	)		(155	)		(126	)
Change in restricted cash				(231	)		(241	)		80			—			—
Proceeds from exercise of stock options				45			806			858			355			61
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/(used in) financing activities				15,088			7,449			282			200			(65	)

Net increase (decrease) in cash and cash equivalents				(544	)		(3,271	)		4,140			(930	)		3,693
Cash and cash equivalents at beginning of period				5,155			4,611			1,340			1,340			5,480

Cash and cash equivalents at end of period			$	4,611		$	1,340		$	5,480		$	410		$	9,173

Supplemental disclosures of cash flow information
Interest paid			$	16		$	78		$	56		$	19		$	6

Income taxes paid			$	—		$	104		$	109		$	28		$	252

Noncash transactions:
	Purchase of equipment through capital lease obligations		$	626		$	837		$	—		$	—		$	—

	Issuance of common stock to the Employee Stock Ownership Plan		$	338		$	490		$	641		$	—		$	—

	Issuance of restricted stock		$	—		$	—		$	—		$	—		$	50

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

F-6

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.


	*Interim Financial Data (Unaudited)*

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2004 and 2005 have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the financial information set forth therein, in accordance with U.S. generally accepted accounting principles.

The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be obtained for the full fiscal year.


	*Pro Forma Balance Sheet Data (Unaudited)*

The unaudited pro forma balance sheet data at March 31, 2005 give effect to the conversion of all outstanding preferred stock into shares of common stock in connection with the Company’s initial public offering.


	*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 the Company’s 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.

F-7

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)


	*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. The contractual maturities of the Company’s short-term investments are shown below.


	As of
	December 31,				As of
					March 31,
	2003		2004		2005

					(Unaudited)
Due in one year or less	$	—	$	—	$	1,962
Due after ten years		39,850		44,500		44,500

	$	39,850	$	44,500	$	46,462

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. 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, and March 31, 2005 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

F-8

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 64% of the Company’s revenues (calculated on a cash basis) 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 on 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.

If the University were 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.

F-9

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)


	*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 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:


										Three Months
	Years Ended									Ended
	December 31,									March 31,

	2002			2003			2004			2004			2005

										(Unaudited)
Expected life (in years)		6.0			6.0			6.0			6.0			6.0
Expected volatility		58.7	%		53.9	%		44.1	%		44.1	%		44.1	%
Risk-free interest rate		3.4	%		3.8	%		3.9	%		3.9	%		3.9	%
Dividend yield		0.0	%		0.0	%		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 from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value

F-10

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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:


											Three Months Ended
		Years Ended December 31,									March 31,

		2002			2003			2004			2004			2005

											(Unaudited)
Net income (loss) as reported		$	(5,667	)	$	4,393		$	18,785		$	1,466		$	2,704
Deferred compensation expense included in net income (loss) as reported			39			37			4			4			4
Compensation expense determined under fair-value-based method			(1,623	)		(1,779	)		(2,383	)		(567	)		(545	)

Pro forma net income (loss)		$	(7,251	)	$	2,651		$	16,406		$	903		$	2,163

Net income (loss) per common share:
	Basic – as reported	$	(3.70	)	$	2.63		$	9.34		$	0.77		$	1.29
	Basic – pro forma	$	(4.76	)	$	1.59		$	8.16		$	0.47		$	1.03
	Diluted – as reported	$	(3.70	)	$	0.39		$	1.62		$	0.13		$	0.23
	Diluted – pro forma	$	(4.76	)	$	0.24		$	1.43		$	0.08		$	0.18


	*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 Company recorded impairment charges of $0 and $49 during the three months ended March 31, 2004 and 2005, 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

F-11

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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.


									Three Months
		Year Ended December 31,							Ended March 31,

		2002			2003		2004		2004		2005

									(Unaudited)
Numerator:
	Net income (loss)	$	(5,667	)	$	4,393	$	18,785	$	1,466	$	2,704
Denominator:
	Denominator for basic net income (loss) per common share – weighted average shares outstanding		1,532			1,669		2,011		1,910		2,092
	Effect of preferred stock		—			9,135		9,178		9,178		9,179
	Effect of dilutive stock options and warrants		—			350		410		242		574

	Denominator for diluted net income (loss) per common share		1,532			11,154		11,599		11,330		11,845

	Basic net income (loss) per common share	$	(3.70	)	$	2.63	$	9.34	$	0.77	$	1.29
	Diluted net income (loss) per common share	$	(3.70	)	$	0.39	$	1.62	$	0.13	$	0.23

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.


	*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.

F-12

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 SFAS No. 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 SFAS No. 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 described earlier in this note.


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.

F-13

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)


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.

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

F-14

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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.

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

F-15

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 $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.

F-16

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 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.

F-17

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 stock option plans that include 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 valuation used to determine the fair market value of the Company’s common stock at each grant date was performed internally and contemporaneously with the issuance of the options. 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.

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

F-18

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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

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 was 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 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.

F-19

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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 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 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	)

F-20

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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	)%

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 types of federal learner financial assistance under Title IV Programs.

F-21

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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.

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 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 the budget and appropriations processes. As of December 31, 2004, programs in which the Company’s learners participate are operative and sufficiently funded.

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 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

F-22

Capella Education Company

Notes to Consolidated Financial Statements – (Continued)

(In thousands, except per share data)

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.


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.


18.	Subsequent Events

In May 2005, the Company adopted the Capella Education Company Employee Stock Purchase Plan, referred to as the ESPP. The Company has reserved an aggregate of 450,000 shares of its common stock for issuance under the ESPP. The ESPP permits eligible employees to utilize up to 10% of their compensation to purchase the Company’s common stock at price of no less than 85% of the fair market value per share of the Company’s common stock at the beginning or the end of the relevant offering period, whichever is less. The compensation committee of the board of directors will administer the ESPP.

F-23

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 fee			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 bylaws provide that we shall indemnify each of our directors and officers, for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as required or permitted by the Minnesota Statutes, 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,

II-1

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 Section 4(2) of the Securities Act of 1933 and 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 Section 4(2) of the Securities Act of 1933 and Rule 506 and Rule 701 promulgated under the Securities Act of 1933.

Shares Issued Upon the Exercise of Warrants

On May 9, 2005, we issued and sold 135,088 shares of our common stock to Legg Mason Wood Walker, Incorporated pursuant to the exercise of warrant by Legg Mason Wood Walker, Incorporated at an exercise price of $17.10 per share. The sale was made in reliance on Section 4(2) of the Securities Act of 1933 and Rule 506 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	.4	Amended and Restated By-Laws of the Registrant.
	4	.1*	Specimen of common stock certificate.

II-2


Exhibit
Number			Description

	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.
	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.

II-3


Exhibit
Number			Description

	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	Capella Education Company Employee Stock Purchase Plan.
	10	.13	Capella Education Company Annual Incentive Plan Management Employees – 2005.
	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.
	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.


#	Previously filed


*	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.

II-4

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 of Note 2, as to which the date is April 14, 2005, and Note 18, as to which the date is May 11, 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

II-5

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


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.


	(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.

II-7

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on the 3rd day of June, 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 Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities indicated on June 3, 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

II-8

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	.4	Amended and Restated By-Laws of the Registrant.
	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.
	10	.4#	Form of Non-Statutory Stock Option Agreement (Director) for the Capella Education Company 1999 Stock Option Plan.


Exhibit
Number			Description

	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	Capella Education Company Employee Stock Purchase Plan.
	10	.13	Capella Education Company Annual Incentive Plan Management Employees — 2005.
	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.
	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.


#	Previously filed


*	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

(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.

(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

-4-

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

-7-

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

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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.

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;

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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.

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.

(B) Preemptive Rights.

(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

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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.

(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;

(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.__________________

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.

/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

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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

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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).

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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.

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.

6. Conversion into Common Shares.

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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.

(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

-3-

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;

7. Redemption Rights.

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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.

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.

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

-2-

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

-3-

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

(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.

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:

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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:

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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

(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.

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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:

(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

(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").

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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.

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.

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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.

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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

(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.

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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.

2. VOTING RIGHTS.

(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

(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.

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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");

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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.

4. DIVIDENDS.

5. LIQUIDATION RIGHT AND PREFERENCE.

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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").

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.

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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.

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.

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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.

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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

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

(g) RESERVATION OF SHARES.

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

(a) ELECTION.

(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.

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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.

(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.

[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:

(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:

(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

(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").

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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.

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.

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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

(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.

(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

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

The undersigned, Gregory W. Thom, 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 III, Section 1 (A) of the Corporation's Amended and Restated Articles of Incorporation (the "Articles") 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 one hundred thirteen million (113,000,000) shares, one hundred million (100,000,000) 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 Articles have been amended by adding a new Article V to read in its entirety as follows:

"ARTICLE V: CONTROL SHARE ACQUISITION STATUTE NOT APPLICABLE Neither Section 302A.671 of the Minnesota Statutes nor any successor statute thereto shall apply to, or govern in any manner, the Corporation or any control share acquisition of shares of capital stock of the Corporation or limit in any respect the voting or other rights of any existing or future shareholder of the Corporation or entitle the Corporation or its shareholders to any redemption or other rights with respect to outstanding capital stock of the Corporation that the Corporation or its shareholders would not have in the absence of Section 302A.671 of the Minnesota Statutes or any successor statute thereto."

(iv) The Articles have been amended by adding a new Article VI to read in its entirety as follows:

"ARTICLE VI: DISSENTERS' RIGHTS To the extent permitted by Chapter 302A of the Minnesota Statutes, no action set forth in paragraph (a) of Section 302A.471, subdivision 1, of the Minnesota Statutes (including any amendment or successor statute thereto) shall create any right of any shareholder of the Corporation to dissent from, and obtain the fair value of the shareholder's shares in the event of, any such action."

(v) The Articles have been amended by adding a new Article VII to read in its entirety as follows:

"ARTICLE VII: WRITTEN ACTION OF THE BOARD OF DIRECTORS Any action required or permitted to be taken at a meeting of the Board of Directors of the Corporation not needing approval by the shareholders under Chapter 302A of the Minnesota Statutes may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the Board of Directors at which all directors are present."

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

IN WITNESS WHEREOF, I have subscribed my name this 2nd day of June, 2005.

/s/Gregory W. Thom
---------------------------------
Gregory W. Thom, Secretary

EXHIBIT 3.2

AMENDED AND RESTATED

ARTICLES OF INCORPORATION
OF
CAPELLA EDUCATION COMPANY

The undersigned, Gregory W. Thom, Secretary of CAPELLA EDUCATION COMPANY, a Minnesota corporation (the "Corporation"), hereby certifies that:

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

(2) The Corporation's Articles of Incorporation have been Amended and Restated to read in their entirety as follows:

ARTICLE I
NAME

The name of the Corporation is Capella Education Company.

ARTICLE II
ADDRESS

The registered office of the Corporation is located at 225 South Sixth Street, 9th Floor, Minneapolis, Minnesota 55402.

ARTICLE III
CAPITAL STOCK

(a) General. The aggregate number of shares of stock that the Corporation is authorized to issue is 110,000,000 shares, par value $.01 per share, of which 100,000,000 shares are designated as common stock (the "Common Stock"), and 10,000,000 shares are undesignated (the "Undesignated Capital Stock"). The shares of Common Stock and Undesignated Capital Stock are referred to collectively as the "capital stock."

(b) Authority Relative to Undesignated Capital Stock. Authority is hereby expressly vested in the Board of Directors of the Corporation, subject to limitations prescribed by law, to authorize the issuance from time to time of one or more classes or series of Undesignated Capital Stock and, with respect to each such class or series, to determine or fix the voting powers, full or limited, if any, of the shares of such class or series and the designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limitation, the determination or fixing of the rates of and terms and conditions upon which any dividends shall be payable on such class or series, any terms under or conditions on which the shares of such class or series may be redeemed, any provision made for the conversion or exchange of the shares of such class or series for shares of any other class or classes or of

any other series of the same or any other class or classes of the Corporation's capital stock, and any rights of the holders of the shares of such class or series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation.

ARTICLE IV
NO CUMULATIVE VOTING

No holder of shares of capital stock of the Corporation shall have any cumulative voting rights.

ARTICLE V
NO PREEMPTIVE RIGHTS

No holder of shares of capital stock of the Corporation shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any new or additional issue of stock of any class or series whatsoever or other securities, or of securities convertible into or exchangeable for or carrying any other right to acquire any stock of any class or series whatsoever or other securities, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. The Corporation shall have the power, however, in its discretion to grant such rights by agreement or other instrument to any person or persons (whether or not they are shareholders).

ARTICLE VI
CONTROL SHARE ACQUISITION STATUTE NOT APPLICABLE

Neither Section 302A.671 of the Minnesota Statutes nor any successor statute thereto shall apply to, or govern in any manner, the Corporation or any control share acquisition of shares of capital stock of the Corporation or limit in any respect the voting or other rights of any existing or future shareholder of the Corporation or entitle the Corporation or its shareholders to any redemption or other rights with respect to outstanding capital stock of the Corporation that the Corporation or its shareholders would not have in the absence of Section 302A.671 of the Minnesota Statutes or any successor statute thereto.

ARTICLE VII
DISSENTERS' RIGHTS

To the extent permitted by Chapter 302A of the Minnesota Statutes, no action set forth in paragraph (a) of Section 302A.471, subdivision 1, of the Minnesota Statutes (including any amendment or successor statute thereto) shall create any right of any shareholder of the Corporation to dissent from, and obtain the fair value of the shareholder's shares in the event of, any such action.

ARTICLE VIII
WRITTEN ACTION OF THE BOARD OF DIRECTORS

Any action required or permitted to be taken at a meeting of the Board of Directors of the Corporation not needing approval by the shareholders under Chapter 302A of the Minnesota Statutes may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the Board of Directors at which all directors are present.

ARTICLE IX
LIMITATION OF LIABILITY

To the full extent that Chapter 302A of the Minnesota Statutes, as it exists on the effective date of this Article IX or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any amendment to or repeal of this Article IX shall not adversely affect any right or protection as a director of the Corporation for or with respect to any acts or omission of such director occurring prior to such amendment or repeal.

* * *

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

IN WITNESS WHEREOF, I have hereunto set my hand this _______ day of _________, 2005.

Gregory W. Thom Secretary

EXHIBIT 3.4

AMENDED AND RESTATED BYLAWS
OF
CAPELLA EDUCATION COMPANY

TABLE OF CONTENTS

SHAREHOLDERS..............................................................       1
   Section 1.01  Place of Meetings........................................       1
   Section 1.02  Regular Meetings.........................................       1
   Section 1.03  Special Meetings.........................................       1
   Section 1.04  Meetings Held Upon Shareholder Demand....................       1
   Section 1.05  Adjournments.............................................       2
   Section 1.06  Notice of Meetings.......................................       2
   Section 1.07  Waiver of Notice.........................................       2
   Section 1.08  Voting Rights............................................       2
   Section 1.09  Proxies..................................................       3
   Section 1.10  Quorum...................................................       3
   Section 1.11  Acts of Shareholders.....................................       3
   Section 1.12  Action Without a Meeting.................................       3
   Section 1.13  Nomination of Director Candidates........................       3
   Section 1.14  Advance Notice of Shareholder Proposals..................       5

DIRECTORS.................................................................       6
   Section 2.01  Number; Qualifications...................................       6
   Section 2.02  Term.....................................................       6
   Section 2.03  Vacancies................................................       6
   Section 2.04  Place of Meetings........................................       6
   Section 2.05  Regular Meetings.........................................       7
   Section 2.06  Special Meetings.........................................       7
   Section 2.07  Waiver of Notice; Previously Scheduled Meetings..........       7
   Section 2.08  Quorum...................................................       7
   Section 2.09  Acts of Board............................................       7
   Section 2.10  Participation by Remote Communication....................       7
   Section 2.11  Absent Directors.........................................       8
   Section 2.12  Action Without a Meeting.................................       8
   Section 2.13  Committees...............................................       8
   Section 2.14  Special Litigation Committee.............................       8
   Section 2.15  Compensation.............................................       9

OFFICERS..................................................................       9
   Section 3.01  Number and Designation...................................       9
   Section 3.02  Chief Executive Officer..................................       9

   Section 3.03  Chief Financial Officer..................................       9
   Section 3.04  President................................................       9
   Section 3.05  Vice Presidents..........................................       9
   Section 3.06  Secretary................................................      10
   Section 3.07  Treasurer................................................      10
   Section 3.08  Authority and Duties.....................................      10
   Section 3.09  Term.....................................................      10
   Section 3.10  Salaries.................................................      11

INDEMNIFICATION...........................................................      11
   Section 4.01  Indemnification..........................................      11
   Section 4.02  Insurance................................................      11

SHARES....................................................................      11
   Section 5.01  Certificated and Uncertificated Shares...................      11
   Section 5.02  Declaration of Dividends and Other Distributions.........      12
   Section 5.03  Transfer of Shares.......................................      12
   Section 5.04  Record Date..............................................      12

MISCELLANEOUS.............................................................      12
   Section 6.01  Execution of Instruments.................................      12
   Section 6.02  Advances.................................................      12
   Section 6.03  Corporate Seal...........................................      12
   Section 6.04  Fiscal Year..............................................      12
   Section 6.05  Amendments...............................................      12

This Table of Contents is not part of the Bylaws of the Corporation. It is intended merely to aid in the utilization of the Bylaws.

AMENDED AND RESTATED BYLAWS

CAPELLA EDUCATION COMPANY

SHAREHOLDERS

Section 1.01 Place of Meetings. Each meeting of the shareholders shall be held at the principal executive office of the Corporation or at such other place as may be designated by the Board of Directors or the Chief Executive Officer. But any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the Corporation is located. The Board of Directors may determine that a meeting of the shareholders shall not be held at a physical place, but instead solely by means of remote communication. Participation by remote communication constitutes presence at the meeting.

Section 1.02 Regular Meetings. Regular meetings of the shareholders may be held on an annual or other less frequent basis as determined by the Board of Directors; provided, however, that if a regular meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3% or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written demand given to the Chief Executive Officer or Chief Financial Officer of the Corporation. At each regular meeting the shareholders 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, subject to the provisions of Section 1.13, and may transact any other business, provided, however, that no business with respect to which special notice is required by law shall be transacted unless such notice shall have been given.

Section 1.03 Special Meetings. A special meeting of the shareholders may be called for any purpose or purposes at any time by the Chief Executive Officer; by the Chief Financial Officer; by the Board of Directors or any two or more members thereof; or by one or more shareholders holding not less than 10% of the voting power of all shares of the Corporation entitled to vote (except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board for that purpose, must be called by shareholders holding not less than 25% of the voting power of all shares of the Corporation entitled to vote), who shall demand such special meeting by written notice given to the Chief Executive Officer or the Chief Financial Officer of the Corporation specifying the purposes of such meeting.

Section 1.04 Meetings Held Upon Shareholder Demand. Within 30 days after receipt of a demand by the Chief Executive Officer or the Chief Financial Officer from any shareholder or shareholders entitled to call a meeting of the shareholders, it shall be the duty of

the Board of Directors of the Corporation to cause a special or regular meeting of shareholders, as the case may be, to be duly called and held on notice no later than 90 days after receipt of such demand. If the Board fails to cause such a meeting to be called and held as required by this Section, the shareholder or shareholders making the demand may call the meeting by giving notice as provided in Section 1.06 hereof at the expense of the Corporation.

Section 1.05 Adjournments. Any meeting of the shareholders may be adjourned from time to time to another date, time and place. If any meeting of the shareholders is so adjourned, no notice as to such adjourned meeting need be given if the adjourned meeting is to be held not more than 120 days after the date fixed for the original meeting and the date, time and place at which the meeting will be reconvened are announced at the time of adjournment.

Section 1.06 Notice of Meetings. Unless otherwise required by law, written notice of each meeting of the shareholders, stating the date, time, and place and, in the case of a special meeting, the purpose or purposes, shall be given at least 10 days and not more than 60 days before the meeting to every holder of shares entitled to vote at such meeting except as specified in Section 1.05 or as otherwise permitted by law. Notice may be given to a shareholder by means of electronic communication if the requirements of Minnesota Statutes
Section 302A.436, Subdivision 5, as amended from time to time, are met. Notice to a shareholder is also effectively given if the notice is addressed to the shareholder or a group of shareholders in a manner permitted by the rules and regulations under the Securities Exchange Act of 1934, so long as the Corporation has first received the written or implied consent required by those rules and regulations. The business transacted at a special meeting of shareholders is limited to the purposes stated in the notice of the meeting.

Section 1.07 Waiver of Notice. A shareholder may waive notice of the date, time, place, or purpose of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, and whether given in writing, orally, by authenticated electronic communication, or by attendance. Attendance by a shareholder at a meeting, including attendance by means of remote communication, is a waiver of notice of that meeting, unless 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 1.08 Voting Rights. Subdivision 1. A shareholder shall have one vote for each share held which is entitled to vote. Except as otherwise required by law, a holder of shares entitled to vote may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all of the shares in that way.

Subdivision 2. The Board of Directors may fix, or authorize an officer to fix, a date not more than 60 days before the date of a meeting of shareholders as the date for the determination of the holders of shares entitled to notice of and entitled to vote at the meeting.

When a date is so fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders.

Section 1.09 Proxies. A shareholder may cast or authorize the casting of a vote by (a) filing a written appointment of a proxy, signed by the shareholder, with an officer of the Corporation at or before the meeting at which the appointment is to be effective, or (b) by telephonic transmission or authenticated electronic communication, whether or not accompanied by written instructions of the shareholder, of an appointment of a proxy with the Corporation or the Corporation's duly authorized agent at or before the meeting at which the appointment is to be effective. The telephonic transmission or authenticated electronic communication must set forth or be submitted with information from which it can be determined that the appointment was authorized by the shareholder. Any copy, facsimile telecommunication, or other reproduction of the original of either the writing or transmission may be used in lieu of the original, provided that it is a complete and legible reproduction of the entire original.

Section 1.10 Quorum. The holders of a majority of the voting power of the shares entitled to vote at a shareholders meeting are a quorum for the transaction of business. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of the shareholders originally present leaves less than the proportion or number otherwise required for a quorum.

Section 1.11 Acts of Shareholders. Subdivision 1. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the shareholders shall take action by the affirmative vote of the holders of the greater of (a) a majority of the voting power of the shares present and entitled to vote on that item of business or (b) a majority of the voting power of the minimum number of shares entitled to vote that would constitute a quorum for the transaction of business at a duly held meeting of shareholders.

Subdivision 2. A shareholder voting by proxy authorized to vote on less than all items of business considered at the meeting shall be considered to be present and entitled to vote only with respect to those items of business for which the proxy has authority to vote. A proxy who is given authority by a shareholder who abstains with respect to an item of business shall be considered to have authority to vote on that item of business.

Section 1.12 Action Without a Meeting. Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed, or consented to by authenticated electronic communication, by all of those shareholders, unless a different effective time is provided in the written action.

Section 1.13 Nomination of Director Candidates. Only persons who are nominated in accordance with the procedures set forth in this Section 1.13 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (i) by or at the direction of the Board of

Directors, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures hereinafter set forth in this Section.

Subdivision 1. Timing of Notice. Nominations by shareholders shall be made pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a shareholder's notice of nominations to be made at an annual meeting of shareholders must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before the first anniversary of the date of the preceding year's annual meeting of shareholders. If, however, the date of the annual meeting of shareholders is more than 30 days before or after such anniversary date, notice by a shareholder shall be timely only if so delivered or so mailed and received not less than 90 days before such annual meeting or, if later, within 10 days after the first public announcement of the date of such annual meeting. If a special meeting of shareholders of the Corporation is called in accordance with Section 1.03 for the purpose of electing one or more directors to the Board of Directors or if a regular meeting other than an annual meeting is held, for a shareholder's notice of nominations to be timely it must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before such special meeting or such regular meeting or, if later, within 10 days after the first public announcement of the date of such special meeting or such regular meeting. Except to the extent otherwise required by law, the adjournment of a regular or special meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as described above.

Subdivision 2. Content of Notice. A shareholder's notice to the Corporation of nominations for a regular or special meeting of shareholders shall set forth (A) as to each person whom the shareholder proposes to nominate for election or re-election as a director: (i) such person's name, age, business address and residence address and principal occupation or employment, (ii) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or that is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and (iii) such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (B) as to the shareholder giving the notice: (i) the name and address, as they appear on the Corporation's books, of such shareholder, (ii) the class or series (if any) and number of shares of the Corporation that are beneficially owned by such shareholder, and (iii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote for the election of directors and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation the information required to be set forth in a shareholder's notice of nomination that pertains to a nominee.

Subdivision 3. Consequences of Failure to Give Timely Notice. Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The officer of the Corporation chairing the meeting shall, if the facts

warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed in this Section and, if such officer should so determine, such officer shall so declare to the meeting, and the defective nomination shall be disregarded.

Subdivision 4. Public Announcement. For purposes of this Section and
Section 1.14, "public announcement" means disclosure (i) when made in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service, (ii) when filed in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended, or (iii) when mailed as the notice of the meeting pursuant to Section 1.06.

Section 1.14 Advance Notice of Shareholder Proposals. As provided in
Section 1.03, the business conducted at any special meeting of shareholders of the Corporation shall be limited to the purposes stated in the notice of the special meeting pursuant to Section 1.06. At any regular meeting of shareholders of the Corporation, only such business (other than the nomination and election of directors, which shall be subject to Section 1.13) may be conducted as shall be appropriate for consideration at the meeting of shareholders and as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any shareholder of the Corporation entitled to vote at the meeting who complies with the notice procedures hereinafter set forth in this Section.

Subdivision 1. Timing of Notice. For such business to be properly brought before any regular meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a shareholder's notice of any such business to be conducted at an annual meeting must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before the first anniversary of the date of the preceding year's annual meeting of shareholders. If, however, the date of the annual meeting of shareholders is more than 30 days before or after such anniversary date, notice by a shareholder shall be timely only if so delivered or so mailed and received not less than 90 days before such annual meeting or, if later, within 10 days after the first public announcement of the date of such annual meeting. To be timely, a shareholder's notice of any such business to be conducted at a regular meeting other than an annual meeting must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before such regular meeting or, if later, within 10 days after the first public announcement of the date of such regular meeting. Except to the extent otherwise required by law, the adjournment of a regular meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as required above.

Subdivision 2. Content of Notice. A shareholder's notice to the Corporation shall set forth as to each matter the shareholder proposes to bring before the regular meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (iii) the class or series (if any) and number of shares of the Corporation that are beneficially owned by the shareholder, (iv) any

material interest of the shareholder in such business, and (v) a representation that the shareholder is a holder of record of shares entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make the proposal.

Subdivision 3. Consequences of Failure to Give Timely Notice. Notwithstanding anything in these Bylaws to the contrary, no business (other than the nomination and election of directors) shall be conducted at any regular meeting except in accordance with the procedures set forth in this Section. The officer of the Corporation chairing the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the procedures described in this Section and, if such officer should so determine, such officer shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section shall be deemed to preclude discussion by any shareholder of any business properly brought before the meeting in accordance with these Bylaws.

Subdivision 4. Compliance with Law. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of Minnesota law and the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section.

DIRECTORS

Section 2.01 Number; Qualifications. Except as authorized by the shareholders pursuant to a shareholder control agreement or unanimous affirmative vote, the business and affairs of the Corporation shall be managed by or under the direction of a Board of one or more directors. Directors shall be natural persons. The number of directors to constitute the Board shall be determined from time to time by resolution of the Board. Directors need not be shareholders.

Section 2.02 Term. Each director shall serve for an indefinite term that expires at the next regular meeting of the shareholders. A director shall hold office until a successor is elected and has qualified or until the earlier death, resignation, removal or disqualification of the director.

Section 2.03 Vacancies. Vacancies on the Board of Directors resulting from the death, resignation, removal or disqualification of a director may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum. Vacancies on the Board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time such directorships are created. Each person elected to fill a vacancy shall hold office until a qualified successor is elected by the shareholders at the next regular meeting or at any special meeting duly called for that purpose.

Section 2.04 Place of Meetings. Each meeting of the Board of Directors shall be held at the principal executive office of the Corporation or at such other place as may be designated from time to time by a majority of the members of the Board or by the Chief Executive Officer. The Board of Directors may determine that a meeting of the Board not be held at a physical place,

but instead solely by means of remote communication through which the directors may participate with each other during the meeting.

Section 2.05 Regular Meetings. Regular meetings of the Board of Directors for the election of officers and the transaction of any other business shall be held at such time and place as the Board of Directors shall determine.

Section 2.06 Special Meetings. A special meeting of the Board of Directors may be called for any purpose or purposes at any time by any member of the Board by giving not less than two days' notice to all directors of the date, time and place of the meeting, provided that when notice is mailed, at least four days' notice shall be given. The notice need not state the purpose of the meeting.

Section 2.07 Waiver of Notice; Previously Scheduled Meetings. Subdivision 1. A director of the Corporation may waive notice of the date, time and place of a meeting of the Board. A waiver of notice by a director entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does not participate in the meeting.

Subdivision 2. If the day or date, time and place of a Board meeting have been provided herein or announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken of the date, time and place at which the meeting will be reconvened.

Section 2.08 Quorum. The presence in person of a majority of the directors currently holding office shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time without further notice until a quorum is present. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of the directors originally present leaves less than the proportion or number otherwise required for a quorum.

Section 2.09 Acts of Board. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the Board shall take action by the affirmative vote of the greater of (a) a majority of the directors present at a duly held meeting at the time the action is taken or (b) a majority of the minimum proportion or number of directors that would constitute a quorum for the transaction of business at the meeting.

Section 2.10 Participation by Remote Communication. A director may participate in a Board meeting by conference telephone, or, if authorized by the Board, by any other means of remote communication through which the director, other directors so participating, and all directors physically present at the meeting may participate with each other during the meeting. A director so participating is deemed present at the meeting.

Section 2.11 Absent Directors. A director of the Corporation may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the 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 the vote of a director present at the meeting 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 2.12 Action Without a Meeting. An action required or permitted to be taken at a Board meeting may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the directors. Any action, other than an action requiring shareholder approval, if the Articles of Incorporation so provide, may be taken by written action signed, or consented to by authenticated electronic communication, by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. The written action is effective when signed, or consented to by authenticated electronic communication, by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date.

Section 2.13 Committees. Subdivision 1. A resolution approved by the affirmative vote of a majority of the Board may establish committees having the authority of the Board in the management of the business of the Corporation only to the extent provided in the resolution. Committees shall be subject at all times to the direction and control of the Board, except as provided in Section 2.14 or otherwise provided by law.

Subdivision 2. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present at a duly held Board meeting.

Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof shall apply to committees and members of committees to the same extent as those sections apply to the Board and directors.

Subdivision 4. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director.

Section 2.14 Special Litigation Committee. Pursuant to the procedure set forth in Section 2.13, the Board may establish a committee composed of one or more independent directors or other independent persons to determine whether it is in the best interests of the Corporation to consider legal rights or remedies of the Corporation and whether those rights and remedies should be pursued. The committee, once established, is not subject to the direction or control of, or (unless required by law) termination by, the Board. To the extent permitted by law, a vacancy on the committee may be filled by a majority vote of the remaining committee members. The good faith determinations of the committee are binding upon the Corporation

and its directors, officers and shareholders to the extent permitted by law. The committee terminates when it issues a written report of its determinations to the Board.

Section 2.15 Compensation. The Board may fix the compensation, if any, of directors.

OFFICERS

Section 3.01 Number and Designation. The Corporation shall have one or more natural persons exercising the functions of the offices of Chief Executive Officer and Chief Financial Officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the Corporation, with such powers, rights, duties and responsibilities as may be determined by the Board, including, without limitation, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these Bylaws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person.

Section 3.02 Chief Executive Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Executive Officer (a) shall have general active management of the business of the Corporation; (b) shall, when present, preside at all meetings of the shareholders and Board; (c) shall see that all orders and resolutions of the Board are carried into effect;
(d) may maintain records of and certify proceedings of the Board and shareholders; and (e) shall perform such other duties as may from time to time be assigned by the Board.

Section 3.03 Chief Financial Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Financial Officer (a) shall keep accurate financial records for the Corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the Corporation in such banks and depositories as the Board shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the Corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the Corporation, as ordered by the Board; (e) shall render to the Chief Executive Officer and the Board, whenever requested, an account of all of such officer's transactions as Chief Financial Officer and of the financial condition of the Corporation; and (f) shall perform such other duties as may be prescribed by the Board or the Chief Executive Officer from time to time.

Section 3.04 President. Unless otherwise determined by the Board of Directors, the President shall be the Chief Executive Officer of the Corporation. If an officer other than the President is designated Chief Executive Officer, the President shall perform such duties as may from time to time be assigned by the Board.

Section 3.05 Vice Presidents. Any one or more Vice Presidents, if any, may be designated by the Board of Directors as Executive Vice Presidents or Senior Vice Presidents. During the absence or disability of the President, it shall be the duty of the highest ranking

Executive Vice President, and, in the absence of any such Vice President, it shall be the duty of the highest ranking Senior Vice President or other Vice President, who shall be present at the time and able to act, to perform the duties of the President. The determination of who is the highest ranking of two or more persons holding the same office shall, in the absence of specific designation of order of rank by the Board, be made on the basis of the earliest date of appointment or election, or, in the event of simultaneous appointment or election, on the basis of the longest continuous employment by the Corporation.

Section 3.06 Secretary. The Secretary, unless otherwise determined by the Board of Directors, shall attend all meetings of the shareholders and all meetings of the Board, shall record or cause to be recorded all proceedings thereof in a book to be kept for that purpose, and may certify such proceedings. Except as otherwise required or permitted by law or by these Bylaws, the Secretary shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board.

Section 3.07 Treasurer. Unless otherwise determined by the Board of Directors, the Treasurer shall be the Chief Financial Officer of the Corporation. If an officer other than the Treasurer is designated Chief Financial Officer, the Treasurer shall perform such duties as may from time to time be assigned by the Board.

Section 3.08 Authority and Duties. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may, without the approval of the Board, delegate some or all of the duties and powers of an office to other persons.

Section 3.09 Term. Subdivision 1. All officers of the Corporation shall hold office until their respective successors are chosen and have qualified or until their earlier death, resignation or removal.

Subdivision 2. An officer may resign at any time by giving written notice to the Corporation. The resignation is effective without acceptance when the notice is given to the Corporation, unless a later effective date is specified in the notice.

Subdivision 3. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting.

Subdivision 4. A vacancy in an office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the office of Chief Executive Officer or Chief Financial Officer shall, be filled for the unexpired portion of the term by the Board.

Section 3.10 Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or by the Chief Executive Officer if authorized by the Board.

INDEMNIFICATION

Section 4.01 Indemnification. The Corporation shall indemnify its officers and directors for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as required or permitted by Minnesota Statutes, Section 302A.521, as amended from time to time, or as required or permitted by other provisions of law.

Section 4.02 Insurance. The Corporation may purchase and maintain insurance on behalf of any person in such person's official capacity against any liability asserted against and incurred by such person in or arising from that capacity, whether or not the Corporation would otherwise be required to indemnify the person against the liability.

Section 5.01 Certificated and Uncertificated Shares. Subdivision 1. The shares of the Corporation shall be either certificated shares or uncertificated shares.

Subdivision 2. Each certificate of shares of the Corporation shall bear the corporate seal, if any, and shall be signed by the Chief Executive Officer, or the President or any Vice President, and the Chief Financial Officer, or the Secretary or any Assistant Secretary, but when a certificate is signed by a transfer agent or a registrar, the signature of any such officer and the corporate seal upon such certificate may be facsimiles, engraved or printed. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent or registrar of the Corporation, the certificate may be issued by the Corporation, even if the person has ceased to serve in that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue.

Subdivision 3. A certificate representing shares issued by the Corporation shall, if the Corporation is authorized to issue shares of more than one class or series, set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as they have been determined, and the authority of the Board to determine the relative rights and preferences of subsequent classes or series.

Subdivision 4. A resolution approved by the affirmative vote of a majority of the directors present at a duly held meeting of the Board may provide that some or all of any or all classes and series of the shares of the Corporation will be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation.

Section 5.02 Declaration of Dividends and Other Distributions. The Board of Directors shall have the authority to declare dividends and other distributions upon the shares of the Corporation to the extent permitted by law.

Section 5.03 Transfer of Shares. Shares of the Corporation may be transferred only on the books of the Corporation by the holder thereof, in person or by such person's attorney. In the case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares. The Board of Directors, however, may appoint one or more transfer agents and registrars to maintain the share records of the Corporation and to effect transfers of shares.

Section 5.04 Record Date. The Board of Directors may fix a time, not exceeding 60 days preceding the date fixed for the payment of any dividend or other distribution, as a record date for the determination of the shareholders entitled to receive payment of such dividend or other distribution, and in such case only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend or other distribution, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed.

MISCELLANEOUS

Section 6.01 Execution of Instruments. Subdivision 1. All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Corporation shall be signed on behalf of the Corporation by the Chief Executive Officer, or the President, or any Vice President, or the Secretary, or by such other person or persons as may be designated from time to time by the Board of Directors.

Subdivision 2. If a document must be executed by persons holding different offices or functions and one person holds such offices or exercises such functions, that person may execute the document in more than one capacity if the document indicates each such capacity.

Section 6.02 Advances. The Corporation may, without a vote of the directors, advance money to its directors, officers or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance.

Section 6.03 Corporate Seal. The Corporation shall have no seal.

Section 6.04 Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors.

Section 6.05 Amendments. The Board of Directors shall have the power to adopt, amend or repeal the Bylaws of the Corporation, subject to the power of the shareholders to change or repeal the same, provided, however, that the Board shall not adopt, amend or repeal any By-Law fixing a quorum for meetings of shareholders, prescribing procedures for

removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but may adopt or amend a By-Law that increases the number of directors.

EXHIBIT 10.1
CAPELLA EDUCATION COMPANY
2005 STOCK INCENTIVE PLAN

(EFFECTIVE AS OF MAY 5, 2005)

1. Purpose. The purpose of the Capella Education Company 2005 Stock Incentive Plan (the "Plan") is to promote the interests of the Company and its shareholders by providing key personnel of the Company and its Affiliates with an opportunity to acquire a proprietary interest in the Company and reward them for achieving a high level of corporate performance and thereby develop a stronger incentive to put forth maximum effort for the continued success and growth of the Company and its Affiliates. In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining key personnel of outstanding ability. The Plan is also intended to provide Non-Employee Directors with an opportunity to acquire a proprietary interest in the Company, to compensate Non-Employee Directors for their contribution to the Company and to aid in attracting and retaining Non-Employee Directors.

2. Definitions.

2.1 The capitalized terms used elsewhere in the Plan have the meanings set forth below.

(a) "Affiliate" means any corporation that is a "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Code Sections 424(e) and (f), or any successor provisions, and, for purposes other than the grant of Incentive Stock Options, any joint venture in which the Company or any such "parent corporation" or "subsidiary corporation" owns an equity interest.

(b) "Agreement" means a written contract (i) consistent with the terms of the Plan entered into between the Company or an Affiliate and a Participant and (ii) containing the terms and conditions of an Award in such form and not inconsistent with the Plan as the Committee shall approve from time to time, together with all amendments thereto, which amendments may be unilaterally made by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially adverse to the Participant and not required as a matter of law.

(c) "Award" or "Awards" means a grant made under the Plan in the form of Restricted Stock, Options, Stock Appreciation Rights, Performance Units, Stock or any other stock-based award.

(d) "Board" means the Board of Directors of the Company.

(e) "Cause" shall, unless otherwise defined in an employment agreement between the Participant and the Company, be deemed to exist upon (i) the Participant'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 the Participant of such failure or refusal providing the Participant 30 days to take corrective action, (ii) conviction of a felony crime, or commission of any act, the conviction for which would be a felony conviction, (iii) theft or misappropriation of the Company's property, and (iv) knowingly making a material false written statement to the Company's Board of Directors regarding the affairs of the Company.

(f) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time or any successor statute.

(g) "Committee" means the Compensation Committee or such other committee of the Board as the Board may from time to time designate, which shall be composed of not less than two Non-Employee Directors designated by the Board to administer the Plan under Section 3.1

and constituted so as to permit grants thereby to comply with Exchange Act Rule 16b-3 and Code Section 162(m).

(h) "Company" means Capella Education Company, a Minnesota corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise.

(i) "Disability" means any physical or mental incapacitation whereby a Participant is 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 Affiliate.

(j) "Effective Date" means the date specified in Section 12.1.

(k) "Employee" means an employee (including an officer or director who is also an employee) of the Company or an Affiliate.

(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time or any successor statute.

(m) "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, as now in force and in effect from time to time or any successor regulation.

(o) "Fair Market Value" as of any date means, unless otherwise expressly provided in the Plan:

(i) the closing sale price of a Share on the date immediately preceding that 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

(A) on the composite tape for New York Stock Exchange listed shares, or

(B) if the Shares are not quoted on the composite tape for New York Stock Exchange listed shares, on the principal United States Securities Exchange registered under the Exchange Act on which the Shares are listed, or

(C) if the Shares are not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotations National Market System or any system then in use, or

(ii) if clause (i) is inapplicable, the mean between the closing "bid" and the closing "asked" quotation of a Share on the date immediately preceding that date, or, if no closing bid or asked quotation is made on that date, on the next preceding day on which a closing bid and asked quotation is made, on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or

(iii) if clauses (i) and (ii) are inapplicable, what the Committee determines in good faith to be 100% of the fair market value of a Share on that date, using such criteria as it shall determine, in its sole discretion, to be appropriate for valuation.

However, if the applicable securities exchange or system has closed for the day at the time the event occurs that triggers a determination of Fair Market Value, whether the grant of an

Award, the exercise of an Option or Stock Appreciation Right or otherwise, all references in this paragraph to the "date immediately preceding that date" shall be deemed to be references to "that date." In the case of an Incentive Stock Option, if this determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury, Fair Market Value shall be determined in accordance with those regulations. The determination of Fair Market Value shall be subject to adjustment as provided in Section 16.

(o) "Fundamental Change" means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company.

(p) "Incentive Stock Option" means any Option designated as such and granted in accordance with the requirements of Code Section 422 or any successor provision.

(q) "Insider" as of a particular date means any person who, as of that date is an officer of the Company as defined under Exchange Act Rule 16a-1(f) or its successor provision.

(r) "Non-Employee Director" means a member of the Board who is considered an independent director within the meaning of Rule 303A of the New York Stock Exchange, a non-employee director within the meaning of Exchange Act Rule 16b-3(b)(3) or its successor provision and an outside director for purposes of Code Section 162(m).

(s) "Non-Statutory Stock Option" means an Option that is not designated as, or the extent to which an Option fails to qualify as, an Incentive Stock Option.

(t) "Option" means a right to purchase Stock, including both Non-Statutory Stock Options and Incentive Stock Options.

(u) "Participant" means a person or entity to whom an Award is or has been made in accordance with the Plan.

(v) "Performance Cycle" means the period of time as specified in an Agreement over which Performance Units are to be earned.

(w) "Performance Measures" means any of the following measures with respect to the performance of the Company or a group, a unit, an Affiliate or an individual: specified levels of the Company's stock price, market share, sales, earnings per share, return on equity, costs, operating income, net income before interest, taxes, depreciation and/or amortization, net income before or after extraordinary items, return on operating assets or levels of cost savings, earnings before taxes, net earnings, asset turnover, total shareholder return, pre-tax, pre-interest expense return on invested capital, return on invested capital, return on incremental invested capital, free cash flow, cash flow from operations, or customer satisfaction or learner success metrics. In addition, with respect to an Award that is not intended to qualify for the exemption from the limitation on deductibility imposed by Section 162(m) of the Code on compensation paid to "covered employees" as defined therein, "Performance Measures" may include any other measure determined by the Committee. Such Performance Measures may be set as an absolute measure or relative to a designated peer group or index of comparable companies.

(x) "Performance Units" means an Award made pursuant to
Section 11.

(y) "Plan" means this Capella Education Company 2005 Stock Incentive Plan, as may be amended and in effect from time to time.

(z) "Restricted Stock" means Stock granted under Section 7 so long as such Stock remains subject to one or more restrictions.

(aa) "Retirement" means, unless otherwise specified in an individual Award Agreement, retirement at age 65, or the applicable normal retirement age then specified by the U.S. government's social security administration definition.

(bb) "Section 16" or "Section 16(b)" means Section 16 or
Section 16(b), respectively, of the Exchange Act or any successor statute and the rules and regulations promulgated thereunder as in effect and as amended from time to time.

(cc) "Share" means a share of Stock.

(dd) "Stock" means the common stock, par value $0.10 per share, of the Company.

(ee) "Stock Appreciation Right" means a right, the value of which is determined in relation to the appreciation in value of Shares pursuant to an Award granted under Section 10.

(ff) "Subsidiary" means a "subsidiary corporation," as that term is defined in Code Section 424(f) or any successor provision.

(gg) "Successor" with respect to a Participant means the legal representative of an incompetent Participant, and if the Participant is deceased the estate of the Participant or the person or persons who may, by bequest or inheritance, or pursuant to the terms of an Award, acquire the right to exercise an Option or Stock Appreciation Right or to receive cash and/or Shares issuable in satisfaction of an Award in the event of the Participant's death.

(hh) "Term" means the period during which an Option or Stock Appreciation Right may be exercised or the period during which the restrictions or terms and conditions placed on Restricted Stock or any other Award are in effect.

(ii) "Transferee" means any member of the Participant's immediate family (i.e., his or her children, step-children, grandchildren and spouse) or one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners.

2.2 Gender and Number. Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural.

3. Administration and Indemnification.

3.1 Administration.

(a) The Committee shall administer the Plan. The Committee shall have exclusive power to (i) make Awards, (ii) determine when and to whom Awards will be granted, the form of each Award, the amount of each Award, and any other terms or conditions of each Award consistent with the Plan, and (iii) determine whether, to what extent and under what circumstances Awards may be settled, paid or exercised in cash, Shares or other Awards, or other property or canceled, forfeited or suspended. Each Award shall be subject to an Agreement authorized by the Committee. A majority of the members of the Committee shall constitute a quorum for any meeting of the Committee, and 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. Notwithstanding the foregoing, the Board shall have the sole

and exclusive power to administer the Plan with respect to Awards granted to Non-Employee Directors.

(b) Solely for purposes of determining and administering Awards to Participants who are not Insiders, the Committee may delegate all or any portion of its authority under the Plan to one or more persons who are not Non-Employee Directors.

(c) To the extent within its discretion and subject to Sections 15 and 16, other than price, the Committee may amend the terms and conditions of any outstanding Award.

(d) The Plan and all Awards granted pursuant to it shall be administered by the Committee so as to permit the Plan and Awards to comply with Exchange Act Rule 16b-3, except in such instances as the Committee, in its discretion, may so provide. If any provision of the Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 3.1(d), that provision to the extent possible shall be interpreted and deemed amended in the manner determined by the Committee so as to avoid the conflict. To the extent of any remaining irreconcilable conflict with this intent, the provision shall be deemed void as applicable to Insiders to the extent permitted by law and in the manner deemed advisable by the Committee.

(e) The Committee's interpretation of the Plan and of any Award or Agreement made under the Plan and all related decisions or resolutions of the Board or Committee shall be final and binding on all parties with an interest therein. Consistent with its terms, the Committee shall have the power to establish, amend or waive regulations to administer the Plan. In carrying out any of its responsibilities, the Committee shall have discretionary authority to construe the terms of the Plan and any Award or Agreement made under the Plan.

3.2 Indemnification. Each person who is or shall have been a member of the Committee, or of the Board, and any other person to whom the Committee delegates authority under the Plan, shall be indemnified and held harmless by the Company, to the extent permitted by law, against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act, made in good faith, under the Plan and against and from any and all amounts paid by such person in settlement thereof, with the Company's approval, or paid by such person in satisfaction of any judgment in any such action, suit or proceeding against such person, provided such person shall give the Company an opportunity, at the Company's expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person or persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

4. Shares Available Under the Plan.

(a) The number of Shares available for distribution under the Plan shall not exceed 1,613,000 (subject to adjustment pursuant to
Section 16).

(b) Any Shares subject to the terms and conditions of an Award under the Plan that are not used because the terms and conditions of the Award are not met may again be used for an Award under the Plan; provided however, that Shares with respect to which a Stock Appreciation Right has been exercised whether paid in cash and/or in Shares may not again be awarded under the Plan.

(c) Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award, or any Award settled in cash in lieu of Shares (except as provided in Section
4(b)) shall be available for further Awards.

(d) For the purposes of computing the total number of Shares granted under the Plan, the following rules shall apply to Awards payable in Shares where appropriate:

(i) each Option shall be deemed to be the equivalent of the maximum number of Shares that may be issued upon exercise of the particular Option;

(ii) an Award (other than an Option) payable in some other security shall be deemed to be equal to the number of Shares to which it relates;

(iii) where the number of Shares available under the Award is variable on the date it is granted, the number of Shares shall be deemed to be the maximum number of Shares that could be received under that particular Award; and

(iv) where two or more types of Awards (all of which are payable in Shares) are granted to a Participant in tandem with each other, such that the exercise of one type of Award with respect to a number of Shares cancels at least an equal number of Shares of the other, each such joint Award shall be deemed to be the equivalent of the maximum number of Shares available under the largest single Award.

Additional rules for determining the number of Shares granted under the Plan may be made by the Committee as it deems necessary or desirable.

(e) No fractional Shares may be issued under the Plan; however, cash shall be paid in lieu of any fractional Share in settlement of an Award.

(f) The maximum number of Shares that may be awarded to a Participant in any calendar year (i) in the form of Options is 500,000, (ii) in the form of Stock Appreciation Rights is 500,000,
(iii) in the form of Restricted Stock is 200,000, and (iv) in the form of Performance Units is 200,000 (or, if the Performance Units are not denominated in Shares, the value of the maximum payment shall be $1,000,000), and in each case the maximum number of Shares shall be subject to adjustment pursuant to Section 16.

(g) The maximum number of Shares that may be issued pursuant to Options intended to be Incentive Stock Options shall be 1,613,000 (subject to adjustment pursuant to Section 16).

5. Eligibility. Participation in the Plan shall be limited to (i) Employees, (ii) individuals who are not Employees but who provide services to the Company or an Affiliate, including services provided in the capacity of a consultant, advisor or director, such as a Non-Employee Director, and (iii) any individual that the Company desires to induce to become an Employee, but any such grant shall be contingent upon such individual becoming an Employee. The granting of Awards is solely at the discretion of the Committee, except that Incentive Stock Options may only be granted to Employees. References herein to "employed," "employment" or similar terms (except "Employee") shall include the providing of services in any capacity or as a director. Neither the transfer of employment of a Participant between any of the Company or its Affiliates, nor change of status from an Employee to a consultant of the Company, nor a leave of absence granted to such Participant and approved by the Committee, shall be deemed a termination of employment for purposes of the Plan.

6. General Terms of Awards.

6.1 Amount of Award. Each Agreement shall set forth the number of Shares of Restricted Stock, Stock or Performance Units subject to the Agreement, or the number of Shares to which the Option subject to the Agreement applies or with respect to which payment upon the exercise of the Stock Appreciation Right subject to the Agreement is to be determined, as the case may be, together with such other terms and conditions applicable to the Award as determined by the Committee acting in its sole discretion.

6.2 Term. Each Agreement, other than those relating solely to Awards of Shares without restrictions, shall set forth the Term of the Option, Stock Appreciation Right, Restricted Stock or other Award or the Performance Cycle for the Performance Units, as the case may be. Acceleration of the expiration of the applicable Term is permitted, upon such terms and conditions as shall be set forth in the Agreement, which may, but need not, include, without limitation, acceleration in the event of the Participant's death or retirement. Acceleration of the Performance Cycle of Performance Units shall be subject to Section 11.2.

6.3 Transferability. Except as provided in this Section, during the lifetime of a Participant to whom an Award is granted, only that Participant (or that Participant's legal representative) may exercise an Option or Stock Appreciation Right, or receive payment with respect to Performance Units or any other Award. No Award of Restricted Stock (before the expiration of the restrictions), Options, Stock Appreciation Rights or Performance Units or other Award may be sold, assigned, transferred, exchanged or otherwise encumbered other than to a Successor in the event of a Participant's death or pursuant to a qualified domestic relations order as defined in the Code or Title 1 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder; provided, however, that any Participant may transfer an Award, granted under this Plan, other than an Incentive Stock 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 (i) the agreement with respect to such Award expressly so provides either at the time of initial grant or by amendment to an outstanding Award agreement and (ii) the Participant does not receive any consideration for the transfer. Any attempted transfer in violation of this Section 6.3 shall be of no effect. Notwithstanding the immediately preceding sentence, the Committee, in an Agreement or otherwise at its discretion, may provide that the Award (other than Incentive Stock Options) may be transferable to a Transferee if the Participant does not receive any consideration for the transfer. Any Award held by a Transferee shall continue to be subject to the same terms and conditions that were applicable to that Award immediately before the transfer thereof to the Transferee. For purposes of any provision of the Plan relating to notice to a Participant or to acceleration or termination of an Award upon the death, disability or termination of employment of a Participant, the references to "Participant" shall mean the original grantee of an Award and not any Transferee.

6.4 Termination of Employment. Except as otherwise provided in the Plan or determined by the Committee or provided by the Committee in an Agreement, in case of a Participant's termination of employment, the following provisions shall apply:

(a) Options and Stock Appreciation Rights.

(i) If a Participant's employment or other relationship with the Company and its Affiliates terminates because of the Participant's death or if the Participant dies during the three month period described below in Section 6.4(a)(iv), then any Option or Stock Appreciation Right that has not expired or been terminated shall become exercisable in full, and may be exercised by the Participant's Successor at any time, or from time to time, within one year after the date of the Participant's death.

(ii) If a Participant's employment or other relationship with the Company and its Affiliates terminates because of the Participant's Disability, then any Option or Stock Appreciation Right that has not expired or been terminated shall become exercisable in full if the Participant's employment or other relationship with the Company and its Affiliates has been continuous between the date the Option or Stock Appreciation Right was granted and the date of such disability, and the Participant or the Participant's Successor may exercise such Option or Stock Appreciation Right at any time, or from time to time, within one year after the date of the Participant's disability.

(iii) If a Participant's employment or other relationship with the Company and its Affiliates is terminated by the Company for Cause, then any Option or Stock Appreciation Right that has not expired or been terminated shall terminate immediately upon termination of the Participant's employment.

(iv) If a Participant's employment or other relationships with the Company and its Affiliates terminates because of the Participant's Retirement, then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for one year after termination of the Participant's employment, but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Participant's Retirement; provided, however, that if the Participant is a Non-Employee Director, the Option or Stock Appreciation Right shall remain exercisable until the expiration of the Term but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Non-Employee Director ceasing to be a director.

(v) If a Participant's employment terminates for any reason other than death, Disability, Retirement or termination by the Company for Cause, then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for three months after termination of the Participant's employment, but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Participant's termination of employment; provided, however, that if the Participant is a Non-Employee Director, the Option or Stock Appreciation Right shall remain exercisable until the expiration of the Term but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Non-Employee Director ceasing to be a director.

(vi) Notwithstanding the foregoing Sections 6.4(a)(i),
(ii), (iv) and (v), in no event shall an Option or a Stock Appreciation Right be exercisable after the expiration of the Term of such Award. Any Option or Stock Appreciation Right that is not exercised within the periods set forth in Sections
6.4 (i), (ii), (iv) and (v), except as otherwise provided by the Committee in the Agreement, shall terminate as of the end of the periods described in such Sections.

(b) Performance Units. If a Participant's employment with the Company and its Affiliates terminates during a Performance Cycle because of death or disability, or under other circumstances provided by the Committee in its discretion in the Agreement or otherwise, the Participant, unless the Committee shall otherwise provide in the Agreement, shall be entitled to a payment with respect to Performance Units at the end of the Performance Cycle based upon the extent to which achievement of performance targets was satisfied at the end of such period (as determined at the end of the Performance Cycle) and prorated for the portion of the Performance Cycle during which the Participant was employed by the Company or its Affiliates. Except as provided in this Section 6.4(b) or in the Agreement, if a Participant's employment or other relationship with the Company and its Affiliates terminates during a Performance Cycle, then such Participant shall not be entitled to any payment with respect to that Performance Cycle.

(c) Restricted Stock Awards. Unless otherwise provided in the Agreement, in case of a Participant's death or disability, the Participant shall be entitled to receive a number of Shares of Restricted Stock under outstanding Awards that has been prorated for the portion of the Term of the Awards during which the Participant was employed by the Company and its Affiliates, and, with respect to such Shares, all restrictions shall lapse. Any Shares of Restricted Stock as to which restrictions do not lapse under the preceding sentence shall terminate at the date of the Participant's termination of employment and such Shares of Restricted Stock shall be forfeited to the Company.

6.5 Rights as Stockholder. Each Agreement shall provide that a Participant shall have no rights as a stockholder with respect to any securities covered by an Award unless and until the date the Participant becomes the holder of record of the Stock, if any, to which the Award relates.

6.6 Performance-Based Awards. Any Award may be granted as a performance-based Award if the Committee establishes one or more Performance Measures upon which vesting, the lapse of restrictions or settlement in cash or Shares is contingent. With respect to any Award intended to qualify as "performance-based compensation" under Section 162(m) of the Code, the Committee shall establish and administer Performance Measures in the manner described in Section 162(m) of the Code and the then current regulations of the Secretary of the Treasury.

7. Restricted Stock Awards.

(a) An Award of Restricted Stock under the Plan shall consist of Shares subject to restrictions on transfer and conditions of forfeiture, which restrictions and conditions shall be included in the applicable Agreement. The Committee may provide for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine.

(b) Except as otherwise provided in the applicable Agreement, each Stock certificate (or uncertificated direct registration book-entry) issued with respect to an Award of Restricted Stock shall either be deposited with the Company or its designee, together with an assignment separate from the certificate, in blank, signed by the Participant, or bear such legends or stop transfer instructions with respect to the restricted nature of the Restricted Stock evidenced thereby as shall be provided for in the applicable Agreement.

(c) The Agreement shall describe the terms and conditions by which the restrictions and conditions of forfeiture upon awarded Restricted Stock shall lapse. Upon the lapse of the restrictions and conditions, Shares free of restrictive legends, if any, relating to such restrictions shall be issued to the Participant or a Successor or Transferee.

(d) A Participant or a Transferee with a Restricted Stock Award shall have all the other rights of a stockholder including, but not limited to, the right to receive dividends and the right to vote the Shares of Restricted Stock.

(e) No more than 1,000,000 of the total number of Shares available for Awards under the Plan shall be issued during the term of the Plan as Restricted Stock (subject to adjustment pursuant to
Section 16).

8. Other Awards. The Committee may from time to time grant Stock and other Awards under the Plan including, without limitation, those Awards pursuant to which Shares are or may in the future be acquired, Awards denominated in Stock units, securities convertible into Stock and phantom securities. The Committee, in its sole discretion, shall determine the terms and conditions of such Awards provided that such Awards shall not be inconsistent with the terms and purposes of the Plan. The Committee may, at its sole discretion, direct the Company to issue Shares subject to restrictive legends and/or stop transfer instructions that are consistent with the terms and conditions of the Award to which the Shares relate. No more than 150,000 of the total number of Shares available

for Awards under the Plan shall be issued during the term of the Plan in the form of Stock without restrictions (subject to adjustment pursuant to Section 16).

9. Stock Options.

9.1 Terms of All Options.

(a) An Option shall be granted pursuant to an Agreement as either an Incentive Stock Option or a Non-Statutory Stock Option. The purchase price of each Share subject to an Option shall be determined by the Committee and set forth in the Agreement, but shall not be less than 100% of the Fair Market Value of a Share as of the date the Option is granted (except as provided in Section 19).

(b) The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise, provided that to the extent permitted by law, the Agreement may permit some or all Participants to simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from the sale as payment of the purchase price of the Shares. To the extent provided in the Agreement, the purchase price may be payable in (i) cash (including check, bank draft or money order); (ii) cancellation of indebtedness; (iii) delivery or tender of Shares already owned by the optionee 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; (iv) 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; (v) any combination of the methods of payments described above; or (vi) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law, as determined by the Committee, but no fractional Shares will be issued or accepted. Notwithstanding the foregoing, however, that a Participant exercising a stock option shall not be permitted to pay any portion of the purchase price with Shares if, in the opinion of the Committee, payment in such manner could have adverse financial accounting consequences for the Company.

(c) Each Option shall be exercisable in whole or in part on the terms provided in the Agreement. In no event shall any Option be exercisable at any time after the expiration of its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated.

9.2 Incentive Stock Options. In addition to the other terms and conditions applicable to all Options:

(a) the aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options held by an individual first become exercisable in any calendar year (under the Plan and all other incentive stock option plans of the Company and its Affiliates) shall not exceed $100,000 (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option and to the extent an Option or Options granted to a Participant exceed this limit, the Option or Options shall be treated as a Non-Statutory Stock Option;

(b) an Incentive Stock Option shall not be exercisable more than 10 years after the date of grant (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option;

(c) notwithstanding any other provision of the Plan to the contrary, an Incentive Stock Option shall not be exercisable more than one year after termination of the Participant's employment with the Company and its Affiliates if the Participant's employment with the Company

and its Affiliates terminates because of the Participant's death or Disability or more than three months after termination of the Participant's employment if the Participant's employment terminates for any reason other than death or disability;

(d) the Agreement covering an Incentive Stock Option shall contain such other terms and provisions that the Committee determines necessary to qualify this Option as an Incentive Stock Option; and

(e) notwithstanding any other provision of the Plan to the contrary, no Participant may receive an Incentive Stock Option under the Plan if, at the time the Award is granted, the Participant owns (after application of the rules contained in Code Section 424(d), or its successor provision) Shares possessing more than 10% of the total combined voting power of all classes of stock of the Company or its Subsidiaries, unless (i) the option price for that Incentive Stock Option is at least 110% of the Fair Market Value of the Shares subject to that Incentive Stock Option on the date of grant and (ii) that Option is not exercisable after the date five years from the date that Incentive Stock Option is granted.

10. Stock Appreciation Rights. An Award of a Stock Appreciation Right shall entitle the Participant (or a Successor or Transferee), subject to terms and conditions determined by the Committee, to receive upon exercise of the Stock Appreciation Right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares as of the date of exercise of the Stock Appreciation Right over (ii) a specified price that shall not be less than 100% of the Fair Market Value of such Shares as of the date of grant of the Stock Appreciation Right. A Stock Appreciation Right may be granted in connection with part or all of, in addition to, or completely independent of an Option or any other Award under the Plan. If issued in connection with a previously or contemporaneously granted Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels a pro rata portion of the Option with which it is connected and vice versa. Each Stock Appreciation Right may be exercisable in whole or in part on the terms provided in the Agreement. No Stock Appreciation Right shall be exercisable at any time after the expiration of its Term. When a Stock Appreciation Right is no longer exercisable, it shall be deemed to have lapsed or terminated. Upon exercise of a Stock Appreciation Right, payment to the Participant or a Successor or Transferee shall be made at such time or times as shall be provided in the Agreement in the form of cash, Shares or a combination of cash and Shares as determined by the Committee. The Agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or Shares) may be made in the event of the exercise of a Stock Appreciation Right.

11. Performance Units.

11.1 Initial Award.

(a) An Award of Performance Units under the Plan shall entitle the Participant or a Successor or Transferee to future payments of cash, Shares or a combination of cash and Shares, as determined by the Committee, based upon the achievement of specified levels of one or more Performance Measures. The Agreement may establish that a portion of a Participant's Award will be paid for performance that exceeds the minimum target but falls below the maximum target applicable to the Award. The Agreement shall also provide for the timing of the payment.

(b) Following the conclusion or acceleration of each Performance Cycle, the Committee shall determine the extent to which
(i) Performance Measures have been attained, (ii) any other terms and conditions with respect to an Award relating to the Performance Cycle have been satisfied and (iii) payment is due with respect to an Award of Performance Units.

11.2 Acceleration and Adjustment. The Agreement may permit an acceleration of the Performance Cycle and an adjustment of performance targets and payments with respect to some or all of the Performance Units awarded to a Participant upon the occurrence of certain events, which may but need not include, without limitation, a Fundamental Change, a recapitalization, a change in the accounting

practices of the Company, a change in the Participant's title or employment responsibilities, the Participant's death or retirement or, with respect to payments in Shares with respect to Performance Units, a reclassification, stock dividend, stock split or stock combination as provided in Section 16. The Agreement also may provide for a limitation on the value of an Award of Performance Units that a Participant may receive.

12. Effective Date and Duration of the Plan.

12.1 Effective Date. The Plan shall become effective as of May 5, 2005, provided that the Plan is approved by the requisite vote of shareholders at the 2005 Annual Meeting of Shareholders or any adjournment thereof.

12.2 Duration of the Plan. The Plan shall remain in effect until all Stock subject to it shall be distributed, all Awards have expired or lapsed, the Plan is terminated pursuant to Section 15, or May 5, 2015 (the "Termination Date"); provided, however, that Awards made before the Termination Date may be exercised, vested or otherwise effectuated beyond the Termination Date unless limited in the Agreement or otherwise. No Award of an Incentive Stock Option shall be made more than 10 years after the Effective Date (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option. The date and time of approval by the Committee of the granting of an Award shall be considered the date and time at which the Award is made or granted.

13. Plan Does Not Affect Employment Status.

(a) Status as an eligible Employee shall not be construed as a commitment that any Award will be made under the Plan to that eligible Employee or to eligible Employees generally.

(b) Nothing in the Plan or in any Agreement or related documents shall confer upon any Employee or Participant any right to continue in the employment of the Company or any Affiliate or constitute any contract of employment or affect any right that the Company or any Affiliate may have to change such person's compensation, other benefits, job responsibilities, or title, or to terminate the employment of such person with or without cause.

14. Tax Withholding. The Company shall have the right to withhold from any cash payment under the Plan to a Participant or other person (including a Successor or a Transferee) an amount sufficient to cover any required withholding taxes. The Company shall have the right to require a Participant or other person receiving Shares under the Plan to pay the Company a cash amount sufficient to cover any required withholding taxes before actual receipt of those Shares. In lieu of all or any part of a cash payment from a person receiving Shares under the Plan, the Committee may permit the individual to cover all or any part of the required withholdings through a reduction of the number of Shares delivered or delivery or tender to the Company of Shares held by the Participant or other person, in each case valued in the same manner as used in computing the withholding taxes under the applicable laws.

15. Amendment, Modification and Termination of the Plan.

(a) The Board may at any time and from time to time terminate, suspend or modify the Plan. Except as limited in (b) below, the Committee may at any time alter or amend any or all Agreements under the Plan to the extent permitted by law.

(b) No termination, suspension, or modification of the Plan will materially and adversely affect any right acquired by any Participant or Successor or Transferee under an Award granted before the date of termination, suspension, or modification, unless otherwise agreed to by the Participant in the Agreement or otherwise, or required as a matter of law; but it will be conclusively presumed that any adjustment for changes in capitalization provided for in Sections 11.2 or 16 does not adversely affect these rights.

16. Adjustment for Changes in Capitalization. Subject to any required action by the Company's shareholders, appropriate adjustments, so as to prevent enlargement of rights or inappropriate dilution -- (i) in the aggregate number and type of Shares available for Awards, or any type of Award, under the Plan,
(ii) in the limitations on the number of Shares that may be issued to an individual Participant as an Option or a Stock Appreciation Right in any calendar year or that may be issued in the form of Restricted Stock or Shares without restrictions, (iii) in the number and type of Shares and amount of cash subject to Awards then outstanding, (iv) in the Option price as to any outstanding Options and, (v) subject to Section 11.2, in outstanding Performance Units and payments with respect to outstanding Performance Units -- may be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a Fundamental Change (subject to Section 17), recapitalization, reclassification, stock dividend, stock split, stock combination or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share.

17. Fundamental Change. In the event of a proposed Fundamental Change, the Committee may, but shall not be obligated to:

(a) if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of the outstanding Options and Stock Appreciation Rights by the substitution of options, stock appreciation rights and appropriate voting common stock of the corporation surviving any merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation; or

(b) at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to each holder of an Option or Stock Appreciation Right of the declaration, that each outstanding Option and Stock Appreciation Right, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of, the Fundamental Change in exchange for payment to each holder of an Option or Stock Appreciation Right, within ten days after the Fundamental Change, of cash equal to (i) for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value (as defined in this Section) per Share exceeds the exercise price per Share covered by such Option or (ii) for each Stock Appreciation Right, the price determined pursuant to Section 10, except that Fair Market Value of the Shares as of the date of exercise of the Stock Appreciation Right, as used in clause
(i) of Section 10, shall be deemed to mean Fair Market Value for each Share with respect to which the Stock Appreciation Right is calculated determined in the manner hereinafter referred to in this Section. At the time of the declaration provided for in the immediately preceding sentence, each Stock Appreciation Right and each Option shall immediately become exercisable in full and each person holding an Option or a Stock Appreciation Right shall have the right, during the period preceding the time of cancellation of the Option or Stock Appreciation Right, to exercise the Option as to all or any part of the Shares covered thereby or the Stock Appreciation Right in whole or in part, as the case may be. In the event of a declaration pursuant to Section 17(b), each outstanding Option and Stock Appreciation Right granted pursuant to the Plan that shall not have been exercised before the Fundamental Change shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration. Notwithstanding the foregoing, no person holding an Option or a Stock Appreciation Right shall be entitled to the payment provided for in this Section 17(b) if such Option or Stock Appreciation Right shall have terminated, expired or been cancelled. For purposes of this Section only, "Fair Market Value" per Share means the cash plus the fair market value, as determined in good faith by the Committee, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Fundamental Change.

18. Forfeitures. An Agreement may provide that if a Participant has received or been entitled to payment of cash, delivery of Shares, or a combination thereof pursuant to an Award within six months before the Participant's termination of employment with the Company and its Affiliates, the Committee, in its sole discretion, may require the Participant to return or forfeit the cash and/or Shares received with respect to the Award (or its economic value as of (i) the date of the exercise of Options or Stock Appreciation Rights, (ii) the date of, and immediately following, the lapse of restrictions on Restricted Stock or the receipt of Shares without restrictions, or (iii) the date on which the right of the Participant to payment with respect to Performance Units vests, as the case may be) in the event of certain occurrences specified in the Agreement. The Committee's right to require forfeiture must be exercised within ninety days after discovery of such an occurrence but in no event later than fifteen months

after the Participant's termination of employment with the Company and its Affiliates. The occurrences may, but need not, include competition with the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies of the Company or Affiliate or any other occurrence specified in the Agreement within the period or periods of time specified in the Agreement.

19. Corporate Mergers, Acquisitions, Etc. The Committee may also grant Options, Stock Appreciation Rights, Restricted Stock or other Awards under the Plan in substitution for, or in connection with the assumption of, existing options, stock appreciation rights, restricted stock or other award granted, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a Subsidiary is a party. The terms and conditions of the substitute Awards may vary from the terms and conditions set forth in the Plan to the extent that the Board at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.

20. Unfunded Plan. The Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. Neither the Company, its Affiliates, the Committee, nor the Board of Directors shall be deemed to be a trustee of any amounts to be paid under the Plan nor shall anything contained in the Plan or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between the Company and/or its Affiliates, and a Participant or Successor or Transferee. To the extent any person acquires a right to receive an Award under the Plan, this right shall be no greater than the right of an unsecured general creditor of the Company.

21. Limits of Liability.

(a) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement.

(b) Except as may be required by law, neither the Company nor any member of the Board of Directors or of the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken, or not taken, in good faith under the Plan.

22. Compliance with Applicable Legal Requirements. No Shares distributable pursuant to the Plan shall be issued and delivered unless the issuance of the Shares 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 in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company's Shares may, at the time, be listed.

23. Deferrals and Settlements. The Committee may require or permit Participants to elect to defer the issuance of Shares or the settlement of Awards in cash under such rules and procedures as it may establish under the Plan. It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts.

24. Other Benefit and Compensation Programs. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination, indemnity or severance pay laws of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate unless expressly so provided by such other plan, contract or arrangement, or unless the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation.

25. Beneficiary Upon Participant's Death. To the extent that the transfer of a Participant's Award at his or her death is permitted under an Agreement, a Participant's Award shall be transferable at death to the estate or to the person who acquires the right to succeed to the Award by bequest or inheritance.

26. Requirements of Law.

(a) To the extent that federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Minnesota without regard to its conflicts-of-law principles and shall be construed accordingly.

(b) If any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not effect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

27. Repricing; Shareholder Approval. Except as provided in Section 16, neither the Board nor any committee thereof shall cause the Company to adjust or amend the exercise price of any outstanding Award, whether through amendment, replacement grant, or other means, without the prior approval of the shareholders of the Company.

EXHIBIT 10.9

CAPELLA EDUCATION COMPANY

EMPLOYEE STOCK OWNERSHIP PLAN

(2005 RESTATEMENT)

.
.

CAPELLA EDUCATION COMPANY
EMPLOYEE STOCK OWNERSHIP PLAN
(2005 RESTATEMENT)

TABLE OF CONTENTS

ARTICLE I     INTRODUCTION......................................................       1
    1.1       PLAN DESIGN.......................................................       1
    1.2       PLAN DOCUMENT.....................................................       1
    1.3       EFFECTIVE DATE OF DOCUMENT........................................       1

ARTICLE II    DEFINITIONS AND CONSTRUCTION......................................       1
    2.1       DEFINITIONS.......................................................       1
    2.2       CHOICE OF LAW.....................................................       6
    2.3       USE OF COMPOUNDS OF WORD "HERE"...................................       6
    2.4       CONSTRUED AS A WHOLE..............................................       6
    2.5       HEADINGS..........................................................       6

ARTICLE III   PARTICIPATION.....................................................       6
    3.1       START OF PARTICIPATION............................................       6
    3.2       END OF PARTICIPATION..............................................       6

ARTICLE IV    NO EMPLOYEE CONTRIBUTIONS.........................................       7

ARTICLE V     EMPLOYER CONTRIBUTIONS............................................       7
    5.1       ESOP CONTRIBUTIONS................................................       7
    5.2       ALLOCATION OF CONTRIBUTIONS.......................................       7

ARTICLE VI    CONTRIBUTION LIMITS...............................................       8
    6.1       MAXIMUM ANNUAL ADDITIONS..........................................       8
    6.2       DEDUCTION LIMIT...................................................      11

ARTICLE VII   ACCOUNTS..........................................................      11
    7.1       ACCOUNTS..........................................................      11
    7.2       VALUATION OF ACCOUNTS.............................................      11
    7.3       VOTING RIGHTS ON COMPANY STOCK....................................      13

ARTICLE VIII  INVESTMENT OF ACCOUNTS............................................      13
    8.1       INVESTMENT IN COMPANY STOCK.......................................      13
    8.2       REPAYMENT OF EXEMPT LOAN..........................................      13

ARTICLE IX    VESTING...........................................................      14
    9.1       VESTING AT NORMAL RETIREMENT AGE..................................      14
    9.2       VESTING IN EVENT OF DISABILITY OR DEATH...........................      14
    9.3       VESTING BASED ON SERVICE..........................................      14
    9.4       FORFEITURE OF NONVESTED BALANCE...................................      14
    9.5       FORFEITURE ACCOUNT................................................      14
    9.6       REINSTATEMENT UPON RETURN TO SERVICE..............................      14
    9.7       FORFEITURE IN EVENT OF MISSING PARTICIPANT OR BENEFICIARY.........      14

ARTICLE X     DIVERSIFICATION DISTRIBUTIONS WHILE EMPLOYED......................      15
    10.1      ELIGIBILITY FOR DIVERSIFICATION DISTRIBUTIONS.....................      15
    10.2      MAXIMUM PERCENTAGE LIMIT..........................................      15
    10.3      MAXIMUM NUMBER OF SHARES..........................................      15
    10.4      DIVERSIFICATION DISTRIBUTION PROCEDURES...........................      15

ARTICLE XI    DISTRIBUTION AFTER TERMINATION OF EMPLOYMENT......................      16
    11.1      DISTRIBUTION AFTER TERMINATION OF EMPLOYMENT......................      16
    11.2      DISTRIBUTION PROCEDURES...........................................      16
    11.3      CASH-OUT OF SMALL ACCOUNTS........................................      17
    11.4      MINIMUM DISTRIBUTION RULES........................................      17

ARTICLE XII   DISTRIBUTION AFTER DEATH..........................................      17
    12.1      DISTRIBUTION AFTER DEATH..........................................      17
    12.2      DISTRIBUTION PROCEDURES...........................................      17
    12.3      BENEFICIARY DESIGNATION...........................................      18
    12.4      MULTIPLE BENEFICIARIES............................................      19
    12.5      CASH-OUT OF SMALL ACCOUNTS........................................      19

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EXHIBIT 10.9

    12.6      MINIMUM DISTRIBUTION RULES........................................      19

ARTICLE XIII  MISCELLANEOUS BENEFIT PROVISIONS..................................      19
    13.1      VALUATION OF ACCOUNTS FOLLOWING TERMINATION OF EMPLOYMENT.........      19
    13.2      DIRECT ROLLOVER OPTION............................................      19
    13.3      BENEFIT STATEMENTS................................................      20
    13.4      MISSING PARTICIPANTS OR BENEFICIARIES.............................      20
    13.5      DISTRIBUTION TO ALTERNATE PAYEE...................................      20
    13.6      PUT OPTION; OTHER RESTRICTIONS ON COMPANY STOCK...................      21
    13.7      NO OTHER BENEFITS.................................................      21
    13.8      SOURCE OF BENEFITS................................................      21
    13.9      INCOMPETENT PAYEE.................................................      22
    13.10     NO ASSIGNMENT OR ALIENATION OF BENEFITS...........................      22
    13.11     PAYMENT OF TAXES..................................................      22
    13.12     CONDITIONS PRECEDENT..............................................      22
    13.13     DELAY OF DISTRIBUTION IN EVENT OF STOCK DIVIDEND OR SPLIT.........      22
    13.14     EFFECT OF REEMPLOYMENT............................................      22

ARTICLE XIV   TRUST FUND........................................................      22
    14.1      COMPOSITION.......................................................      22
    14.2      NO DIVERSION......................................................      22
    14.3      BORROWING TO PURCHASE COMPANY STOCK...............................      23
    14.4      FUNDING POLICY....................................................      24
    14.5      SHARE REGISTRATION................................................      24
    14.6      PURCHASE/SALE OF COMPANY STOCK....................................      24

ARTICLE XV    ADMINISTRATION....................................................      25
    15.1      ADMINISTRATION....................................................      25
    15.2      CERTAIN FIDUCIARY PROVISIONS......................................      25
    15.3      PAYMENT OF EXPENSES...............................................      25
    15.4      EVIDENCE..........................................................      25
    15.5      CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION...............      26
    15.6      CLAIMS AND LIMITATIONS ON ACTIONS.................................      26
    15.7      WAIVER OF NOTICE..................................................      26
    15.8      AGENT FOR LEGAL PROCESS...........................................      26
    15.9      INDEMNIFICATION...................................................      26
    15.10     EXERCISE OF AUTHORITY.............................................      26
    15.11     TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS.................      27

ARTICLE XVI   AMENDMENT, TERMINATION, MERGER....................................      27
    16.1      AMENDMENT.........................................................      27
    16.2      PERMANENT DISCONTINUANCE OF CONTRIBUTIONS.........................      28
    16.3      TERMINATION.......................................................      28
    16.4      PARTIAL TERMINATION...............................................      28
    16.5      MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS.................      28
    16.6      DEFERRAL OF DISTRIBUTIONS.........................................      28

ARTICLE XVII  MISCELLANEOUS PROVISIONS..........................................      28
    17.1      SPECIAL TOP-HEAVY RULES...........................................      28
    17.2      QUALIFIED MILITARY SERVICE........................................      30
    17.3      INSURANCE COMPANY NOT RESPONSIBLE FOR VALIDITY OF PLAN............      30
    17.4      NO GUARANTEE OF EMPLOYMENT........................................      30

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CAPELLA EDUCATION COMPANY
EMPLOYEE STOCK OWNERSHIP PLAN
(2005 RESTATEMENT)

ARTICLE I

INTRODUCTION

1.1 PLAN DESIGN. The Capella Education Company Employee Stock Ownership Plan is a stock bonus and employee stock ownership plan (within the meaning of Code Section 4975(3)(7)) that is intended to qualify under Code Section
401(a). Thus, the Plan is designed to invest primarily in Company Stock.

1.2 PLAN DOCUMENT. The Plan document consists of this document, any amendments to this document, the List of Participating Employers maintained for the Plan, the List of Predecessor Employers maintained for the Plan, and any other document that is expressly incorporated by reference into the Plan.

1.3 EFFECTIVE DATE OF DOCUMENT. The Plan (as amended and restated in this document) is effective June 1, 2005.

ARTICLE II

DEFINITIONS AND CONSTRUCTION

2.1 DEFINITIONS.

2.1.1 "Account" means either of the following:

(a) A bookkeeping account maintained to reflect the Participant's interest in the Trust Fund.

(b) A Forfeiture Account.

2.1.2 "Affiliate" means any corporation that is a member of the same controlled group as the Company as defined in Code Section 414(b), any business entity that is under common control with the Company as defined in Code
Section 414(c), any business entity that is a member of an affiliated service group with the Company as defined in Code Section 414(m), or any other business entity that is required to be aggregated and treated as one employer with the Company under Code Section 414(o). For purposes of applying the limits of Code Section 415, Code Sections 414(b) and 414(c) will be applied as modified by Code Section 415(h).

2.1.3 "Beneficiary" means a person (or persons) designated as such pursuant to Sec. 12.3.

2.1.4 "Code" means the Internal Revenue Code of 1986, as amended.

2.1.5 "Company" means Capella Education Company, a Minnesota corporation, and any successor.

2.1.6 "Company Stock" means common stock (including associated rights, if any) of the Company which is readily tradable on an established securities market.

If there is no such common stock, Company Stock shall mean only that class of common stock of the Company having a combination of voting power and dividend rights equal to or in excess of: (i) that class of common stock having the greatest voting power, and (ii) that class of common stock having the greatest dividend rights.

2.1.7 "Covered Compensation" means the wages and other compensation reported on Form W-2 (as defined in paragraph (a) below) by a Participating Employer for an individual's employment as an Eligible Employee, but adjusted as described in paragraphs (b), (c) and (d) below.

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(a) Form W-2 Definition. Form W-2 includes wages within the meaning of Code Section 3401(a) and all other payments of compensation to an Eligible Employee by a Participating Employer (in the course of the Participating Employer's trade or business) for which the Participating Employer is required to furnish the Eligible Employee a written statement under Code Section 6041(d), 6051(a)(3) and 6052. This compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location oF the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

(b) Specific Inclusions. Covered Compensation also will include contributions made by pay reduction to:

(1) Any qualified cash or deferred arrangement (as defined in Code
Section 401(k)) that forms part of a plan maintained by the Participating Employer, which contributions are excludable from gross income under Code Section 402(e)(3).

(2) Any cafeteria plan (as defined in Code Section 125) maintained by the Participating Employer, which contributions are excludable from gross income under Code Section 125.

(3) Receive qualified transportation fringe benefits provided by the Participating Employer, which contributions are excludable from gross income under Code Section 132(f).

(1) Amounts earned while the individual is not an Eligible Employee.

(2) Expense allowances or reimbursements (including but not limited to moving expenses).

(3) Severance pay and any other amounts the payment of which, or entitlement to which, is triggered or accelerated by reason of Termination of Employment (including but not limited to accumulated vacation pay paid at Termination of Employment).

(4) Contributions to, allocations under or distributions from any nonqualified plan of deferred compensation under Code Section 409A (including but not limited to deferred bonuses).

(5) Grants of any stock option, restricted stock, deferred stock unit, stock appreciation right or similar equity compensation (or cash payments in lieu thereof).

(6) Amounts reported as taxable income on Form W-2 as a result of the exercise of a non-qualified stock option or as a result of vesting in restricted stock granted under any stock compensation plan.

(7) Amounts reported as taxable income on Form W-2 as a result of receiving group-term life insurance.

(8) Merchandise or service discounts, non-cash employee awards, earnings payable in a form other than cash, any amounts paid to or for an individual that receive special tax benefits, or any other fringe benefits.

(d) Code Section 401(a)(17) Limit. Covered Compensation does not include any amounts in excess of the limit in effect under Code Section 401(a)(17) for any Plan Year.

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2.1.9 "Eligible Employee" means the following:

(a) General Rule. An Eligible Employee is an Employee of a Participating Employer, other than the following (that is, the following are excluded):

(1) Any individual who is a Leased Employee with respect to the Participating Employer, or any other individual who performs services through, or is paid by, a third-party (including, for example, an employee leasing or staffing agency).

(2) Any individual who is classified as a consultant, independent contractor, or as having any status other than a common-law employee by the Participating Employer (regardless of whether such individual is subsequently determined to be a common-law employee or an employee for any other purpose).

(3) Any individual who is a nonresident alien with respect to the United States and who either:

(A) Receives no earned income (within the meaning of Code
Section 911(d)(2)) from the Participating Employer that constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)), or who receives such earned income but it all is exempt from income tax in the United States under the terms of an income tax treaty; or

(B) Is on temporary assignment in the United States.

(b) Collective Bargaining Employees. An Employee is not an Eligible Employee during any period he/she is a member of a unit of Employees covered by a collective bargaining agreement unless the agreement expressly provides that he/she is eligible to participate in this Plan. For this purpose, a collective bargaining agreement will be deemed to continue in effect after it expires during the pendency of collective bargaining negotiations until the parties have negotiated to "impasse" as determined by the Company, and an Employee thereafter will be an Eligible Employee if and only if participation is part of the impasse proposal of the Company or the Employee was an Eligible Employee before the collective bargaining agreement expired and the Company elects to continue such status with respect to the Plan.

(c) Authorized Leaves of Absence. An Employee will continue as an Eligible Employee during any authorized leave of absence if he/she was an Eligible Employee prior to the start of such leave until Termination of Employment or the happening of any event that would have caused the Employee to cease to be an Eligible Employee if he/she had not been on a leave of absence (e.g., if his/her employer ceases to be a Participating Employer).

An "authorized leave of absence" for this purpose means any absence authorized by the Participating Employer under its standard personnel practices, and also includes any absence due to service in the Armed Forces of the United States provided the Employee returns to employment with the Participating Employer with reemployment rights provided by law.

(d) Termination of Plan. No Employee will become or remain an Eligible Employee after termination of the Plan.

2.1.10 "Employee" means any common-law employee of the Company or an Affiliate (while it is an Affiliate) and any Leased Employee with respect to the Company or an Affiliate (while it is an Affiliate). However, a Leased Employee will not be an Employee if Leased Employees do not constitute more than twenty percent (20%) of the combined workforce of the Company and Affiliates and the Leased Employee is covered by a plan of the leasing organization that is described in Code Section 414(n)(5).

2.1.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

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2.1.12 "Exempt Loan" means a loan or other extension of credit to the Plan to enable the Plan to acquire shares of Company Stock, or to refinance a prior Exempt Loan.

2.1.13 "Forfeiture" means the nonvested balance of a Participant's Account that is forfeited by the Participant upon Termination of Employment, or any other amount treated as a Forfeiture under the terms of the Plan.

2.1.14 "Forfeiture Account" means an Account maintained to reflect Forfeitures (and investment income, gains and losses).

2.1.15 "Highly Compensated Employee" means an Employee who was a five-percent owner (as defined in Code Section 414(q)(2)) at any time during the current Plan Year or the look-back period, or an Employee who received compensation (as defined in Sec. 6.2.2) in excess of the amount in effect under Code Section 414(q)(1)(A) for the look-back period.

The "look-back period" for this purpose is the twelve-month period immediately preceding the current Plan Year.

2.1.16 "Hour of Service" means each of the following (but in no event will duplicate credit be given for the same hour under more than one subsection):

(a) Work Periods. Each hour for which the individual is paid or entitled to payment by the Company or an Affiliate for the performance of services for the Company or Affiliate (while it is an Affiliate), with overtime hours credited on a straight-time basis.

(b) Non-Work Periods. Each hour for which the individual is paid or entitled to payment by the Company or an Affiliate (while it is an Affiliate) on account of a period of time during which no services are performed for the Company or Affiliate (irrespective of whether the employment relationship has terminated) due to vacation (but excluding hours attributable to accrued vacation for which payment is made in lieu of actual time off from work), holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. However, no more than five hundred and one (501) hours will be credited under this paragraph for any single continuous period during which the individual performs no services. Hours will not be credited under this paragraph with respect to a payment under a plan maintained to comply with applicable workers' compensation, unemployment compensation, or disability insurance laws, or with respect to a payment which reimburses the individual for medical or medically-related expenses.

(c) Back Pay Awards. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company or an Affiliate (while it is an Affiliate), with such hours to be credited to the computation period or periods to which the award or agreement pertains, rather than to the computation period in which the award, agreement, or payment is made.

(d) Credit if No Hour Records Maintained. If an individual is within a classification for which a record of hours for the performance of services is not maintained, or if he/she is on an authorized leave of absence or military leave, the individual will be credited with ten (10) hours of service for each day for which he/she would otherwise be credited under (a), (b) or (c) with at least one Hour of Service.

To determine the Hours of Service of a Leased Employee, a payment to the Leased Employee by the leasing organization for services rendered to the Company or an Affiliate will be deemed to be a payment by the Company or Affiliate.

The Company may use any records to determine hours of service which it considers an accurate reflection of the actual facts.

2.1.17 "Leased Employee" means an individual defined as such under Code Section
414(n); generally, any individual whO is not a common-law employee of the Company or an Affiliate, but who performs

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services for the Company or Affiliate (while it is an Affiliate) pursuant to an agreement with any other person, provided such individual has performed such services for the Company or Affiliate on a substantially full-time basis for a period of at least one year and such services are performed under the primary direction and control of the Company or Affiliate.

2.1.18 "Normal Retirement Age" means the later of: (i) the individual's sixty-fifth (65th) birthday, or (ii) the third (3rd) anniversary of the date the individual became a Participant.

2.1.19 "Participant" means either of the following:

(a) an Eligible Employee, or

(b) an Employee or former Employee who is no longer an Eligible Employee but who still has a vested Account balance under the Plan.

2.1.20 "Participating Employer" means the Company and each Affiliate that is identified as a Participating Employer, in the List of Participating Employers maintained for the Plan.

2.1.21 "Plan" means the Capella Education Company Employee Stock Ownership Plan, as amended.

2.1.22 "Plan Year" means the calendar year.

2.1.23 "Predecessor Employer" means any business entity from whose employment a group of Employees has been transferred to employment with the Company or an Affiliate, or any member of a controlled group of corporations of which an Affiliate used to be a member prior to becoming a member of the controlled group of the Company. Each such Predecessor Employer will be identified in the List of Predecessor Employers maintained for the Plan.

2.1.24 "Spouse" means a person of the opposite sex to whom the Participant is legally married (including a common-law spouse in any state that recognizes common-law marriage), except that a former spouse will be treated as the Spouse to the extent provided under a qualified domestic relations order (as defined in Code Section 414(p)).

2.1.25 "Termination of Employment" means either of the following:

(a) Common Law Employee. In the case of a common-law employee, his/her resignation, discharge, failure to return to work at the end of an authorized leave of absence, death or the happening of any other event or circumstances that results in the severance of the common-law employee relationship between that individual and his/her employer (as determined under the employment policies and practices of the Company). However, a Termination of Employment will not occur with respect to an individual even though there has been a severance of the common-law employee relationship between that individual and his/her employer if he/she remains an Employee (for example, he/she leaves one Affiliate and becomes a common-law employee of another Affiliate, or if he/she continues work as a Leased Employee).

(b) Leased Employee. In the case of a Leased Employee, the end of his/her status as a Leased Employee, unless he/she then becomes a common-law employee of the Company or an Affiliate (while it is an Affiliate).

2.1.26 "Trust Fund" means the trust fund (or funds) that serve as a funding vehicle for the Plan.

2.1.27 "Trustee" means a trustee (or trustees) appointed and acting as such with respect to all or any portion of the Trust Fund.

2.1.28 "Unallocated Reserve" means the portion of the Trust Fund that consists of:

(a) The proceeds of an Exempt Loan,

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(b) The shares of Company Stock that were acquired with the proceeds of an Exempt Loan and that have not yet been allocated to Accounts,

(c) The dividends and other investment earnings on the shares of Company Stock or other assets held in the Unallocated Reserve, and

(d) The proceeds from any sale of shares of Company Stock (or other assets) held in the Unallocated Reserve.

2.1.29 "Valuation Date" means each day on which trading occurs on the principal United States Securities Exchanges registered under the Securities Exchange Act of 1934, as amended.

2.1.30 "Vesting Service" means the following measure of an Employee's service with the Company and Affiliates (while they are Affiliates):

(a) Computation. One year of Vesting Service will be credited to the Employee for each Plan Year in which the Employee has one thousand (1,000) or more Hours of Service.

(b) Completion. A year of Vesting Service will be deemed completed as of the date in the Plan Year that the Employee completes one thousand (1,000) Hours of Service.

(d) Predecessor Employers. Vesting Service also will include service with a Predecessor Employer (such service will be treated as service with an Affiliate) as required under Code Section 414(a) or as provided under the List of Predecessor Employers maintained for the Plan.

2.2 CHOICE OF LAW. The Plan will be governed by the substantive laws of the State of Minnesota (without giving effect to the choice or conflict of law principles of that state), to the extent that such laws are not preempted by the laws of the United States. All controversies, disputes, and claims arising under the Plan and not otherwise resolved must be submitted to the United States District Court for the District of Minnesota, except as otherwise provided in any trust agreement governing all or a portion of the Trust Fund.

2.3 USE OF COMPOUNDS OF WORD "HERE". Use of the words "hereof," "herein," "hereunder," or similar compounds of the word "here" will mean and refer to the entire Plan unless the context clearly indicates to the contrary.

2.4 CONSTRUED AS A WHOLE. The Plan is to be construed as a whole in such manner as to carry out its purpose and a given provision is not to be construed separately without relation to the context.

2.5 HEADINGS. Headings at the beginning of Articles and Sections are for convenience of reference, are not considered a part of the text of the Plan, and will not influence its construction.

ARTICLE III

PARTICIPATION

3.1 START OF PARTICIPATION. An Employee will become a Participant on the date that he/she becomes (or again becomes) an Eligible Employee.

3.2 END OF PARTICIPATION. A Participant will continue as such until:

(a) Nonvested Participant. Termination of Employment without a vested Account balance.

(b) Vested Participant. Full distribution of his/her vested Account balance.

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ARTICLE IV

NO EMPLOYEE CONTRIBUTIONS

Employee contributions (including before-tax or after-tax contributions, or rollover contributions) are not required or permitted under the Plan.

ARTICLE V

EMPLOYER CONTRIBUTIONS

5.1 ESOP CONTRIBUTIONS. An ESOP Contribution will be made for any Plan Year for which a payment is due on an Exempt Loan or for any other Plan Year for which the Company in its sole discretion determines that such a contribution will be made.

5.1.1 Amount of Contribution. The amount of the ESOP Contribution for a Plan Year will be determined at the sole discretion of the Company, but will not be less than the minimum amount sufficient to enable the Trustee to make the payment due on any Exempt Loan for the Plan Year to the extent that such payment is not satisfied from (i) cash dividends and other investment earnings on the shares of Company Stock or other assets held in the Unallocated Reserve, (ii) the proceeds from any refinancing of the Exempt Loan, or (iii) the proceeds from any sale of shares of Company Stock or other assets held in the Unallocated Reserve.

5.1.2 Form of Contribution. ESOP Contributions will be made in cash or shares of Company Stock as determined at the sole discretion of the Company. If a contribution is made in shares of Company Stock, each share so contributed will be valued at the closing price of a share of Company Stock for the Valuation Date immediately preceding the date the Company directs its transfer agent to issue such share to the Trust Fund (as such price is reported in any financial newspaper or on any electronic stock reporting service deemed accurate by the Company).

5.1.3 Time of Contribution. ESOP Contributions will be made to the Trust Fund at such time or times as the Company in its sole discretion deems appropriate. However, the ESOP contribution (if any) for a given Plan Year will be delivered to the Trustee for deposit in the Trust Fund not later than the time prescribed by federal law (including extensions) for filing the federal income tax return of the Company for the taxable year in which the Plan Year ends.

5.1.4 Limits. ESOP Contributions will be subject to the applicable limits set forth in Article VI.

5.2 ALLOCATION OF CONTRIBUTIONS.

5.2.1 Contributions Used for Loan Repayment. The ESOP Contribution for a Plan Year first will be applied to make the payment due on any outstanding Exempt Loan. The shares of Company Stock released from the Unallocated Reserve as a result of such payment will be allocated as provided in Sec. 7.2.2.

5.2.2 Contributions Not Used for Loan Repayment. The ESOP Contribution (or the portion thereof) for a Plan Year that is not applied to an Exempt Loan will be allocated among the Accounts of the allocation eligible Participants for the Plan Year, and the portion allocated to each such Account will be credited to the Account as of the last Valuation Date in the Plan Year. The portion of the ESOP Contribution allocated to the Account of each allocation eligible Participant will equal the total amount of the ESOP Contribution to be so allocated multiplied by a fraction, the numerator of which is the Covered Compensation of the Participant for the Plan Year, and the denominator of which is the aggregate Covered Compensation of all allocation eligible Participants for the Plan Year.

5.2.3 Eligible Participants. An "allocation eligible" Participant for a Plan Year is:

(a) A Participant who both:

(1) Has one thousand (1,000) or more Hours of Service during the Plan Year, and

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(2) Is an Employee on the last day of the Plan Year.

(b) A Participant whose Termination of Employment occurred during the Plan Year as a result of his/her:

(1) Retirement at or after Normal Retirement Age,

(2) Total and permanent disability (as evidenced by a determination from the Social Security Administration), or

(3) Death.

ARTICLE VI

CONTRIBUTION LIMITS

6.1 MAXIMUM ANNUAL ADDITIONS.

6.1.1 Defined Contribution Plan Limit. The annual additions for a Participant for a limitation year will not exceed the lesser of:

(a) The dollar amount in effect for such limitation year under Code
Section 415(c)(1)(A)), or

(b) One-hundred percent (100%) of the Participant's compensation for the limitation year.

If a Participant has annual additions under more than one defined contribution plan maintained by the Company or an Affiliate (while it is an Affiliate), the Annual Additions under all such plans will not exceed the limit specified above.

6.1.2 Special Definitions. For purposes of Article VI, the following definitions apply:

(a) "Annual Addition" means any of the following amounts credited to the individual as of any date within the limitation year:

(1) Employee after-tax contributions credited under any defined contribution plan maintained by the Company or an Affiliate, but not including rollover contributions (whether after-tax or before-tax).

(2) Employer contributions and elective deferrals credited under any defined contribution plan or simplified employee pension plan maintained by the Company or an Affiliate, but not including: (i) any excess deferrals under Code Section 402(g) that are timely distributed, (ii) any catch-up contributions under Code Section 414(v), or (iii) any buy-back contributions made to restore a prior forfeiture.

(3) Forfeitures credited under this Plan any other defined contribution plan maintained by the Company or an Affiliate.

(4) Amounts credited to any individual medical benefit account (as described in Code Section 415(l)(2)) under any defined benefit plan maintained by the Company or an Affiliate. However, such amounts will be disregarded in applying the one hundred percent (100%) of compensation limit under Code Section
415(c)(1)(B).

(5) Amounts credited to any separate account for retiree medical benefits (as described in Code Section 419A(d)(2)) on behalf of any Key Employee under any welfare benefit fund maintained by the Company or an Affiliate.

Any contrary provision notwithstanding, employer contributions under this Plan that are applied to pay interest on an Exempt Loan will not be an annual addition if no more than one-third (1/3rd) of such employer contributions that are applied to pay principal or

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interest on an Exempt Loan for the Plan Year are allocated to Participants who are Highly Compensated Employees.

(b) "Compensation" means the wages and other compensation reported on Form W-2 by the Company and all Affiliates for the individual's employment during the limitation year, subject to the following:

(1) Form W-2 Definition. Form W-2 includes wages within the meaning of Code Section 3401(a) anD all other payments of compensation to the individual by his/her employer (in the course of the employer's trade or business) for which the employer is required to furnish the individual a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. This compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

(2) Specific Inclusions. Compensation also will include contributions made by pay reduction to

(A) Any qualified cash or deferred arrangement (as defined in Code Section 401(k)) thaT forms part of a plan maintained by the Company or an Affiliate, which contributions are excludable from gross income under Code Section 402(e)(3).

(B) Any cafeteria plan (as defined in Code Section 125)

maintained by the Company or aN Affiliate which
contributions are excludable from gross income under
Code Section 402(e)(3).

(C) Receive qualified transportation fringe benefits provided by the Company or an Affiliate, which contributions are excludable from gross income under Code Section 132(f).

6.1.3 Correction if Limit Is Exceeded. If the limit specified in Sec. 6.1.1 would be exceeded for a Participant for a limitation year, the following actions will be taken in the following sequence, to the extent necessary to eliminate the excess:

(a) Employee After-Tax Contributions and Elective Deferrals. The defined contribution plan will:

(1) Return any unmatched employee contributions made by the individual for the limitation year to the Participant (adjusted for their proportionate share of gains but not losses while held in the defined contribution plan).

(2) Distribute unmatched elective deferrals (within the meaning of Code Section 402(g)(3)) made for the limitation year to the individual (adjusted for their proportionate share of gains but not losses while held in the defined contribution plan).

(3) Return any matched employee contributions made by the individual for the limitation year to the individual (adjusted for their proportionate share of gains but not losses while held in the defined contribution plan).

(4) Distribute matched elective deferrals (within the meaning of Code Section 402(g)(3)) made for the limitation year to the individual (adjusted for their proportionate share of gains but not losses while held in the defined contribution plan).

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To the extent matched employee contributions are returned or any matched elective deferrals are distributed, any matching contribution made with respect thereto shall be forfeited and applied as provided in the defined contribution plan.

(b) Employer Contributions. If, after taking all the actions described in paragraph (a), an excess still exists, the defined contribution plan will dispose of the excess as follows:

(1) Covered. If the individual is covered by the defined contribution plan at the end of the limitation year, the employer shall cause such excess to be used to reduce employer contributions for the next limitation year ("second limitation year") and succeeding limitation years, as necessary, for that individual.

(2) Not Covered. If the individual is not covered by the defined contribution plan at the end of the limitation year, however, then the excess amounts must be held unallocated in an "excess account" for the second limitation year (or succeeding limitation years) and allocated and reallocated in the second limitation year (or succeeding limitation years) to all the remaining participants in the defined contribution plan as if an employer contribution for the second limitation year (or succeeding limitation year). However, if the allocation or reallocation of the excess amounts pursuant to the provisions of the defined contribution plan causes the limitations of Sec. 6.1.1 to be exceeded with respect to each participant for the second limitation year (or succeeding limitation years), then these amounts must be held unallocated in an excess account. If an excess account is in existence at any time during the second limitation year (or any succeeding limitation year), all amounts in the excess account must be allocated and reallocated to participants' accounts (subject to the limitations of Sec. 6.1.1) as if they were additional employer contributions before any employer contribution and any participant contributions which would constitute annual additions may be made to the defined contribution plan for that limitation year. Furthermore, the excess amounts must be used to reduce employer contributions for the second limitation year (and succeeding limitation years, as necessary) for all of the remaining participants.

(3) No Distributions. Excess amounts may not be distributed from the defined contribution plan to participants or former participants.

If an excess account is in existence at any time during a limitation year, the investment income, gains and losses attributable to the excess account will be allocated to such excess account. To the extent that investment income, gains and losses are allocated to the excess account, the entire amount allocated to participants from the excess account, including any such investment income and gains or less any investment losses, will be considered as an annual addition. If the defined contribution plan should be terminated prior to the date any such temporarily held, unallocated excess can be allocated to the accounts of participants, the date of termination will be deemed to be a valuation date for the purpose of allocating such excess and, if any portion of such excess cannot be allocated as of such deemed valuation date by reason of the limitations of Sec. 6.1.1, such remaining excess will be returned to the Company or Affiliate that maintained the plan.

(c) Sequence of Plans. Each step of remedial action under paragraphs (a) and (b) as may be necessary to correct an excess allocation will be made in all defined contribution plans before the next step of remedial action is made. Each such step will be made in the defined contribution plans in the following sequence:

(1) All profit sharing and stock bonus plans containing cash or deferred arrangements.

(2) All money purchase pension plans, other than money purchase pension plans that are part of employee stock ownership plans.

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(3) All profit sharing and stock bonus plans, other than profit sharing and stock bonus plans containing cash or deferred arrangements and employee stock ownership plans.

(4) All employee stock ownership plans.

If an excess allocation occurs in two (2) or more plans in the same category, correction of the excess allocation will be made in chronological order as determined by the original effective date of each plan beginning with the most recently established plan.

6.2 DEDUCTION LIMIT. The contributions made for any Plan Year will not exceed the maximum amount allowable as a deduction in computing the taxable income for federal income tax purposes of the Company and Affiliates for the taxable year of the Company that ends with or within the Plan Year. Each contribution is expressly conditioned upon its being deductible under Code Section 404.

ARTICLE VII

ACCOUNTS

7.1 ACCOUNTS.

7.1.1 Balance of Accounts. Each Account will have a stock balance expressed in full and fractional shares of Company Stock, and may have a cash balance expressed in United States dollars to reflect (i) cash contributions, cash dividends, and other cash amounts received by the Trust Fund that are held in cash temporarily pending investment in shares of Company Stock, and
(ii) such minor amounts (if any) as the Trustee determines are appropriate to hold in cash for purposes of honoring anticipated distribution and transfer requests from Participants and Beneficiaries.

7.1.2 Accounts for Bookkeeping Only. Accounts are for bookkeeping purposes only. The maintenance of Accounts will not require any segregation of assets of the Trust Fund.

7.2 VALUATION OF ACCOUNTS.

7.2.1 Daily Adjustments. Accounts will be adjusted as of each Valuation Date as follows:

(a) Contributions. Contributions made with respect to a Participant will be added to the balance of his/her Account as soon as administratively practicable after such contributions are paid into the Trust Fund. However, for purposes of applying the nondiscrimination tests under Code Section 401(a)(4), for purposes of determining the maximum allocations under Code Section 415, for purposes of calculating the deductions under Code Section 404 and for any other qualification provision of the Code, a contribution will be treated as having been made for the Plan Year designated by the Company, provided that the contribution is made to the Trust Fund by such deadline as may be prescribed for the applicable provision of the Code.

(b) Cash Dividends. The cash dividends paid on shares of Company Stock held by the Trust Fund as of the record date of such dividend (other than cash dividends paid on shares held in the Unallocated Reserve) will be allocated among the Accounts. The portion allocated to each Account will be added to balance of the Account as soon as administratively practicable after such dividends are paid into the Trust Fund.

The portion of such cash dividends allocated to each Participant's Account will be determined by multiplying the total cash dividends (other than cash dividends paid on shares held in the Unallocated Reserve) by a fraction, the numerator of which is the number of shares of Company Stock credited to the Participant's Account as of the date the dividends are paid into the Trust Fund (or as of such other date as may be established by the Company), and the denominator of which is the total number of shares of Company Stock held in all Participants' Accounts as of the date the dividends

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are paid into the Trust Fund (or as of such other date as may be established by the Company).

The cash dividends paid on shares of Company Stock held in the Unallocated Reserve as of the record date of such dividend will be credited to the Unallocated Reserve and will thereafter be applied to any payment due for the Plan Year on the Exempt Loan.

(c) Stock Dividends and Splits. The stock dividends paid on shares of Company Stock credited to the Participant's Account as of the record date of such dividend, and stock splits or reverse stock splits with respect to shares of Company Stock credited to the Participant's Account as of the record date of such split, will be added to the balance of the Account as soon as administratively practicable after the additional shares resulting from such stock dividend, stock split or reverse stock split are paid into the Trust Fund.

The stock dividends paid on shares of Company Stock held in the Unallocated Reserve as of the record date of such dividend, and stock splits or reverse stock splits with respect to shares of Company Stock held in the Unallocated Reserve as of the record date of such split, will be credited to the Unallocated Reserve.

(d) Distributions and Transfers. The distributions and transfers made from an Account will be subtracted from the balance of the Account as of the date the distribution or transfer is made from the Trust Fund.

Any items of investment income and gain not provided for under the above provisions and not applied to pay expenses of the Plan will be allocated among the Accounts in accordance with rules prescribed for this purpose by the Company. Any items of investment loss and any expenses not provided for under the above provisions will be allocated among the Accounts in accordance with rules prescribed for this purpose by the Company. The portion allocated to each Account will be added to or subtracted from the Account as of the date established by the Company.

7.2.2 Annual Adjustments for ESOP Contributions/Shares Released from Unallocated Reserve.

(a) Contributions Used for Loan Repayment. The shares of Company Stock released from the Unallocated Reserve for a Plan Year will be allocated among the Accounts of the allocation eligible Participants (as defined in Sec. 5.2.3) for the Plan Year. The shares allocated to each such Account will be added to the balance of the Account as of the last Valuation Date in the Plan Year. The number of shares of Company Stock allocated to the Account of each allocation eligible Participant will be determined by multiplying the number of shares of Company Stock released from the Unallocated Reserve by a fraction, the numerator of which is the Covered Compensation of the allocation eligible Participant for the Plan Year, and the denominator of which is the aggregate Covered Compensation of all allocation eligible Participants for the Plan Year.

(b) Contributions Not Used for Loan Repayment. Any ESOP Contribution for a Plan Year that is allocated to a Participant under Sec. 5.2.2 (and not applied to an Exempt Loan) will be added to the balance of the Participant's Account as of the last Valuation Date in the Plan Year.

7.2.3 Processing Transactions Involving Accounts. Accounts will be adjusted to reflect contributions, dividends, distributions and transfers, and other transactions as provided above. However, all information necessary to properly reflect a given transaction in the Accounts may not be immediately available, in which case the transaction will be reflected in the Accounts when such information is received and processed. Further, subject to express limits that may be imposed under the Code or ERISA, the Company reserves the right to delay the processing of any contribution, dividend, distribution or transfer, or other transaction for any legitimate business reason (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to timely receive asset values or prices, or to correct for its errors or omissions or the errors or omissions of any service provider). With respect to any contribution, dividend, distribution or transfer, or other

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transaction, the processing date of the transaction will be considered the applicable Valuation Date for that transaction and will be binding for all purposes of the Plan.

7.2.4 Valuation of Non-Traded Shares. If shares of Company Stock cease to be readily tradable on an established securities market, all valuations of such shares for purposes of the Plan will be performed by an independent appraiser as provided in Code Section 401(a)(28)(C).

7.3 VOTING RIGHTS ON COMPANY STOCK.

7.3.1 Voting of Allocated Shares. A Participant (or Beneficiary of a deceased Participant) may instruct the Trustee as to how to vote shares of Company Stock credited to his/her Account on any matter submitted for a vote to shareholders of the Company. The number of shares with respect to which a Participant (or Beneficiary) may provide voting instructions will equal the number of full and fractional shares credited to his/her Account as of the record date for determining the shareholders entitled to vote at the shareholder meeting. The Company will cause the proxy materials that are sent to shareholders to be sent to Participants (and Beneficiaries of deceased Participants) prior to the shareholders meeting at which the vote is to be cast. The Company or Trustee will establish a deadline by which instructions must be received from Participants (and Beneficiaries); the Trustee will tabulate the instructions received by that deadline, will determine the number of votes for and against each proposal, and will vote the allocated shares in accordance with the directions received.

7.3.2 Voting of Unallocated Shares/Shares for Which Directions Not Received. The Trustee will vote all shares of Company Stock held in the Unallocated Reserve (if any) and all shares of Company Stock credited to Accounts for which instructions from the Participants (or Beneficiaries) have not been received by the established deadline in the same proportion as the votes cast pursuant to Sec. 7.4.1.

7.3.3 Named Fiduciary. A Participant (or Beneficiary) will be a "named fiduciary" to the extent of the voting control granted under this Section.

ARTICLE VIII

INVESTMENT OF ACCOUNTS

8.1 INVESTMENT IN COMPANY STOCK. All Accounts will be invested exclusively in shares of Company Stock, except for such minor amounts (if any) as the Trustee determines are appropriate to hold in cash for purposes of honoring anticipated distribution and transfer requests from Participants and Beneficiaries. All shares of Company Stock held under the Plan will be held in the name of the Trustee or the nominee of the Trustee.

8.2 REPAYMENT OF EXEMPT LOAN.

8.2.1 Contribution Requirement. If an Exempt Loan is outstanding, an ESOP Contribution will be made for the Plan Year in an amount at least sufficient to make the payment due on the Exempt Loan to the extent that such payment is not made from (i) cash dividends and other investment earnings on the shares of Company Stock or other assets held in the Unallocated Reserve, (ii) the proceeds from any refinancing of the Exempt Loan, or (iii) the proceeds from any sale of shares of Company Stock or other assets held in the Unallocated Reserve.

8.2.2 Dividend Limitation. Dividends paid on shares of Company Stock allocated to Participants' Accounts will not be used to make payments on an Exempt Loan.

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ARTICLE IX

VESTING

9.1 VESTING AT NORMAL RETIREMENT AGE. A Participant will have a vested and non-forfeitable interest in the full balance of his/her Account upon reaching Normal Retirement Age while employed with the Company or an Affiliate (while it is an Affiliate).

9.2 VESTING IN EVENT OF DISABILITY OR DEATH. A Participant will have a vested and non-forfeitable interest in the full balance of his/her Account upon:

(a) The occurrence of a total and permanent disability (as evidenced by a determination of the Social Security Administration) prior to Termination of Employment; or

(b) Termination of Employment as a result of death.

9.3 VESTING BASED ON SERVICE. As of any date prior to an event specified in Sec. 9.1 or 9.2, the vested balance of a Participant's Account will equal the balance of that Account as of such date multiplied by the vested percentage determined under the following table:

   Years of                               Vested
Vesting Service                         Percentage
---------------                         ----------
Less than 3                                 0%
3 or more                                 100%

9.4 FORFEITURE OF NONVESTED BALANCE. The nonvested balance of a Participant's Account will become a Forfeiture immediately upon the Participant's Termination of Employment. The Participant will lose all claim to the nonvested balance of an Account upon Forfeiture, subject to possible restoration under Sec. 9.6.

9.5 FORFEITURE ACCOUNT. A Forfeiture Account will be maintained within the Plan. Upon the Forfeiture of the nonvested balance of a Participant's Account, the Forfeiture will be transferred to the Forfeiture Account. As of the last Valuation Date in each Plan Year, the balance of the Forfeiture Account will be used first to restore prior Forfeitures pursuant to Sec. 9.6 and any remaining balance of the Forfeiture Account will be applied under Sec. 5.2 as if it were an ESOP Contribution for the Plan Year.

9.6 REINSTATEMENT UPON RETURN TO SERVICE.

9.6.1   Return Before Recognized Break in Service. If a Participant resumes
        employment with the Company or an Affiliate (while it is an Affiliate)
        after a Forfeiture but before he/she has a recognized break in service,
        an amount will be restored to the Participant's Account equal to the
        value of such Account as of the date of the Forfeiture. A "recognized
        break in service" for this purpose means a period of five (5) or more
        consecutive Plan Years during each of which the individual has five
        hundred (500) or less Hours of Service.

9.6.2   Restoration of Account. The restoration will be made as of the last
        Valuation Date of the Plan Year in which the Participant resumes
        employment with the Company or an Affiliate. Only the actual Forfeiture
        amount (as a dollar value, not as a number of shares of Company Stock)
        will be restored. The Participant will not be credited with interest or
        with any investment income, gain or loss during the period between the
        Forfeiture date and the restoration date.

9.6.3   Employer Contribution. If the Forfeiture Account is not sufficient to
        make the restorations due as of the last Valuation Date of the Plan
        Year, the Participating Employers will made an additional contribution
        equal to the amount remaining to be restored. This contribution will be
        made without regard to the limitations of Code Section 415.

9.7     FORFEITURE IN EVENT OF MISSING PARTICIPANT OR BENEFICIARY. If a
        Participant or Beneficiary cannot be found after reasonable effort, the
        Participant's Account (or the portion thereof assigned to the
        Beneficiary) will be treated as a Forfeiture or will be applied in such
        other manner as may be

                                      -14-

        directed by the Company in accordance with any regulations or other
        guidance issued by the Internal Revenue Service or the Department of
        Labor (including payment to any account authorized by law). In the event
        of such a Forfeiture, if the individual is subsequently located, the
        Participant's Account (or the portion thereof assigned to the
        Beneficiary) will be restored either under Sec. 9.6 of the Plan (prior
        to its termination) or under another qualified defined contribution plan
        then maintained by the Company or an Affiliate. If no plan is then being
        maintained by the Company or an Affiliate, restoration will be made by
        means of a payment from the business assets of the Participating
        Employers or other method deemed appropriate by the Company.

ARTICLE X

DIVERSIFICATION DISTRIBUTIONS WHILE EMPLOYED

10.1    ELIGIBILITY FOR DIVERSIFICATION DISTRIBUTIONS. Diversification
        distributions are available to a Participant while employed with the
        Company or an Affiliate, starting on the January 1st after he/she:

        (a)     Attains age fifty-five (55), and

        (b)     Completes ten (10) or more years of participation in the Plan.

10.2    MAXIMUM PERCENTAGE LIMIT. The diversification distributions to a
        Participant will not exceed the following percentage of the shares of
        Company Stock that have been credited to his/her Account:

        (a)     First Five Years. During the first five (5) Plan Years that the
                Participant is eligible for diversification distributions, the
                maximum is twenty-five percent (25%) of the shares.

        (b)     Subsequent Years. During the sixth (6th) and subsequent Plan
                Years that the Participant is eligible for diversification
                distributions, the maximum is fifty percent (50%) of the shares.

10.3    MAXIMUM NUMBER OF SHARES. The maximum number of shares of Company Stock
        available for diversification distributions to the Participant during a
        given Plan Year will be determined as follows:

        (a)     Start with the number of shares credited to the Participant's
                Account as of the December 31st preceding the Plan Year.

        (b)     Add the number of shares (if any) the Participant previously has
                received in diversification distributions.

        (c)     Multiply that sum by the maximum percentage specified in Sec.
                10.2 for the Plan Year.

        (d)     Round that product down to the next lower whole number of
                shares.

        (e)     Subtract the number of shares (if any) that the Participant
                previously has received in diversification distributions.

        (f)     The result is the number of shares available for diversification
                distributions to the Participant during the Plan Year.

10.4    DIVERSIFICATION DISTRIBUTION PROCEDURES.

10.4.1  Application for Distribution. To receive a diversification distribution,
        the Participant must apply in such manner and in accordance with such
        rules as may be prescribed for this purpose by the Company.

10.4.2  Time of Distribution. The diversification distribution will be made as
        soon as administratively practicable after proper application is
        received from the Participant.

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10.4.3  Form of Distribution. The diversification distribution will be made in
        either one or a combination of the following forms at the election of
        the Participant:

        (a)     Single-Sum Distribution. The Participant may elect a single-sum
                distribution of any percentage or number of the shares of
                Company Stock that have been credited to his/her Account, up to
                the maximum specified in Sec. 10.2 and 10.3.

        (b)     Directed Rollover. The Participant may elect a direct rollover
                to an eligible retirement plan (as described in Sec. 13.2) of
                any percentage or number of the shares of Company Stock that
                have been credited to his/her Account, up to the maximum
                specified in Sec. 10.2 and 10.3 (but the rollover cannot be less
                than $200).

10.4.4  Medium of Distribution. The diversification distribution (including any
        direct rollover) will be made in whole shares of Company Stock.

10.4.5  Annual Limit. Only one diversification distribution is permitted during
        each Plan Year.

ARTICLE XI

DISTRIBUTION AFTER TERMINATION OF EMPLOYMENT

11.1    DISTRIBUTION AFTER TERMINATION OF EMPLOYMENT. A Participant will be
        eligible to receive a distribution of the vested balance of his/her
        Account following his/her Termination of Employment in accordance with
        the terms of this Article.

11.2    DISTRIBUTION PROCEDURES.

11.2.1  Application for Distribution. To receive the distribution, the
        Participant must apply in such manner and in accordance with such rules
        as may be prescribed for this purpose by the Company.

11.2.2  Time of Distribution.

        (a)     General Rule. The distribution will be made as soon as
                administratively practicable after proper application is
                received from the Participant.

        (b)     Normal Retirement Age. While a distribution generally will be
                made not later than sixty (60) days after the close of the Plan
                Year in which a Participant attains Normal Retirement Age (or in
                which his/her Termination of Employment occurs, if later), a
                failure to apply for the distribution will serve as a waiver of
                this requirement.

        (c)     Required Beginning Date. The deadline for distribution to the
                Participant, however, is his/her required beginning date. For
                this purpose, "required beginning date' means the April 1 of the
                calendar year after the later of (i) the calendar year in which
                the Participant attains age seventy and one-half (70-1/2), or
                (ii) the calendar year of Termination of Employment. However,
                clause (ii) will not apply to any Participant who is more than a
                five-percent (5%) owner (as defined in Code Section 416) with
                respect to the Plan Year in which he/she attains age seventy and
                one-half (70-1/2).

11.2.3  Form of Distribution. The distribution will be made in either one or a
        combination of the following forms at the election of the Participant:

        (a)     Single-Sum Distribution. The Participant may elect a single-sum
                distribution of the full vested balance of his/her Account.

        (b)     Direct Rollover. The Participant may elect a direct rollover to
                an eligible retirement plan (as described in Sec. 13.2) of all
                or any part (but not less than $200) of the full vested balance
                of his/her Account. If a direct rollover is elected for only
                part of the balance, the

                                      -16-

                remaining vested balance of the Account will be distributed to
                the Participant in a single-sum distribution.

11.2.4  Medium of Distribution. The distribution (including any direct rollover)
        will be made in whole shares of Company Stock (with any fractional share
        in cash).

11.2.5  Default upon Failure to Request Distribution. If the Participant fails
        to apply for a distribution in advance of his/her required beginning
        date under Sec. 11.2.2, a distribution will be made to the Participant
        immediately before his/her required beginning date in the form of a
        single-sum distribution in whole shares of Company Stock (with any
        fractional share in cash).

11.3    CASH-OUT OF SMALL ACCOUNTS.

11.3.1  Cash-Out Amount. Any contrary provision notwithstanding, if the vested
        balance of a Participant's Account does not exceed $1,000, a single-sum
        distribution of the full vested balance of the Account will be made to
        the Participant as soon as administratively practicable after his/her
        Termination of Employment.

11.3.2  Subsequent Changes. If the vested balance of a Participant's Account
        exceeds $1,000 as of the earliest payment date available to the
        Participant, but subsequently falls below such amount (for example,
        because of investment losses), the Company may then direct that a
        single-sum distribution of the full vested balance of the Account be
        made to the Participant.

11.3.3  Medium of Distribution. Any distribution under this Section (including
        any direct rollover) will be made in whole shares of Company Stock (with
        any fractional share in cash).

11.4    MINIMUM DISTRIBUTION RULES. Any contrary provision notwithstanding,
        distribution will be made as necessary to comply with the minimum
        distribution rules of Code Section 401(a)(9) (including the incidental
        death benefit rules of Code Section 401(a)(9)(G)).

ARTICLE XII

DISTRIBUTION AFTER DEATH

12.1    DISTRIBUTION AFTER DEATH. The Beneficiary of a Participant will be
        eligible to receive a distribution of that portion of the vested balance
        of the Participant's Account allocated to such Beneficiary following the
        Participant's death in accordance with the terms of this Article.

12.2    DISTRIBUTION PROCEDURES.

12.2.1  Application for Distribution. To receive the distribution, the
        Beneficiary must apply in such manner and in accordance with such rules
        as may be prescribed for this purpose by the Company.

12.2.2  Time of Distribution. The distribution will be made as soon as
        administratively practicable after (i) the Participant dies, (ii) the
        Beneficiary makes proper application for distribution, and (iii) the
        Company determines the entitlement of the Beneficiary. The deadline for
        distribution to the Beneficiary, however, is December 31st of the
        calendar year in which falls the fifth (5th) anniversary of the
        Participant's death.

12.2.3  Form of Distribution. The distribution will be made in the form of a
        single-sum distribution of the full vested balance of the Account that
        is payable to such Beneficiary. A Beneficiary who is the Participant's
        surviving Spouse may request a direct rollover to an eligible retirement
        plan (as described in Sec. 13.2) of all or any part (but not less than
        $200) of his/her benefit.

12.2.4  Medium of Distribution. The distribution (including any direct rollover)
        will be made in whole shares of Company Stock (with any fractional share
        paid in cash).

12.2.5  Default Upon Failure to Request Distribution. If the Beneficiary fails
        to apply for distribution in advance of the deadline specified in Sec.
        12.2.2, a distribution will be made to the Beneficiary

                                      -17-

        immediately before such deadline in the form of a single-sum
        distribution in whole shares of Company Stock (with any fractional share
        in cash).

12.3    BENEFICIARY DESIGNATION.

12.3.1  General Rule. A Participant may designate any person (natural or
        otherwise, including a trust or estate) as his/her Beneficiary to
        receive any balance remaining in his/her Account when he/she dies, and
        may change or revoke a Beneficiary designation previously made without
        the consent of any Beneficiary named therein.

12.3.2  Special Requirements for Married Participants. If a Participant has a
        Spouse at the time of death, such Surviving Spouse will be his/her
        Beneficiary unless:

        (a)     The Spouse has consented in writing to the designation of a
                different Beneficiary;

        (b)     The Spouse's consent acknowledges the effect of such
                designation; and

        (c)     The Spouse's consent is witnessed by a notary public or an
                authorized representative of the Plan.

        Consent of a Spouse will be deemed to have been obtained if it is
        established to the satisfaction of the Company that such consent cannot
        be obtained because the Spouse cannot be located, or because of such
        other circumstances as may be prescribed by the Secretary of Treasury. A
        consent by a Spouse will be effective only with respect to such Spouse,
        and cannot be revoked. A Beneficiary designation that has received
        spousal consent cannot be changed without spousal consent.

12.3.3  Form and Method of Designation. A Beneficiary designation must be made
        on such form and in accordance with such rules as may be prescribed for
        this purpose by the Company. A Beneficiary designation will be effective
        (and will revoke all prior designations) only if it is received by the
        Company and either:

        (a)     It is received by the Company prior to the date of death of the
                Participant; or

        (b)     If sent by mail, the post-mark of the mailing is prior to the
                date of death of the Participant.

        The Company may rely on the latest designation on file with it (or may
        direct that payment be made pursuant to the default provision if an
        effective designation is not on file) and will not be liable to any
        person making claim for such payment under a subsequently filed
        designation or for any other reason.

        If a Participant designates a Beneficiary by name that is accompanied by
        a description of a business, legal or familial relationship to the
        Participant (for example, "spouse", "business partner", "landlord"),
        such Beneficiary will be deemed to have predeceased the Participant if
        such relationship has been dissolved or no longer exists at the death of
        the Participant. If a Participant designates a Beneficiary by name that
        is accompanied by a description of a personal relationship to the
        Participant (for example, "friend"), the dissolution of that
        relationship will not affect the designation.

12.3.4  Default Designation. If a Beneficiary designation is not on file with
        the Company, or if no designated Beneficiary survives the Participant,
        the Beneficiary will be the person or persons surviving the Participant
        in the first of the following classes in which there is a survivor,

share and share alike:

(a) The Participant's Spouse.

(b) The Participant's children, except that if any of the Participant's children predecease the Participant but leave issue surviving the Participant, such issue will take by right of representation the share their parent would have taken if living.

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        (c)     The Participant's parents.

        (d)     The Participant's brothers and sisters, except that if any of
                the Participant's siblings predecease the Participant but leave
                issue surviving the Participant, such issue will take by right
                of representation the share their parent would have taken if
                living.

        (e)     The Participant's estate.

        The identity of the Beneficiary in each case will be determined by the
        Company.

12.3.5  Successor Beneficiary. If a Beneficiary survives the Participant but
        dies before receiving the full balance to which he/she is entitled, the
        remaining balance will be payable to the surviving contingent
        Beneficiary designated by the Participant or otherwise to the estate of
        the deceased Beneficiary.

12.4    MULTIPLE BENEFICIARIES. If more than one Beneficiary is entitled to
        benefits following the death of a Participant, the interest of each will
        be segregated for purposes of applying this Article.

12.5    CASH-OUT OF SMALL ACCOUNTS.

12.5.1  Cash-Out Amount. Any contrary provision notwithstanding, if the vested
        balance of the Account payable to a Beneficiary does not exceed
        one-thousand dollars ($1,000), a single-sum distribution of the full
        vested balance of the Account will be made to the Beneficiary as soon as
        administratively practicable after (i) the Participant dies and (ii) the
        entitlement of the Beneficiary has been determined by the Company.

12.5.2  Subsequent Changes. If the vested balance of the Account payable to a
        Beneficiary exceeds one-thousand dollars ($1,000) as of the earliest
        payment date available to the Beneficiary, but subsequently falls below
        such amount (for example, because of investment losses), the Company may
        then direct that a single-sum distribution of the full vested balance of
        the Account be made to the Beneficiary.

12.5.3  Medium of Distribution. Any distribution under this Section (including
        any direct rollover) will be made in whole shares of Company Stock (with
        any fractional share in cash).

12.6    MINIMUM DISTRIBUTION RULES. Any contrary provision notwithstanding,
        distribution after the death of the Participant will be made as
        necessary to comply with the minimum distribution rules of Code Section
        401(a)(9).

                                  ARTICLE XIII

                        MISCELLANEOUS BENEFIT PROVISIONS

13.1    VALUATION OF ACCOUNTS FOLLOWING TERMINATION OF EMPLOYMENT.

13.1.1  Continued Adjustment of Accounts. If a distribution of all or any
        portion of an Account is deferred or delayed for any reason, the Account
        will continue to be adjusted to reflect increases or decreases in the
        value of Company Stock, dividends on Company Stock, and other investment
        income, gains or losses of the Trust Fund in accordance with the terms
        of the Plan.

13.1.2  Disbursement Account. To facilitate cash distributions from the Plan,
        the Plan may participate in a disbursement account established by the
        Trustee or recordkeeper for the Plan. The person entitled to the
        distribution will not be entitled to any interest or other income earned
        on such disbursement account; rather, such interest or other income will
        be applied in accordance with the policies and procedures of the Trustee
        or recordkeeper for the Plan.

13.2    DIRECT ROLLOVER OPTION.

13.2.1  Eligible Individuals. An eligible rollover distribution of two hundred
        dollars ($200) or more made to a Participant, the Spouse of a deceased
        Participant, or an alternate payee under a qualified

                                      -19-

        domestic relations order who is the Spouse or former Spouse of a
        Participant may be made in the form of a direct rollover to an eligible
        retirement plan. The recipient of an eligible rollover distribution must
        provide the Company with the information necessary to accomplish the
        direct rollover in such manner and in accordance with such rules as may
        be prescribed for this purpose by the Company.

13.2.2  Eligible Rollover Distribution. An "eligible rollover distribution" for
        purpose is any distribution defined as such under Code Section 402(c)(4)
        (for example, an eligible rollover distribution does not include a
        hardship distribution, a distribution that is part of a series of
        installments payable over a period of ten (10) years or more, a cash
        dividend distribution under Code Section 404(k) or a distribution that
        is required under Code Section 401(a)(9)).

13.2.3  Eligible Retirement Plan. An "eligible retirement plan" for this purpose
        is any individual retirement plan described in Code Section 408(a), any
        individual retirement annuity described in Code Section 408(b) (other
        than an endowment contract), any qualified trust as described in Code
        Section 402(c)(8)(a), any annuity plan described in Code Section 403(a),
        any eligible deferred compensation plan described in Code Section 457(b)
        which is maintained by an eligible employer described in Code Section
        457(e)(1)(A), and any annuity contract described in Code Section 403(b).

13.3    BENEFIT STATEMENTS.

13.3.1  Issuance of Statements. The Company may cause benefit statements to be
        issued from time to time advising Participants and Beneficiaries of the
        balance and/or investment of their Accounts. However, the Company is not
        required to issue benefits statements except at the request of a
        Participant or Beneficiary to the extent so required by ERISA.

13.3.2  Errors on Statements. The Company may correct errors that appear on
        benefit statements at any time, and the issuance of a benefit statement
        (and any errors that may appear on a statement) will not in any way
        alter or affect the rights of a Participant or Beneficiary with respect
        to the Plan.

13.3.3  Participant's Duty to Review Statements. Each Participant or Beneficiary
        has a duty to promptly review each benefit statement and to notify the
        Company of any error that appears on such statement within thirty (30)
        days of the date such statement is provided or made available to the
        Participant or Beneficiary (for example, the date the statement is sent
        by mail, or the date the statement is provided or made available
        electronically). If a Participant or Beneficiary fails to review a
        benefit statement or fails to notify the Company of any error that
        appears on such statement within such period of time, he/she will not be
        able to bring any claim seeking relief or damages based on the error.

13.4    MISSING PARTICIPANTS OR BENEFICIARIES. A Participant or Beneficiary must
        maintain his/her most recent post office address on file with the
        Company. Any communication addressed to the Participant or Beneficiary
        at the post office address on file with the Company will be binding on
        the Participant or Beneficiary for all purposes of the Plan. If a
        Participant or Beneficiary fails to claim any amount payable under the
        Plan, or if any check or stock certificate is returned after being sent
        to the most recent post office address on file with the Company, or if a
        Participant or Beneficiary fails to cash any check drawn on the
        disbursement account established for the Plan, such amount will be
        disposed of as provided in Sec. 9.7.

13.5    DISTRIBUTION TO ALTERNATE PAYEE.

13.5.1  Immediate Distribution Option. An alternate payee under a qualified
        domestic relations order (each as defined in Code Section 414(p)) may
        elect to receive a single-sum distribution of the amount assigned to
        such individual under the order as soon as administratively practicable
        after the Company has determined that the order is a qualified domestic
        relations order (and all time for appeal of such decision has expired),
        or as of such later date as may be specified in the order, without
        regard to whether such distribution is made prior to the earliest
        retirement age (as defined in Code Section 414(p)).

13.5.2  Small Amounts. If the amount assigned to the alternate payee under a
        qualified domestic relations order does not exceed one thousand dollars
        ($1,000), such amount will be distributed to

                                      -20-

        the alternate payee in a single-sum distribution as soon as
        administratively practicable after the Company has determined that the
        order is a qualified domestic relations order (and all time for appeal
        of such decision has expired), and a delayed distribution option will
        not be available to the alternate payee.

13.5.3  Medium of Distribution. Any distribution to an alternate payee under a
        qualified domestic relations order (including any direct rollover) will
        be made in whole shares of Company Stock (with any fractional share in
        cash).

13.6    PUT OPTION; OTHER RESTRICTIONS ON COMPANY STOCK.

13.6.1  Put Option. If shares of Company Stock are either not readily tradable
        on an established securities market or are subject to a trading
        limitation when such shares are distributed, such shares will be subject
        to a "put option" as follows:

        (a)     The put option will be to the Company; provided that, the
                Trustee may at its discretion cause the Plan to voluntarily
                assume the rights and obligations of the Company with respect to
                the put option.

        (b)     The put option may be exercised only by the distributee (whether
                the Participant, Beneficiary or alternate payee), any person to
                whom the shares have passed by gift from the distributee or any
                person (including an estate or distributee of an estate) to whom
                the shares have passed on the death of the distributee.

        (c)     The put option may be exercised only during the fifteen (15)
                month period beginning on the date the shares are distributed
                from the Plan; provided that, the exercise period will be
                extended by the number of days during such period that the
                holder is unable to exercise the put option because the Company
                is prohibited from honoring the put option by federal or state
                law.

        (d)     The put option may be exercised by written notice of exercise to
                the Company made on such form and in accordance with such rules
                as may be prescribed for this purpose by the Company.

        (e)     The Company will honor a put option by paying to the holder the
                fair market value either in a single lump sum or substantially
                equal installments (bearing a reasonable rate of interest and
                providing adequate security to the holder) over a period
                beginning within thirty (30) days following the date the put
                option is exercised and ending not more than five (5) years
                after the date the put option is exercised.

        A "trading limitation" means a restriction under any federal or state
        securities law or under any agreement affecting the shares that would
        make the shares not as freely tradable as shares not subject to such
        restriction.

13.6.2  No Other Restrictions. No other options, buy-sell arrangements, puts,
        call, rights of first refusal or other restrictions on alienability will
        attach to any shares of Company Stock acquired with the proceeds of an
        Exempt Loan and held in the Trust Fund or distributed from the Plan,
        whether or not this Plan continues to be an employee stock ownership
        plan.

13.7    NO OTHER BENEFITS. No benefits other than those specifically provided
        for in the Plan document will be provided under the Plan.

13.8    SOURCE OF BENEFITS. All benefits to which any person becomes entitled
        under the Plan will be provided only out of the Trust Fund and only to
        the extent that the Trust Fund is adequate therefor. The Participants
        and Beneficiaries assume all risk connected with any decrease in the
        market value of shares of Company Stock or any other assets held under
        the Plan, and the Company and its Affiliates do not in any way guarantee
        the Trust Fund against any loss or depreciation, or the payment of any
        amount, that may be or become due to any person from the Trust Fund.

                                      -21-

13.9    INCOMPETENT PAYEE. If a person entitled to distribution hereunder is in
        the opinion of the Company unable to care for his/her affairs because of
        a mental or physical condition, any distribution due such person may be
        made to such person's guardian, conservator, or other legal personal
        representative upon furnishing the Company with evidence satisfactory to
        the Company of such status. Prior to the furnishing of such evidence,
        the Company may cause the distribution due the person to be made, for
        such person's use and benefit, to any person or institution then in the
        opinion of the Company caring for or maintaining the person. The Company
        will have no liability with respect to any distribution so made and will
        have no duty to make inquiry as to the competence of any person entitled
        to receive distribution hereunder.

13.10   NO ASSIGNMENT OR ALIENATION OF BENEFITS. The interests of any person who
        is entitled to benefits under the Plan may not in any manner whatsoever
        be assigned or alienated, whether voluntarily or involuntarily, directly
        or indirectly, except as expressly permitted under Code Section
        401(a)(13).

13.11   PAYMENT OF TAXES. The Trustee may pay any estate, inheritance, income,
        or other tax, charge, or assessment attributable to any benefit payable
        hereunder which in the Trustee's opinion it will be or may be required
        to pay out of such benefit. The Trustee may require, before making any
        payment, such release or other document from any taxing authority and
        such indemnity from the intended payee as the Trustee will deem
        necessary for its protection.

13.12   CONDITIONS PRECEDENT. No person will be entitled to a benefit until
        his/her right to such benefit has been finally determined by the Company
        nor until he/she has submitted to the Company relevant data reasonably
        requested by the Company, including, but not limited to, proof of birth
        or death.

13.13   DELAY OF DISTRIBUTION IN EVENT OF STOCK DIVIDEND OR SPLIT. The Company
        may direct that, no distribution will be made between the record date
        and the ex-date of any stock dividend, stock split or reverse stock
        split if the ex-date is after the record date.

13.14   EFFECT OF REEMPLOYMENT. If a Participant is reemployed by the Company or
        an Affiliate (while it is an Affiliate) before he/she has received full
        distribution of the vested balance of his/her Account, entitlement to a
        distribution will cease upon such reemployment, and will recommence in
        accordance with the terms of the Plan upon subsequent Termination of
        Employment.

ARTICLE XIV

TRUST FUND

14.1    COMPOSITION. The assets of the Plan will be held in trust by one or more
        Trustees appointed by the Company under one or more trust agreements.
        The Company may cause the assets held under any trust agreement to be
        divided into any number of parts for investment purposes or any other
        purpose deemed necessary or advisable for the proper administration of
        the Plan.

14.2    NO DIVERSION. The Trust Fund will be maintained for the exclusive
        purpose of providing benefits to Participants and their Beneficiaries
        and defraying reasonable expenses of administering the Plan. No part of
        the corpus or income of the Trust Fund may be used for, or diverted to,
        purposes other than for the exclusive benefit of Participants or their
        Beneficiaries. Notwithstanding the foregoing:

        (a)     Mistake of Fact. If all or any portion of a contribution is made
                as a result of a mistake of fact, the Trustee will, upon written
                request of the Company, return such portion of the contribution
                to the Company within one year after its payment to the Trust
                Fund. Earnings attributable to such contribution (or portion
                thereof) will not be returned but will remain in the Trust Fund,
                and the amount returned will be reduced by any losses
                attributable to such contribution (or portion thereof).

        (b)     Disallowance of Deduction. Each contribution is conditioned upon
                the deductibility of the contribution under Code Section 404. To
                the extent the deduction is disallowed, the Trustee will return
                such contribution to the Company within one year after the
                disallowance of the deduction; however, earnings attributable to
                such contribution (or

                                      -22-

                disallowed portion thereof) will not be returned but will remain
                in the Trust Fund, and the amount returned will be reduced by
                any losses attributable to such contribution (or disallowed
                portion thereof).

        In the case of any such return of contribution, the Company will cause
        such adjustments to be made to the Accounts of Participants as it
        considers fair and equitable under the circumstances resulting in the
        return of such contribution.

14.3    BORROWING TO PURCHASE COMPANY STOCK. The Plan may engage in an Exempt
        Loan that satisfies the following requirements:

14.3.1  Lender. The Exempt Loan may be made by the Company or any lender
        acceptable to the Company, and may be made or guaranteed by a party in
        interest (as defined in ERISA Section 3(14)) or a disqualified person
        (as defined in Code Section 4975).

14.3.2  Use of Loan Proceeds. The Exempt Loan must be used within a reasonable
        time after receipt to acquire shares of Company Stock for the
        Unallocated Reserve, or to repay a prior Exempt Loan, or for any
        combination of these purposes.

14.3.3  No Recourse Against Trust Fund. The Exempt Loan must be without recourse
        against the Trust Fund, except that:

        (a)     The Company Stock acquired with the proceeds of the Exempt Loan
                may be pledged or otherwise used to secure repayment of the
                Exempt Loan.

        (b)     The Company Stock acquired with the proceeds of a prior Exempt
                Loan which is repaid with the proceeds of the Exempt Loan may be
                pledged or otherwise used to secure repayment of the Exempt
                Loan, and

        (c)     Any cash contributions to the Plan that are made for the purpose
                of satisfying the obligations under the Exempt Loan (and
                earnings thereon) may be pledged or otherwise used to secure
                repayment of the Exempt Loan.

        (d)     The earnings attributable to shares of Company Stock acquired
                with the proceeds of an Exempt Loan may be used to repay that
                Exempt Loan or any renewal or extension of it.

        (e)     The earnings attributable to unallocated shares of Company Stock
                that were acquired with the proceeds of an Exempt Loan may be
                pledged or otherwise used as security for another Exempt Loan.

14.3.4  Term of Loan. The Exempt Loan must provide for principal and interest to
        be paid over a specific term.

14.3.5  Release of Shares from Unallocated Reserve. Payments on an Exempt Loan
        will result in release of shares from the Unallocated Reserve, with the
        number of shares released each Plan Year being determined in accordance
        with one of the following methods as directed by the Company:

        (a)     Principal and Interest Method. The number of shares released
                from the Unallocated Reserve will equal the number of shares
                held in the Unallocated Reserve immediately before the release
                multiplied by a fraction, the numerator of which is equal to the
                principal and interest payments made on the Exempt Loan for the
                Plan Year and the denominator of which is equal to the total
                principal and interest paid on the Exempt Loan for the current
                Plan Year and scheduled to be paid for all subsequent Plan
                Years. The number of future years for which principal and
                interest are payable under the Exempt Loan must be definitely
                ascertainable and must be determined without taking into Account
                any possible extensions or renewal periods. If the interest rate
                under the loan is variable, the amount of future interest
                payable will be calculated by using the interest rate in effect
                on the last day of the current Plan Year.

-23-

        (b)     Principal Only Method. The number of shares of Company Stock
                released from the Unallocated Reserve will be equal to the
                number of shares held in the Unallocated Reserve immediately
                before the release multiplied by a fraction, the numerator of
                which is equal to the principal payments made on the Exempt Loan
                for the Plan Year and the denominator of which is equal to the
                total principal outstanding on the Exempt Loan. This method may
                be used only if:

                (1)     The Exempt Loan provides for principal and interest
                        payments at a cumulative rate that is not less rapid at
                        any time than level annual payments of such amounts for
                        ten (10) years.

                (2)     If the Exempt Loan constitutes a renewal, extension or
                        refinancing of a prior Exempt Loan, the sum of the
                        expired duration of the prior Exempt Loan, the renewal
                        period, the extension period, and the duration of the
                        new Exempt Loan does not exceed ten (10) years.

                (3)     For purposes of this subsection, the amount of interest
                        included in any payment is disregarded only to the
                        extent that it would be determined to be interest under
                        standard loan amortization tables.

14.3.6  Interest Rate. The Exempt Loan must bear interest at a fixed or variable
        rate that is not in excess of a reasonable rate of interest considering
        all relevant factors (including, but not limited to, the amount and
        duration of the loan, the security given, the guarantees involved, the
        credit standing of the Plan, the Company, and the guarantors, and the
        generally prevailing rates of interest).

14.3.7  Default. The Exempt Loan must provide that, in the event of default, the
        fair market value of Company Stock and other assets which can be
        transferred in satisfaction of the loan must not exceed the amount of
        the loan. If the lender is a party in interest or disqualified person,
        the loan must provide for a transfer of Plan assets upon default only
        upon and to the extent of the failure of the Plan to satisfy the payment
        schedule of the Exempt Loan.

14.4    FUNDING POLICY. The Company will adopt a procedure, and revise it from
        time to time as it considers advisable, for establishing and carrying
        out a funding policy and method consistent with the objectives of the
        Plan and the requirements of ERISA.

14.5    SHARE REGISTRATION. Interests in the Plan, and any shares of Company
        Stock contributed by or purchased from the Company will be registered in
        accordance with requirements prescribed by the Securities and Exchange
        Commission. The number of shares so registered will be appropriately
        adjusted to reflect any stock dividends, stock splits, or other similar
        changes.

14.6    PURCHASE/SALE OF COMPANY STOCK.

14.6.1  Purchases of Company Stock. If it is necessary to purchase Company Stock
        for the Trust Fund, such purchase may be on the open market or from the
        Company. If shares are purchased from the Company, the purchase will be
        made at the closing price of a share of Company Stock on the Valuation
        Date immediately preceding the transaction (as reported in a financial
        newspaper or by any electronic stock reporting service deemed accurate
        by the Company and Trustee). No commission will be paid on any purchase
        from the Company.

14.6.2  Sales of Company Stock. If it is necessary to convert shares of Company
        Stock held in the Trust Fund to cash to provide for a distribution,
        transfer, or for any other reason required under the Plan, conversion
        may be made by exchanging such shares for cash (if any) then held in the
        Trust Fund and credited to Accounts, or by selling such shares on the
        open market or to the Company. If shares are exchanged for cash then
        held in the Trust Fund or sold to the Company, the exchange or sale will
        be made at the closing price of a share of Company Stock for the
        Valuation Date immediately preceding the transaction (as reported in any
        financial newspaper or by any electronic stock reporting service deemed
        accurate by the Company and Trustee). No commission will be paid on any
        sale to the Company.

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                                   ARTICLE XV

                                 ADMINISTRATION

15.1    ADMINISTRATION.

15.1.1  Administrator. The Company is the "administrator" of the Plan, with
        authority to control and manage the operation and administration of the
        Plan and make all decisions and determinations incident thereto. Action
        on behalf of the Company as administrator may be taken by any of the
        following:

        (a)     Its Board of Directors (or a committee thereof).

        (b)     Its Chief Executive Officer.

        (c)     Any individual, committee, or entity to whom responsibility for
                the operation and administration of the Plan is allocated to by
                action of one of the above.

15.1.2  Third-Party Service Providers. The Company may from time to time
        contract with or appoint a recordkeeper or other third-party service
        provider for the Plan. Any such recordkeeper or other third-party
        service provider will serve in a nondiscretionary capacity and will act
        in accordance with directions given and/or procedures established by the
        Company, unless such recordkeeper or other third-party service provider
        is expressly designated as a "named fiduciary" of the Plan and makes a
        written acceptance of such designation.

15.2    CERTAIN FIDUCIARY PROVISIONS.

15.2.1  Named Fiduciaries. The Company is a "named fiduciary" of the Plan with
        authority to appoint additional named fiduciaries and to allocate
        responsibilities among them, and the power to appoint one or more
        investment managers (as defined in ERISA Section 3(38)) to manage any
        assets of the Plan (including the power to acquire and dispose of such
        assets). If so permitted by the Company in the appointment of a named
        fiduciary, such named fiduciary may designate another person to carry
        out any or all of the fiduciary responsibilities of the named fiduciary;
        except that, a named fiduciary may not designate another person to carry
        out any responsibilities relating to the management or control of Plan
        assets other than in exercise of a power granted under the trust
        agreement to appoint an investment manager.

15.2.2  Corporate Versus Personal Liability. The Company as a legal entity can
        only act through others. The Company's intent is that, while the Company
        will at times be a fiduciary (as that term is used in ERISA) with
        respect to the Plan, the individual directors, officers and employees of
        the Company through which the Company acts will not individually be
        considered to be fiduciaries. Accordingly, it is intended that while the
        Company with have corporate responsibility and liability for its actions
        or omissions with respect to the Plan, the individual directors,
        officers and employees through which the Company acts will not have
        individual liability for their actions or omissions with respect to the
        Plan.

15.3    PAYMENT OF EXPENSES. The compensation and expense reimbursements payable
        to any fiduciary, or to any recordkeeper or other third-party service
        provider, any other fees and expenses incurred in the operation or
        administration of the Plan may be paid out of the Trust Fund if not
        prohibited by ERISA. Such other fees and expenses include, but are not
        limited to, fees and expenses for investment education or advice
        services, distribution costs (for example, stock certificate issuance
        fees and check-writing fees), premiums on bonds required under ERISA and
        direct costs incurred by the Company or any Affiliate to the extent that
        the payment of such amounts out of the Trust Fund is not prohibited by
        ERISA. Distribution costs (for example, the actual stock certificate
        issuance fee and actual check-writing fee) of any elective distribution
        and similar fees may be charged to the Account of the Participant (or
        Beneficiary of a deceased Participant) if directed by the Company and
        not prohibited under ERISA.

15.4    EVIDENCE. Evidence required of anyone under the Plan may be by
        certificate, affidavit, document, or other instrument which the person
        acting in reliance thereon considers to be pertinent and reliable and to
        be signed, made, or presented by the proper party.

                                      -25-

15.5    CORRECTION OF ERRORS AND DUTY TO REVIEW INFORMATION.

15.5.1  Correction of Errors. Errors may occur in the operation and
        administration of the Plan. The Company reserves the right to cause such
        equitable adjustments to be made to correct for such errors as it
        considers appropriate (including adjustments to Participant or
        Beneficiary Accounts), which will be final and binding on the
        Participant or Beneficiary.

15.5.2  Participant's Duty to Review Information. Each Participant and
        Beneficiary has the duty to promptly review any information that is
        provided or made available to the Participant or Beneficiary and that
        relates in any way to the operation and administration of the Plan or
        his/her elections under the Plan (for example, to review benefit
        statements, to review summary plan descriptions, etc.) and to notify the
        Company of any error made in the operation or administration of the Plan
        that affects the Participant or Beneficiary within thirty (30) days of
        the date such information is provided or made available to the
        Participant or Beneficiary (for example, the date the information is
        sent by mail or the date the information is provided or made available
        electronically). If the Participant or Beneficiary fails to review any
        information or fails to notify the Company of any error within such
        period of time, he/she will not be able to bring any claim seeking
        relief or damages based on the error.

        If the Company is notified of an alleged error within the thirty (30)
        day time period, the Company will investigate and either correct the
        error or notify the Participant or Beneficiary that it believes that no
        error occurred. If the Participant or Beneficiary is not satisfied with
        the correction (or the decision that no correction is necessary), he/she
        will have sixty (60) days from the date of notification of the
        correction (or notification of the decision that no correction is
        necessary), to file a formal claim under the claims procedures
        established for the Plan.

15.6    CLAIMS AND LIMITATIONS ON ACTIONS.

15.6.1  Claims Procedures. The Company will establish a claims procedure for the
        Plan as a separate written document (which may be a section in the
        summary plan description) that will be deemed to form a part of the Plan
        and is hereby incorporated by reference into the Plan.

15.6.2  Limitation on Actions After Exhaustion of Claims Process. A claimant
        must follow the claims procedure (and comply with all applicable
        deadlines established as part thereof) as a condition to the receipt of
        any benefit under the Plan, and as a condition to the availability of
        any other relief under or with respect to the Plan. The failure of a
        claimant to follow the claims procedure (including the failure to comply
        with the deadlines established as part thereof) will extinguish his/her
        right to file a subsequent claim or to file a lawsuit with respect to
        the claim. If a claimant follows the claims procedure, but his/her final
        appeal is denied, he/she will have six months to file a lawsuit with
        respect to that claim, and failure to meet the six-month deadline will
        extinguish his/her right to file a lawsuit with respect to that claim.

15.7    WAIVER OF NOTICE. Any notice required hereunder may be waived by the
        person entitled thereto.

15.8    AGENT FOR LEGAL PROCESS. The Company will be the agent for service of
        legal process with respect to any matter concerning the Plan (unless it
        designates some other entity or individual as such agent).

15.9    INDEMNIFICATION. The Company and its Affiliates jointly and severally
        agree to indemnify and hold harmless, to the extent permitted by law,
        each director, officer, and employee against any and all liabilities,
        losses, costs, or expenses (including legal fees) of whatsoever kind and
        nature that may be imposed on, incurred by, or asserted against such
        person at any time by reason of such person's services in the
        administration of the Plan, but only if such person did not act
        dishonestly, or in bad faith, or in willful violation of the law or
        regulations under which such liability, loss, cost, or expense arises.

15.10   EXERCISE OF AUTHORITY. The Company and any person who has authority with
        respect to the management, administration or investment of the Plan may
        exercise that authority in its/his/her full discretion, subject only to
        the duties imposed under ERISA. This discretionary authority includes,
        but is not limited to, the authority to make any and all factual
        determinations and

                                      -26-

        interpret all terms and provisions of this document (or any other
        document established for use in the administration of the Plan) relevant
        to the issue under consideration. The exercise of authority will be
        binding upon all persons. It is intended that the exercise of authority
        be given deference in all courts of law to the greatest extent allowed
        under law, and that it not be overturned or set aside by any court of
        law unless found to be arbitrary and capricious.

15.11   TELEPHONIC OR ELECTRONIC NOTICES AND TRANSACTIONS. Any notice that is
        required to be given under the Plan to a Participant or Beneficiary, and
        any action that can be taken under the Plan by a Participant or
        Beneficiary (including enrollments, distributions, consents, etc.), may
        be by means of voice response or other electronic system to the extent
        so authorized by the Company and permitted under the Code and ERISA. Any
        notice or other communication sent by a Participant or Beneficiary to
        the Company, or to a recordkeeper or other service-provider acting on
        behalf of the Company with respect to the Plan, via e-mail will be
        considered adequate only if it is sent to a specific e-mail address
        provided for purposes of such notice or other communication, it is
        confirmed to have been received and it complies with such other
        procedural requirements as may be established for this purpose by the
        Company.

                                   ARTICLE XVI

                         AMENDMENT, TERMINATION, MERGER

16.1    AMENDMENT.

16.1.1  Amendment. The Company expressly reserves the right to amend the Plan in
        whole or in part at any time and from time to time and for any reason.
        An amendment may be adopted:

        (a)     By resolution of the Board of Directors (or a committee
                thereof).

        (b)     By signed writing of the Chief Executive Officer (but only if
                such amendment does not materially increase the cost of the Plan
                to Participating Employers).

        (c)     By signed writing of any person to whom amendment authority has
                been delegated by action of one of the above.

        No action by any individual, committee or entity with amendment
        authority will constitute an amendment to the Plan unless it is
        expressly designated as an amendment to the Plan.

16.1.2  Effect on Prior Operation of Plan. An amendment will not affect the
        operation of the Plan or the rights of any Participant retroactive to a
        date prior to the effective date of the amendment. The Account of a
        Participant (and all payment options and other rights with respect
        thereto) will be determined and paid in accordance with the terms of the
        Plan in effect as of his/her Termination of Employment, without regard
        to any subsequent amendment to the Plan (including an amendment with an
        effective date retroactive to a date prior to Termination of Employment)
        unless such amendment is required by law to be applied to the
        Participant or the amendment expressly provides that it will apply to
        Participants who have already had a Termination of Employment. The
        Company reserves the right to adopt an amendment with a retroactive
        effective date to the extent that retroactive application of the
        amendment is required by law or for any other reason deemed appropriate
        by the Company.

16.1.3  Effect on Vesting. An amendment will not reduce the vested percentage of
        a Participant determined as of the later of the effective date or
        adoption date of the amendment. Further, if the Company amends the
        vesting schedule under the Plan, with respect to any Participant who has
        three (3) or more years of vesting service (determined using the elapsed
        time methodology set forth in ERISA Reg. Section 2530.200b-9), the
        Company either will permit such Participant to elect to have his/her
        vested percentage computed without regard to such amendment or will
        amend the Plan to provide that the vested interest of such Participant
        will be the greater of his/her vested interest with regard to such
        amendment or his/her vested interest without regard to such amendment.

                                      -27-

        The election period for which the Participant may elect to have his or
        her vested percentage computed without regard to such amendment shall
        begin no later than the adoption date of the amendment and end no
        earlier than sixty (60) days after the latest of the following dates:

        (a)     The adoption date of the amendment,

        (b)     The effective date of the amendment, or

        (c)     The day of the Participant is issued written notice of the
                amendment.

16.1.4  Effect on Protected Benefits. An amendment will not reduce any Account
        balance or eliminate any optional form of benefit to the extent to
        prohibited under Code Section 411(d)(6).

16.2    PERMANENT DISCONTINUANCE OF CONTRIBUTIONS. The Company may completely
        discontinue contributions under the Plan. No Employee will become a
        Participant after such discontinuance, and each Participant will be
        vested in the full balance of his/her Account. Subject to the foregoing,
        all of the provisions of the Plan will continue in effect, and upon
        entitlement thereto distributions will be made in accordance with the
        terms of the Plan.

16.3    TERMINATION. The Company may terminate the Plan at any time and for any
        reason by action of its Board of Directors. After the Plan is terminated
        no further contributions will be made. No Employee will become a
        Participant after such termination, and each Participant will be vested
        in the full balance of his/her Account. Distributions will be made to
        Participants and Beneficiaries promptly after the termination of the
        Plan, but not before the earliest date permitted under the Code and
        applicable regulations, and the Plan and any related trust agreement
        will continue in force for the purpose of making such distributions.

16.4    PARTIAL TERMINATION. If the Company determines that there has been a
        partial termination of the Plan, any Participant affected by such
        partial termination will become vested in the full balance of his/her
        Account.

16.5    MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS. If the Plan is merged
        or consolidated with any other plan, or if assets or liabilities of the
        Plan are transferred to any other plan, provision will be made so that
        each Participant and Beneficiary would (if such other plan then
        terminated) receive a benefit immediately after the merger,
        consolidation, or transfer that is equal to or greater than the benefit
        he/she would have been entitled to receive immediately before the
        merger, consolidation, or transfer (if the Plan had then terminated).

16.6    DEFERRAL OF DISTRIBUTIONS. In the case of a complete discontinuance of
        contributions to the Plan or of a complete or partial termination of the
        Plan, the Company or the Trustee may defer any distribution of benefits
        to Participants and Beneficiaries with respect to which such
        discontinuance or termination applies (except for distributions which
        are required to be made under Code Section 401(a)(9)) until appropriate
        adjustment of Accounts to reflect taxes, costs, and expenses, if any,
        incident to such discontinuance or termination.

ARTICLE XVII

MISCELLANEOUS PROVISIONS

17.1    SPECIAL TOP-HEAVY RULES. The following provisions apply in any Plan Year
        in which the Plan is top-heavy.

17.1.1  Minimum Contribution. If the Plan is Top-Heavy for a Plan Year, a
        minimum contribution will be made for such Plan Year on behalf of each
        Participant who is not a Key Employee and who is employed with the
        Company or an Affiliate on the last day of such Plan Year. The minimum
        contribution will equal that percentage of the Participant's

Compensation for the Plan Year which is the smaller of:

(a) Three percent (3%).

-28-

        (b)     The percentage which is the largest percentage of Compensation
                allocated to any Key Employee from employer contributions for
                such Plan Year.

        However, any required minimum contribution will be made under the
        Company's profit sharing plan before any minimum contribution is made
        under this Plan. Also, the minimum contribution due under this Plan for
        each Top-Heavy Eligible Participant will be reduced by the amount of any
        minimum contribution made for him/her under the Company's profit sharing
        plan.

17.1.2  Definitions. The following terms have the following meanings in this
        Section:

        (a)     "Compensation" means compensation as defined in Sec. 6.1.2, but
                disregarding any amounts in excess of the limit in effect under
                Code Section 401(a)(17).

        (b)     "Determination Date" means the last day of the preceding Plan
                Year.

        (c)     "Determination Period" means the Plan Year in which the
                applicable Determination Date occurs and the four preceding Plan
                Years.

        (d)     "Key Employee" means any Employee or former Employee of the
                Company or an Affiliate who is defined as such under Code
                Section 416(i).

        (e)     "Required Aggregation Group" means each qualified plan of the
                Company or an Affiliate in which at least one Key Employee
                participates in the Plan Year that contains the Determination
                Date or any of the four preceding Plan Years, and any other
                qualified plan of the Company or an Affiliate that enables such
                a Plan to meet the requirements of Code Sections 401(a)(4) and
                410.

        (f)     "Permissive Aggregation Group" means the Required Aggregation
                Group plus any other qualified plan of the Company or an
                Affiliate which, when consolidated as a group with the Required
                Aggregation Group, would continue to satisfy the requirements of
                Code Sections 401(a)(4) and 410.

        (g)     "Present Value" for purposes of determining whether a defined
                benefit plan is Top-Heavy, will be calculated using the
                actuarial assumptions specified in the defined benefit plan for
                this purpose.

        (h)     "Top-Heavy" means the condition of the Plan that exists (or
                would exist) for any Plan Year if:

                (1)     The Plan is not part of a Required Aggregation Group and
                        the top-heavy ratio for the Plan exceeds 60%; or

                (2)     The Plan is a part of a Required Aggregation Group and
                        the top-heavy ratio for the Required Aggregation Group
                        exceeds 60%

                Notwithstanding the above, the Plan is not Top-Heavy if the Plan
                is a part of a Permissive Aggregation Group and the top-heavy
                ratio for the Permissive Aggregation Group does not exceed 60%.

                The "top-heavy ratio" for this purpose means a fraction, the
                numerator of which is the sum of account balances as of the
                Determination Date of all Key Employees under all defined
                contribution plans maintained by the Company or an Affiliate
                (including any part of any account balance distributed in the
                five-year period ending on the Determination Date), and the
                Present Value of accrued benefits as of the Determination Date
                of all Key Employees under all defined benefit plans maintained
                by the Company or an Affiliate, and the denominator of which is
                the sum of all account balances as of the Determination Date of
                all Employees under all such defined contribution plans
                (including any part of any account balance distributed in the
                five-year period ending on the Determination Date), and the
                Present Value of accrued benefits as of the Determination Date
                of all Employees under all such defined benefit plans, all
                determined in accordance with Code

                                      -29-

                Section 416 and the regulations thereunder. The account balances
                under a defined contribution plan and the accrued benefits under
                a defined benefit plan in both the numerator and denominator of
                the top-heavy ratio will be increased for any distribution made
                during the one-year period (or, in the case of a distribution
                for any reason other than separation from service, death or
                disability, the five-year period) ending on the Determination
                Date.

                For purposes of calculating the top-heavy ratio, the value of
                the account balances and the accrued benefits will be determined
                as of the most recent Valuation Date that falls within the
                12-month period ending on the Determination Date. If an
                individual has not performed services for the Company or an
                Affiliate at any time during the one-year period ending on the
                Determination Date, any account balance or accrued benefit of
                such individual will be disregarded.

        (i)     "Valuation Date" is the last day of each Plan Year and is the
                date as of which account balances or accrued benefits are valued
                for purposes of calculating the top-heavy ratio.

17.1.3  Exception For Collective Bargaining Unit. The minimum contribution
        requirement described above will not apply to any Employee covered by
        the provisions of a collective bargaining agreement.

17.1.4  Defined Benefit Plan Accrued Benefit. For purposes of determining if a
        defined benefit plan included in a Required Aggregation Group of which
        this Plan is a part is a Top-Heavy Plan, the accrued benefit to any
        employee (other than a Key Employee) shall be determined under the
        method which is used for accrual purposes under all defined benefit
        plans maintained by the employer, or, if there is no such method, as if
        such benefit accrued not more rapidly than the lowest accrual rate
        permitted under Code Section 411(b)(1)(C).

17.2    QUALIFIED MILITARY SERVICE. The Plan will comply with the requirements
        of Code Section 414(u) with respect to each Participant who is absent
        from service because of "qualified military service" (as defined in Code
        Section 414(u)(5)) provided that he/she returns to employment within
        such period after the end of the qualified military service as is
        prescribed under Code Section 414(u) (or other federal law cited
        therein).

17.3    INSURANCE COMPANY NOT RESPONSIBLE FOR VALIDITY OF PLAN. Any insurance
        company that issues a contract under the Plan will not have any
        responsibility for the validity of the Plan. An insurance company to
        which an application may be submitted hereunder may accept such
        application and will have no duty to make any investigation or inquiry
        regarding the authority of the applicant to make such application or any
        amendment thereto or to inquire as to whether a person on whose life any
        contract is to be issued is entitled to such contract under the Plan.

17.4    NO GUARANTEE OF EMPLOYMENT. The Plan is not an employment agreement, and
        participation herein does not constitute a guarantee of employment with
        the Company or any Affiliate.

IN WITNESS WHEREOF, the Company has caused this Plan document to be executed on May 11, 2005.

CAPELLA EDUCATION COMPANY

By /s/Gregory W. Thom
   ------------------------
Its  Vice President, General
     Counsel, and Secretary

And

By /s/ Stephen G. Shank
   ------------------------
   Its  Chairman and CEO

-30-

CAPELLA EDUCATION COMPANY
EMPLOYEE STOCK OWNERSHIP PLAN
(2005 RESTATEMENT)

LIST OF PARTICIPATING EMPLOYERS
(EFFECTIVE JUNE 1, 2005)

As of June 1, 2005, the Participating Employers are:

1. Capella Education Company

2. Capella University, Inc.

-31-

CAPELLA EDUCATION COMPANY
EMPLOYEE STOCK OWNERSHIP PLAN

(2005 RESTATEMENT)

LIST OF PREDECESSOR EMPLOYERS
(EFFECTIVE JUNE 1, 2005)

As of June 1, 2005, there are no Predecessor Employers.

-32-

EXHIBIT 10.10
NON-STANDARDIZED 401(K) PROFIT SHARING PLAN

ADOPTION AGREEMENT FOR

AMERICAN EXPRESS TAX & BUSINESS SERVICES, INC.

NON-STANDARDIZED 401(K) PROFIT SHARING
PLAN AND TRUST

The undersigned Employer adopts American Express Tax & Business Services, Inc. Prototype Non-Standardized 401(k) Profit Sharing Plan and Trust and elects the following provisions:

CAUTION: Failure to properly fill out this Adoption Agreement may result in disqualification of the Plan.

EMPLOYER INFORMATION

(An amendment to the Adoption Agreement is not needed solely to reflect a change in the information in this Employer Information Section.)

1. EMPLOYER'S NAME, ADDRESS AND TELEPHONE NUMBER

Name: Capella Education Company _________________________________________

Address: 225 S. Sixth Street ____________________________________________

                                     Street
 Minneapolis              MN                  55402
_______________________  __________________  ___________________
               City            State                 Zip

Telephone: (612) 339-7665 _______________________________________________

2. EMPLOYER'S TAXPAYER IDENTIFICATION NUMBER 41-1717955

3. TYPE OF ENTITY

a. [X] Corporation (including Tax-exempt or Non-profit Corporation)

b. [ ] Professional Service Corporation

c. [ ] S Corporation

d. [ ] Limited Liability Company that is taxed as:

1. [ ] a partnership or sole proprietorship

2. [ ] a Corporation

3. [ ] an S Corporation

e. [ ] Sole Proprietorship

f. [ ] Partnership (including Limited Liability)

g. [ ] Other:

AND, the Employer is a member of (select all that apply):

h. [ ] a controlled group

i. [ ] an affiliated service group

4. EMPLOYER FISCAL YEAR means the 12 consecutive month period:

Beginning on   January 1                 (e.g., January 1st)
               --------------------------
               month                day

and ending on  December 31
               --------------------------
               month                day

PLAN INFORMATION

(An amendment to the Adoption Agreement is not needed solely to reflect a change in the information in Questions 9. through 11.)

5. PLAN NAME:

Capella Education Company Retirement Savings Plan _______________________

NON-STANDARDIZED 401(K) PROFIT SHARING PLAN

6. EFFECTIVE DATE

a. [ ] This is a new Plan effective as of _______ (hereinafter called the "Effective Date").

b. [X] This is an amendment and restatement of a previously established qualified plan of the Employer which was originally effective July 1, 1994 , (hereinafter called the "Effective Date"). The effective date of this amendment and restatement is April 1, 2005 with April 21, 2005 as the effective date for Employer Matching Contributions.

c. [ ] FOR GUST RESTATEMENTS: This is an amendment and restatement of a previously established qualified plan of the Employer to bring the Plan into compliance with GUST (GATT, USERRA, SBJPA and TRA '97). The original Plan effective date was _______ (hereinafter called the "Effective Date"). Except as specifically provided in the Plan, the effective date of this amendment and restatement is ______.

(May enter a restatement date that is the first day of the current Plan Year. The Plan contains appropriate retroactive effective dates with respect to provisions for the appropriate laws.)

7. PLAN YEAR means the 12 consecutive month period:

Beginning on   January 1                (e.g., January 1st)
               ------------------------
               month            day

and ending on  December 31
               ------------------------
               month            day

EXCEPT that there will be a Short Plan Year:
a. [X] N/A
b. [ ] Beginning on _______________________________ (e.g., July 1, 2000) month day, year

and ending on _______________________________ month day, year

8. VALUATION DATE means:

a. [X] Every day that the Trustee, any transfer agent appointed by the Trustee or the Employer, and any stock exchange used by such agent are open for business (daily valuation).

b. [ ] The last day of each Plan Year.

c. [ ] The last day of each Plan Year half (semi-annual).

d. [ ] The last day of each Plan Year quarter.

e. [ ] Other (specify day or dates): __________________ (must be at least once each Plan Year).

9. PLAN NUMBER assigned by the Employer

a. [X] 001

b. [ ] 002

c. [ ] 003

d. [ ] Other. __________________

10. TRUSTEE(S):

a. [X] Individual Trustee(s) who serve as discretionary Trustee(s) over assets not subject to control by a corporate Trustee.

Name(s)                       Title(s)

Shawn Featherston             Director, Compensation & Benefits
Brian Faeth                   Director, Finance & Treasury
Elizabeth Rausch              Vice President, Human Resources

Address and Telephone number

1. [X] Use Employer address and telephone number.

2. [ ] Use address and telephone number below:

Address: ________________________________________________________________

                          Street
_______________________  ____________________  _________________
         City                    State               Zip

Telephone: ______________________________________________________________

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

b. [X] Corporate Trustee

Name:     American Stock Transfer and Trust Company

Address:  2390 East Camelback Road, Suite 240 ___________________________
                                                         Street

               Phoenix                 Arizona                 85016
          ------------------    --------------------     ----------------
                City                    State                   Zip

Telephone: (800) 458-9269

AND, the corporate Trustee shall serve as:

1. [X] a directed (nondiscretionary) Trustee over all Plan assets except for the following:
None _____________________________________________________________

2. [ ] a discretionary Trustee over all Plan assets except for the following:

AND, shall a separate trust agreement be used with this Plan?

c. [X] Yes

d. [ ] No

NOTE: If Yes is selected, an executed copy of the trust agreement between the Trustee and the Employer must be attached to this Plan. The Plan and trust agreement will be read and construed together. The responsibilities, rights and powers of the Trustee shall be those specified in the trust agreement.

11. PLAN ADMINISTRATOR'S NAME, ADDRESS AND TELEPHONE NUMBER:

(If none is named, the Employer will become the Administrator.)

a. [X] Employer (Use Employer address and telephone number).

b. [ ] Use name, address and telephone number below:

Name:      ______________________________________________________________

Address:   ______________________________________________________________
                                   Street
           __________________       _____________________      __________
                 City                      State                   Zip
Telephone: ______________________________________________________________

12. CONSTRUCTION OF PLAN

This Plan shall be governed by the laws of the state or commonwealth where the Employer's (or, in the case of a corporate Trustee, such Trustee's) principal place of business is located unless another state or commonwealth is specified:

Minnesota _______________________________________________________________

ELIGIBILITY REQUIREMENTS

13. ELIGIBLE EMPLOYEES (Plan Section 1.18)

FOR ALL PURPOSES OF THE PLAN (EXCEPT AS ELECTED IN d. or e. BELOW FOR
EMPLOYER CONTRIBUTIONS) means all Employees (including Leased Employees)
EXCEPT:

NOTE: If different exclusions apply to Elective Deferrals than to other Employer contributions, complete this part a.-b. for the Elective Deferral component of the Plan.

a. [ ] N/A. No exclusions.

b. [X] The following are excluded, except that if b.3. is selected, such Employees will be included (select all that apply):

1. [X] Union Employees (as defined in Plan Section 1.18).

2. [X] Non-resident aliens (as defined in Plan Section 1.18).

3. [ ] Employees who became Employees as the result of a "Code
Section 410(b)(6)(C) transaction" (as defined in Plan
Section 1.18).

4. [ ] Salaried Employees

5. [ ] Highly Compensated Employees

6. [X] Leased Employees

7. [ ] Other: _________________

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

HOWEVER, different exclusions will apply (select c. OR d. and/or e.):

c. [X] N/A. The options elected in a.-b. above apply for all purposes of the Plan.

d. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions)...

e. [ ] For purposes of Employer matching contributions...

IF d. OR e. IS SELECTED, the following exclusions apply for such purposes (select f. or g.):

f. [ ] N/A. No exclusions.

g. [ ] The following are excluded, except that if g.3. is selected, such Employees will be included (select all that apply):

1. [ ] Union Employees (as defined in Plan Section 1.18).

2. [ ] Non-resident aliens (as defined in Plan Section 1.18).

3. [ ] Employees who became Employees as the result of a "Code
Section 410(b)(6)(C) transaction" (as defined in Plan
Section 1.18).

4. [ ] Salaried Employees

5. [ ] Highly Compensated Employees

6. [ ] Leased Employees

7. [ ] Other: ___________

14. THE FOLLOWING AFFILIATED EMPLOYER (Plan Section 1.6) will adopt this Plan as a Participating Employer (if there is more than one, or if Affiliated Employers adopt this Plan after the date the Adoption Agreement is executed, attach a list to this Adoption Agreement of such Affiliated Employers including their names, addresses, taxpayer identification numbers and types of entities):

NOTE: Employees of an Affiliated Employer that does not adopt this Adoption Agreement as a Participating Employer shall not be Eligible Employees. This Plan could violate the Code Section 410(b) coverage rules if all Affiliated Employers do not adopt the Plan.

a. [X] N/A

b. [ ] Name of First Affiliated Employer: _______________________________

Address:   ______________________________________________________________
                                     Street

           _____________________    _______________________    __________
                   City                       State                Zip
Telephone: _______________________________________

Taxpayer Identification Number: __________________

AND, the Affiliated Employer is:

c. [ ] Corporation (including Tax-exempt, Non-profit or Professional Service Corporation)

d. [ ] S Corporation

e. [ ] Limited Liability Company that is taxed as:

1. [ ] a partnership or sole proprietorship

2. [ ] a Corporation

3. [ ] an S Corporation

f. [ ] Sole Proprietorship

g. [ ] Partnership (including Limited Liability)

h. [ ] Other: ___________________________________________________________

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

15. CONDITIONS OF ELIGIBILITY (Plan Section 3.1)

Any Eligible Employee will be eligible to participate in the Plan upon satisfaction of the following:

NOTE: If the Year(s) of Service selected is or includes a fractional year, an Employee will not be required to complete any specified number of Hours of Service to receive credit for such fractional year. If expressed in months of service, an Employee will not be required to complete any specified number of Hours of Service in a particular month, unless elected in b.4. or i.4. below.

ELIGIBILITY FOR ALL PURPOSES OF THE PLAN (EXCEPT AS ELECTED IN e.-k BELOW FOR EMPLOYER CONTRIBUTIONS) (select a or all that apply of b., c., and d.):

NOTE: If different conditions apply to Elective Deferrals than to other Employer contributions, complete this part a.-d. for the Elective Deferral component of the Plan.

a. [ ] No age or service required. (Go to e.-g. below)

b. [X] Completion of the following service requirement which is based on Years of Service (or Periods of Service if the Elapsed Time Method is elected):

1. [X] No service requirement

2. [ ] 1/2 Year of Service or Period of Service

3. [ ] 1 Year of Service or Period of Service

4. [ ] _____ (not to exceed 1,000) Hours of Service within (not to exceed 12) months from the Eligible Employee's employment commencement date. If an Employee does not complete the stated Hours of Service during the specified time period, the Employee is subject to the Year of Service requirement in b.3. above.

5. [ ] Other: ____________________________________________________ (may not exceed one (1) Year of Service or Period of Service)

c. [X] Attainment of age:

1. [ ] No age requirement

2. [ ] 20 1/2

3. [ ] 21

4. [X] Other. 18 (may not exceed 21)

d. [ ] The service and/or age requirements specified above shall be waived with respect to any Eligible Employee who was employed on ____________ and such Eligible Employee shall enter the Plan as of such date.

The requirements to be waived are (select one or both):

1. [ ] service requirement (will let part-time Eligible Employees in Plan)

2. [ ] age requirement

HOWEVER, DIFFERENT ELIGIBILITY CONDITIONS WILL APPLY (select e. OR f.
and/or g.):

e. [X] N/A. The options elected in a.-d. above apply for all purposes of the Plan.

f. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions).

g. [ ] For purposes of Employer matching contributions...

If f. OR g. IS SELECTED, the following eligibility conditions apply for such purposes:

h. [ ] No age or service requirements

i. [ ] Completion of the following service requirement which is based on Years of Service (or Periods of Service if the Elapsed Time Method is elected):

1. [ ] No service requirement

2. [ ] 1/2 Year of Service or Period of Service

3. [ ] 1 Year of Service or Period of Service

4. [ ] (not to exceed 1,000) Hours of Service within (not to exceed 12) months from the Eligible Employee's employment commencement date. If an Employee does not complete the stated Hours of Service during the specified time period, the Employee is subject to the Year of Service requirement in i.3. above.

5. [ ] 1 1/2 Years of Service or Periods of Service

6. [ ] 2 Years of Service or Periods of Service

7. [ ] Other: ____________________________________________________ (may not exceed two (2) Years of Service or Periods of Service)

NOTE: If more than one (1) Year of Service is elected 100% immediate vesting is required.

j. [ ] Attainment of age:

1. [ ] No age requirement

2. [ ] 20 1/2

3. [ ] 21

4. [ ] Other: ____________ (may not exceed 21)

k. [ ] The service and/or age requirements specified above shall be waived with respect to any Eligible Employee who was employed on _________ and such Eligible Employee shall enter the Plan as of such date.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

The requirements to be waived are (select one or both):

1. [ ] service requirement (will let part-time Eligible Employees in Plan)

2. [ ] age requirement

16. EFFECTIVE DATE OF PARTICIPATION (Plan Section 3.2)

An Eligible Employee who has satisfied the eligibility requirements will become a Participant for all purposes of the Plan (except as elected in
g.-p. below for Employer contributions):

NOTE: If different entry dates apply to Elective Deferrals than to other Employer contributions, complete this part a-f. for the Elective Deferral component of the Plan.

a. [ ] the day on which such requirements are satisfied.

b. [X] the first day of the month coinciding with or next following the date on which such requirements are satisfied.

c. [ ] the first day of the Plan Year quarter coinciding with or next following the date on which such requirements are satisfied.

d. [ ] the earlier of the first day of the seventh month or the first day of the Plan Year coinciding with or next following the date on which such requirements are satisfied.

e. [ ] the first day of the Plan Year next following the date on which such requirements are satisfied. (Eligibility must be 1/2 Year of Service (or Period of Service) or less and age must be 20 1/2 or less.)

f. [ ] other: ___________________________________________________________ provided that an Eligible Employee who has satisfied the maximum age (21) and service requirements (one (1) Year or Period of Service) and who is otherwise entitled to participate, shall commence participation no later than the earlier of (a) 6 months after such requirements are satisfied, or (b) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date.

HOWEVER, different entry dates will apply (select g. OR h. and/or i.):

g. [X] N/A. The options elected in a-f. above apply for all purposes of the Plan.

h. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions).

i. [ ] For purposes of Employer matching contributions...

IF h. OR i. IS SELECTED, the following entry dates apply for such purposes (select one):

j. [ ] the first day of the month coinciding with or next following the date on which such requirements are satisfied.

k. [ ] the first day of the Plan Year quarter coinciding with or next following the date on which such requirements are satisfied.

l. [ ] the first day of the Plan Year in which such requirements are satisfied.

m. [ ] the first day of the Plan Year in which such requirements are satisfied, if such requirements are satisfied in the first 6 months of the Plan Year, or as of the first day of the next succeeding Plan Year if such requirements are satisfied in the last 6 months of the Plan Year.

n. [ ] the earlier of the first day of the seventh month or the first day of the Plan Year coinciding with or next following the date on which such requirements are satisfied.

o. [ ] the first day of the Plan Year next following the date on which such requirements are satisfied. (Eligibility must be 1/2 (or 1 1/2 if 100% immediate Vesting is selected) Year of Service (or Period of Service) or less and age must be 20 1 /2 or less.)

p. [ ] other: __________________________________________________________, provided that an Eligible Employee who has satisfied the maximum age (21) and service requirements (one (1) Year or Period of Service (or more than one (1) year if full and immediate vesting)) and who is otherwise entitled to participate, shall commence participation no later than the earlier of (a) 6 months after such requirements are satisfied, or (b) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date.

SERVICE

17. RECOGNITION OF SERVICE WITH PREDECESSOR EMPLOYER (Plan Sections 1.57 and 1.85)

a. [X] No service with a predecessor Employer shall be recognized.

b. [ ] Service with ________ will be recognized except as follows (select
1. or all that apply of 2. through 4.):

1. [ ] N/A, no limitations.

2. [ ] service will only be recognized for vesting purposes.

3. [ ] service will only be recognized for eligibility purposes.

4. [ ] service prior to _________________ will not be recognized.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

NOTE: If the predecessor Employer maintained this qualified Plan, then Years of Service (and/or Periods of Service) with such predecessor Employer shall be recognized pursuant to Plan Sections 1.57 and 1.85 and b. l . will apply.

18. SERVICE CREDITING METHOD (Plan Sections 1.57 and 1.85)

NOTE: If no elections are made in this Section, then the Hours of Service Method will be used and the provisions set forth in the definition of Year of Service in Plan Section 1.85 will apply.

ELAPSED TIME METHOD shall be used for the following purposes (select all that apply):

a. [ ] N/A. Plan only uses the Hours of Service Method

b. [ ] all purposes. (If selected, skip to Question 19.)

c. [X] eligibility to participate.

d. [ ] vesting.

e. [ ] sharing in allocations or contributions.

HOURS OF SERVICE METHOD shall be used for the following purposes (select all that apply):

f. [ ] N/A. Plan only uses the Elapsed Time Method.

g. [ ] eligibility to participate in the Plan. The eligibility computation period after the initial eligibility computation period shall...

1. [ ] shift to the Plan Year after the initial computation period.

2. [ ] be based on the date an Employee first performs an Hour of Service (initial computation period) and subsequent computation periods shall be based on each anniversary date thereof.

h. [X] vesting. The vesting computation period shall be.

1. [X] the Plan Year.

2. [ ] the date an Employee first performs an Hour of Service and each anniversary thereof.

i. [X] sharing in allocations or contributions (the computation period shall be the Plan Year).

AND, IF THE HOURS OF SERVICE METHOD IS BEING USED, the Hours of Service will be determined on the basis of the method selected below. Only one method may be selected. The method selected below will be applied to (select j. or k.):

j. [X] all Employees.

k. [ ] salaried Employees only (for hourly Employees, actual Hours of Service will be used).

ON THE BASIS OF:

l. [X] actual hours for which an Employee is paid or entitled to payment.

m. [ ] days worked. An Employee will be credited with ten (10) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the day.

n. [ ] weeks worked. An Employee will be credited with forty-five (45) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the week.

o. [ ] semi-monthly payroll periods worked. An Employee will be credited with ninety-five (95) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period.

p. [ ] months worked. An Employee will be credited with one hundred ninety
(190) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the month.

AND, a Year of Service means the applicable computation period during which an Employee has completed at least:

q. [ ] ________ (may not be more than 1,000) Hours of Service (if left blank, the Plan will use 1,000 Hours of Service).

VESTING

19. VESTING OF PARTICIPANTS INTEREST (Plan Section 6.4(b))

Vesting for Employer Contributions (except as otherwise elected in j. - q. below for matching contributions). The vesting schedule, based on a Participant's Years of Service (or Periods of Service if the Elapsed Time Method is elected), shall be as follows:

a. [ ] 100% upon entering Plan. (Required if eligibility requirement is greater than one (1) Year of Service or Period of Service.)

b. [ ] 3 Year Cliff:               c. [ ] 5 Year Cliff
         0-2 years       0 %                0-4 years           0 %
          3 years      100 %                 5 years          100 %

d. [ ] 6 Year Graded: e. [ ] 4 year Graded:

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

          0-1 year      0 %                  0-1 year         25 %
           2 years     20 %                   2 years         50 %
           3 years     40 %                   3 years         75 %
           4 years     60 %                   4 years        100 %
           5 years     80 %
           6 years    100 %

f. [X] 5 Year Graded:              g. [ ] 7 Year Graded:
            1 year     20 %                 0-2 years          0 %
           2 years     40 %                   3 years         20 %
           3 years     60 %                   4 years         40 %
           4 years     80 %                   5 years         60 %
           5 years    100 %                   6 years         80 %
                                              7 years        100 %

h. [ ] Other - Must be at least as liberal as either c. or g. above.

Service                 Percentage

_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______

VESTING FOR EMPLOYER MATCHING CONTRIBUTIONS

The vesting schedule for Employer matching contributions, based on a Participant's Years of Service (or Periods of Service if the Elapsed Time Method is elected) shall be as follows:

i. [X] N/A. There are no matching contributions subject to a vesting schedule OR the schedule in a.-h. above shall also apply to matching contributions.

j. [ ] 100% upon entering Plan. (Required if eligibility requirement is greater than one (1) Year of Service or Period of Service.)

k. [ ] 3 Year Cliff

l. [ ] 5 Year Cliff

m. [ ] 6 Year Graded

n. [ ] 4 Year Graded

o. [ ] 5 Year Graded

p. [ ] 7 Year Graded

q. [ ] Other - Must be at least as liberal as either 1. or p. above.

Service                 Percentage

_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______

20. FOR AMENDED PLANS (Plan Section 6.4(f))

If the vesting schedule has been amended to a less favorable schedule, enter the pre-amended schedule below:

a. [ ] Vesting schedule has not been amended, amended schedule is more favorable in all years or prior schedule was immediate 100% vesting.

b. [X] Pre-amended schedule:

Service Percentage

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

                       0-2                       0%
                        3                       100%

21.   TOP HEAVY VESTING (Plan Section 6.4(c))

If this Plan becomes a Top Heavy Plan, the following vesting schedule, based on number of Years of Service (or Periods of Service if the Elapsed Time Method is elected), shall apply and shall be treated as a Plan amendment pursuant to this Plan. Once effective, this schedule shall also apply to any contributions made before the Plan became a Top Heavy Plan and shall continue to apply if the Plan ceases to be a Top Heavy Plan unless an amendment is made to change the vesting schedule.

a. [X] N/A (the regular vesting schedule already satisfies one of the minimum top heavy schedules).

b. [ ] 6 Year Graded:

          0-1 year                         0 %
           2 years                        20 %
           3 years                        40 %
           4 years                        60 %
           5 years                        80 %
           6 years                        100%

c. [ ] 3 Year Cliff:

          0-2 years                        0 %
            3 years                       100%

d. [ ] Other - Must be at least as liberal as either b. or c. above.

Service                 Percentage

_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______
_______                   _______

NOTE: This Section does not apply to the account balances of any Participant who does not have an Hour of Service after the Plan has initially become top heavy. Such Participant's Account balance attributable to Employer contributions and Forfeitures will be determined without regard to this Section.

22. EXCLUDED VESTING SERVICE

a. [X] No exclusions.

b. [ ] Service prior to the Effective Date of the Plan or a predecessor plan.

c. [ ] Service prior to the time an Employee has attained age 18.

23. VESTING FOR DEATH AND TOTAL AND PERMANENT DISABILITY

Regardless of the vesting schedule, Participants shall become fully Vested upon (select a. or all that apply of b. and c.)

a. [ ] N/A. Apply vesting schedule, or all contributions to the Plan are fully Vested

b. [X] Death.

c. [X] Total and Permanent Disability.

24. NORMAL RETIREMENT AGE ("NRA") (Plan Section 1.45) means the:

a. [X] date of a Participant's 65th birthday (not to exceed 65th).

b. [ ] later of a Participant's _______ birthday (not to exceed 65th) or the ___________ (not to exceed 5th) anniversary of the first day of the Plan Year in which participation in the Plan commenced.

25. NORMAL RETIREMENT DATE (Plan Section 1.46) means the

a. [X] Participant's "NRA".

OR (select one)

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

b. [ ] first day of the month coinciding with or next following the Participant's "NRA".

c. [ ] first day of the month nearest the Participant's "NRA".

d. [ ] Anniversary Date coinciding with or next following the Participant's "NRA".

e. [ ] Anniversary Date nearest the Participant's "NRA".

26. EARLY RETIREMENT DATE (Plan Section 1.15) means the:

a. [X] No Early Retirement provision provided.

b. [ ] date on which a Participant...

c. [ ] first day of the month coinciding with or next following the date on which a Participant...

d. [ ] Anniversary Date coinciding with or next following the date on which a Participant...

AND, if b., c., or d. is selected...

e. [ ] attains age ______

f. [ ] attains age ______ and completes at least ______ Years of Service (or Periods of Service) for vesting purposes.

AND, if b., c. or d is selected, shall a Participant become fully Vested upon attainment of the Early Retirement Date?

g. [ ] Yes

h. [ ] No

COMPENSATION

27. COMPENSATION (Plan Section 1.11) with respect to any Participant means:

a. [X] Wages, tips and other compensation on Form W-2.

b. [ ] Section 3401(a) wages (wages for withholding purposes).

c. [ ] 415 safe-harbor compensation.

COMPENSATION shall be based on the following determination period:

d. [X] the Plan Year.

e. [ ] the Fiscal Year coinciding with or ending within the Plan Year.

f. [ ] the calendar year coinciding with or ending within the Plan Year.

NOTE: The Limitation Year for Code Section 415 purposes shall be the same as the determination period for Compensation unless an alternative period is specified: ______ (must be a consecutive twelve month period).

ADJUSTMENTS TO COMPENSATION

g. [ ] N/A. No adjustments.

h. [X] Compensation shall be adjusted by: (select all that apply)

1. [X] including compensation which is not currently includible in the Participant's gross income by reason of the application of Code Sections 125 (cafeteria plan), 132(f)(4) (qualified transportation fringe), 402(e)(3) (401(k) plan), 402(h)(1)(B) (simplified employee pension plan), 414(h) (employer pickup contributions under a governmental plan), 403(b) (tax sheltered annuity) or 457(b) (eligible deferred compensation plan).

2. [X] excluding reimbursements or other expense allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation (other than deferrals specified in 1. above) and welfare benefits.

3. [X] excluding Compensation paid during the determination period while not a Participant in the component of the Plan for which the definition is being used.

4. [ ] excluding overtime.

5. [ ] excluding bonuses.

6. [ ] excluding commissions.

7. [ ] other:

NOTE: Options 4., 5., 6. or 7. may not be selected if an integrated allocation formula is selected (i.e., if 33.f. is selected). In addition, if 4., 5., 6., or 7. is selected, the definition of Compensation could violate the nondiscrimination rules.

HOWEVER, FOR SALARY DEFERRAL AND MATCHING PURPOSES Compensation shall be adjusted by (for such purposes, the Plan automatically includes Elective Deferrals and other amounts in h.1. above):

i. [ ] N/A. No adjustments or same adjustments as in above.

j. [X] Compensation shall be adjusted by: (select all that apply)

1. [X] excluding reimbursements or other expense allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation (other than deferrals specified in h. 1. above) and welfare benefits.

2. [X] excluding Compensation paid during the determination period while not a Participant in the component of the Plan for which the definition is being used.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

3. [ ] excluding overtime

4. [ ] excluding bonuses

5. [ ] excluding commissions

6. [ ] other: ____________________________________________________

CONTRIBUTIONS AND ALLOCATIONS

28. SALARY REDUCTION ARRANGEMENT - ELECTIVE DEFERRALS (Plan Section 12.2) Each Participant may elect to have Compensation deferred by:

a. [ ] _____%.

b. [ ] up to _____%.

c. [ ] from _____% to _____%.

d. [X] up to the maximum percentage allowable not to exceed the limits of Code Sections 401(k), 402(g), 404 and 415.

AND, Participants who are Highly Compensated Employees determined as of the beginning of a Plan Year may only elect to defer Compensation by:

e. [X] Same limits as specified above.

f. [ ] The percentage equal to the deferral limit in effect under Code
Section 402(g)(3) for the calendar year that begins with or within the Plan Year divided by the annual compensation limit in effect for the Plan Year under Code Section 401(a)(17).

MAY PARTICIPANTS make a special salary deferral election with respect to bonuses?

g. [X] No.

h. [ ] Yes, a Participant may elect to defer up to % of any bonus.

PARTICIPANTS MAY commence salary deferrals on the effective date of participation and on each payroll period (must be at least once each calendar year).

Participants may modify salary deferral elections:

1. [X] As of each payroll period

2. [ ] On the first day of the month

3. [ ] On the first day of each Plan Year quarter

4. [ ] On the first day of the Plan Year or the first day of the 7th month of the Plan Year

5. [ ] Other: ______ (must be at least once each calendar year)

AUTOMATIC ELECTION: Shall Participants who do not affirmatively elect to receive cash or have a specified amount contributed to the Plan automatically have Compensation deferred?

i. [ ] No.

j. [X] Yes, by 4% of Compensation.

SHALL THERE BE a special effective date for the salary deferral component of the Plan?

k. [X] No.

l. [ ] Yes, the effective date of the salary deferral component of the Plan is ______ (enter month day, year).

29. SIMPLE 401(k) PLAN ELECTION (Plan Section 13.1)

Shall the simple 401(k) provisions of Article XIII apply?

a. [X] No. The simple 401(k) provisions will not apply.

b. [ ] Yes. The simple 401(k) provisions will apply.

30. 401(k) SAFE HARBOR PROVISIONS (Plan Section 12.8)

Will the ADP and/or ACP test safe harbor provisions be used? (select a.,
b. or c.)

a. [X] No. (If selected, skip to Question 31.)

b. [ ] Yes, but only the ADP (and NOT the ACP) Test Safe Harbor provisions will be used.

c. [ ] Yes, both the ADP and ACP Test Safe Harbor provisions will be used.

IF c. is selected, does the Plan permit matching contributions in addition to any safe harbor contributions elected in d. or e. below?

1. [ ] No or N/A. Any matching contributions, other than any Safe Harbor Matching Contributions elected in d. below, will be suspended in any Plan Year in which the safe harbor provisions are used.

2. [ ] Yes, the Employer may make matching contributions in addition to any Safe Harbor Matching contributions elected in d. below. (If elected, complete the provisions of the Adoption Agreement

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

relating to matching contributions
(i.e., Questions 31. and 32.) that will apply in
addition to any elections made in d. below. NOTE:
Regardless of any election made in Question 31., the
Plan automatically provides that only Elective Deferrals
up to 6% of Compensation are taken into account in
applying the match set forth in that Question and that
the maximum discretionary matching contribution that may
be made on behalf of any Participant is 4% of
Compensation.)

THE EMPLOYER WILL MAKE THE FOLLOWING ADP TEST SAFE HARBOR CONTRIBUTION FOR
THE PLAN YEAR:

NOTE: The ACP Test Safe Harbor is automatically satisfied if the only matching contribution made to the Plan is either (1) a Basic Matching Contribution or (2) an Enhanced Matching Contribution that does not provide a match on Elective Deferrals in excess of 6% of Compensation.

d. [ ] Safe Harbor Matching Contribution (select 1. or 2. AND 3.)

1. [ ] BASIC MATCHING CONTRIBUTION. The Employer will make Matching Contributions to the account of each "Eligible Participant" in an amount equal to the sum of 100% of the amount of the Participant's Elective Deferrals that do not exceed 3% of the Participant's Compensation, plus 50% of the amount of the Participant's Elective Deferrals that exceed 3% of the Participant's Compensation but do not exceed 5% of the Participant's Compensation.

2. [ ] ENHANCED MATCHING CONTRIBUTION. The Employer will make Matching Contributions to the account of each "Eligible Participant" in an amount equal to the sum of:

a. [ ] ____% (may not be less than 100%) of the Participant's Elective Deferrals that do not exceed ____% (if over 6% or if left blank, the ACP test will still apply) of the Participant's Compensation, plus

b. [ ] ___% of the Participant's Elective Deferrals that exceed _____% of the Participant's Compensation but do not exceed ____% (if over 6% or if left blank, the ACP test will still apply) of the Participant's Compensation.

NOTE: a. and b. must be completed so that, at any rate of Elective Deferrals, the matching contribution is at least equal to the matching contribution receivable if the Employer were making Basic Matching Contributions, but the rate of match cannot increase as deferrals increase. For example, if a. is completed to provide a match equal to 100% of deferrals up to 4% of Compensation, then b. need not be completed.

3. [ ] The safe harbor matching contribution will be determined on the following basis (and Compensation for such purpose will be based on the applicable period):

a. [ ] the entire Plan Year.

b. [ ] each payroll period.

c. [ ] all payroll periods ending with or within each month.

d. [ ] all payroll periods ending with or within the Plan Year quarter.

e. [ ] Nonelective Safe Harbor Contributions (select one)

1. [ ] The Employer will make a Safe Harbor Nonelective Contribution to the account of each "Eligible Participant" in an amount equal to ____% (may not be less than 3%) of the Employee's Compensation for the Plan Year.

2. [ ] The Employer will make a Safe Harbor Nonelective Contribution to another defined contribution plan maintained by the Employer (specify the name of the other plan): ______.

FOR PURPOSES OF THE ADP Test Safe Harbor contribution, the term "Eligible Participant" means any Participant who is eligible to make Elective Deferrals with the following exclusions:

f. [ ] Highly Compensated Employees.

g. [ ] Employees who have not satisfied the greatest minimum age and service conditions permitted under Code Section 410(a).

h. [ ] Other. ___________________________________________________________ (must be a category that could be excluded under the permissive or mandatory disaggregation rules of Regulations 1.401(k)-1(b)(3) and 1.401(m)-i (b)(3)).

SPECIAL EFFECTIVE DATE OF ADP AND ACP TEST SAFE HARBOR PROVISIONS

i. [ ] N/A. The safe harbor provisions are effective as of the later of the Effective Date of this Plan or, if this is an amendment or restatement, the effective date of the amendment or restatement.

j. [ ] The ADP and ACP Test Safe Harbor provisions are effective for the Plan Year beginning: ____________________________ (enter the first day of the Plan Year for which the provisions are (or, for GUST updates, were) effective and, if necessary, enter any other special effective dates that apply with respect to the provisions).

31. FORMULA FOR DETERMINING EMPLOYER MATCHING CONTRIBUTIONS (Plan Section 12.1(a)(2))

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

NOTE: Regardless of any election below, if the ACP test safe harbor is being used (i.e., Question 30.c. is selected), then the Plan automatically provides that only Elective Deferrals up to 6% of Compensation are taken into account in applying the match set forth below and that the maximum discretionary matching contribution that may be made on behalf of any Participant is 4% of Compensation.

a. [ ] N/A. There will not be any matching contributions (Skip to Question 33).

b. [X] The Employer ... (select 1. or 2.)

1. [ ] may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of the Participant's Elective Deferrals.

2. [X] will make matching contributions equal to 50 % (e.g., 50) of the Participant's Elective Deferrals, plus:

a. [X] N/A.

b. [ ] an additional discretionary percentage, to be determined by the Employer.

AND, in determining the matching contribution above, only Elective Deferrals up to the percentage or dollar amount specified below will be matched: (select 3. and/or 4. OR 5.)

3. [X] 4 % of a Participant's Compensation.

4. [ ] $_______________

5. [ ] a discretionary percentage of a Participant's Compensation or a discretionary dollar amount, the percentage or dollar amount to be determined by the Employer on a uniform basis to all Participants.

c. [ ] The Employer may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of each tier, to be determined by the Employer, of the Participant's Elective Deferrals.

d. [ ] The Employer will make matching contributions equal to the sum of ______% of the portion of the Participant's Elective Deferrals which do not exceed ______% of the Participant's Compensation or $__________ plus _____% of the portion of the Participant's Elective Deferrals which exceed _____% of the Participant's Compensation or $___________, but does not exceed ____% of the Participant's Compensation or $___________.

NOTE: If c. or d. above is elected, the Plan may violate the Code Section 401(a)(4) nondiscrimination requirements if the rate of matching contributions increases as a Participant's Elective Deferrals or Years of Service (or Periods of Service) increase.

PERIOD OF DETERMINING MATCHING CONTRIBUTIONS

Matching contributions will be determined on the following basis (and any Compensation or dollar limitation used in determining the match will be based on the applicable period):

e. [ ] the entire Plan Year.

f. [X] each payroll period.

g. [ ] all payroll periods ending within each month.

h. [ ] all payroll periods ending with or within the Plan Year quarter.

THE MATCHING CONTRIBUTION MADE ON BEHALF OF ANY PARTICIPANT for any Plan
Year will not exceed:

i. [X] N/A.

j. [ ] $__________

MATCHING CONTRIBUTIONS WILL BE MADE ON BEHALF OF:

k. [X] all Participants.

l. [ ] only Non-Highly Compensated Employees.

SHALL THE MATCHING CONTRIBUTIONS BE QUALIFIED MATCHING CONTRIBUTIONS?

m. [ ] Yes. If elected, ALL matching contributions will be fully Vested and will be subject to restrictions on withdrawals. In addition, Qualified Matching Contributions may be used in either the ADP or ACP test.

n. [X] No.

32. ONLY PARTICIPANTS WHO SATISFY THE FOLLOWING CONDITIONS WILL BE ELIGIBLE TO SHARE IN THE ALLOCATION OF MATCHING CONTRIBUTIONS:

REQUIREMENTS FOR PARTICIPANTS WHO ARE ACTIVELY EMPLOYED AT THE END OF THE
PLAN YEAR.

a. [ ] N/A.

b. [X] No service requirement.

c. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

d. [ ] A Participant must complete at least __________ (may not be more than 1,000) Hours of Service during the Plan Year. (Could cause the Plan to violate coverage requirements under Code
Section 410(b).)

REQUIREMENTS FOR PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF
THE PLAN YEAR (except as otherwise provided in i. through k. below).

e. [ ] A Participant must complete more than Hours of Service (not more than 500) (or _____ months of service (not more than three
(3)) if the Elapsed Time Method is elected).

f. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

g. [ ] Participants will NOT share in such allocations, regardless of service. (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

h. [X] Participants will share in such allocations, regardless of service.

PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR due to the following shall be eligible to share in the allocation of matching contributions regardless of the above conditions (select all that apply):

i. [X] Death.

j. [X] Total and Permanent Disability.

k. [X] Early or Normal Retirement.

AND, if 32.c., d., f., or g. is selected, shall the 410(b) ratio percentage fail safe provisions apply (Plan Section 12.3(f))?

l. [X] No or N/A.

m. [ ] Yes (If selected, the Plan must satisfy the ratio percentage test of Code Section 410(b).)

33. FORMULA FOR DETERMINING EMPLOYER'S PROFIT SHARING CONTRIBUTION (Plan
Section 12.1(a)(3)) (d. may be selected in addition to b. or c.)

a. [ ] N/A. No Employer Profit Sharing Contributions may be made (other than top heavy minimum contributions) (Skip to Question 34.)

b. [X] Discretionary, to be determined by the Employer, not limited to current or accumulated Net Profits.

c. [ ] Discretionary, to be determined by the Employer, out of current or accumulated Net Profits.

d. [ ] Prevailing Wage Contribution. The Employer will make a Prevailing Wage Contribution on behalf of each Participant who performs services subject to the Service Contract Act, Davis-Bacon Act or similar Federal, State, or Municipal Prevailing Wage statutes. The Prevailing Wage Contribution shall be an amount equal to the balance of the fringe benefit payment for health and welfare for each Participant (after deducting the cost of cash differential payments for the Participant) based on the hourly contribution rate for the Participant's employment classification, as designated on Schedule A as attached to this Adoption Agreement. Notwithstanding anything in the Plan to the contrary, the Prevailing Wage Contribution shall be fully Vested. Furthermore, the Prevailing Wage Contribution shall not be subject to any age or service requirements set forth in Question 15. nor to any service or employment conditions set forth in Question 35.

AND, if d. is selected, is the Prevailing Wage Contribution considered a Qualified Non-Elective Contribution?

1. [ ] Yes.

2. [ ] No.

AND, if d. is selected, shall the amounts allocated on behalf of a Participant for a Plan Year pursuant to e. or f. below be reduced (offset) by the Prevailing Wage Contribution made on behalf of such Participant for the Plan Year under this Plan?

3. [ ] No (If selected, then the Prevailing Wage Contribution will be added to amounts allocated pursuant to e. or f. below.)

4. [ ] Yes.

CONTRIBUTION ALLOCATIONS

If b. or c. above is selected, the Employer's discretionary profit sharing contribution for a Plan Year will be allocated as follows:

e. [X] NON-INTEGRATED ALLOCATION

1. [X] In the same ratio as each Participant's Compensation bears to the total of such Compensation of all Participants.

2. [ ] In the same dollar amount to all Participants (per capita).

3. [ ] In the same dollar amount per Hour of Service completed by each Participant.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

4. [ ] In the same proportion that each Participant's points bears to the total of such points of all Participants. A Participant's points with respect to any Plan Year shall be computed as follows (select all that apply):

a. [ ] ______ point(s) shall be allocated for each Year of Service (or Period of Service if the Elapsed Time Method is elected). However, the maximum Years of Service (or Periods of Service) taken into account shall not exceed ______ (leave blank if no limit on service applies).

b. [ ] ______ point(s) shall be allocated for each full $_________ (may not exceed $200) of Compensation.

c. [ ] ______ point(s) shall be allocated for each year of age as of the end of the Plan Year.

f. [ ] INTEGRATED ALLOCATION

In accordance with Plan Section 4.3(b)(2) based on a Participant's Compensation in excess of:

1. [ ] The Taxable Wage Base.

2. [ ] ____ % (not to exceed 100%) of the Taxable Wage Base. (See Note below)

3. [ ] 80% of the Taxable Wage Base plus $1.00.

4. [ ] $______ (not greater than the Taxable Wage Base). (See Note below)

NOTE: The integration percentage of 5.7% shall be reduced to:

1. 4.3% if 2. or 4. above is more than 20% and less than or equal to 80% of the Taxable Wage Base.

2. 5.4% if 3. is elected or if 2. or 4. above is more than 80% of the Taxable Wage Base.

34. QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Plan Section 12.1(a)(4))

NOTE: Regardless of any election made in this Question, the Plan automatically permits Qualified Non-Elective Contributions to correct a failed ADP or ACP test.

a. [X] N/A. There will be no additional Qualified Non-Elective Contributions except as otherwise provided in the Plan.

b. [ ] The Employer will make a Qualified Non-Elective Contribution equal to ______% of the total Compensation of those Participants eligible to share in the allocations.

c. [ ] The Employer may make a Qualified Non-Elective Contribution in an amount to be determined by the Employer, to be allocated in proportion to the Compensation of those Participants eligible to share in the allocations.

d. [ ] The Employer may make a Qualified Non-Elective Contribution in an amount to be determined by the Employer, to be allocated equally to all Participants eligible to share in the allocations (per capita).

AND, if b., c., or d. is selected, the Qualified Non-Elective Contributions above will be made on behalf of:

e. [ ] all Participants.

f. [ ] only Non-Highly Compensated Employees.

35. REQUIREMENTS TO SHARE IN ALLOCATIONS OF EMPLOYER DISCRETIONARY PROFIT SHARING CONTRIBUTION, QUALIFIED NON-ELECTIVE CONTRIBUTIONS (other than
Qualified Non-Elective Contributions under Plan Sections 12.5(c) and
12.7(g)) AND FORFEITURES

a. [ ] N/A. Plan does not permit such contributions.

b. [X] Requirements for Participants who are actively employed at the end of the Plan Year.

l. [ ] No service requirement.

2. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

3. [X] A Participant must complete at least 1,000 (may not be more than 1,000) Hours of Service during the Plan Year. (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

REQUIREMENTS FOR PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF
THE PLAN YEAR (except as otherwise provided in g. through i. below).

c. [ ] A Participant must complete more than ______ Hours of Service (not more than 500) (or _____ months of service (not more than three (3)) if the Elapsed Time Method is elected).

d. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

e. [X] Participants will NOT share in such allocations, regardless of service. (Could cause the Plan to violate coverage requirements under Code Section 410(b).)

f. [ ] Participants will share in such allocations, regardless of service.

PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR due to the following will be eligible to share in the allocations regardless of the above conditions (select all that apply):

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

g. [X] Death.

h. [X] Total and Permanent Disability.

i. [X] Early or Normal Retirement.

AND, if 35.b.2, b.3, d. or e. is selected, shall the 410(b) ratio percentage fail safe provisions apply (Plan Section 12.3(f))?

j. [X] No or N/A.

k. [ ] Yes (If selected, the Plan must satisfy the ratio percentage test of Code Section 410(b)).

36. FORFEITURES (Plan Sections 1.27 and 4.3(e))

Except as provided in Plan Section 1.27, a Forfeiture will occur (if no election is made, a. will apply):

a. [X] as of the earlier of (1) the last day of the Plan Year in which the Former Participant incurs five (5) consecutive 1-Year Breaks in Service, or (2) the distribution of the entire Vested portion of the Participant's Account.

b. [ ] as of the last day of the Plan Year in which the Former Participant incurs five (5) consecutive 1-Year Breaks in Service.

Will Forfeitures first be used to pay any administrative expenses?

c. [X] Yes.

d. [ ] No.

AND, EXCEPT as otherwise provided below with respect to Forfeitures attributable to matching contributions, any remaining Forfeitures will be...

e. [ ] added to any Employer discretionary contribution.

f. [X] used to reduce any Employer contribution.

g. [ ] added to any Employer matching contribution and allocated as an additional matching contribution.

h. [ ] allocated to all Participants eligible to share in the allocations in the same proportion that each Participant's Compensation for the Plan Year bears to the Compensation of all Participants for such year.

FORFEITURES OF MATCHING CONTRIBUTIONS WILL BE...

i. [ ] N/A. Same as above or no matching contributions.

j. [X] used to reduce the Employer's matching contribution.

k. [ ] added to any Employer matching contribution and allocated as an additional matching contribution.

l. [ ] added to any Employer discretionary profit sharing contribution.

m. [ ] allocated to all Participants eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year.

n. [ ] allocated to all Non-Highly Compensated Employees eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year.

37. ALLOCATIONS OF EARNINGS (Plan Section 4.3(c))

Allocations of earnings with respect to amounts which are not subject to Participant directed investments and which are contributed to the Plan after the previous Valuation Date will be determined...

a. [X] N/A. All assets in the Plan are subject to Participant investment direction.

b. [ ] by using a weighted average based on the amount of time that has passed between the date a contribution or distribution was made and the date of the prior Valuation Date.

c. [ ] by treating one-half of all such contributions as being a part of the Participant's nonsegregated account balance as of the previous Valuation Date.

d. [ ] by using the method specified in Plan Section 4.3(c) (balance forward method).

e. [ ] other: ___________________________________________________________ (must be a definite predetermined formula that is not based on Compensation and that satisfies the nondiscrimination requirements of Regulation 1.401(a)(4)-4 and is applied uniformly to all Participants).

38. LIMITATIONS ON ALLOCATIONS (Plan Section 4.4)

If any Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, or if the Employer maintains a welfare benefit fund, as defined in Code
Section 419(e), or an individual medical account, as defined in Code
Section 415(l)(2), under which amounts are treated as Annual Additions with respect to any Participant in this Plan:

a. [ ] N/A. The Employer does not maintain another qualified defined contribution plan.

b. [ ] The provisions of Plan Section 4.4(b) will apply as if the other plan were a Master or Prototype Plan.

c. [X] Specify the method under which the plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion:

Total Annual Additions to the Employer's Employee Stock Ownership Plan ("ESOP") and this Plan, shall not

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

exceed the maximum Annual Additions for such year. If such Annual Additions exceed the Maximum Permissible Amount, any Employer contributions made under this plan. shall be reduced in the amount necessary to satisfy the Annual Additions limit.

DISTRIBUTIONS

39. FORM OF DISTRIBUTIONS (Plan Sections 6.5 and 6.6)

Distributions under the Plan may be made in (select all that apply)...

a.  [X]  lump-sums.
b.  [ ]  substantially equal installments.
c.  [ ]  partial withdrawals provided the minimum withdrawal is $________.

AND, pursuant to Plan Section 6.12,
d.  [X]  no annuities are allowed (Plan Section 6.12(b) will apply and the
         joint and survivor rules of Code Sections 401(a)(11) and 417 will
         not apply to the Plan).

         AND, if this is an amendment that is eliminating annuities,
         then an annuity form of payment is not available with respect
         to distributions that have an Annuity Starting Date beginning
         on or after:

         1. [X] N/A

         2. [ ] ________ (may not be a retroactive date), except
            that regardless of the date entered, the amendment
            will not be effective prior to the time set forth in
            Plan Section 8.1(e).

e.  [ ]  annuities are allowed as the normal form of distribution
         (Plan Section 6.12 will not apply and the joint and survivor
         rules of Code Sections 401(a)(11) and 417 will automatically
         apply). If elected, the Pre-Retirement Survivor Annuity
         (minimum spouse's death benefit) will be equal to:

         1. [ ] 100% of Participant's interest in the Plan.
         2. [ ] 50% of Participant's interest in the Plan.
         3. [ ] _____% (may not be less than 50%) of a Participant's
         interest in the Plan.

         AND, the normal form of the Qualified Joint and Survivor
         Annuity will be a joint and 50% survivor annuity unless
         otherwise elected below:

         4. [ ] N/A.
         5. [ ] Joint and 100% survivor annuity.
         6. [ ] Joint and 75% survivor annuity.
         7. [ ] Joint and 66 2/3% survivor annuity.

NOTE:    If only a portion of the Plan assets may be distributed in an
         annuity form of payment, then select d. AND e. and the assets
         subject to the joint and survivor annuity provisions will be
         those assets attributable to (specify): _____________ (e.g.,
         the money purchase pension plan that was merged into this Plan).

AND,distributions may be made in...

f. [X]   cash only (except for insurance or annuity contracts).

g. [ ]   cash or property.

40. CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION OF EMPLOYMENT Distributions upon termination of employment pursuant to Plan Section 6.4(a) of the Plan will not be made unless the following conditions have been satisfied:

a. [ ]   No distributions may be made until a Participant has reached
         Early or Normal Retirement Date.

b. [X]   Distributions may be made as soon as administratively feasible
         at the Participant's election.

c. [ ]   The Participant has incurred ___ 1-Year Break(s) in Service (or
         Period(s) of Severance if the Elapsed Time Method is elected).

d. [ ]   Distributions may be made at the Participant's election as soon
         as administratively feasible after the Plan Year coincident with
         or next following termination of employment.

e. [ ]   Distributions may be made at the Participant's election as
         soon as administratively feasible after the Plan Year quarter
         coincident with or next following termination of employment.

f. [ ]   Distributions may be made at the Participant's election as soon
         as administratively feasible after the Valuation Date coincident
         with or next following termination of employment.

g. [ ]   Distributions may be made at the Participant's election as soon
         as administratively feasible _____ months following termination
         of employment.

h.[ ]    Other. __________________________________________________________

         (must be objective conditions which are ascertainable and are not
         subject to Employer discretion except as otherwise permitted in
         Regulation 1.411(d)-4 and may not exceed the limits of Code
         Section 401(a)(14) as set forth in Plan Section 6.7).

                                 17

                               NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

41. INVOLUNTARY DISTRIBUTIONS

Will involuntary distributions of amounts less than $5,000 be made in accordance with the provisions of Sections 6.4, 6.5 and 6.6?

a. [X] Yes
b. [ ] No

42. MINIMUM DISTRIBUTION TRANSITIONAL RULES (Plan Section 6.5(e))

NOTE:    This Section does not apply to (1) a new Plan or (2) an amendment
         or restatement of an existing Plan that never contained the
         provisions of Code Section 401(a)(9) as in effect prior to the
         amendments made by the Small Business Job Protection Act of 1996
         (SBJPA).

         The "required beginning date" for a Participant who is not a
         "five percent (5%) owner" is:

a. [ ]   N/A. (This is a new Plan or this Plan has never included the
         pre-SBJPA provisions.)

b. [ ]   April 1st of the calendar year following the year in which the
         Participant attains age 70 1/2. (The pre-SBJPA rules will
         continue to apply.)

c. [X]   April 1st of the calendar year following the later of the year in
         which the Participant attains age 70 1/2 or retires (the post-
         SBJPA rules), with the following exceptions (select one or both
         and if no election is made, both will apply effective as of
         January 1, 1996):

         1. [X]   A Participant who was already receiving required minimum
                  distributions under the pre-SBJPA rules as of January 1,
                  1996 (not earlier than January 1, 1996) may elect to
                  stop receiving distributions and have them recommence in
                  accordance with the post-SBJPA rules. Upon the
                  recommencement of distributions, if the Plan permits
                  annuities as a form of distribution then the following
                  will apply:

                  a. [X] N/A. Annuity distributions are not permitted.

                  b. [ ] Upon the recommencement of distributions, the
                         original Annuity StartingDate will be retained.

                  c. [ ] Upon the recommencement of distributions, a new
                         Annuity Starting Date is created.

         2. [X]   A Participant who had not begun receiving required
                  minimum distributions as of January 1, 1996 (not earlier
                  than January 1, 1996) may elect to defer commencement of
                  distributions until retirement. The option to defer the
                  commencement of distributions (i.e., to elect to receive
                  in-service distributions upon attainment of age 70 1/2)
                  will apply to all such Participants unless the option
                  below is elected:

                  a. [X] N/A.

                  b. [ ] The in-service distribution option is eliminated
                         with respect to Participants who attain age
                         70 1/2 in or after the calendar year that begins
                         after the later of (1) December 31, 1998, or (2)
                         the adoption date of the amendment and
                         restatement to bring the Plan into compliance
                         with SBJPA. (This option may only be elected
                         if the amendment to eliminate the in-service
                         distribution is adopted no later than the last
                         day of the remedial amendment period that applies
                         to the Plan for changes under SBJPA.)

43. DISTRIBUTIONS UPON DEATH (Plan Section 6.6(h)) Distributions upon the death of a Participant prior to receiving any

benefits shall...

a. [X]   be made pursuant to the election of the Participant or
         beneficiary.
b. [ ]   begin within 1 year of death for a designated beneficiary and be
         payable over the life (or over a period not exceeding the life
         expectancy) of such beneficiary, except that if the beneficiary
         is the Participant's spouse, begin prior to December 31st of the
         year in which the Participant would have attained age 70 1/2.
c. [ ]   be made within 5 (or if lesser ____) years of death for all
         beneficiaries.
d. [ ]   be made within 5 (or if lesser ____) years of death for all
         beneficiaries, except that if the beneficiary is the
         Participant's spouse, begin prior to December 31st of the year
         in which the Participant would have attained age 70 1/2 and be
         payable over the life (or over a period not exceeding the life
         expectancy) of such  surviving spouse.

44. HARDSHIP DISTRIBUTIONS (Plan Sections 6.11 and/or 12.9)

a. [ ]   No hardship distributions are permitted.

b. [X]   Hardship distributions are permitted from the following accounts
         (select all that apply):

         1. [X] All accounts.

         2. [ ] Participant's Elective Deferral Account.

         3. [ ] Participant's Account attributable to Employer matching
                contributions.

         4. [ ] Participant's Account attributable to Employer
                profit sharing contributions.

5. [ ] Participant's Rollover Account.

6. [ ] Participant's Transfer Account.

7. [ ] Participant's Voluntary Contribution Account.

NOTE: Distributions from a Participant's Elective Deferral Account are limited to the portion of such account attributable to such Participant's Elective Deferrals (and earnings attributable thereto up to December 31,

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

1988). Hardship distributions are not permitted from a Participant's Qualified Non-Elective Account (including any 401(k) Safe Harbor Contributions) or Qualified Matching Contribution Account.

AND, shall the safe harbor hardship rules of Plan Section 12.9 apply to distributions made from all accounts? (Note: The safe harbor hardship rules automatically apply to hardship distributions of Elective Deferrals.)

c. [X]  No or N/A. The provisions of Plan Section 6.11 apply to hardship
        distributions from all accounts other than a Participant's
        Elective Deferral Account

d. [ ]  Yes. The provisions of Plan Section 12.9 apply to all hardship
        distributions.

AND, are distributions restricted to those accounts in which a Participant is fully Vested?

e. [X]  Yes, distributions may only be made from accounts which are fully
        Vested.

f. [ ]  No. (If elected, the fraction at Plan Section 6.5(h) shall apply
        in determining vesting of the portion of the account balance not
        withdrawn).

AND, the minimum hardship distribution shall be...

g. [X]  N/A. There is no minimum.

h. [ ]  $______________ (may not exceed $1,000).

45. IN-SERVICE DISTRIBUTIONS (Plan Section 6.10)

a. [ ]  In-service distributions may not be made (except as otherwise
        elected for Hardship Distributions).

b. [X]  In-service distributions may be made to a Participant who has not
        separated from service provided any of the following conditions
        have been satisfied (select all that apply):

        1. [ ] the Participant has attained age ______

        2. [X] the Participant has reached Normal Retirement Age.

        3. [ ] the Participant has been a Participant in the Plan for at
               least ____ years (may not be less than five (5)).

        4. [ ] the amounts being distributed have accumulated in the Plan
               for at least two (2) years.

AND, in-service distributions are permitted from the following accounts (select all that apply):

c. [X]  All accounts.

d. [ ]  Participant's Elective Deferral Account

e. [ ]  Qualified Matching Contribution Account and portion of
        Participant's Account attributable to Employer matching
        contributions.

f. [ ]  Participant's Account attributable to Employer profit sharing
        contributions.

g. [ ]  Qualified Non-Elective Contribution Account.

h. [ ]  Participant's Rollover Account.

i. [ ]  Participant's Transfer Account.

j. [ ]  Participant's Voluntary Contribution Account.

NOTE:   Distributions from a Participant's Elective Deferral Account,
        Qualified Matching Contribution Account and Qualified Non-Elective
        Account (including 401(k) Safe Harbor Contributions) are subject
        to restrictions and generally may not be distributed prior to age
        59 1/2.

AND, are distributions restricted to those accounts in which a Participant is fully Vested?

k. [X]  Yes, distributions may only be made from accounts which are fully
        Vested.

l. [ ]  No. (If elected, the fraction at Plan Section 6.5(h) will apply in
        determining vesting of the portion of the account balance not
        withdrawn.)

AND, the minimum distribution shall be...

m. [X]  N/A. There is no minimum.

n. [ ]  $________ (may not exceed $1,000).

NONDISCRIMINATION TESTING

46. HIGHLY COMPENSATED EMPLOYEE (Plan Section 1.31)

NOTE: If this is a GUST restatement, complete the questions in this
Section retroactively to the first Plan Year beginning after 1996.

TOP-PAID GROUP ELECTION. Will the top-paid group election be made? (The election made below for the latest year will continue to apply to subsequent Plan Years unless a different election is made.)

a. [X] Yes, for the Plan Year beginning in: 2001.

b. [ ] No, for the Plan Year beginning in: ___________.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

CALENDAR YEAR DATA ELECTION. Will the calendar year data election be used? (The election made below for the latest year will continue to apply to subsequent Plan Years unless a different election is made.)

c. [X] Yes, for the Plan Year beginning in: 2001.

d. [ ] No, for the Plan Year beginning in: _______.

47. ADP AND ACP TESTS (Plan Sections 12.4 and 12.6). The ADP ratio and ACP ratio for Non-Highly Compensated Employees will be based on the following. The election made below for the latest year will continue to apply to subsequent Plan Years unless the Plan is amended to a different election.

a. [ ]  N/A. This Plan satisfies the ADP Test Safe Harbor rules and there
        are no contributions subject to an ACP test or for all Plan Years
        beginning in or after the Effective Date of the Plan or, in the
        case of an amendment and restatement, for all Plan Years to which
        the amendment and restatement relates.

b. [ ]  PRIOR YEAR TESTING: The prior year ratio will be used for the Plan
        Year beginning in _______. (Note: If this election is made for the
        first year the Code Section 401(k) or 401 (m) feature is added to
        this Plan (unless this Plan is a successor plan), the amount taken
        into account as the ADP and ACP of Non-Highly Compensated
        Employees for the preceding Plan Year will be 3%.)

c. [X]  CURRENT YEAR TESTING: The current year ratio will be used for the
        Plan Year beginning in 2001 .

NOTE:   In any Plan Year where the ADP Test Safe Harbor is being used but
        not the ACP Test Safe Harbor, then c. above must be used if an ACP
        test applies for such Plan Year.

TOP HEAVY REQUIREMENTS

48. TOP HEAVY DUPLICATIONS (Plan Section 4.3(1)): When a Non-Key Employee is a Participant in this Plan and a Defined Benefit Plan maintained by the Employer, indicate which method shall be utilized to avoid duplication of top heavy minimum benefits: (If b., c., d. ore. is elected, f. must be completed.)

a. [X]  N/A. The Employer does not maintain a Defined Benefit Plan. (Go to
        next Question)

b. [ ]  The full top heavy minimum will be provided in each plan (if
        selected, Plan Section 4.3(i) shall not apply).

c. [ ]  5% defined contribution minimum.

d. [ ]  2% defined benefit minimum.

e. [ ]  Specify the method under which the Plans will provide top heavy
        minimum benefits for Non-Key Employees that will preclude Employer
        discretion and avoid inadvertent omissions:

        __________________________________________________________________

NOTE:   If c., d., or e. is selected and the Defined Benefit Plan and this
        Plan do not benefit the same Participants, the uniformity
        requirement of the Section 401(a)(4) Regulations may be violated.

AND, the "Present Value of Accrued Benefit" (Plan Section 9.2) for Top Heavy purposes shall be based on...

f. [ ] Interest Rate: ___________________________________________________

Mortality Table: _________________________________________________

49. TOP HEAVY DUPLICATIONS (Plan Section 4.3(f)): When a Non-Key Employee is a Participant in this Plan and another defined contribution plan maintained by the Employer, indicate which method shall be utilized to avoid duplication of top heavy minimum benefits:

a. [ ]  N/A. The Employer does not maintain another qualified defined
        contribution plan.

b. [ ]  The full top heavy minimum will be provided in each plan.

c. [ ]  A minimum, non-integrated contribution of 3% of each Non-Key
        Employee's 415 Compensation shall be provided in the Money
        Purchase Plan (or other plan subject to Code Section 412).

d. [X]  Specify the method under which the Plans will provide top heavy
        minimum benefits for Non-Key Employees that will preclude Employer
        discretion and avoid inadvertent omissions, including any
        adjustments required under Code Section 415:
        Top heavy contributions shall be provided in this plan.

NOTE:   If c. or d. is selected and both plans do not benefit the same
        Participants, the uniformity requirement of the Section 401(a)(4)
        Regulations may be violated.

MISCELLANEOUS

50. LOANS TO PARTICIPANTS (Plan Section 7.6)

a. [ ]  Loans are not permitted.

b. [X]  Loans are permitted.

IF loans are permitted (select all that apply)...

c. [X]  loans will be treated as a Participant directed investment.

d. [ ]  loans will only be made for hardship or financial necessity.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

e. [X]  the minimum loan will be $ 500 (may not exceed $1,000).

f. [X]  a Participant may only have one (e.g., one (1)) loan(s)
        outstanding at any time.

g. [X]  all outstanding loan balances will become due and payable in
        their entirety upon the occurrence of a distributable event (other
        than satisfaction of the conditions for an in-service
        distribution).

h. [X]  loans will only be permitted from the following accounts (select
        all that apply):

        1.[X]  All accounts.

        2.[ ]  Participant's Elective Deferral Account

        3.[ ]  Qualified Matching Contribution Account and/or portion
               of Participant's Account attributable to Employer
               matching contributions.

        4.[ ]  Participant's Account attributable to Employer profit
               sharing contributions.

        5.[ ]  Qualified Non-Elective Contribution Account.

        6.[ ]  Participant's Rollover Account.

        7.[ ]  Participant's Transfer Account.

        8.[ ]  Participant's Voluntary Contribution Account.

NOTE: Department of Labor Regulations require the adoption of a separate
      written loan program setting forth the requirements outlined in Plan
      Section 7.6.

51. DIRECTED INVESTMENT ACCOUNTS (Plan Section 4.10)

a.[ ]  Participant directed investments are not permitted.

b.    [X] Participant directed investments are permitted for the following
      accounts (select all that apply):

      1. [X]  All accounts.

      2. [ ]  Participant's Elective Deferral Account

      3. [ ]  Qualified Matching Contribution Account and/or portion of
              Participant's Account attributable to Employer matching
              contributions.

      4. [ ]  Participant's Profit Sharing Account.

      5. [ ]  Qualified Non-Elective Contribution Account.

      6. [ ]  Participant's Rollover Account.

      7. [ ]  Participant's Transfer Account.

      8. [ ]  Participant's Voluntary Contribution Account.

9. [ ] Other:

AND, is it intended that the Plan comply with Act Section 404(c) with respect to the accounts subject to Participant investment direction?

c. [ ] No.

d. [X] Yes

AND, will voting rights on directed investments be passed through to

Participants?

      e. [ ]  No. Employer stock is not an alternative OR Plan is not intended
              to comply with Act Section 404(c).

      f. [ ]  Yes, for Employer stock only.

      g. [X]  Yes, for all investments.

52. ROLLOVERS (Plan Section 4.6)

      a. [ ]  Rollovers will not be accepted by this Plan.

      b. [X]  Rollovers will be accepted by this Plan.

AND, if b. is elected, rollovers may be accepted...

      c. [X]  from any Eligible Employee, even if not a Participant.

      d. [ ]  from Participants only.

AND, distributions from a Participant's Rollover Account may be made...

      e. [ ]  at any time.

      f. [X]  only when the Participant is otherwise entitled to a distribution
              under the Plan.

53. AFTER-TAX VOLUNTARY EMPLOYEE CONTRIBUTIONS (Plan Section 4.8)

a. [X] After-tax voluntary Employee contributions will not be allowed.

b. [ ] After-tax voluntary Employee contributions will be allowed.

54. LIFE INSURANCE (Plan Section 7.5)

a. [X]  Life insurance may not be purchased.

b. [ ]  Life insurance may be purchased at the option of the
        Administrator.

c. [ ]  Life insurance may be purchased at the option of the Participant.

AND, if b. or c. is elected, the purchase of initial or additional life insurance will be subject to the following limitations (select all that apply):

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

d. [ ]  N/A, no limitations.

e. [ ]  each initial Contract will have a minimum face amount of $_______.

f. [ ]  each additional Contract will have a minimum face amount of
        $_______.

g. [ ]  the Participant has completed _______ Years of Service (or Periods
        of Service).

h. [ ]  the Participant has completed _______ Years of Service (or Periods
        of Service) while a Participant in the Plan.

i. [ ]  the Participant is under age _______ on the Contract issue date.

j. [ ]  the maximum amount of all Contracts on behalf of a Participant may
        not exceed $_________.

k. [ ]  the maximum face amount of any life insurance Contract will be
        $_______.

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

The adopting Employer may rely on an opinion letter issued by the Internal Revenue Service as evidence that the plan is qualified under Code Section 401 only to the extent provided in Announcement 2001-77, 2001-30 I.R.B.

The Employer may not rely on the opinion letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the opinion letter issued with respect to the plan and in Announcement 2001-77.

In order to have reliance in such circumstances or with respect to such qualification requirements, application for a determination letter must be made to Employee Plans Determinations of the Internal Revenue Service.

This Adoption Agreement may be used only in conjunction with basic Plan document #01. This Adoption Agreement and the basic Plan document shall together be known as American Express Tax & Business Services, Inc. Prototype Non-Standardized
401(k) Profit Sharing Plan and Trust #01-005.

The adoption of this Plan, its qualification by the IRS, and the related tax consequences are the responsibility of the Employer and its independent tax and legal advisors.

American Express Tax & Business Services, Inc. will notify the Employer of any amendments made to the Plan or of the discontinuance or abandonment of the Plan. Furthermore, in order to be eligible to receive such notification, we agree to notify American Express Tax & Business Services, Inc. of any change in address.

This Plan may not be used, and shall not be deemed to be a Prototype Plan, unless an authorized representative of American Express Tax & Business Services, Inc. has acknowledged the use of the Plan. Such acknowledgment is for administerial purposes only. It acknowledges that the Employer is using the Plan but does not represent that this Plan, including the choices selected on the Adoption Agreement, has been reviewed by a representative of the sponsor or constitutes a qualified retirement plan.

American Express Tax & Business Services, Inc.

By: /s/ Rosemary M. Panico-Marino
    -----------------------------
With regard to any questions regarding the provisions of the Plan, adoption of
the Plan, or the effect of an opinion letter from the IRS, call or write (this
information must be completed by the sponsor of this Plan or its designated
representative):

Name: Rosemarie Panico-Marino/American Express Tax & Business Services, Inc.

Address: One South Wacker Drive, Suite 800

Chicago Illinois 60606

Telephone: (312) 634-4343

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

The Employer and Trustee hereby cause this Plan to be executed on March 23, 2005.

Furthermore, this Plan may not be used unless acknowledged by American Express Tax & Business Services, Inc. or its authorized representative.

EMPLOYER:

By: /s/ Sean Featherston
    -------------------------
    Capella Education Company

[X] The signature of the Trustee appears on a separate trust agreement attached to the Plan,

TRUSTEE

NON-STANDARDIZED 401(k) PROFIT SHARING PLAN

EGTRRA
AMENDMENT TO THE

CAPELLA EDUCATION COMPANY RETIREMENT SAVINGS PLAN

EGTRRA - EMPLOYER

ARTICLE I
PREAMBLE

1.1 Adoption and effective date of amendment. This amendment of the plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. Except as otherwise provided, this amendment shall be effective as of the first day of the first plan year beginning after December 31, 2001.

1.2 Supersession of inconsistent provisions. This amendment shall supersede the provisions of the plan to the extent those provisions are inconsistent with the provisions of this amendment.

ARTICLE II
ADOPTION AGREEMENT ELECTIONS

THE QUESTIONS IN THIS ARTICLE II ONLY NEED TO BE COMPLETED IN ORDER TO OVERRIDE THE DEFAULT PROVISIONS SET FORTH BELOW. IF ALL OF THE DEFAULT PROVISIONS WILL APPLY, THEN THESE QUESTIONS SHOULD BE SKIPPED.

UNLESS THE EMPLOYER ELECTS OTHERWISE IN THIS ARTICLE II, THE FOLLOWING DEFAULTS APPLY:

1) THE VESTING SCHEDULE FOR MATCHING CONTRIBUTIONS WILL BE A 6 YEAR GRADED SCHEDULE (IF THE PLAN CURRENTLY HAS A GRADED SCHEDULE THAT DOES NOT SATISFY EGTRRA) OR A 3 YEAR CLIFF SCHEDULE (IF THE PLAN CURRENTLY HAS A CLIFF SCHEDULE THAT DOES NOT SATISFY EGTRRA), AND SUCH SCHEDULE WILL APPLY TO ALL MATCHING CONTRIBUTIONS (EVEN THOSE MADE PRIOR TO 2002).

2) ROLLOVERS ARE AUTOMATICALLY EXCLUDED IN DETERMINING WHETHER THE $5,000 THRESHOLD HAS BEEN EXCEEDED FOR AUTOMATIC CASH-OUTS (IF THE PLAN IS NOT SUBJECT TO THE QUALIFIED JOINT AND SURVIVOR ANNUITY RULES AND PROVIDES FOR AUTOMATIC CASH-OUTS). THIS IS APPLIED TO ALL PARTICIPANTS REGARDLESS OF WHEN THE DISTRIBUTABLE EVENT OCCURRED.

3) THE SUSPENSION PERIOD AFTER A HARDSHIP DISTRIBUTION IS MADE WILL BE 6 MONTHS AND THIS WILL ONLY APPLY TO HARDSHIP DISTRIBUTIONS MADE AFTER 2001.

4) CATCH-UP CONTRIBUTIONS WILL BE ALLOWED.

5) FOR TARGET BENEFIT PLANS, THE INCREASED COMPENSATION LIMIT OF $200,000 WILL BE APPLIED RETROACTIVELY (I.E., TO YEARS PRIOR TO 2002).

2.1 VESTING SCHEDULE FOR MATCHING CONTRIBUTIONS

If there are matching contributions subject to a vesting schedule that does not satisfy EGTRRA, then unless otherwise elected below, for participants who complete an hour of service in a plan year beginning after December 31, 2001, the following vesting schedule will apply to all matching contributions subject to a vesting schedule:

If the plan has a graded vesting schedule (i.e., the vesting schedule includes a vested percentage that is more than 0% and less than 100%) the following will apply:

Years of vesting service       Nonforfeitable percentage
           2                               20%
           3                               40%
           4                               60%
           5                               80%
           6                              100%

If the plan does not have a graded vesting schedule, then matching contributions will be nonforfeitable upon the completion of 3 years of vesting service.

In lieu of the above vesting schedule, the employer elects the following schedule:

a. [ ]  3 year cliff (a participant's accrued benefit derived from
        employer matching contributions shall be nonforfeitable upon the
        participant's completion of three years of vesting service).

b. [ ]  6 year graded schedule (20% after 2 years of vesting service and
        an additional 20% for each year thereafter).

c. [ ] Other (must be at least as liberal as a. or the b. above):

EGTRRA - EMPLOYER

Years of vesting service     Nonforfeitable percentage
      ________                        ________%
      ________                        ________%
      ________                        ________%
      ________                        ________%
      ________                        ________%

The vesting schedule set forth herein shall only apply to participants who complete an hour of service in a plan year beginning after December 31, 2001, and, unless the option below is elected, shall apply to all matching contributions subject to a vesting schedule.

d. [ ]  The vesting schedule will only apply to matching contributions
        made in plan years beginning after December 31, 2001 (the prior
        schedule will apply to matching contributions made in prior plan
        years).

2.2 EXCLUSION OF ROLLOVERS IN APPLICATION OF INVOLUNTARY CASH-OUT PROVISIONS (FOR PROFIT SHARING AND 401(K) PLANS ONLY). If the plan is not subject to the qualified joint and survivor annuity rules and includes involuntary cash-out provisions, then unless one of the options below is elected, effective for distributions made after December 31, 2001, rollover contributions will be excluded in determining the value of the participant's nonforfeitable account balance for purposes of the plan's involuntary cash-out rules.

a. [ ]  Rollover contributions will not be excluded.

b. [ ]  Rollover contributions will be excluded only with respect to
        distributions made after ________. (Enter a date no earlier than
        December 31, 2001.)

c. [ ]  Rollover contributions will only be excluded with respect to
        participants who separated from service after _______. (Enter a
        date. The date may be earlier than December 31, 2001.)

2.3 SUSPENSION PERIOD OF HARDSHIP DISTRIBUTIONS. If the plan provides for hardship distributions upon satisfaction of the safe harbor (deemed) standards as set forth in Treas. Reg. Section 1.401(k)-1(d)(2)(iv), then, unless the option below is elected, the suspension period following a hardship distribution shall only apply to hardship distributions made after December 31, 2001.

[ ] With regard to hardship distributions made during 2001, a participant shall be prohibited from making elective deferrals and employee contributions under this and all other plans until the later of January 1, 2002, or 6 months after receipt of the distribution.

2.4 CATCH-UP CONTRIBUTIONS (FOR 401(K) PROFIT SHARING PLANS ONLY): The plan permits catch-up contributions (Article VI) unless the option below is elected.

[ ] The plan does not permit catch-up contributions to be made.

ARTICLE III
VESTING OF MATCHING CONTRIBUTIONS

3.1 Applicability. This Article shall apply to participants who complete an Hour of Service after December 31, 2001, with respect to accrued benefits derived from employer matching contributions made in plan years beginning after December 31, 2001. Unless otherwise elected by the employer in
Section 2.1 above, this Article shall also apply to all such participants with respect to accrued benefits derived from employer matching contributions made in plan years beginning prior to January 1, 2002.

3.2 Vesting schedule. A participant's accrued benefit derived from employer matching contributions shall vest as provided in Section 2.1 of this amendment.

ARTICLE IV
INVOLUNTARY CASH-OUTS

4.1 Applicability and effective date. If the plan provides for involuntary cash-outs of amounts less than $5,000, then unless otherwise elected in
Section 2.2 of this amendment, this Article shall apply for distributions made after December 31, 2001, and shall apply to all participants. However, regardless of the preceding, this Article shall not apply if the plan is subject to the qualified joint and survivor annuity requirements of Sections 401(a)(11) and 417 of the Code.

4.2 Rollovers disregarded in determining value of account balance for involuntary distributions. For purposes of the Sections of the plan that provide for the involuntary distribution of vested accrued benefits of $5,000 or less, the value of a participant's nonforfeitable account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of Sections 402(c), 403(a)(4),
403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code. If the value of the participant's

EGTRRA - EMPLOYER

nonforfeitable account balance as so determined is $5,000 or less, then the plan shall immediately distribute the participant's entire nonforfeitable account balance.

ARTICLE V
HARDSHIP DISTRIBUTIONS

5.1 Applicability and effective date. If the plan provides for hardship distributions upon satisfaction of the safe harbor (deemed) standards as set forth in Treas. Reg. Section 1.401(k)-1(d)(2)(iv), then this Article shall apply for calendar years beginning after 2001.

5.2 Suspension period following hardship distribution. A participant who receives a distribution of elective deferrals after December 31, 2001, on account of hardship shall be prohibited from making elective deferrals and employee contributions under this and all other plans of the employer for 6 months after receipt of the distribution. Furthermore, if elected by the employer in Section 2.3 of this amendment, a participant who receives a distribution of elective deferrals in calendar year 2001 on account of hardship shall be prohibited from making elective deferrals and employee contributions under this and all other plans until the later of January 1, 2002, or 6 months after receipt of the distribution.

ARTICLE VI
CATCH-UP CONTRIBUTIONS

Catch-up Contributions. Unless otherwise elected in Section 2.4 of this amendment, all employees who are eligible to make elective deferrals under this plan and who have attained age 50 before the close of the plan year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the plan implementing the required limitations of Sections 402(g) and 415 of the Code. The plan shall not be treated as failing to satisfy the provisions of the plan implementing the requirements of Section 401 (k)(3), 401(k)(11), 401(k)(12),
410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions.

ARTICLE VII
INCREASE IN COMPENSATION LIMIT

Increase in Compensation Limit. The annual compensation of each participant taken into account in determining allocations for any plan year beginning after December 31, 2001, shall not exceed $200,000, as adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. Annual compensation means compensation during the plan year or such other consecutive 12-month period over which compensation is otherwise determined under the plan (the determination period). If this is a target benefit plan, then except as otherwise elected in Section 2.5 of this amendment, for purposes of determining benefit accruals in a plan year beginning after December 31, 2001, compensation for any prior determination period shall be limited to $200,000. The cost-of-living adjustment in effect for a calendar year applies to annual compensation for the determination period that begins with or within such calendar year.

ARTICLE VIII
PLAN LOANS

Plan loans for owner-employees or shareholder-employees. If the plan permits loans to be made to participants, then effective for plan loans made after December 31, 2001, plan provisions prohibiting loans to any owner-employee or shareholder-employee shall cease to apply.

ARTICLE IX
LIMITATIONS ON CONTRIBUTIONS (IRC SECTION 415 LIMITS)

9.1 Effective date. This Section shall be effective for limitation years beginning after December 31, 2001.

9.2 Maximum annual addition. Except to the extent permitted under Article VI of this amendment and Section 414(v) of the Code, if applicable, the annual addition that may be contributed or allocated to a participant's account under the plan for any limitation year shall not exceed the lesser of:

a. $40,000, as adjusted for increases in the cost-of-living under
Section 415(d) of the Code, or

b. 100 percent of the participant's compensation, within the meaning of
Section 415(c)(3) of the Code, for the limitation year.

The compensation limit referred to in b. shall not apply to any contribution for medical benefits after separation from service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition.

EGTRRA - EMPLOYER

ARTICLE X
MODIFICATION OF TOP-HEAVY RULES

10.1    Effective date. This Article shall apply for purposes of determining
        whether the plan is a top-heavy plan under Section 416(g) of the Code
        for plan years beginning after December 31, 2001, and whether the plan
        satisfies the minimum benefits requirements of Section 416(c) of the
        Code for such years. This Article amends the top-heavy provisions of the
        plan.

10.2    Determination of top-heavy status.

10.2.1  Key employee. Key employee means any employee or former employee
        (including any deceased employee) who at any time during the plan year
        that includes the determination date was an officer of the employer
        having annual compensation greater than $130,000 (as adjusted under
        Section 416(i)(1) of the Code for plan years beginning after December
        31, 2002), a 5-percent owner of the employer, or a 1-percent owner of
        the employer having annual compensation of more than $150,000. For this
        purpose, annual compensation means compensation within the meaning of
        Section 415(c)(3) of the Code. The determination of who is a key
        employee will be made in accordance with Section 416(i)(1) of the Code
        and the applicable regulations and other guidance of general
        applicability issued thereunder.

10.2.2  Determination of present values and amounts. This Section 10.2.2 shall
        apply for purposes of determining the present values of accrued benefits
        and the amounts of account balances of employees as of the determination
        date.

        a.  Distributions during year ending on the determination date. The
            present values of accrued benefits and the amounts of account
            balances of an employee as of the determination date shall be
            increased by the distributions made with respect to the employee
            under the plan and any plan aggregated with the plan under Section
            416(g)(2) of the Code during the 1-year period ending on the
            determination date. The preceding sentence shall also apply to
            distributions under a terminated plan which, had it not been
            terminated, would have been aggregated with the plan under Section
            416(g)(2)(A)(i) of the Code. In the case of a distribution made for
            a reason other than separation from service, death, or disability,
            this provision shall be applied by substituting "5-year period" for
            "1-year period."

        b.  Employees not performing services during year ending on the
            determination date. The accrued benefits and accounts of any
            individual who has not performed services for the employer during
            the 1-year period ending on the determination date shall not be
            taken into account.

10.3    Minimum benefits.

10.3.1  Matching contributions. Employer matching contributions shall be taken
        into account for purposes of satisfying the minimum contribution
        requirements of Section 416(c)(2) of the Code and the plan. The
        preceding sentence shall apply with respect to matching contributions
        under the plan or, if the plan provides that the minimum contribution
        requirement shall be met in another plan, such other plan. Employer
        matching contributions that are used to satisfy the minimum contribution
        requirements shall be treated as matching contributions for purposes of
        the actual contribution percentage test and other requirements of
        Section 401(m) of the Code.

10.3.2  Contributions under other plans. The employer may provide, in an
        addendum to this amendment, that the minimum benefit requirement shall
        be met in another plan (including another plan that consists solely of a
        cash or deferred arrangement which meets the requirements of Section
        401(k)(12) of the Code and matching contributions with respect to which
        the requirements of Section 401(m)( (m)(11) of the Code are met). The
        addendum should include the name of the other plan, the minimum benefit
        that will be provided under such other plan, and the employees who will
        receive the minimum benefit under such other plan.

                                   ARTICLE XI
                                DIRECT ROLLOVERS

11.1    Effective date. This Article shall apply to distributions made after
        December 31, 2001.

11.2    Modification of definition of eligible retirement plan. For purposes of
        the direct rollover provisions of the plan, an eligible retirement plan
        shall also mean an annuity contract described in Section 403(b) of the
        Code and an eligible plan under Section 457(b) of the Code which is
        maintained by a state, political subdivision of a state, or any agency
        or instrumentality of a state or political subdivision of a state and
        which agrees to separately account for amounts transferred into such
        plan from this plan. The definition of eligible retirement plan shall
        also apply in the case of a distribution to a surviving spouse, or to a
        spouse or former spouse who is the alternate payee under a qualified
        domestic relation order, as defined in Section 414(p) of the Code.

EGTRRA - EMPLOYER

11.3    Modification of definition of eligible rollover distribution to exclude
        hardship distributions. For purposes of the direct rollover provisions
        of the plan, any amount that is distributed on account of hardship shall
        not be an eligible rollover distribution and the distributee may not
        elect to have any portion of such a distribution paid directly to an
        eligible retirement plan.

11.4    Modification of definition of eligible rollover distribution to include
        after-tax employee contributions. For purposes of the direct rollover
        provisions in the plan, a portion of a distribution shall not fail to be
        an eligible rollover distribution merely because the portion consists of
        after-tax employee contributions which are not includible in gross
        income. However, such portion may be transferred only to an individual
        retirement account or annuity described in Section 408(a) or (b) of the
        Code, or to a qualified defined contribution plan described in Section
        401 (a) or 403(a) of the Code that agrees to separately account for
        amounts so transferred, including separately accounting for the portion
        of such distribution which is includible in gross income and the portion
        of such distribution which is not so includible.

                                  ARTICLE XII
                           ROLLOVERS FROM OTHER PLANS

Rollovers from other plans. The employer, operationally and on a nondiscriminatory basis, may limit the source of rollover contributions that may be accepted by this plan.

ARTICLE XIII
REPEAL OF MULTIPLE USE TEST

Repeal of Multiple Use Test. The multiple use test described in Treasury Regulation Section 1.401(m)-2 and the plan shall not apply for plan years beginning after December 31, 2001.

ARTICLE XIV
ELECTIVE DEFERRALS

14.1    Elective Deferrals Contribution Limitation. No participant shall be
        permitted to have elective deferrals made under this plan, or any other
        qualified plan maintained by the employer during any taxable year, in
        excess of the dollar limitation contained in Section 402(g) of the Code
        in effect for such taxable year, except to the extent permitted under
        Article VI of this amendment and Section 414(v) of the Code, if
        applicable.

14.2    Maximum Salary Reduction Contributions for SIMPLE plans. If this is a
        SIMPLE 401(k) plan, then except to the extent permitted under Article VI
        of this amendment and Section 414(v) of the Code, if applicable, the
        maximum salary reduction contribution that can be made to this plan is
        the amount determined under Section 408(p)(2)(A)(ii) of the Code for the
        calendar year.

                                   ARTICLE XV
                          SAFE HARBOR PLAN PROVISIONS

Modification of Top-Heavy Rules. The top-heavy requirements of Section 416 of the Code and the plan shall not apply in any year beginning after December 31, 2001, in which the plan consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are met.

ARTICLE XVI
DISTRIBUTION UPON SEVERANCE OF EMPLOYMENT

16.1    Effective date. This Article shall apply for distributions and
        transactions made after December 31, 2001, regardless of when the
        severance of employment occurred.

16.2    New distributable event. A participant's elective deferrals, qualified
        nonelective contributions, qualified matching contributions, and
        earnings attributable to these contributions shall be distributed on
        account of the participant's severance from employment. However, such a
        distribution shall be subject to the other provisions of the plan
        regarding distributions, other than provisions that require a separation
        from service before such amounts may be distributed.

EGTRRA - EMPLOYER

This amendment has been executed this 23rd day of March, 2005.

Name of Employer: Capella Education Company

By: /s/  Sean Featherston
    ---------------------
              EMPLOYER

Name of Plan: Capella Education Company Retirement Savings Plan

POST-EGTRRA
AMENDMENT TO THE

CAPELLA EDUCATION COMPANY RETIREMENT SAVINGS PLAN

POST-EGTRRA -- SPONSOR

ARTICLE I
PREAMBLE

1.1 Adoption and effective date of amendment. This amendment of the plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the Job Creation and Worker Assistance Act of 2002, IRS Regulations issued pursuant to IRC ss.401(a)(9), and other IRS guidance. This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. Except as otherwise provided, this amendment shall be effective as of the first day of the first plan year beginning after December 31, 2001.

1.2 Supersession of inconsistent provisions. This amendment shall supersede the provisions of the plan to the extent those provisions are inconsistent with the provisions of this amendment.

1.3 Adoption by prototype sponsor. Except as otherwise provided herein, pursuant to Section 5.01 of Revenue Procedure 2000-20, the sponsor hereby adopts this amendment on behalf of all adopting employers.

ARTICLE II
ADOPTION AGREEMENT ELECTIONS

UNLESS THE EMPLOYER ELECTS OTHERWISE IN THIS ARTICLE II, THE FOLLOWING
DEFAULTS APPLY:

1. IF CATCH-UP CONTRIBUTIONS ARE PERMITTED, THEN THE CATCH-UP CONTRIBUTIONS ARE TREATED LIKE ANY OTHER ELECTIVE DEFERRALS FOR PURPOSES OF DETERMINING MATCHING CONTRIBUTIONS UNDER THE PLAN.

2. FOR PLANS SUBJECT TO THE QUALIFIED JOINT AND SURVIVOR ANNUITY RULES, ROLLOVERS ARE AUTOMATICALLY EXCLUDED IN DETERMINING WHETHER THE $5,000 THRESHOLD HAS BEEN EXCEEDED FOR AUTOMATIC CASH-OUTS (IF THE PLAN PROVIDES FOR AUTOMATIC CASH-OUTS). THIS IS APPLIED TO ALL PARTICIPANTS REGARDLESS OF WHEN THE DISTRIBUTABLE EVENT OCCURRED.

3. THE MINIMUM DISTRIBUTION REQUIREMENTS ARE EFFECTIVE FOR DISTRIBUTION CALENDAR YEARS BEGINNING WITH THE 2002 CALENDAR YEAR. IN ADDITION, PARTICIPANTS OR BENEFICIARIES MAY ELECT ON AN INDIVIDUAL BASIS WHETHER THE 5-YEAR RULE OR THE LIFE EXPECTANCY RULE IN THE PLAN APPLIES TO DISTRIBUTIONS AFTER THE DEATH OF A PARTICIPANT WHO HAS A DESIGNATED BENEFICIARY.

4. AMOUNTS THAT ARE "DEEMED 125 COMPENSATION" ARE NOT INCLUDED IN THE DEFINITION OF COMPENSATION.

2.1 EXCLUSION OF ROLLOVERS IN APPLICATION OF INVOLUNTARY CASH-OUT PROVISIONS. If the plan is subject to the joint and survivor annuity rules and includes involuntary cash-out provisions, then unless one of the options below is elected, effective for distributions made after December 31, 2001, rollover contributions will be excluded in determining the value of a participant's nonforfeitable account balance for purposes of the plan's involuntary cash-out rules.

a.  [ ]   Rollover contributions will not be excluded.

b.  [ ]   Rollover contributions will be excluded only with respect to
          distributions made after ___________. (Enter a date no earlier
          than December 31, 2001).

c.  [ ]   Rollover contributions will only be excluded with respect to
          participants who separated from service after _____________.
          (Enter  a date. The date may be earlier than December 31, 2001.)

2.2 CATCH-UP CONTRIBUTIONS (FOR 401(K) PROFIT SHARING PLANS ONLY): The plan permits catch-up contributions effective for calendar years beginning after December 31, 2001, (Article V) unless otherwise elected below.

a.  [ ]   The plan does not permit catch-up contributions to be made.

b.  [ ]   Catch-up contributions are permitted effective as of: ____
          (enter a date no earlier than January 1, 2002).

AND, catch-up contributions will be taken into account in applying any matching contribution under the Plan unless otherwise elected below.

c.  [ ]   Catch-up contributions will not be taken into
          account in applying any matching contribution under the
          Plan.

POST-EGTRRA -- SPONSOR

2.3 AMENDMENT FOR SECTION 401(A)(9) FINAL AND TEMPORARY TREASURY REGULATIONS.

a. EFFECTIVE DATE. Unless a later effective date is specified below, the provisions of Article VI of this amendment will apply for purposes of determining required minimum distributions for calendar years beginning with the 2002 calendar year.

[ ] This amendment applies for purposes of determining required minimum distributions for distribution calendar years beginning with the 2003 calendar year, as well as required minimum distributions for the 2002 distribution calendar year that are made on or after ________ (leave blank if this amendment does not apply to any minimum distributions for the 2002 distribution calendar year).

b. ELECTION TO NOT PERMIT PARTICIPANTS OR BENEFICIARIES TO ELECT 5-YEAR RULE.

Unless elected below, Participants or beneficiaries may elect on an individual basis whether the 5-year rule or the life expectancy rule in Sections 6.2.2 and 6.4.2 of this amendment applies to distributions after the death of a Participant who has a designated beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under Section 6.2.2 of this amendment, or by September 30 of the calendar year which contains the fifth anniversary of the Participant's (or, if applicable, surviving spouse's) death. If neither the Participant nor beneficiary makes an election under this paragraph, distributions will be made in accordance with Sections 6.2.2 and 6.4.2 of this amendment and, if applicable, the elections in Section 2.3.c of this amendment below.

[ ] The provision set forth above in this Section 2.3.b shall not apply. Rather, Sections 6.2.2 and 6.4.2 of this amendment shall apply except as elected in Section 2.3.c of this amendment below.

c. ELECTION TO APPLY 5-YEAR RULE TO DISTRIBUTIONS TO DESIGNATED BENEFICIARIES.

[ ] If the Participant dies before distributions begin and there is a designated beneficiary, distribution to the designated beneficiary is not required to begin by the date specified in the Plan, but the Participant's entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant's death. If the Participant's surviving spouse is the Participant's sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to either the Participant or the surviving spouse begin, this election will apply as if the surviving spouse were the Participant.

If the above is elected, then this election will apply to:

1. [ ] All distributions.

2. [ ] The following distributions: ________.

d. ELECTION TO ALLOW DESIGNATED BENEFICIARY RECEIVING DISTRIBUTIONS UNDER 5-YEAR RULE TO ELECT LIFE EXPECTANCY DISTRIBUTIONS.

[ ] A designated beneficiary who is receiving payments under the 5-year rule may make a new election to receive payments under the life expectancy rule until December 31, 2003, provided that all amounts that would have been required to be distributed under the life expectancy rule for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003, or the end of the 5-year period.

2.4 DEEMED 125 COMPENSATION. Article VII of this amendment shall not apply unless otherwise elected below.

[ ] Article VII of this amendment (Deemed 125 Compensation) shall apply effective as of Plan Years and Limitation Years beginning on or after ____ (insert the later of January 1, 1998, or the first day of the first plan year the Plan used this definition).

ARTICLE III
INVOLUNTARY CASH-OUTS

3.1 Applicability and effective date. If the plan is subject to the qualified joint and survivor annuity rules and provides for involuntary cash-outs of amounts less than $5,000, then unless otherwise elected in Section 2.1 of this amendment, this Article shall apply for distributions made after December 31, 2001, and shall apply to all participants.

3.2 Rollovers disregarded in determining value of account balance for involuntary distributions. For purposes of the Sections of the plan that provide for the involuntary distribution of vested accrued benefits of $5,000 or less, the value of a participant's nonforfeitable account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of Sections

POST-EGTRRA -- SPONSOR

402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(l6) of the Code. If the value of the participant's nonforfeitable account balance as so determined is $5,000 or less, then the plan shall immediately distribute the participant's entire nonforfeitable account balance.

ARTICLE IV
HARDSHIP DISTRIBUTIONS

Reduction of Section 402(e) of the Code following hardship distribution. If the plan provides for hardship distributions upon satisfaction of the safe harbor (deemed) standards as set forth in Treas. Reg. Section 1.401(k)-1(d)(2)(iv), then effective as of the date the elective deferral suspension period is reduced from 12 months to 6 months pursuant to EGTRRA, there shall be no reduction in the maximum amount of elective deferrals that a Participant may make pursuant to
Section 402(g) of the Code solely because of a hardship distribution made by this plan or any other plan of the Employer.

ARTICLE V
CATCH-UP CONTRIBUTIONS

Catch-up Contributions. Unless otherwise elected in Section 2.2 of this amendment, effective for calendar years beginning after December 31, 2001, all employees who are eligible to make elective deferrals under this plan and who have attained age 50 before the close of the calendar year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the plan implementing the required limitations of Sections 402(g) and 415 of the Code. The plan shall not be treated as failing to satisfy the provisions of the plan implementing the requirements of Sections 401(k)(3), 401(k)(11), 401 (k)(12), 410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions.

If elected in Section 2.2, catch-up contributions shall not be treated as elective deferrals for purposes of applying any Employer matching contributions under the plan.

ARTICLE VI
REQUIRED MINIMUM DISTRIBUTIONS

6.1 GENERAL RULES

6.1.1 Effective Date. Unless a later effective date is specified in Section 2.3.a of this amendment, the provisions of this amendment will apply for purposes of determining required minimum distributions for calendar years beginning with the 2002 calendar year.

6.1.2 Coordination with Minimum Distribution Requirements Previously in Effect. If the effective date of this amendment is earlier than calendar years beginning with the 2003 calendar year, required minimum distributions for 2002 under this amendment will be determined as follows. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this amendment equals or exceeds the required minimum distributions determined under this amendment, then no additional distributions will be required to be made for 2002 on or after such date to the distributee. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this amendment is less than the amount determined under this amendment, then required minimum distributions for 2002 on and after such date will be determined so that the total amount of required minimum distributions for 2002 made to the distributee will be the amount determined under this amendment.

6.1.3 Precedence. The requirements of this amendment will take precedence over any inconsistent provisions of the Plan.

6.1.4 Requirements of Treasury Regulations Incorporated. All distributions required under this amendment will be determined and made in accordance with the Treasury regulations under Section 401(a)(9) of the Internal Revenue Code.

6.1.5 TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this amendment, distributions may be made under a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA.

6.2 TIME AND MANNER OF DISTRIBUTION

6.2.1 Required Beginning Date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's required beginning date.

6.2.2 Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant's entire interest will be distributed, or begin to be distributed, no later than as follows:

POST-EGTRRA -- SPONSOR

(a) If the Participant's surviving spouse is the Participant's sole designated beneficiary, then, except as provided in Article VI, distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70-1/2, if later.

(b) If the Participant's surviving spouse is not the Participant's sole designated beneficiary, then, except as provided in Section 2.3 of this amendment, distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(c) If there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant's death.

(d) If the Participant's surviving spouse is the Participant's sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 6.2.2, other than Section 6.2.2(a), will apply as if the surviving spouse were the Participant.

For purposes of this Section 6.2.2 and Section 2.3, unless Section 6.2.2(d) applies, distributions are considered to begin on the Participant's required beginning date. If Section 6.2.2(d) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 6.2.2(a). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant's required beginning date (or to the Participant's surviving spouse before the date distributions are required to begin to the surviving spouse under Section 6.2.2(a)), the date distributions are considered to begin is the date distributions actually commence.

6.2.3 Forms of Distribution. Unless the Participant's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with Sections 6.3 and 6.4 of this amendment. If the Participant's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury regulations.

6.3 REQUIRED MINIMUM DISTRIBUTIONS DURING PARTICIPANT'S LIFETIME

6.3.1 Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participant's lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(a) the quotient obtained by dividing the Participant's account balance by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant's age as of the Participant's birthday in the distribution calendar year; or

(b) if the Participant's sole designated beneficiary for the distribution calendar year is the Participant's spouse, the quotient obtained by dividing the Participant's account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant's and spouse's attained ages as of the Participant's and spouse's birthdays in the distribution calendar year.

6.3.2 Lifetime Required Minimum Distributions Continue Through Year of Participant's Death. Required minimum distributions will be determined under this Section 6.3 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant's date of death.

6.4 REQUIRED MINIMUM DISTRIBUTIONS AFTER PARTICIPANT'S DEATH

6.4.1 Death On or After Date Distributions Begin.

(a) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant's designated beneficiary, determined as follows:

(1) The Participant's remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(2) If the Participant's surviving spouse is the Participant's sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant's death using the surviving spouse's age as of the spouse's birthday in that year. For distribution

POST-EGTRRA -- SPONSOR

calendar years after the year of the surviving spouse's death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each subsequent calendar year.

(3) If the Participant's surviving spouse is not the Participant's sole designated beneficiary, the designated beneficiary's remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant's death, reduced by one for each subsequent year.

(b) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant's death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the Participant's remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

6.4.2 Death Before Date Distributions Begin.

(a) Participant Survived by Designated Beneficiary. Except as provided in
Section 2.3, if the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the remaining life expectancy of the Participant's designated beneficiary, determined as provided in Section 6.4.1.

(b) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, distribution of the Participant's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death.

(c) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant's surviving spouse is the Participant's sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 6.2.2(a), this
Section 6.4.2 will apply as if the surviving spouse were the Participant.

6.5 DEFINITIONS

6.5.1 Designated beneficiary. The individual who is designated as the Beneficiary under the Plan and is the designated beneficiary under Section 401(a)(9) of the Internal Revenue Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations.

6.5.2 Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section
6.2.2. The required minimum distribution for the Participant's first distribution calendar year will be made on or before the Participant's required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant's required beginning date occurs, will be made on or before December 31 of that distribution calendar year.

6.5.3 Life expectancy. Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations.

6.5.4 Participant's account balance. The account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of the dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.

6.5.5 Required beginning date. The date specified in the Plan when distributions under Section 401(a)(9) of the Internal Revenue Code are required to begin.

POST-EGTRRA -- SPONSOR

ARTICLE VII
DEEMED 125 COMPENSATION

If elected, this Article shall apply as of the effective date specified in
Section 2.4 of this amendment. For purposes of any definition of compensation under this Plan that includes a reference to amounts under Section 125 of the Code, amounts under Section 125 of the Code include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he or she has other health coverage. An amount will be treated as an amount under Section 125 of the Code only if the Employer does not request or collect information regarding the Participant's other health coverage as part of the enrollment process for the health plan.

Except with respect to any election made by the employer in Article II, this amendment is hereby adopted by the prototype sponsor on behalf of all adopting employers on:

[SPONSOR'S SIGNATURE AND ADOPTION DATE ARE ON FILE WITH SPONSOR]

NOTE: THE EMPLOYER ONLY NEEDS TO EXECUTE THIS AMENDMENT IF AN ELECTION HAS BEEN MADE IN ARTICLE II OF THIS AMENDMENT.

This amendment has been executed this 23rd day of March , 2005

Name of Plan: Capella Education Company Retirement Savings Plan

Name of Employer: Capella Education Company

By: /s/  Sean Featherston
    ---------------------
          EMPLOYER

Name of Participating Employer: ___________________________

By: _______________________________________________________
PARTICIPATING EMPLOYER

POST-EGTRRA -- SPONSOR

Internal Revenue Service Department of the Treasury

Washington, DC 20224

Plan Description: Prototype Non-Standardized Profit Sharing Plan with CODA FF [?] i3B7220701-005 Case: 200110524 EIN: 41-1795707 BPD: 01 Plan: 005 Letter Serial No: K337970a

Contact Person: Ms. Arrington 50-00197

AMERICAN EXPRESS TAX & BUSINESS SERVICES Telephone Number: (202) 283-8811

ONE SOUTH WACKER DRIVE SUITE 900         In Reference to: T:EP:RA:ICU

CHICAGO, IL 60606
                                         Date: 08/07/2001

Dear Applicant:

In our opinion, the form of the plan identified above is acceptable under section 401 of the internal Revenue Code for use by employers for the benefit of their employees. This opinion relates only to the acceptability of the form of the plan under the Internal Revenue Code. It is not an opinion of the effect of other Federal or local statutes.

You must furnish a copy of this letter to each employer who adopts this plan. You are also required to send a copy of the approved form of the plan, any approved amendments and related documents to Employee Plans Determinations in Cincinnati at the address specified in section 9.11 of Rev. Proc. 2000-20, 2000-6 I.R.B. 553.

This letter considers the changes in qualifications requirements made by the Uruguay Round Agreements Act (GATT). Pub. L. 103-465, the Small Business Job Protection Act of 1996, Pub. L. 104-188, the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103-353, the Taxpayer Relief Act of 1997, Pub. L. 105-34, the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206 and the Community Renewal Tax Relief Act of 2000, Pub. L. 106-554. Those laws are referred to collectively as GUST.

Our opinion on the acceptability of the form of the plan is not a ruling or determination as to whether an employer's plan qualifies under Code section
401(a). However, an employer that adopts this plan may rely on this letter with respect to the qualification of its plan under Code section 401(a), as provided for in Announcement 2001-77, 2001-30 I.R.B. and outlined below. The terms of the plan must be followed in operation.

Except as provided below, our opinion does not apply with respect to the requirements of: (a) Code sections 401(a) (4), 401(a)(26), 401(1), 410(b) and
414(s). Our opinion does not apply for purposes of Code section 401(a)(10)(B) and section 401(a)(16) if an employer ever maintained another qualified plan for one or more employees who are covered by this plan. For this purpose, the employer will not be considered to have maintained another plan merely because the employer has maintained another defined contribution plan(s), provided such other plan(s) has been terminated prior to the effective date of this plan and no annual additions have been credited to the account of any participant under such other plan(s) as of any date within the limitation year of this plan. Likewise, if this plan is first effective on or after the effective date of the repeal of Code section 415(e), the employer will not be considered to have maintained another plan merely because the employer has maintained a defined benefit plan(s), provided the defined benefit plan(s) has been terminated prior to the effective date of this plan. Our opinion also does not apply for purposes of Code section 401(a)(16) if, after December 31, 1985, the employer maintains a welfare benefit fund defined in Code section 419(e), which provides postretirement medical benefits allocated to separate accounts for key employees as defined in Code section 419A(d)(3).

Our opinion applies with respect to the requirements of Code section 410(b) if 100 percent of all nonexcludable employees benefit under the plan. Employers that elect a safe harbor allocation formula and a safe harbor compensation definition can also rely on an opinion letter with respect to the nondiscriminatory amounts requirement under section 401(a)(4) and the requirements of sections 401(k) and 401(m) (except where the plan is a safe harbor plan under section 401(k)(12) that provides for the safe harbor contribution to be made under another plan).

An employer that elects to continue to apply the pre-GUST family aggregation rules in years beginning after December 31, 1996, or the combined plan limit of section 415(e) in years beginning after December 31, 1999, will not be able to rely on the opinion letter without a determination letter. The employer may request a determination letter by filing an application with Employee Plans Determinations on Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans.

If you, the master or prototype sponsor, have any questions concerning the IRS processing of this case, please call the above telephone number. This number is only for use of the sponsor. Individual participants and/or adopting employers with questions concerning the plan should contact the master or prototype sponsor. The plan's adoption agreement must include the sponsor's address and telephone number for inquiries by adopting employers.

POST-EGTRRA -- SPONSOR

If you write to the IRS regarding this plan, please provide your telephone number and the most convenient time for us to call in case we need more information. Whether you call or write, please refer to the Letter Serial Number and File Folder Number shown in the heading of this letter.

You should keep this letter as a permanent record. Please notify us if you modify or discontinue sponsorship of this plan

Sincerely yours,

/s/  Paul T. Shultz

Director
Employee Plans Rulings & Agreements

AMERICAN EXPRESS TAX AND BUSINESS SERVICES INC.
DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

DEFINED CONTRIBUTION PROTOTYPE PLAN

TABLE OF CONTENTS

ARTICLE I
         DEFINITIONS

ARTICLE II
         ADMINISTRATION
         2.1      POWERS AND RESPONSIBILITIES OF THE EMPLOYER................................................    13
         2.2      DESIGNATION OF ADMINISTRATIVE AUTHORITY....................................................    14
         2.3      ALLOCATION-AND DELEGATION OF RESPONSIBILITIES..............................................    14
         2.4      POWERS AND DUTIES OF THE ADMINISTRATOR.....................................................    14
         2.5      RECORDS AND REPORTS........................................................................    15
         2.6      APPOINTMENT OF ADVISERS....................................................................    15
         2.7      INFORMATION FROM EMPLOYER..................................................................    16
         2.8      PAYMENT OF EXPENSES........................................................................    16
         2.9      MAJORITY ACTIONS...........................................................................    16
         2.10     CLAIMS PROCEDURE...........................................................................    16
         2.11     CLAIMS REVIEW PROCEDURE....................................................................    16

ARTICLE III
         ELIGIBILITY
         3.1      CONDITIONS OF ELIGIBILITY..................................................................    17
         3.2      EFFECTIVE DATE OF PARTICIPATION............................................................    17
         3.3      DETERMINATION OF ELIGIBILITY...............................................................    17
         3.4      TERMINATION OF ELIGIBILITY.................................................................    17
         3.5      REHIRED EMPLOYEES AND BREAKS IN SERVICE....................................................    17
         3.6      ELECTION NOT TO PARTICIPATE................................................................    18
         3.7      CONTROL OF ENTITIES BY OWNER-EMPLOYEE......................................................    18

ARTICLE IV
         CONTRIBUTION AND ALLOCATION
         4.1      FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION............................................    18
         4.2      TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION.................................................    19
         4.3      ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS.......................................    19
         4.4      MAXIMUM ANNUAL ADDITIONS...................................................................    24
         4.5      ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS..................................................    28
         4.6      ROLLOVERS..................................................................................    28
         4.7      PLAN-TO-PLAN TRANSFERS FROM QUALIFIED PLANS................................................    29
         4.8      VOLUNTARY EMPLOYEE CONTRIBUTIONS...........................................................    30
         4.9      QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS.................................................    30
         4.10     DIRECTED INVESTMENT ACCOUNT................................................................    31
         4.11     INTEGRATION IN MORE THAN ONE PLAN..........................................................    32
         4.12     QUALIFIED MILITARY SERVICE.................................................................    32

ARTICLE V
         VALUATIONS
         5.1      VALUATION OF THE TRUST FUND................................................................    33
         5.2      METHOD OF VALUATION........................................................................    33

ARTICLE VI
         DETERMINATION AND DISTRIBUTION OF BENEFITS
         6.1      DETERMINATION OF BENEFITS UPON RETIREMENT..................................................    33
         6.2      DETERMINATION OF BENEFITS UPON DEATH.......................................................    33
         6.3      DETERMINATION OF BENEFITS IN EVENT OF DISABILITY...........................................    34
         6.4      DETERMINATION OF BENEFITS UPON TERMINATION.................................................    34

DEFINED CONTRIBUTION PROTOTYPE PLAN

         6.5      DISTRIBUTION OF BENEFITS...................................................................    36
         6.6      DISTRIBUTION OF BENEFITS UPON DEATH........................................................    41
         6.7      TIME OF DISTRIBUTION.......................................................................    44
         6.8      DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY..........................................    44
         6.9      LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN.............................................    44
         6.10     IN-SERVICE DISTRIBUTION....................................................................    44
         6.11     ADVANCE DISTRIBUTION FOR HARDSHIP..........................................................    44
         6.12     SPECIAL RULE FOR CERTAIN PROFIT SHARING PLANS..............................................    45
         6.13     QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION............................................    46
         6.14     DIRECT ROLLOVERS...........................................................................    46
         6.15     TRANSFER OF ASSETS FROM A MONEY PURCHASE PLAN..............................................    46
         6.16     ELECTIVE TRANSFERS OF BENEFITS TO OTHER PLANS..............................................    47

ARTICLE VII
         TRUSTEE AND CUSTODIAN
         7.1      BASIC RESPONSIBILITIES OF THE TRUSTEE......................................................    48
         7.2      INVESTMENT POWERS AND DUTIES OF DISCRETIONARY TRUSTEE......................................    48
         7.3      INVESTMENT POWERS AND DUTIES OF NONDISCRETIONARY TRUSTEE...................................    50
         7.4      POWERS AND DUTIES OF CUSTODIAN.............................................................    52
         7.5      LIFE INSURANCE.............................................................................    52
         7.6      LOANS TO PARTICIPANTS......................................................................    53
         7.7      MAJORITY ACTIONS...........................................................................    54
         7.8      TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES..............................................    54
         7.9      ANNUAL REPORT OF THE TRUSTEE...............................................................    54
         7.10     AUDIT......................................................................................    55
         7.11     RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE.............................................    55
         7.12     TRANSFER OF INTEREST.......................................................................    56
         7.13     TRUSTEE INDEMNIFICATION....................................................................    56
         7.14     EMPLOYER SECURITIES AND REAL PROPERTY......................................................    56

ARTICLE VIII
         AMENDMENT, TERMINATION AND MERGERS
         8.1      AMENDMENT..................................................................................    56
         8.2      TERMINATION................................................................................    57
         8.3      MERGER, CONSOLIDATION OR TRANSFER OF ASSETS................................................    57

ARTICLE IX
         TOP HEAVY PROVISIONS
         9.1      TOP HEAVY PLAN REQUIREMENTS................................................................    58
         9.2      DETERMINATION OF TOP HEAVY STATUS..........................................................    58

ARTICLE X

         MISCELLANEOUS

         10.1     EMPLOYER ADOPTIONS.........................................................................    59
         10.2     PARTICIPANT'S RIGHTS.......................................................................    59
         10.3     ALIENATION.................................................................................    59
         10.4     CONSTRUCTION OF PLAN.......................................................................    60
         10.5     GENDER AND NUMBER..........................................................................    60
         10.6     LEGAL ACTION...............................................................................    60
         10.7     PROHIBITION AGAINST DIVERSION OF FUNDS.....................................................    60
         10.8     EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE.................................................    61
         10.9     INSURER'S PROTECTIVE CLAUSE................................................................    61
         10.10    RECEIPT AND RELEASE FOR PAYMENTS...........................................................    61
         10.11    ACTION BY THE EMPLOYER.....................................................................    61
         10.12    NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY.........................................    61
         10.13    HEADINGS...................................................................................    61

DEFINED CONTRIBUTION PROTOTYPE PLAN

         10.14    APPROVAL BY INTERNAL REVENUE SERVICE.......................................................    62
         10.15    UNIFORMITY.................................................................................    62
         10.16    PAYMENT OF BENEFITS........................................................................    62

ARTICLE XI
         PARTICIPATING EMPLOYERS
         11.1     ELECTION TO BECOME A PARTICIPATING EMPLOYER................................................    62
         11.2     REQUIREMENTS OF PARTICIPATING EMPLOYERS....................................................    62
         11.3     DESIGNATION OF AGENT.......................................................................    62
         11.4     EMPLOYEE TRANSFERS.........................................................................    63
         11.5     PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES......................................    63
         11.6     AMENDMENT..................................................................................    63
         11.7     DISCONTINUANCE OF PARTICIPATION............................................................    63
         11.8     ADMINISTRATOR'S AUTHORITY..................................................................    63
         11.9     PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE..........................................    63

ARTICLE XII
         CASH OR DEFERRED PROVISIONS
         12.1     FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION............................................    64
         12.2     PARTICIPANT'S SALARY REDUCTION ELECTION....................................................    64
         12.3     ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS.......................................    66
         12.4     ACTUAL DEFERRAL PERCENTAGE TESTS...........................................................    68
         12.5     ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS.............................................    70
         12.6     ACTUAL CONTRIBUTION PERCENTAGE TESTS.......................................................    73
         12.7     ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS.........................................    75
         12.8     SAFE HARBOR PROVISIONS.....................................................................    77
         12.9     ADVANCE DISTRIBUTION FOR HARDSHIP..........................................................    79

ARTICLE XIII
         13.1     SIMPLE 401(k) PROVISIONS...................................................................    80
         13.2     DEFINITIONS................................................................................    81
         13.3     CONTRIBUTIONS..............................................................................    81
         13.4     ELECTION AND NOTICE REQUIREMENTS...........................................................    81
         13.5     VESTING REQUIREMENTS.......................................................................    82
         13.6     TOP-HEAVY RULES............................................................................    82
         13.7     NONDISCRIMINATION TESTS....................................................................    82

iii

DEFINED CONTRIBUTION PROTOTYPE PLAN

ARTICLE I
DEFINITIONS

As used in this Plan, the following words and phrases shall have the meanings set forth herein unless a different meaning is clearly required by the context:

1.1 "ACP" means the "Actual Contribution Percentage" determined pursuant to Section 12.6(e).

1.2 "ACT" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.3 "ADP" means the "Actual Deferral Percentage" determined pursuant to
Section 12.4(e).

1.4 "ADMINISTRATOR" means the Employer unless another person or entity has been designated by the Employer pursuant to Section 2.2 to administer the Plan on behalf of the Employer.

1.5 "ADOPTION AGREEMENT" means the separate agreement which is executed by the Employer and sets forth the elective provisions of this Plan and Trust as specified by the Employer.

1.6 "AFFILIATED EMPLOYER" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o).

1.7 "ANNIVERSARY DATE" means the last day of the Plan Year.

1.8 "ANNUITY STARTING DATE" means, with respect to any Participant, the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitles the Participant to such benefit.

1.9 "BENEFICIARY" means the person (or entity) to whom all or a portion of a deceased Participant's interest in the Plan is payable, subject to the restrictions of Sections 6.2 and 6.6.

1.10 "CODE" means the Internal Revenue Code of 1986, as amended.

1.11 "COMPENSATION" with respect to any Participant means one of the following as elected in the Adoption Agreement:

(a) Information required to be reported under Code Sections 6041, 6051 and 6052 (Wages, tips and other compensation as reported on Form W-2). Compensation means wages, within the meaning of Code Section 3401(a), and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 605 l(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401 (a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

(b) Code Section 3401 (a) Wages. Compensation means an Employee's wages within the meaning of Code Section 3401 (a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

(c) 415 Safe-Harbor Compensation. Compensation means wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and

DEFINED CONTRIBUTION PROTOTYPE PLAN

reimbursements, or other expense allowances under a nonaccountable plan (as described in Regulation 1.62-2(c))), and excluding the following:

(1) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are excludable from the Employee's gross income, or any distributions from a plan of deferred compensation;

(2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and

(4) Other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee).

However, Compensation for any Self-Employed Individual shall be equal to Earned Income. Compensation shall include only that Compensation which is actually paid to the Participant during the determination period. Except as otherwise provided in this Plan, the determination period shall be the period elected by the Employer in the Adoption Agreement. If the Employer makes no election, the determination period shall be the Plan Year.

Notwithstanding the above, if elected in the Adoption Agreement, Compensation shall include all of the following types of elective contributions and all of the following types of deferred compensation:

(a) Elective contributions that are made by the Employer on behalf of a Participant that are not includible in gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b), and for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4);

(b) Compensation deferred under an eligible deferred compensation plan within the meaning of Code Section 457(b); and

(c) Employee contributions (under governmental plans) described in Code Section 414(h)(2) that are picked up by the employing unit and thus are treated as Employer contributions.

For Plan Years beginning on or after January 1, 1989, and before January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990.

For Plan Years beginning on or after January 1, 1994, Compensation in excess of $150,000 (or such other amount provided in the Code) shall be disregarded for all purposes other than for purposes of salary deferral elections. Such amount shall be adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the $150,000 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12).

If Compensation for any prior determination period is taken into account in determining a Participant's allocations for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining allocations in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining allocations in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000.

Notwithstanding the foregoing, except as otherwise elected in a non-standardized Adoption Agreement, the family member aggregation rules of Code Sections 401(a)(17) and 414(q)(6) as in effect prior to the enactment of the Small Business Job Protection Act of 1996 shall not apply to this Plan effective with respect to Plan Years beginning after December 31, 1996.

If, in the Adoption Agreement, the Employer elects to exclude a class of Employees from the Plan, then Compensation for any Employee who becomes eligible or ceases to be eligible to participate during a determination period shall only include Compensation while the Employee is an Eligible Employee.

If, in connection with the adoption of any amendment, the definition of Compensation has been modified, then, except as otherwise provided herein, for Plan Years prior to the Plan Year which includes the adoption date of such amendment, Compensation means compensation determined pursuant to the terms of the Plan then in effect.

1.12 "CONTRACT" OR "POLICY" means any life insurance policy, retirement income policy, or annuity contract (group or individual) issued by the Insurer. In the event of any conflict between the terms of this Plan and the terms of any contract purchased hereunder, the Plan provisions shall control.

1.13 "DESIGNATED INVESTMENT ALTERNATIVE" means a specific investment identified by name by the Employer (or such other Fiduciary who has been given the authority to select investment options) as an available investment under the Plan to which Plan assets may be invested by the Trustee pursuant to the investment direction of a Participant.

1.14 "DIRECTED INVESTMENT OPTION" means a Designated Investment Alternative and any other investment permitted by the Plan and the Participant Direction Procedures to which Plan assets may be invested pursuant to the investment direction of a Participant.

1.15 "EARLY RETIREMENT DATE" means the date specified in the Adoption Agreement on which a Participant or Former Participant has satisfied the requirements specified in the Adoption Agreement (Early Retirement Age). If elected in the Adoption Agreement, a Participant shall become fully Vested upon satisfying such requirements if the Participant is still employed at the Early Retirement Age.

A Former Participant who separates from service after satisfying any service requirement but before satisfying the age requirement for Early Retirement Age and who thereafter reaches the age requirement contained herein shall be entitled to receive benefits under this Plan (other than any accelerated vesting and allocations of Employer Contributions) as though the requirements for Early Retirement Age had been satisfied.

1.16 "EARNED INCOME" means the net earnings from self-employment in the trade or business with respect to which the Plan is established, for which the personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions made by the Employer to a qualified plan to the extent deductible under Code Section 404. In addition, net earnings shall be determined with regard to the deduction allowed to the taxpayer by Code Section 164(f), for taxable years beginning after December 31, 1989.

1.17 "ELECTIVE DEFERRALS" means the Employer's contributions to the Plan that are made pursuant to a Participant's deferral election pursuant to Section 12.2, excluding any such amounts distributed as "excess annual additions" pursuant to Section 4.5. Elective Deferrals shall be subject to the requirements of Sections 12.2(b) and 12.2(c) and shall, except as otherwise provided herein, be required to satisfy the nondiscrimination requirements of Regulation 1.401(k)-1(b)(2), the provisions of which are specifically incorporated herein by reference.

1.18 "ELIGIBLE EMPLOYEE" means any Eligible Employee as elected in the Adoption Agreement and as provided herein. With respect to a non-standardized Adoption Agreement, an individual shall not be an "Eligible Employee" if such individual is not reported on the payroll records of the Employer as a common law employee. In particular, it is expressly intended that individuals not treated as common law employees by the Employer on its payroll records are not "Eligible Employees" and are excluded from Plan participation even if a court or administrative agency determines that such individuals are common law employees and not independent contractors. Furthermore, with respect to a non-standardized Adoption Agreement, Employees of an Affiliated Employer will not be treated as "Eligible Employees" prior to the date the Affiliated Employer adopts the Plan as a Participating Employer.

Except as otherwise provided in this paragraph, if the Employer does not elect in the Adoption Agreement to include Employees who became Employees as the result of a "Code Section 410(b)(6)(C) transaction," then such Employees will

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only be "Eligible Employees" after the expiration of the transition period beginning on the date of the transaction and ending on the last day of the first Plan Year beginning after the date of the transaction. A "Code Section 410(b)(6)(C) transaction" is an asset or stock acquisition, merger, or similar transaction involving a change in the Employer of the Employees of a trade or business that is subject to the special rules set forth in Code Section
410(b)(6)(C). However, regardless of any election made in the Adoption Agreement, if a separate entity becomes an Affiliate Employer as the result of a "Code Section 410(b)(6)(C) transaction," then Employees of such separate entity will not be treated as "Eligible Employees" prior to the date the entity adopts the Plan as a Participating Employer or, with respect to a standardized Adoption Agreement, if earlier, the expiration of the transition period set forth above.

If, in the Adoption Agreement, the Employer elects to exclude union employees, then Employees whose employment is governed by a collective bargaining agreement between the Employer and "employee representatives" under which retirement benefits were the subject of good faith bargaining and if two percent (2%) or less of the Employees covered pursuant to that agreement are professionals as defined in Regulation 1.410(b)-9, shall not be eligible to participate in this Plan. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers, or executives of the Employer.

If, in the Adoption Agreement, the Employer elects to exclude non-resident aliens, then Employees who are non-resident aliens (within the meaning of Code Section 7701(b)(l)(B)) who received no earned income (within the meaning of Code Section 911 (d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section
861(a)(3)) shall not be eligible to participate in this Plan.

1.19 "EMPLOYEE" means any person who is employed by the Employer. The term "Employee" shall also include any person who is an employee of an Affiliated Employer and any Leased Employee deemed to be an Employee as provided in Code
Section 414(n) or (o).

1.20 "EMPLOYER" means the entity specified in the Adoption Agreement, any successor which shall maintain this Plan and any predecessor which has maintained this Plan. In addition, unless the context means otherwise, the term "Employer" shall include any Participating Employer (as defined in Section 11.1) which shall adopt this Plan.

1.21 "EXCESS AGGREGATE CONTRIBUTIONS" means, with respect to any Plan Year, the excess of:

(a) The aggregate "Contribution Percentage Amounts" (as defined in
Section 12.6) actually made on behalf of Highly Compensated Participants for such Plan Year and taken into account in computing the numerator of the ACP, over

(b) The maximum "Contribution Percentage Amounts" permitted by the ACP test in Section 12.6 (determined by reducing contributions made on behalf of Highly Compensated Participants in order of their "Contribution Percentages" beginning with the highest of such percentages).

Such determination shall be made after first taking into account corrections of any Excess Deferrals pursuant to Section 12.2 and then taking into account adjustments of any Excess Contributions pursuant to Section 12.5.

1.22 "EXCESS COMPENSATION" means, with respect to a Plan that is integrated with Social Security (permitted disparity), a Participant's Compensation which is in excess of the integration level elected in the Adoption Agreement.

However, if Compensation is based on less than a twelve (12) month determination period, Excess Compensation shall be determined by reducing the integration level by a fraction, the numerator of which is the number of full months in the short period and the denominator of which is twelve (12).

1.23 "EXCESS CONTRIBUTIONS" means, with respect to any Plan Year, the excess of:

(a) The aggregate amount of Employer contributions actually made on behalf of Highly Compensated Participants for such Plan Year and taken into account in computing the numerator of the ADP, over

(b) The maximum amount of such contributions permitted by the ADP test in Section 12.4 (determined by hypothetically reducing contributions made on behalf of Highly Compensated Participants in order of the actual deferral ratios, beginning with the highest of such ratios).

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In determining the amount of Excess Contributions to be distributed and/or recharacterized with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced by any Excess Deferrals previously distributed to such affected Highly Compensated Participant for the Participant's taxable year ending with or within such Plan Year.

1.24 "EXCESS DEFERRALS" means, with respect to any taxable year of a Participant, those elective deferrals (within the meaning of Code Section
402(g)) that are includible in the Participant's gross income under Code Section 402(g) to the extent such Participant's elective deferrals for the taxable year exceed the dollar limitation under such Code Section. Excess Deferrals shall be treated as an "Annual Addition" pursuant to Section 4.4 when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year in which the Excess Deferral was made. Additionally, for purposes of Sections 4.3(f) and 9.2, Excess Deferrals shall continue to be treated as Employer contributions even if distributed pursuant to Section 12.2(e). However, Excess Deferrals of Non-Highly Compensated Participants are not taken into account for purposes of Section 12.4.

1.25 "FIDUCIARY" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan.

1.26 "FISCAL YEAR" means the Employer's accounting year.

1.27 "FORFEITURE" means, with respect to a Former Participant who has severed employment, that portion of the Participant's Account that is not Vested. Unless otherwise elected in the Adoption Agreement, Forfeitures occur pursuant to (a) below.

(a) A Forfeiture will occur on the earlier of:

(1) The last day of the Plan Year in which a Former Participant who has severed employment with the Employer incurs five (5) consecutive 1-Year Breaks in Service, or

(2) The distribution of the entire Vested portion of the Participant's Account of a Former Participant who has severed employment with the Employer. For purposes of this provision, if the Former Participant has a Vested benefit of zero, then such Former Participant shall be deemed to have received a distribution of such Vested benefit as of the year in which the severance of employment occurs.

(b) If elected in the Adoption Agreement, a Forfeiture will occur as of the last day of the Plan Year in which the Former Participant incurs five (5) 1-Year Breaks in Service.

Regardless of the preceding provisions, if a Former Participant is eligible to share in the allocation of Employer contributions or Forfeitures in the year in which the Forfeiture would otherwise occur, then the Forfeiture will not occur until the end of the first Plan Year for which the Former Participant is not eligible to share in the allocation of Employer contributions or Forfeitures. Furthermore, the term "Forfeiture" shall' also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan.

1.28 "FORMER PARTICIPANT" means a person who has been a Participant, but who has ceased to be a Participant for any reason.

1.29 "414(s) COMPENSATION" means any definition of compensation that satisfies the nondiscrimination requirements of Code Section 414(s) and the Regulations thereunder. The period for determining 414(s) Compensation must be either the Plan Year or the calendar year ending with or within the Plan Year. An Employer may further limit the period taken into account to that part of the Plan Year or calendar year in which an Employee was a Participant in the component of the Plan being tested. The period used to determine 414(s) Compensation must be applied uniformly to all Participants for the Plan Year.

1.30 "415 COMPENSATION" means, with respect to any Participant, such Participant's (a) Wages, tips and other compensation on Form W-2, (b) Section 3401(a) wages or (c) 415 safe-harbor compensation as elected in the Adoption Agreement for purposes of Compensation. 415 Compensation shall be based on the full Limitation Year regardless of when participation in the Plan commences. Furthermore, regardless of any election made in the Adoption Agreement, with respect to Limitation Years beginning after December 31, 1997, 415 Compensation shall include any elective deferral (as defined in Code

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Section 402(g)(3)) and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Section 125, 457, and, for Limitation Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4). For Limitation Years beginning prior to January 1, 1998, 415 Compensation shall exclude such amounts.

Except as otherwise provided herein, if, in connection with the adoption of any amendment, the definition of 415 Compensation has been modified, then for Plan Years prior to the Plan Year which includes the adoption date of such amendment, 415 Compensation means compensation determined pursuant to the terms of the Plan then in effect.

1.31 "HIGHLY COMPENSATED EMPLOYEE" means, effective for Plan Years beginning after December 31, 1996, an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means any Employee who:

(a) was a "five percent (5%) owner" as defined in Section 1.37(c) at any time during the "determination year" or the "look-back year"; or

(b) for the "look-back year" had 415 Compensation from the Employer in excess of $80,000 and, if elected in the Adoption Agreement, was in the Top-Paid Group for the "look-back year." The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996.

The "determination year" means the Plan Year for which testing is being performed and the "look-back year" means the immediately preceding twelve
(12) month period. However, if the calendar year data election is made in the Adoption Agreement, for purposes of (b) above, the "look-back year" shall be the calendar year beginning within the twelve (12) month period immediately preceding the "determination year." Notwithstanding the preceding sentence, if the calendar year data election is effective with respect to a Plan Year beginning in 1997, then for such Plan Year the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being performed.

A highly compensated former employee is based on the rules applicable to determining highly compensated employee status as in effect for that "determination year," in accordance with Regulation 1.414(q)-IT, A-4 and IRS Notice 97-45 (or any superseding guidance).

In determining whether an employee is a Highly Compensated Employee for a Plan Year beginning in 1997, the amendments to Code Section 414(q) stated above are treated as having been in effect for years beginning in 1996.

For purposes of this Section, for Plan Years beginning prior to January 1, 1998, the determination of 415 Compensation shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(l)(B) and, for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b).

In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans.

1.32 "HIGHLY COMPENSATED PARTICIPANT" means any Highly Compensated Employee who is eligible to participate in the component of the Plan being tested.

1.33 "HOUR OF SERVICE" means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period (these hours will be credited to the Employee for the computation period in which the duties are performed); (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, incapacity
(including disability), jury duty, lay-off, military duty or leave of absence) during the applicable computation period

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(these hours will be calculated and credited pursuant to Department of Labor regulation 2530.200b-2 which is incorporated herein by reference); (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages (these hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made). The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3).

Notwithstanding (2) above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. Furthermore, for purposes of (2) above, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate.

Hours of Service will be credited for employment with all Affiliated Employers and for any individual considered to be a Leased Employee pursuant to Code Section 414(n) or 414(o) and the Regulations thereunder. Furthermore, the provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference.

Hours of Service will be determined on the basis of the method elected in the Adoption Agreement.

1.34 "INSURER" means any legal reserve insurance company which has issued or shall issue one or more Contracts or Policies under the Plan.

1.35 "INVESTMENT MANAGER" means a Fiduciary as described in Act Section 3(38).

1.36 "JOINT AND SURVIVOR ANNUITY" means an annuity for the life of a Participant with a survivor annuity for the life of the Participant's spouse which is not less than fifty percent (50%), nor more than one-hundred percent (100%) of the amount of the annuity payable during the joint lives of the Participant and the Participant's spouse which can be purchased with the Participant's Vested interest in the Plan reduced by any outstanding loan balances pursuant to Section 7.6.

1.37 "KEY EMPLOYEE" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of such Employee's or former Employee's Beneficiaries) is considered a Key Employee if, the individual at any time during the Plan Year that contains the "Determination Date" (as defined in Section 9.2(c)) or any of the preceding four (4) Plan Years, has been included in one of the following categories:

(a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual 415 Compensation greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year;

(b) one of the ten Employees having annual 415 Compensation from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code
Section 318) both more than one-half percent (1/2%) interest and the largest interests in the Employer;

(c) a "five percent (5%) owner" of the Employer. "Five percent (5%) owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the value of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer; and

(d) a "one percent (I%) owner" of the Employer having annual 415 Compensation from the Employer of more than $150,000. "One percent (1%) owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the value of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the

DEFINED CONTRIBUTION PROTOTYPE PLAN

case of an unincorporated business, any person who owns more than one percent (I%) of the capital or profits interest in the Employer.

In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. In determining whether an individual has 415 Compensation of more than $150,000, 415 Compensation from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. Furthermore, for purposes of this Section, for Plan Years beginning prior to January 1, 1998, the determination of 415 Compensation shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125,
402(e)(3), 402(h)(1)(B) and, for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b).

1.38 "LATE RETIREMENT DATE" means the date of, or the first day of the month or the Anniversary Date coinciding with or next following, whichever corresponds to the election in the Adoption Agreement for the Normal Retirement Date, a Participant's actual retirement after having reached the Normal Retirement Date.

1.39 "LEASED EMPLOYEE" means, effective with respect to Plan Years beginning on or after January 1, 1997, any person (other than an Employee of the recipient Employer) who, pursuant to an agreement between the recipient Employer and any other person or entity ("leasing organization"), has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient Employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. Furthermore, Compensation for a Leased Employee shall only include Compensation from the leasing organization that is attributable to services performed for the recipient Employer.

A Leased Employee shall not be considered an employee of the recipient Employer if: (a) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Code Section 415(c)(3), but for Plan Years beginning prior to January 1, 1998, including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B),
403(b), or for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), (2) immediate participation, and (3) full and immediate vesting; and (b) leased employees do not constitute more than twenty percent (20%) of the recipient Employer's nonhighly compensated workforce.

1.40 "LIMITATION YEAR" means the determination period used to determine Compensation. However, the Employer may elect a different Limitation Year in the Adoption Agreement or by adopting a written resolution to such effect. All qualified plans maintained by the Employer must use the same limitation Year. Furthermore, unless there is a change to a new Limitation Year, the Limitation Year will be a twelve (12) consecutive month period. In the case of an initial Limitation Year, the Limitation Year will be the twelve (12) consecutive month period ending on the last day of the period specified in the Adoption Agreement (or written resolution). If the Limitation Year is amended to a different twelve
(12) consecutive month period, the new "Limitation Year" must begin on a date within the "Limitation Year" in which the amendment is made.

1.41 "NET PROFIT" means, with respect to any Fiscal Year, the Employer's net income or profit for such Fiscal Year determined upon the basis of the Employer's books of account in accordance with generally accepted accounting principles, without any reduction for taxes based upon income, or for contributions made by the Employer to this Plan and any other qualified plan.

1.42 "NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan other than Elective Deferrals, any Qualified Non-Elective Contributions and any Qualified Matching Contributions. Employer matching contributions which are not Qualified Matching Contributions shall be considered a Non-Elective Contribution for purposes of the Plan.

1.43 "NON-HIGHLY COMPENSATED PARTICIPANT" means any Participant who is not a Highly Compensated Employee. However, if pursuant to Sections 12.4 or 12.6 the prior year testing method is used to calculate the ADP or the ACP, a Non-Highly Compensated Participant shall be determined using the definition of Highly Compensated Employee in effect for the preceding Plan Year.

1.44 "NON-KEY EMPLOYEE" means any Employee or former Employee (and such Employee's or former Employee's Beneficiaries) who is not, and has never been, a Key Employee.

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1.45 "NORMAL RETIREMENT AGE" means the age elected in the Adoption Agreement at which time a Participant's Account shall be nonforfeitable (if the Participant is employed by the Employer on or after that date).

1.46 "NORMAL RETIREMENT DATE" means the date elected in the Adoption Agreement.

1.47 "1-YEAR BREAK IN SERVICE" means, if the Hour of Service Method is elected in the Adoption Agreement, the applicable computation period during which an Employee or former Employee has not completed more than 500 Hours of Service. Further, solely for the purpose of determining whether an Employee has incurred a I-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed the number of Hours of Service needed to prevent the Employee from incurring a 1-Year Break in Service.

"Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason.

A "maternity or paternity leave of absence" means an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement.

If the Elapsed Time Method is elected in the Adoption Agreement, a "1-Year Break in Service" means a twelve (12) consecutive month period beginning on the severance from service date or any anniversary thereof and ending on the next succeeding anniversary of such date; provided, however, that the Employee or former Employee does not perform an Hour of Service for the Employer during such twelve (12) consecutive month period.

1.48 "OWNER-EMPLOYEE" means a sole proprietor who owns the entire interest in the Employer or a partner (or member in the case of a limited liability company treated as a partnership or sole proprietorship for federal income tax purposes) who owns more than ten percent (10%) of either the capital interest or the profits interest in the Employer and who receives income for personal services from the Employer.

1.49 "PARTICIPANT" means any Eligible Employee who has satisfied the requirements of Section 3.2 and has not for any reason become ineligible to participate further in the Plan.

1.50 "PARTICIPANT DIRECTED ACCOUNT" means that portion of a Participant's interest in the Plan with respect to which the Participant has directed the investment in accordance with the Participant Direction Procedures.

1.51 "PARTICIPANT DIRECTION PROCEDURES" means such instructions, guidelines or policies, the terms of which are incorporated herein, as shall be established pursuant to Section 4.10 and observed by the Administrator and applied and provided to Participants who have Participant Directed Accounts.

1.52 "PARTICIPANT'S ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest under the Plan resulting from (a) the Employer's contributions in the case of a Profit Sharing Plan or Money Purchase Plan, and (b) the Employer's Non-Elective Contributions in the case of a 401(k) Profit Sharing Plan. Separate accountings shall be maintained with respect to that portion of a Participant's Account attributable to Employer matching contributions and to Employer discretionary contributions made pursuant to Section 12.1(a)(3).

1.53 "PARTICIPANT'S COMBINED ACCOUNT" means the total aggregate amount of a Participant's interest under the Plan resulting from Employer contributions (including Elective Deferrals).

1.54 "PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest in the Plan resulting from Elective Deferrals. Amounts in the Participant's Elective Deferral Account are nonforfeitable when made and are subject to the distribution restrictions of
Section 12.2(c).

DEFINED CONTRIBUTION PROTOTYPE PLAN

1.55 "PARTICIPANT'S ROLLOVER ACCOUNT" means the account established and maintained by the Administrator for . each Participant with respect: to such Participants interest .in the Plan resulting from amounts transferred from another qualified plan or "conduit" Individual Retirement Account in accordance with Section 4.6.

1.56 "PARTICIPANT'S TRANSFER ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to the total interest in the Plan resulting from amounts transferred to this Plan from a direct plan-to-plan transfer in accordance with Section 4.7.

1.57 "PERIOD OF SERVICE" means the aggregate of all periods commencing with an Employee's first day of employment or reemployment with the Employer or an Affiliated Employer and ending on the first day of a Period of Severance. The first day of employment or reemployment is the first day the Employee performs an Hour of Service. An Employee will also receive partial credit for any Period of Severance of less than twelve (12) consecutive months. Fractional periods of a year will be expressed in terms of days.

Periods of Service with any Affiliated Employer shall be recognized. Furthermore, Periods of Service with any predecessor employer that maintained this Plan shall be recognized. Periods of Service with any other predecessor employer shall be recognized as elected in the Adoption Agreement.

In determining Periods of Service for purposes of vesting under the Plan, Periods of Service will be excluded as elected in the Adoption Agreement and as specified in Section 3.5.

In the event the method of crediting service is amended from the Hour of Service Method to the Elapsed Time Method, an Employee will receive credit for a Period of Service consisting of:

(a) A number of years equal to the number of Years of Service credited to the Employee before the computation period during which the amendment occurs; and

(b) The greater of (1) the Periods of Service that would be credited to the Employee under the Elapsed Time Method for service during the entire computation period in which the transfer occurs or (2) the service taken into account under the Hour of Service Method as of the date of the amendment.

In addition, the Employee will receive credit for service subsequent to the amendment commencing on the day after the last day of the computation period in which the transfer occurs.

1.58 "PERIOD OF SEVERANCE" means a continuous period of time during which an Employee is not employed by the Employer. Such period begins on the date the Employee retires, quits or is discharged, or if earlier, the twelve (12) month anniversary of the date on which the Employee was otherwise first absent from service.

In the case of an individual who is absent from work for "maternity or paternity" reasons, the twelve (12) consecutive month period beginning on the first anniversary of the first day of such absence shall not constitute a one year Period of Severance. For purposes of this paragraph, an absence from work for "maternity or paternity" reasons means an absence (a) by reason of the pregnancy of the individual, (b) by reason of the birth of a child of the individual, (c) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement.

1.59 "PLAN" means this instrument (hereinafter referred to as American Express Tax and Business Services Inc. Defined Contribution Prototype Plan and Trust Basic Plan Document #01) and the Adoption Agreement as adopted by the Employer, including all amendments thereto and any addendum which is specifically permitted pursuant to the terms of the Plan.

1.60 "PLAN YEAR" means the Plan's accounting year as specified in the Adoption Agreement. Unless there is a Short Plan Year, the Plan Year will be a twelve-consecutive month period.

1.61 "PRE-RETIREMENT SURVIVOR ANNUITY" means an immediate annuity for the life of a Participant's spouse, the payments under which must be equal to the benefit which can be provided with the percentage, as specified in the Adoption Agreement, of the Participant's Vested interest in the Plan as of the date of death. If no election is made in the Adoption Agreement, the percentage shall be equal to fifty percent (50%). Furthermore, if less than one hundred percent (100%) of the Participant's Vested interest in the Plan is used to provide the Pre-Retirement Survivor Annuity, a proportionate share of each of the Participant's accounts shall be used to provide the Pre-Retirement Survivor Annuity.

DEFINED CONTRIBUTION PROTOTYPE PLAN

1.62 "QUALIFIED MATCHING CONTRIBUTION" means any Employer matching contributions that are made pursuant to Sections 12.1(a)(2) if elected in the Adoption Agreement, 12.5 and 12.7.

1.63 "QUALIFIED MATCHING CONTRIBUTION ACCOUNT" means the account established hereunder to which Qualified Matching Contributions are allocated. Amounts in the Qualified Matching Contribution Account are nonforfeitable when made and are subject to the distribution restrictions of Section 12.2(c).

1.64 "QUALIFIED NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan that are made pursuant to Sections 12.1(a)(4) if elected in the Adoption Agreement, 12.5 and 12.7.

1.65 "QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT" means the account established hereunder to which Qualified Non-Elective Contributions are allocated. Amounts in the Qualified Non-Elective Contribution Account are nonforfeitable when made and are subject to the distribution restrictions of
Section 12.2(c).

1.66 "QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTION ACCOUNT" means the account established hereunder to which a Participant's tax deductible qualified voluntary employee contributions made pursuant to Section 4.9 are allocated.

1.67 "REGULATION" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or a delegate of the Secretary of the Treasury, and as amended from time to time.

1.68 "RETIRED PARTICIPANT" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan.

1.69 "RETIREMENT DATE" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, regardless of whether such retirement occurs on a Participant's Normal Retirement Date, Early Retirement Date or Late Retirement Date (see Section 6.1).

1.70 "SELF-EMPLOYED INDIVIDUAL" means an individual who has Earned Income for the taxable year from the trade or business for which the Plan is established, and, also, an individual who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year. A Self-Employed Individual shall be treated as an Employee.

1.71 "SHAREHOLDER-EMPLOYEE" means a Participant who owns (or is deemed to own pursuant to Code Section 318(a)(1)) more than five percent (5%) of the Employer's outstanding capital stock during any year in which the Employer elected to be taxed as a Small Business Corporation (S Corporation) under the applicable Code sections relating to Small Business Corporations.

1.72 "SHORT PLAN YEAR" means, if specified in the Adoption Agreement, a Plan Year of less than a twelve (12) month period. If there is a Short Plan Year, the following rules shall apply in the administration of this Plan. In determining whether an Employee has completed a Year of Service (or Period of Service if the Elapsed Time Method is used) for benefit accrual purposes in the Short Plan Year, the number of the Hours of Service (or months of service if the Elapsed Time Method is used) required shall be proportionately reduced based on the number of days (or months) in the Short Plan Year. The determination of whether an Employee has completed a Year of Service (or Period of Service) for vesting and eligibility purpose; shall be made in accordance with Department of Labor regulation 2530.203-2(c). In addition, if this Plan is integrated with Social Security, then the integration level shall be proportionately reduced based on the number of months in the Short Plan Year.

1.73 "SUPER TOP HEAVY PLAN" means a plan which would be a Top Heavy Plan if sixty percent (60%) is replaced with ninety percent (90%) in Section 9.2(a). However, effective as of the first Plan Year beginning after December 31, 1999, no Plan shall be considered a Super Top Heavy Plan.

1.74 "TAXABLE WAGE BASE" means, with respect to any Plan Year, the contribution and benefit base under Section 230 of the Social Security Act at the beginning of such Plan Year.

1.75 "TERMINATED PARTICIPANT" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement.

1.76 "TOP HEAVY PLAN" means a plan described in Section 9.2(a).

DEFINED CONTRIBUTION PROTOTYPE PLAN

1.77 "TOP HEAVY PLAN YEAR" means a Plan Year commencing after December 31, 1983, during which the Plan is a Top Heavy Plan.

1.78 "TOP-PAID GROUP" shall be determined pursuant to Code Section 414(q) and the Regulations thereunder and generally means the top twenty percent (20%) of Employees who performed services for the Employer during the applicable year, ranked according to the amount of 415 Compensation received from the Employer during such year. All Affiliated Employers shall be taken into account as a single employer, and Leased Employees shall be treated as Employees if required pursuant to Code Section 414(n) or (o). Employees who are non-resident aliens who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Furthermore, for the purpose of determining the number of active Employees in any year, the following additional Employees may also be excluded, however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top-Paid Group:

(a) Employees with less than six (6) months of service;

(b) Employees who normally work less than 17 1/2 hours per week;

(d) Employees who have not yet attained age twenty-one (21).

In addition, if ninety percent (90%) or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top-Paid Group.

The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. Furthermore, in applying such exclusions, the Employer may substitute any lesser service, hours or age.

1.79 "TOTAL AND PERMANENT DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The disability of a Participant shall be determined by a licensed physician chosen by the Administrator. However, if the condition constitutes total disability under the federal Social Security Acts, the Administrator may rely upon such determination that the Participant is Totally and Permanently Disabled for the purposes of this Plan. The determination shall be applied uniformly to all Participants.

1.80 "TRUSTEE" means the person or entity named in the Adoption Agreement, or any successors thereto.

If the sponsor of this prototype is a bank, savings and loan, trust company, credit union or similar institution, a person or entity other than the prototype sponsor (or its affiliates or subsidiaries) may not serve as Trustee without the written consent of the sponsor.

1.81 "TRUST FUND" means the assets of the Plan and Trust as the same shall exist from time to time.

1.82 "VALUATION DATE" means the date or dates specified in the Adoption Agreement. Regardless of any election to the contrary, the Valuation Date shall include the Anniversary Date and may include any other date or dates deemed necessary or appropriate by the Administrator for the valuation of Participants' Accounts during the Plan Year, which may include any day that the Trustee, any transfer agent appointed by the Trustee or the Employer, or any stock exchange used by such agent, are open for business.

1.83 "VESTED" means the nonforfeitable portion of any account maintained on behalf of a Participant.

1.84 "VOLUNTARY CONTRIBUTION ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest in the Plan resulting from the Participant's after-tax voluntary Employee contributions made pursuant to Section 4.7.

DEFINED CONTRIBUTION PROTOTYPE PLAN

Amounts recharacterized as after-tax voluntary Employee contributions pursuant to Section 12.5 shall remain subject to the limitations of Section 12.2. Therefore, a separate accounting shall be maintained with respect to that portion of the Voluntary Contribution Account attributable to after-tax voluntary Employee contributions made pursuant to Section 4.8.

1.85 "YEAR OF SERVICE" means the computation period of twelve (12) consecutive months, herein set forth, and during which an Employee has completed at least 1,000 Hours of Service (unless a lower number of Hours of Service is specified in the Adoption Agreement).

For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service (employment commencement date). The initial computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. Unless otherwise elected in the Adoption Agreement, the succeeding computation periods shall begin on the anniversary of the Employee's employment commencement date. However, unless otherwise elected in the Adoption Agreement, if one (1) Year of Service or less is required as a condition of eligibility, then the computation period after the initial computation period shall shift to the current Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, and subsequent computation periods shall be the Plan Year. If there is a shift to the Plan Year, an Employee who is credited with the number of Hours of Service to be credited with a Year of Service in both the initial eligibility computation period and the first Plan Year which commences prior to the first anniversary of the Employee's initial eligibility computation period will be credited with two (2) Years of Service for purposes of eligibility to participate.

If two (2) Years of Service are required as a condition of eligibility, a Participant will only have completed two (2) Years of Service for eligibility purposes upon completing two (2) consecutive Years of Service without an intervening 1-Year Break-in-Service.

For vesting purposes, and all other purposes not specifically addressed in this Section, the computation period shall be the period elected in the Adoption Agreement. If no election is made in the Adoption Agreement, the computation period shall be the Plan Year.

In determining Years of Service for purposes of vesting under the Plan, Years of Service will be excluded as elected in the Adoption Agreement and as specified in Section 3.5.

Years of Service and 1-Year Breaks in Service for eligibility purposes will be measured on the same eligibility computation period. Years of Service and 1-Year Breaks in Service for vesting purposes will be measured on the same vesting computation period.

Years of Service with any Affiliated Employer shall be recognized. Furthermore, Years of Service with any predecessor employer that maintained this Plan shall be recognized. Years of Service with any other predecessor employer shall be recognized as elected in the Adoption Agreement.

In the event the method of crediting service is amended from the Elapsed Time Method to the Hour of Service Method, an Employee will receive credit for Years of Service equal to:

(a) The number of Years of Service equal to the number of 1-year Periods of Service credited to the Employee as of the date of the amendment; and

(b) In the computation period which includes the date of the amendment, a number of Hours of Service (using the Hours of Service equivalency method elected in the Adoption Agreement) to any fractional part of a year credited to the Employee under this Section as of the date of the amendment.

ARTICLE II
ADMINISTRATION

2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER

(a) In addition to the general powers and responsibilities otherwise provided for in this Plan, the Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to ensure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. The Employer may appoint counsel, specialists, advisers, agents (including any nonfiduciary agent) and other persons as the Employer

DEFINED CONTRIBUTION PROTOTYPE PLAN

deems necessary or desirable in connection with the exercise of its fiduciary duties under this Plan. The Employer may compensate such agents or advisers from the assets of the Plan as fiduciary expenses (but not including any business (settlor) expenses of the Employer), to the extent not paid by the Employer.

(b) The Employer shall establish a "funding policy and method,"
i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. If the Trustee has discretionary authority, the Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to the investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act.

(c) The Employer may appoint, at its option, an Investment Manager, investment adviser, or other agent to provide direction to the Trustee with respect to any or all of the Plan assets. Such appointment shall be given by the Employer in writing in a form acceptable to the Trustee and shall specifically identify the Plan assets with respect to which the Investment Manager or other agent shall have the authority to direct the investment.

(d) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways.

2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY

The Employer may appoint one or more Administrators. If the Employer does not appoint an Administrator, the Employer will be the Administrator. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering a written resignation to the Employer or be removed by the Employer by delivery of written notice. of removal, to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. Upon the resignation or removal of an Administrator, the Employer may designate in writing a successor to this position.

2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES

If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrators file with the Trustee a written revocation of such designation.

2.4 POWERS AND DUTIES OF THE ADMINISTRATOR

The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and determine all questions arising in connection with the administration, interpretation, and application of the Plan. Benefits under this Plan will be paid only if the Administrator decides in its discretion that the applicant is entitled to them. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan continue to be deemed a qualified plan under the terms of Code Section
401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary, or appropriate to accomplish its duties under this Plan.

The Administrator shall be charged with the duties of the general administration of the Plan and the power necessary to carry out such duties as set forth under the terms of the Plan, including, but not limited to, the following:

DEFINED CONTRIBUTION PROTOTYPE PLAN

(a) the discretion to determine all questions relating to the eligibility of an Employee to participate or remain a Participant hereunder and to receive benefits under the Plan;

(b) the authority to review and settle all claims against the Plan, including claims where the settlement amount cannot be calculated or is not calculated in accordance with the Plan's benefit formula. This authority specifically permits the Administrator to settle, in compromise fashion, disputed claims for benefits and any other disputed claims made against the Plan;

(c) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder;

(d) to authorize and direct the Trustee with respect to all discretionary or otherwise directed disbursements from the Trust Fund;

(e) to maintain all necessary records for the administration of the Plan;

(f) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan that are consistent with the terms hereof;

(g) to determine the size and type of any Contract to be purchased from any Insurer, and to designate the Insurer from which such Contract shall be purchased;

(h) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan;

(i) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion (if the Trustee has such discretion), in a manner designed to accomplish specific objectives;

(j) to prepare and implement a procedure for notifying Participants and Beneficiaries of their rights to elect Joint and Survivor Annuities and Pre-Retirement Survivor Annuities if required by the Plan, Code and Regulations thereunder;

(k) to assist Participants regarding their rights, benefits, or elections available under the Plan;

(l) to act as the named Fiduciary responsible for communicating with Participants as needed to maintain Plan compliance with Act Section 404(c) (if the Employer intends to comply with Act Section 404(c)) including, but not limited to, the receipt and transmission of Participants' directions as to the investment of their accounts under the Plan and the formation of policies, rules, and procedures pursuant to which Participants may give investment instructions with respect to the investment of their accounts; and

(m) to determine the validity of, and take appropriate action with respect to, any qualified domestic relations order received by it.

2.5 RECORDS AND REPORTS

The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law.

2.6 APPOINTMENT OF ADVISERS

The Administrator may appoint counsel, specialists, advisers, agents (including nonfiduciary agents) and other persons as the Administrator deems necessary or desirable in connection with the administration of this Plan, including but not limited to agents and advisers to assist with the administration and management of the Plan, and thereby to provide, among such other duties as the Administrator may appoint, assistance with maintaining Plan records and the providing of investment information to the Plan's investment fiduciaries and, if applicable, to Plan Participants.

DEFINED CONTRIBUTION PROTOTYPE PLAN

2.7 INFORMATION FROM EMPLOYER

The Employer shall supply full and timely information to the Administrator on all pertinent facts as the Administrator may require in order to perform its functions hereunder and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information.

2.8 PAYMENT OF EXPENSES

All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, or any person or persons retained or appointed by any Named Fiduciary incident to the exercise of their duties under the Plan, including, but not limited to, fees of accountants, counsel, Investment Managers, agents (including nonfiduciary agents) appointed for the purpose of assisting the Administrator or Trustee in carrying out the instructions of Participants as to the directed investment of their accounts (if permitted) and other specialists and their agents, the costs of any bonds required pursuant to Act Section 412, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund.

2.9 MAJORITY ACTIONS

Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.3, if there is more than one Administrator, then they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf.

2.10 CLAIMS PROCEDURE

Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within ninety (90) days after the application is filed, or such period as is required by applicable law or Department of Labor regulation. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure.

2.11 CLAIMS REVIEW PROCEDURE

Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.10 shall be entitled to request the Administrator to give further consideration to the claim by filing with the Administrator a written request for a hearing. Such request, together with a written statement of the reasons why the claimant believes such claim should be allowed, shall be filed with the Administrator no later than sixty (60) days after receipt of the written notification provided for in Section 2.10. The Administrator shall then conduct a hearing within the next sixty (60) days, at which the claimant may be represented by an attorney or any other representative of such claimant's choosing and expense and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of the claim. At the hearing (or prior thereto upon five (5) business days written notice to the Administrator) the claimant or the claimant's representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within sixty (60) days of receipt of the appeal (unless there has been an extension of sixty (60) days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the sixty (60) day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. Notwithstanding the preceding, to the extent any of the time periods specified in this Section are amended by law or Department of Labor regulation, then the time frames specified herein shall automatically be changed in accordance with such law or regulation.

If the Administrator, pursuant to the claims review procedure, makes a final written determination denying a Participant's or Beneficiary's benefit claim, then in order to preserve the claim, the Participant or Beneficiary must file an action with respect to the denied claim not later than one hundred eighty (180) days following the date of the Administrator's final determination.

DEFINED CONTRIBUTION PROTOTYPE PLAN

ARTICLE III
ELIGIBILITY

3.1 CONDITIONS OF ELIGIBILITY

Any Eligible Employee shall be eligible to participate hereunder on the date such Employee has satisfied the conditions of eligibility elected in the Adoption Agreement.

3.2 EFFECTIVE DATE OF PARTICIPATION

An Eligible Employee who has satisfied the conditions of eligibility pursuant to Section 3.1 shall become a Participant effective as of the date elected in the Adoption Agreement. If said Employee is not employed on such date, but is reemployed before a 1-Year Break in Service has occurred, then such Employee shall become a Participant on the date of reemployment or, if later, the date that the Employee would have otherwise entered the Plan had the Employee not terminated employment.

Unless specifically provided otherwise in the Adoption Agreement, an Eligible Employee who satisfies the Plan's eligibility requirement conditions by reason of recognition of service with a predecessor employer will become a Participant as of the day the Plan credits service with a predecessor employer or, if later, the date the Employee would have otherwise entered the Plan had the service with the predecessor employer been service with the Employer.

If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise have become a Participant, shall go from a classification of a noneligible Employee to an Eligible Employee, such Employee shall become a Participant on the date such Employee becomes an Eligible Employee or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee.

If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise become a Participant, shall go from a classification of an Eligible Employee to a noneligible class of Employees, such Employee shall become a Participant in the Plan on the date such Employee again becomes an Eligible Employee, or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee. However, if such Employee incurs a 1-Year Break in Service, eligibility will be determined under the Break in Service rules set forth in
Section 3.5.

3.3 DETERMINATION OF ELIGIBILITY

The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review pursuant to Section 2.11.

3.4 TERMINATION OF ELIGIBILITY

In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in the Plan for each Year of Service (or Period of Service, if the Elapsed Time Method is used) completed while an ineligible Employee, until such time as the Participant's Account is forfeited or distributed pursuant to the terms of the Plan. Additionally, the Former Participant's interest in the Plan shall continue to share in the earnings of the Trust Fund in the same manner as Participants.

3.5 REHIRED EMPLOYEES AND BREAKS IN SERVICE

(a) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed by the Employer before a 1-Year Break in Service occurs, the Former Participant shall become a Participant as of the reemployment date.

(b) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed after a 1-Year Break in Service has occurred, Years of Service (or Periods of Service if the Elapsed Time Method is being used) shall include Years of Service (or Periods of Service if the Elapsed Time Method is being used) prior to the 1-Year Break in Service subject to the following rules:

DEFINED CONTRIBUTION PROTOTYPE PLAN

(1) In the case of a Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions, Years of Service (or Periods of Service) before a period of 1-Year Breaks in Service will not be taken into account if the number of consecutive 1-Year Breaks in Service equals or exceeds the greater of (A) five (5) or (B) the aggregate number of pre-break Years of Service (or Periods of Service). Such aggregate number of Years of Service (or Periods of Service) will not include any Years of Service (or Periods of Service) disregarded under the preceding sentence by reason of prior 1-Year Breaks in Service;

(2) A Former Participant who has not had Years of Service (or Periods of Service) before a 1-Year Break in Service disregarded pursuant to (1) above, shall participate in the Plan as of the date of reemployment, or if later, as of the date the Former Participant would otherwise enter the Plan pursuant to Sections 3.1 and 3.2 taking into account all service not disregarded.

(c) After a Former Participant who has severed employment with the Employer incurs five (5) consecutive 1-Year Breaks in Service, the Vested portion of such Former Participant's Account attributable to pre-break service shall not be increased as a result of post-break service. In such case, separate accounts will be maintained as follows:

(1) one account for nonforfeitable benefits attributable to pre-break service; and

(2) one account representing the Participant's Employer-derived account balance in the Plan attributable to post-break service.

(d) If any Participant becomes a Former Participant due to severance of employment with the Employer and is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received a distribution of the entire Vested interest prior to reemployment, then the forfeited account shall be reinstated only if the Former Participant repays the full amount which had been distributed. Such repayment must be made before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five
(5) consecutive 1-Year Breaks in Service commencing after the distribution. If a distribution occurs for any reason other than a severance of employment, the time for repayment may not end earlier than five (5) years after the date of distribution. In the event the Former Participant does repay the full amount distributed, the undistributed forfeited portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Valuation Date preceding the distribution. The source for such reinstatement may be Forfeitures occurring during the Plan Year. If such source is insufficient, then the Employer will contribute an amount which is sufficient to restore the Participant's Account, provided, however, that if a discretionary contribution is made for such year, such contribution will first be applied to restore any such accounts and the remainder shall be allocated in accordance with the terms of the Plan. If a non-Vested Former Participant was deemed to have received a distribution and such Former Participant is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, then such Participant will be deemed to have repaid the deemed distribution as of the date of reemployment.

3.6 ELECTION NOT TO PARTICIPATE

An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be irrevocable and communicated to the Employer, in writing, within a reasonable period of time before the beginning of the first Plan Year. For standardized Plans, a Participant or an Eligible Employee may not elect not to participate.

3.7 CONTROL OF ENTITIES BY OWNER-EMPLOYEE

Effective with respect to Plan Years beginning after December 31, 1996, if this Plan provides contributions or benefits for one or more Owner-Employees, the contributions on behalf of any Owner-Employee shall be made only with respect to the Earned Income for such Owner-Employee which is derived from the trade or business with respect to which such Plan is established.

ARTICLE IV
CONTRIBUTION AND ALLOCATION

4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION

DEFINED CONTRIBUTION PROTOTYPE PLAN

(a) For a Money Purchase Plan:

(1) The Employer will make contributions on the following basis. On behalf of each Participant eligible to share in allocations, for each year of such Participant's participation in this Plan, the Employer will contribute the amount elected in the Adoption Agreement. All contributions by the Employer will be made in cash. In the event a funding waiver is obtained, this Plan shall be deemed to be an individually designed plan.

(2) Notwithstanding the foregoing, with respect to an Employer which is not a tax-exempt entity, the Employer's contribution for any Fiscal Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. However, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds the amount that is deductible under Code Section 404.

(b) For a Profit Sharing Plan:

(1) For each Plan Year, the Employer may (or will in the case of a Prevailing Wage contribution) contribute to the Plan such amount as elected by the Employer in the Adoption Agreement.

(2) Additionally, the Employer will contribute to the Plan the amount necessary, if any, to provide the top heavy minimum allocations, even if it exceeds current or accumulated Net Profit or the amount that is deductible under Code Section 404.

4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION

Unless otherwise provided by contract or law, the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines. If the Employer makes a contribution for a particular Plan Year after the close of that Plan Year, the Employer will designate to the Administrator the Plan Year for which the Employer is making its contribution.

4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS

(a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date, or other Valuation Date, all amounts allocated to each such Participant as set forth herein.

(b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contribution, if any, for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate any contributions as follows:

(1) For a Money Purchase Plan (other than a Money Purchase Plan which is integrated by allocation):

(i) The Employer's contribution shall be allocated to each Participant's Account in the manner set forth in Section 4.1 herein and as specified in the Adoption Agreement.

(ii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected).

DEFINED CONTRIBUTION PROTOTYPE PLAN

(2) For an integrated Profit Sharing Plan allocation or a Money Purchase Plan which is integrated by allocation:

(i) Except as provided in Section 4.3(f) for top heavy purposes and subject to the "Overall Permitted Disparity Limits," the Employer's contribution shall be allocated to each Participant's Account in a dollar amount equal to 5.7% of the sum of each Participant's Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that each such Participant's Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus the total Excess Compensation of all Participants for that year. However, in the case of any Participant who has exceeded the "Cumulative Permitted Disparity Limit," the allocation set forth in this paragraph shall be based on such Participant's Compensation rather than Compensation plus Excess Compensation.

Regardless of the preceding, 4.3% shall be substituted for 5.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 5.4% shall be substituted for 5.7% above.

(ii) The balance of the Employer's contribution over the amount allocated above, if any, shall be allocated to each Participant's Account in the same proportion that each such Participant's Compensation for the Year bears to the total Compensation of all Participants for such year.

(iii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's Contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected).

(3) For a Profit Sharing Plan with a non-integrated allocation formula or a Prevailing Wage contribution:

(i) The Employer's contribution shall be allocated to each Participant's Account in accordance with the allocation method elected in the Adoption Agreement.

(ii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected).

(4) "Overall Permitted Disparity Limits":

"Annual Overall Permitted Disparity Limit": Notwithstanding the preceding paragraphs, if in any Plan Year this Plan "benefits" any Participant who "benefits" under another qualified plan or

DEFINED CONTRIBUTION PROTOTYPE PLAN

simplified employee pension, as defined in Code Section
408(k), maintained by the Employer that either provides for or imputes permitted disparity (integrates), then such plans will be considered to be one plan and will be considered to comply with the permitted disparity rules if the extent of the permitted disparity of all such plans does not exceed 100%. For purposes of the preceding sentence, the extent of the permitted disparity of a plan is the ratio, expressed as a percentage, which the actual benefits, benefit rate, offset rate, or employer contribution rate, whatever is applicable under the Plan bears to the limitation under Code Section 401(l) applicable to such Plan. Notwithstanding the foregoing, if the Employer maintains two or more standardized paired plans, only one plan may provide for permitted disparity.

"Cumulative Permitted Disparity Limit": With respect to a Participant who "benefits" or "has benefited" under a defined benefit or target benefit plan of the Employer, effective for Plan Years beginning on or after January 1, 1994, the cumulative permitted disparity limit for the Participant is thirty five (35) total cumulative permitted disparity years. Total cumulative permitted disparity years means the number of years credited to the Participant for allocation or accrual purposes under the Plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the Employer, while such plan either provides for or imputes permitted disparity. For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant has not "benefited" under a defined benefit or target benefit plan which neither provides for nor imputes permitted disparity for any year beginning on or after January 1, 1994, then such Participant has no cumulative disparity limit.

For purposes of this Section, "benefiting" means benefiting under the Plan for any Plan Year during which a Participant received or is deemed to receive an allocation in accordance with Regulation 1.410(b)-3(a).

(c) Except as otherwise elected in the Adoption Agreement or as provided in Section 4.10 with respect to Participant Directed Accounts, as of each Valuation Date, before allocation of any Employer contributions and Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund (exclusive of assets segregated for distribution) shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts as of such date. If any nonsegregated account of a Participant has been distributed prior to the Valuation Date subsequent to a Participant's termination of employment, no earnings or losses shall be credited to such account.

(d) Participants' Accounts shall be debited for any insurance or annuity premiums paid, if any, and credited with any dividends or interest received on Contracts.

(e) On or before each Anniversary Date, any amounts which became Forfeitures since the last Anniversary Date may be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 3.5(d) or used to satisfy any contribution that may be required pursuant to Section 6.9. The remaining Forfeitures, if any, shall be treated in accordance with the Adoption Agreement. If no election is made in the Adoption Agreement, any remaining Forfeitures will be used to reduce any future Employer contributions under the Plan. However, if the Plan provides for an integrated allocation, then any remaining Forfeitures will be added to the Employer's contributions under the Plan. Regardless of the preceding sentences, in the event the allocation of Forfeitures provided herein shall cause the "Annual Additions" (as defined in Section 4.4) to any Participant's Account to exceed the amount allowable by the Code, an adjustment shall be made in accordance with Section 4.5. Except, however, a Participant shall only be eligible to share in the allocations of Forfeitures for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year.

(f) Minimum Allocations Required for Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to at least three percent (3%) of such Non-Key Employee's 415 Compensation (reduced by contributions and forfeitures, if any, allocated to each Non-Key Employee in any defined contribution plan included with this Plan in a "required aggregation group" (as defined in Section 9.2(f)). However, if (i) the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each

DEFINED CONTRIBUTION PROTOTYPE PLAN

Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's 415 Compensation and (ii) this Plan is not required to be included in a "required aggregation group" (as defined in Section 9.2(f)) to enable a defined benefit plan to meet the requirements of Code
Section 401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee.

However, for each Non-Key Employee who is a Participant in a paired Profit Sharing Plan or 401(k) Profit Sharing Plan and a paired Money Purchase Plan, the minimum three percent (3%) allocation specified above shall be provided in the Money Purchase Plan.

If this is an integrated Plan, then for any Top Heavy Plan Year the Employees contribution shall be allocated as follows and shall still be required to satisfy the other provisions of this subsection:

(1) An amount equal to three percent (3%) multiplied by each Participant's Compensation for the Plan Year shall be allocated to each Participant's Account. If the Employer does not contribute such amount for all Participants, the amount shall be allocated to each Participant's Account in the same proportion that such Participant's total Compensation for the Plan Year bears to the total Compensation of all Participants for such year.

(2) The balance of the Employer's contribution over the amount allocated under subparagraph (1) hereof shall be allocated to each Participant's Account in a dollar amount equal to three percent (3%) multiplied by a Participant's Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that such Participant's Excess Compensation bears to the total Excess Compensation of all Participants for that year. For purposes of this paragraph, in the case of any Participant who has exceeded the cumulative permitted disparity limit described in
Section 4.3(b)(4), such Participant's total Compensation will be taken into account.

(3) The balance of the Employer's contribution over the amount allocated under subparagraph (2) hereof shall be allocated to each Participant's Account in a dollar amount equal to 2.7% multiplied by the sum of each Participant's total Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that such Participant's total Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for that year. For purposes of this paragraph, in the case of any Participant who has exceeded the cumulative permitted disparity limit described in Section 4.3(b)(4), such Participant's total Compensation rather than Compensation plus Excess Compensation will be taken into account.

Regardless of the preceding, 1.3% shall be substituted for 2.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 2.4% shall be substituted for 2.7% above.

(4) The balance of the Employer's contributions over the amount allocated above, if any, shall be allocated to each Participant's Account in the same proportion that such Participant's total Compensation for the Plan Year bears to the total Compensation of all Participants for such year.

For each Non-Key Employee who is a Participant in this Plan and another non-paired defined contribution plan maintained by the Employer, the minimum three percent (3%) allocation specified above shall be provided as specified in the Adoption Agreement.

(g) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions and Forfeitures allocated on behalf of such Key Employee divided by the 415 Compensation for such Key Employee.

(h) For any Top Heavy Plan Year, the minimum allocations set forth in this Section shall be allocated to the Participant's Combined Account of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employees who have (1) failed to complete a Year of

DEFINED CONTRIBUTION PROTOTYPE PLAN

Service; or (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, Elective Deferrals to the Plan.

(i) Notwithstanding anything herein to the contrary, in any Plan Year in which the Employer maintains both this Plan and a defined benefit pension plan included in a "required aggregation group" (as defined in
Section 9.2(f)) which is top heavy, the Employer will not be required (unless otherwise elected in the Adoption Agreement) to provide a Non-Key Employee with both the full separate minimum defined benefit plan benefit and the full separate defined contribution plan allocations. In such case, the top heavy minimum benefits will be provided as elected in the Adoption Agreement and, if applicable, as follows:

(1) If the 5% defined contribution minimum is elected in the Adoption Agreement:

(i) The requirements of Section 9.1 will apply except that each Non-Key Employee who is a Participant in the Profit Sharing Plan or Money Purchase Plan and who is also a Participant in the Defined Benefit Plan will receive a minimum allocation of five percent (5%) of such Participant's 415 Compensation from the applicable defined contribution plan(s).

(ii) For each Non-Key Employee who is a Participant only in the Defined Benefit Plan the Employer will provide a minimum integrated benefit equal to two percent (2%) of such Participant's highest five (5) consecutive year average 415 Compensation for each Year of Service while a participant in the plan, in which the Plan is top heavy, not to exceed ten (10).

(iii) For each Non-Key Employee who is a Participant only in this defined contribution plan, the Employer will provide a minimum allocation equal to three percent (3%) of such Participant's 415 Compensation.

(2) If the 2% defined benefit minimum is elected in the Adoption Agreement, then for each Non-Key Employee who is a Participant only in the defined benefit plan, the Employer will provide a minimum non-integrated benefit equal to two percent (2%) of such Participant's highest five (5) consecutive year average of 415 Compensation for each Year of Service while a participant in the plan, in which the Plan is top heavy, not to exceed ten (10).

(j) For the purposes of this Section, 415 Compensation will be limited to the same dollar limitations set forth in Section 1.11 adjusted in such manner as permitted under Code Section 415(d).

(k) Notwithstanding anything in this Section to the contrary, all information necessary to properly reflect a given transaction may not be available until after the date specified herein for processing such transaction, in which case the transaction will be reflected when such information is received and processed. Subject to express limits that may be imposed under the Code, the processing of any contribution, distribution or other transaction may be delayed for any legitimate business reason (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to timely receive values or prices, and correction for errors or omissions or the errors or omissions of any service provider). The processing date of a transaction will be binding for all purposes of the Plan.

(1) Notwithstanding anything in this Section to the contrary, the provisions of this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b) ratio percentage failsafe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year allocation condition or an Hours of Service (or months of service) allocation condition. A plan satisfies the "ratio percentage test" if, on the last day of the Plan Year, the "benefiting ratio" of the Non-Highly Compensated Employees who are "includible" is at least 70% of the "benefiting ratio" of the Highly Compensated Employees who are "includible." The "benefiting ratio" of the Non-Highly Compensated Employees is the number of "includible" Non-Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Employees who are Non-Highly Compensated Employees. The "benefiting ratio" of the Highly Compensated Employees is the number of Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Highly Compensated Employees. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion described in the Code or by reason of the age and service requirements of Article III; and (2) any Employee who incurs a separation from service during the Plan Year and fails to complete at least 501 Hours of Service (or three (3) months of service if the Elapsed Time Method is being used) during such Plan Year.

DEFINED CONTRIBUTION PROTOTYPE PLAN

For purposes of this subsection, an Employee is "benefiting" under the Plan on a particular date if, under the Plan, the Employee is entitled to an Employer contribution or an allocation of Forfeitures for the Plan Year.

If this subsection applies, then the Administrator will suspend the allocation conditions for the "includible" Non-Highly Compensated Employees who are Participants, beginning first with the "includible" Employees employed by the Employer on the last day of the Plan Year, then the "includible" Employees who have the latest separation from service during the Plan Year, and continuing to suspend the allocation conditions for each "includible" Employee who incurred an earlier separation from service, from the latest to the earliest separation from service date, until the Plan satisfies the "ratio percentage test" for the Plan Year. If two or more "includible" Employees have a separation from service on the same day, then the Administrator will suspend the allocation conditions for all such "includible" Employees, irrespective of whether the Plan can satisfy the "ratio percentage test" by accruing benefits for fewer than all such "includible" Employees. If the Plan for any Plan Year suspends the allocation conditions for an "includible" Employee, then that Employee will share in the allocation for that Plan Year of the Employer contribution and Forfeitures, if any, without regard to whether the Employee has satisfied the other allocation conditions set forth in this Section.

4.4 MAXIMUM ANNUAL ADDITIONS

(a)(1) If a Participant does not participate in, and has never participated in another qualified plan maintained by the Employer, or a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, or an individual medical account (as defined in Code Section
415(l)(2)) maintained by the Employer, or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer which provides "Annual Additions;" the amount of "Annual Additions" which may be credited to the Participant's accounts for any Limitation Year shall not exceed the lesser of the "Maximum Permissible Amount" or any other limitation contained in this Plan.

If the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts would cause the "Annual Additions" for the Limitation Year to exceed the "Maximum Permissible Amount," the amount contributes or allocated will be reduced so that the "Annual Additions" for the Limitation Year will equal the "Maximum Permissible Amount," and any amount in excess of the "Maximum Permissible Amount" which would have been allocated to such Participant may be allocated to other Participants.

(2) Prior to determining the Participant's actual 415 Compensation for the Limitation Year, the Employer may determine the "Maximum Permissible Amount" for a Participant on the basis of a reasonable estimation of the Participant's 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.

(3) As soon as is administratively feasible after the end of the Limitation Year the "Maximum Permissible Amount" for such Limitation Year shall be determined on the basis of the Participant's actual 415 Compensation for such Limitation Year.

(b)(1) This subsection applies if, in addition to this Plan, a Participant is covered under another qualified defined contribution plan maintained by the Employer that is a "Master or Prototype Plan," a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, an individual medical account (as defined in Code Section 415(1)(2)) maintained by the Employer, or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer, which provides "Annual Additions," during any Limitation Year. The "Annual Additions' which may be credited to a Participant's accounts under this Plan for any such Limitation Year shall not exceed the "Maximum Permissible Amount" reduced by the "Annual Additions" credited to a Participant's accounts under the other plans and welfare benefit funds, individual medical accounts, and simplified employee pensions for the same Limitation Year. If the "Annual Additions" with respect to the Participant under other defined contribution plans and welfare benefit funds maintained by the Employer are less than the "Maximum Permissible Amount" and the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts under this Plan would cause the "Annual Additions" for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the "Annual Additions" under all such plans and welfare benefit funds for the Limitation Year will equal the "Maximum Permissible Amount," and any amount in excess of the "Maximum Permissible Amount" which would have been allocated to such Participant may be allocated to other Participants. If the "Annual Additions" with respect to the Participant under such other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions in the aggregate are equal to or greater than the "Maximum Permissible Amount," no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(3) As soon as is administratively feasible after the end of the Limitation Year, the "Maximum Permissible Amount" for the Limitation Year will be determined on the basis of the Participant's actual 415 Compensation for the Limitation Year.

(4) If, pursuant to Section 4.4(b)(2) or Section 4.5, a Participant's "Annual Additions" under this Plan and such other plans would result in an "Excess Amount" for a Limitation Year, the "Excess Amount" will be deemed to consist of the "Annual Additions" last allocated, except that "Annual Additions" attributable to a simplified employee pension will be deemed to have been allocated first, followed by "Annual Additions" to a welfare benefit fund or individual medical account, and then by "Annual Additions" to a plan subject to Code Section 412, regardless of the actual allocation date.

(5) If an "Excess Amount" was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the "Excess Amount" attributed to this Plan will be the product of:

(i) the total "Excess Amount" allocated as of such date, times

(ii) the ratio of (1) the "Annual Additions" allocated to the Participant for the Limitation Year as of such date under this Plan to (2) the total "Annual Additions" allocated to the Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans

(6) Any "Excess Amount" attributed to this Plan will be disposed of in the manner described in Section 4.5.

(c) If the Participant is covered under another qualified defined contribution plan maintained by the Employer which is not a "Master or Prototype Plan," "Annual Additions" which may be credited to the Participant's Combined Account under this Plan for any Limitation Year will be limited in accordance with Section 4.4(b), unless the Employer provides other limitations in the Adoption Agreement.

(d) For any Limitation Year beginning prior to the date the Code
Section 415(e) limits are repealed with respect to this Plan (as specified in the Adoption Agreement for the GUST transitional rules), if the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, then the sum of the Participant's "Defined Benefit Plan Fraction" and "Defined Contribution Plan Fraction" may not exceed 1.0. In such event, the rate of accrual in the defined benefit plan will be reduced to the extent necessary so that the sum of the "Defined Contribution Fraction" and "Defined Benefit Fraction" will equal 1.0. However, in the Adoption Agreement the Employer may specify an alternative method under which the plans involved will satisfy the limitations of Code Section 415(e), including increased top heavy minimum benefits so that the combined limitation is 1.25 rather than 1.0.

(e) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "Annual Addition." In addition, the following are not Employee contributions for the purposes of Section 4.4(f)(1)(b): (1) rollover contributions (as defined in Code Sections 402(c), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section
411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6).

(f) For purposes of this Section, the following terms shall be defined as follows:

(1) "Annual Additions" means the sum credited to a Participant's accounts for any Limitation Year of (a) Employer contributions, (b) Employee contributions (except as provided below), (c) forfeitures,
(d) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer, (e) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are

DEFINED CONTRIBUTION PROTOTYPE PLAN

attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section
419(e)) maintained by the Employer and (f) allocations under a simplified employee pension. Except, however, the Compensation percentage limitation referred to in paragraph (f)(9)(ii) shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "Annual Addition," or (2) any amount otherwise treated as an "Annual Addition" under Code Section
415(1)(1). Notwithstanding the foregoing, for Limitation Years beginning prior to January 1, 1987, only that portion of Employee contributions equal to the lesser of Employee contributions in excess of six percent (6%) of 415 Compensation or one-half of Employee contributions shall be considered an "Annual Addition."

For this purpose, any Excess Amount applied under
Section 4.5 in the Limitation Year to reduce Employer contributions shall be considered "Annual Additions" for such Limitation Year.

(2) "Defined Benefit Fraction" means a fraction, the numerator of which is the sum of the Participant's "Projected Annual Benefits" under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined for the Limitation Year under Code Sections 415(b)(1)(A) as adjusted by Code Section 415(d) or one hundred forty percent (140%) of the "Highest Average Compensation" including any adjustments under Code Section 415(b).

Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than one hundred twenty-five percent (125%) of the sum of the annual benefits under such plans which the Participant had accrued as of the end of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987.

Notwithstanding the foregoing, for any Top Heavy Plan Year, one hundred percent (100%) shall be substituted for one hundred twenty-five percent (125%) unless the extra top heavy minimum allocation or benefit is being made pursuant to the Employer's specification in the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top Heavy Plan, one hundred percent (100%) shall always be substituted for one hundred twenty-five percent (125%).

(3) Defined Contribution Dollar limitation means $30,000 as adjusted under Code Section 415(d).

(4) Defined Contribution Fraction means a fraction, the numerator of which is the sum of the "Annual Additions" to the Participant's accounts under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "Limitation Years," (including the "Annual Additions" attributable to the Participant's nondeductible voluntary employee contributions to any defined benefit plans, whether or not terminated, maintained by the Employer and the "Annual Additions" attributable to all welfare benefit funds (as defined in Code Section 419(e)), individual medical accounts (as defined in Code Section 415(l)(2)), and simplified employee pensions (as defined in Code Section 408(k)) maintained by the Employer), and the denominator of which is the sum of the "Maximum Aggregate Amounts" for the current and all prior Limitation Years in which the Employee had service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined under Code Section 415(c)(1)(A) as adjusted by Code Section 415(d) or thirty-five percent (35%) of the Participant's 415 Compensation for such year.

If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the "Defined Benefit Fraction" would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times
(2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan

DEFINED CONTRIBUTION PROTOTYPE PLAN

made after May 5, 1986, but using the Code Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987.

For Limitation Years beginning prior to January 1, 1987, the "Annual Additions" shall not be recomputed to treat all Employee contributions as "Annual Additions."

(5) "Employer" means the Employer that adopts this Plan and all Affiliated Employers, except that for purposes of this Section, the determination of whether an entity is an Affiliated Employer shall be made by applying Code Section 415(h).

(6) "Excess Amount" means the excess of the Participant's "Annual Additions" for the Limitation Year over the "Maximum Permissible Amount."

(7) "Highest Average Compensation" means the average Compensation for the three (3) consecutive Years of Service with the Employer while a Participant in the Plan that produces the highest average. A Year of Service with the Employer is the twelve (12) consecutive month period ending on the last day of the Limitation Year.

(8) "Master or Prototype Plan" means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service.

(9) "Maximum Permissible Amount" means the maximum Annual Addition that may be contributed or allocated to a Participant's accounts under the Plan for any "Limitation Year," which shall not exceed the lesser of:

(i) the "Defined Contribution Dollar Limitation," or

(ii) twenty-five percent (25%) of the Participant's 415 Compensation for the "Limitation Year."

The Compensation Limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of Code Sections 401(h) or 419A(f)(2)) which is otherwise treated as an "Annual Addition."

If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve
(12) consecutive month period, the "Maximum Permissible Amount" will not exceed the "Defined Contribution Dollar Limitation multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year and the denominator of which is twelve (12).

(10) "Projected Annual Benefit" means the annual retirement benefit (adjusted to. an actuarially equivalent "straight life annuity" if such benefit is expressed in a form other than a "straight life annuity" or qualified joint and survivor annuity) to which the Participant would be entitled under the terms of the plan assuming:

(i) the Participant will continue employment until Normal Retirement Age (or current age, if later), and

(ii) the Participant's 415 Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years.

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For purposes of this subsection, "straight life annuity" means an annuity that is payable in equal installments for the life of the Participant that terminates upon the Participant's death.

(g) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code
Section 415 and the Regulations thereunder.

4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS

Allocation of "Annual Additions" (as defined in Section 4.4) to a Participant's Combined Account for a Limitation Year generally will cease once the limits of Section 4.4 have been reached for such Limitation Year. However, if as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's annual 415 Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3)) that may be made with respect to any Participant under the limits of
Section 4.4, or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "Annual Additions" under this Plan would cause the maximum provided in Section 4.4 to be exceeded, the "Excess Amount" will be disposed of in one of the following manners, as uniformly determined by the Plan Administrator for all Participants similarly situated:

(a) Any after-tax voluntary Employee contributions (plus attributable gains), to the extent they would reduce the Excess Amount, will be distributed to the Participant;

(b) If, after the application of subparagraph (a), an "Excess Amount" still exists, any unmatched Elective Deferrals (and for Limitation Years beginning after December 31, 1995, any gains attributable to such Elective Deferrals), to the extent they would reduce the Excess Amount, will be distributed to the Participant;

(c) To the extent necessary, matched Elective Deferrals and Employer matching contributions will be proportionately reduced from the Participant's Account. The Elective Deferrals (and for Limitation Years beginning after December 31, 1995, any gains attributable to such Elective Deferrals) will be distributed to the Participant and the Employer matching contributions (and for Limitation Years beginning after December 31, 1995, any gains attributable to such matching contributions) will be used to reduce the Employer's contributions in the next Limitation Year;

(d) If, after the application of subparagraphs (a), (b) and (c), an "Excess Amount" still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the "Excess Amount" in the Participant's Account will be used to reduce Employer contributions (including any allocation of Forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary;

(e) If, after the application of subparagraphs (a), (b) and (c), an "Excess Amount" still exists, and the Participant is not covered by the Plan at the end of a Limitation Year, the "Excess Amount" will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any Forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; and

(f) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, no investment gains and losses shall be allocated to such suspense account. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer contributions or any Employee contributions may be made to the Plan for that Limitation Year. Except as provided in
(a), (b) and (c) above, "Excess Amounts" may not be distributed to Participants or Former Participants.

4.6 ROLLOVERS

(a) If elected in the Adoption Agreement and with the consent of the Administrator, the Plan may accept a "rollover," provided the "rollover" will not jeopardize the tax-exempt status of the Plan or create adverse tax consequences for the-Employer. The amounts rolled over shall be set up in a separate account herein referred to as a "Participant's Rollover Account." Such account shall be fully Vested at all times and shall not be subject to forfeiture for any reason. For purposes of this Section, the term Participant shall include any Eligible Employee who is not yet a Participant, if, pursuant to the Adoption Agreement, "rollovers" are permitted to be accepted from Eligible Employees. In addition, for purposes of this Section the term Participant shall also include former Employees if the Employer and Administrator consent to accept "rollovers" of distributions made to former Employees from any plan of the Employer.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(b) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as elected in the Adoption Agreement and subsection (c) below. The Trustee shall have no duty or responsibility to inquire as to the propriety of the amount, value or type of assets transferred, nor to conduct any due diligence with respect to such assets; provided, however, that such assets are otherwise eligible to be held by the Trustee under the terms of this Plan.

(c) At Normal Retirement Date, or such other date when the Participant or Eligible Employee or such Participant's or Eligible Employee's Beneficiary shall be entitled to receive benefits, the Participant's Rollover Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. Any distribution of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of Sections 6.5 and 6.6, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, such amounts shall be considered to be part of a Participant's benefit in determining whether an involuntary cash-out of benefits may be made without Participant consent.

(d) The Administrator may direct that rollovers made after a Valuation Date be segregated into a separate account for each Participant until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated, invested as part of the general Trust Fund or, if elected in the Adoption Agreement, directed by the Participant.

(e) For purposes of this Section, the term "qualified plan" shall mean any tax qualified plan under Code Section 401(a), or any other plans from which distributions are eligible to be rolled over into this Plan pursuant to the Code. The term "rollover" means: (i) amounts transferred to this Plan in a direct rollover made pursuant to Code Section 401(a)(31) from another "qualified plan"; (ii) distributions received by an Employee from other "qualified plans" which are eligible for tax-free rollover to a "qualified plan" and which are transferred by the Employee to this Plan within sixty (60) days following receipt thereof; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another "qualified plan" (B) were eligible for tax-free rollover to a "qualified plan" and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof; (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of receipt thereof from such conduit individual retirement account; and (v) any other amounts which are eligible to be rolled over to this Plan pursuant to the Code.

(f) Prior to accepting any "rollovers" to which this Section applies, the Administrator may require the Employee to establish (by providing opinion of counsel or otherwise) that the amounts to be rolled over to this Plan meet the requirements of this Section.

4.7 PLAN-TO-PLAN TRANSFERS FROM QUALIFIED PLANS

(a) With the consent of the Administrator, amounts may be transferred (within the meaning of Code Section 414(1)) to this Plan from other tax qualified plans under Code Section 401(a), provided the plan from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax-exempt status of the Plan or Trust or create adverse tax consequences for the Employer. Prior to accepting any transfers to which this Section applies, the Administrator may require an opinion of counsel that the amounts to be transferred meet the requirements of this Section. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's Transfer Account." Furthermore, for Vesting purposes, the Participant's Transfer Account shall be treated as a separate "Participant's Account."

(b) Amounts in a Participant's Transfer Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as elected in the Adoption Agreement and subsection (d) below, provided the restrictions of subsection (c) below and Section 6.15 are satisfied. The Trustee shall have no duty or responsibility to inquire as to the propriety of the amount, value or type of assets transferred, nor to conduct any due diligence with respect to such assets; provided, however, that such assets are otherwise eligible to be held by the Trustee under the terms of this Plan.

(c) Except as permitted by Regulations (including Regulation 1.411(d)-4), amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1(g)(3)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer (other than a direct rollover) shall be subject to the distribution limitations provided for in Regulation 1.401(k)-1(d).

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(d) At Normal Retirement Date, or such other date when the Participant or the Participant's Beneficiary shall, be entitled to receive benefits; the Participant's Transfer Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. Any distribution of amounts held in a Participant's Transfer Account shall be made in a manner which is consistent with and satisfies the provisions of Sections 6.5 and 6.6, including, but not limited to, all notice and consent requirements of Code Sections 41l(a)(11) and 417 and the Regulations thereunder. Furthermore, such amounts shall be considered to be part of a Participant's benefit in determining whether an involuntary cash-out of benefits may be made without Participant consent.

(e) The Administrator may direct that Employee transfers made after a Valuation Date be segregated into a separate account for each Participant until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated, invested as part of the general Trust Fund or, if elected in the Adoption Agreement, directed by the Participant.

(f) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit" as described in Section 8.1(e).

4.8 VOLUNTARY EMPLOYEE CONTRIBUTIONS

(a) Except as provided in subsection 4.8(b) below, this Plan will not accept after-tax voluntary Employee contributions. If this is an amendment to a Plan that had previously allowed after-tax voluntary Employee contributions, then this Plan will not accept after-tax voluntary Employee contributions for Plan Years beginning after the Plan Year in which this Plan is adopted by the Employer.

(b) For 401(k) Plans, if elected in the Adoption Agreement, each Participant who is eligible to make Elective Deferrals may, in accordance with nondiscriminatory procedures established by the Administrator, elect to make after-tax voluntary Employee contributions to this Plan. Such contributions must generally be paid to the Trustee within a reasonable period of time after being received by the Employer.

(c) The balance in each Participant's Voluntary Contribution Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason.

(d) A Participant may elect at any time to withdraw after-tax voluntary Employee contributions from such Participant's Voluntary Contribution Account and the actual earnings thereon in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. If the Administrator maintains sub-accounts with respect to after-tax voluntary Employee contributions (and earnings thereon) which were made on or before a specified date, a Participant shall be permitted to designate which sub-account shall be the source for the withdrawal. Forfeitures of Employer contributions shall not occur solely as a result of an Employee's withdrawal of after-tax voluntary Employee contributions.

In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any plan maintained by the Employer, then the Participant shall be barred from making any after-tax voluntary Employee contributions for a period of twelve (12) months after receipt of the hardship distribution.

(e) At Normal Retirement Date, or such other date when the Participant or the Participant's Beneficiary is entitled to receive benefits, the Participant's Voluntary Contribution Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary.

(f) To the extent a Participant has previously made mandatory Employee contributions under prior provisions of this Plan, such contributions will be treated as after-tax voluntary Employee contributions.

4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS

(a) If this is an amendment to a Plan that previously permitted deductible voluntary Employee contributions, then each Participant who made "Qualified Voluntary Employee Contributions" within the meaning of Code Section 219(e)(2) as it existed prior to the enactment of the Tax Reform Act of 1986, shall have such contributions held in a separate Qualified Voluntary Employee Contribution Account which shall be fully Vested at all times. Such contributions, however, shall not be permitted for taxable years beginning after December 31, 1986.

DEFINED CONTRIBUTION PROTOTYPE PLAN

            (b) A Participant may, upon written request delivered to the
      Administrator, make withdrawals from such Participant's Qualified
      Voluntary Employee Contribution Account. Any distribution shall be made in
      a manner which is consistent with and satisfies the provisions of Section
      6.5, including, but not limited to, all notice and consent requirements of
      Code Sections 411(a)(11) and 417 and the Regulations thereunder.

            (c) At Normal Retirement Date, or such other date when the
      Participant or the Participant's Beneficiary is entitled to receive
      benefits, the Qualified Voluntary Employee Contribution Account shall be
      used to provide additional benefits to the Participant or the
      Participant's Beneficiary.

4.10  DIRECTED INVESTMENT ACCOUNT

            (a) If elected in the Adoption Agreement, all Participants may
      direct the Trustee as to the investment of all or a portion of their
      individual account balances as set forth in the Adoption Agreement and
      within limits set by the Employer. Participants may direct the Trustee, in
      writing (or in such other form which is acceptable to the Trustee), to
      invest their accounts in specific assets, specific funds or other
      investments permitted under the Plan and the Participant Direction
      Procedures. That portion of the account of any Participant that is subject
      to investment direction of such Participant will be considered a
      Participant Directed Account.

            (b) The Administrator will establish a Participant Direction
      Procedure, to be applied in a uniform and nondiscriminatory manner,
      setting forth the permissible investment options under this Section, how
      often changes between investments may be made, and any other limitations
      and provisions that the Administrator may impose on a Participant's right
      to direct investments.

            (c) The Administrator may, in its discretion, include or exclude by
      amendment or other action from the Participant Direction Procedures such
      instructions, guidelines or policies as it deems necessary or appropriate
      to ensure proper administration of the Plan, and may interpret the same
      accordingly.

            (d) As of each Valuation Date, all Participant Directed Accounts
      shall be charged or credited with the net earnings, gains, losses and
      expenses as well as any appreciation or depreciation in the market value
      using publicly listed fair market values when available or appropriate as
      follows:

            (1) to the extent the assets in a Participant Directed Account are
            accounted for as pooled assets or investments, the allocation of
            earnings, gains and losses of each Participant's Account shall be
            based upon the total amount of funds so invested in a manner
            proportionate to the Participant's share of such pooled investment;
            and

            (2) to the extent the assets in a Participant Directed Account are
            accounted for as segregated assets, the allocation of earnings,
            gains on and losses from such assets shall be made on a separate and
            distinct basis.

            (e) Investment directions will be processed as soon as
      administratively practicable after proper investment directions are
      received from the Participant. No guarantee is made by the Plan, Employer,
      Administrator or Trustee that investment directions will be processed on a
      daily basis, and no guarantee is made in any respect regarding the
      processing time of an investment direction. Notwithstanding any other
      provision of the Plan, the Employer, Administrator or Trustee reserves the
      right to not value an investment option on any given Valuation Date for
      any reason deemed appropriate by the Employer, Administrator or Trustee.
      Furthermore, the processing of any investment transaction may be delayed
      for any legitimate business reason (including, but not limited to, failure
      of systems or computer programs, failure of the means of the transmission
      of data, force majeure, the failure of a service provider to timely
      receive values or prices, and correction for errors or omissions or the
      errors or omissions of any service provider). The processing date of a
      transaction will be binding for all purposes of the Plan and considered
      the applicable Valuation Date for an investment transaction.

            (f) If the Employer has elected in the Adoption Agreement that it
      intends to operate any portion of this Plan as an Act Section 404(c) plan,
      the Participant Direction Procedures should provide an explanation of the
      circumstances under which Participants and their Beneficiaries may give
      investment instructions, including but not limited to, the following:

            (1) the conveyance of instructions by the Participants and their
            Beneficiaries to invest Participant Directed Accounts in a Directed
            Investment Option;

DEFINED CONTRIBUTION PROTOTYPE PLAN

            (2) the name, address and phone number of the Fiduciary (and, if
            applicable, the person or persons designated by the Fiduciary to act
            on its behalf) responsible for providing information to the
            Participant or a Beneficiary upon request relating to the Directed
            Investment Options;

            (3) applicable restrictions on transfers to and from any Designated
            Investment Alternative;

            (4) any restrictions on the exercise of voting, tender and similar
            rights related to a Directed Investment Option by the Participants
            or their Beneficiaries;

            (5) a description of any transaction fees and expenses which affect
            the balances in Participant Directed Accounts in connection with the
            purchase or sale of a Directed Investment Option; and

            (6) general procedures for the dissemination of investment and other
            information relating to the Designated Investment Alternatives as
            deemed necessary or appropriate; including but not limited to a
            description of the following:

                  (i) the investment vehicles available under the Plan,
                  including specific information regarding any Designated
                  Investment Alternative;

                  (ii) any designated Investment Managers; and

                  (iii) a description of the additional information that may be
                  obtained upon request from the Fiduciary designated to provide
                  such information.

            (g) With respect to those assets in a Participant's Directed
      Account, the Participant or Beneficiary shall direct the Trustee with
      regard to any voting, tender and similar rights associated with the
      ownership of such assets (hereinafter referred to as the "Stock Rights")
      as follows based on the election made in the Adoption Agreement:

            (1) each Participant or Beneficiary shall direct the Trustee to vote
            or otherwise exercise such Stock Rights in accordance with the
            provisions, conditions and terms of any such Stock Rights;

            (2) such directions shall be provided to the Trustee by the
            Participant or Beneficiary in accordance with the procedure as
            established by the Administrator and the Trustee shall vote or
            otherwise exercise such Stock Rights with respect to which it has
            received directions to do so under this Section; and

            (3) to the extent to which a Participant or Beneficiary does not
            instruct the Trustee to vote or otherwise exercise such Stock
            Rights, such Participants or Beneficiaries shall be deemed to have
            directed the Trustee that such Stock Rights remain nonvoted and
            unexercised.

            (h) Any information regarding investments available under the Plan,
      to the extent not required to be described in the Participant Direction
      Procedures, may be provided to Participants in one or more documents (or
      in any other form, including, but not limited to, electronic media) which
      are separate from the Participant Direction Procedures and are not thereby
      incorporated by reference into this Plan.

4.11  INTEGRATION IN MORE THAN ONE PLAN

            If the Employer maintains qualified retirement plans that provide

for permitted disparity (integration), the provisions of Section 4.3(b)(4) will apply. Furthermore, if the Employer maintains two or more standardized paired plans, only one plan may provide for permitted disparity.

4.12 QUALIFIED MILITARY SERVICE

Notwithstanding any provisions of this Plan to the contrary, effective as of the later of December 12, 1994, or the Effective Date of the Plan, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). Furthermore, loan repayments may be suspended under this Plan as permitted under Code Section 414(u)(4).

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ARTICLE V
VALUATIONS

5.1 VALUATION OF THE TRUST FUND

The Administrator shall direct the Trustee, as of each Valuation Date, to determine the net worth of the assets comprising the Trust Fund as it exists on the Valuation Date. In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value (or their contractual value in the case of a Contract or Policy) as of the Valuation Date and may deduct all expenses for which the Trustee has not yet been paid by the Employer or the Trust Fund. The Trustee may update the value of any shares held in a Participant Directed Account by reference to the number of shares held on behalf of the Participant, priced at the market value as of the Valuation Date.

5.2 METHOD OF VALUATION

In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the Valuation Date. If such securities were not traded on the Valuation Date, or if the exchange on which they are traded was not open for business on the Valuation Date, then the securities shall be valued at the prices at which they were last traded prior to the Valuation Date. Any unlisted security held in the Trust Fund shall be valued at its bid price next preceding the close of business on the Valuation Date, which bid price shall be obtained from a registered broker or an investment banker. In determining the fait market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers.

ARTICLE VI

DETERMINATION AND DISTRIBUTION OF BENEFITS

6.1 DETERMINATION OF BENEFITS UPON RETIREMENT

Every Participant may terminate employment with the Employer and retire for purposes hereof on the Participant's Normal Retirement Date or Early Retirement Date. However, a Participant may postpone the termination of employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.3, shall continue until such Participant's Retirement Date. Upon a Participant's Retirement Date, or if elected in the Adoption Agreement, the attainment of Normal Retirement Date without termination of employment with the Employer, or as soon thereafter as is practicable, the Administrator shall direct the distribution, at the election of the Participant, of the Participant's entire Vested interest in the Plan in accordance with
Section 6.5.

6.2 DETERMINATION OF BENEFITS UPON DEATH

(a) Upon the death of a Participant before the Participant's Retirement Date or other termination of employment, all amounts credited to such Participant's Combined Account shall, if elected in the Adoption Agreement, become fully Vested. The Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of the deceased Participant's Vested accounts to the Participant's Beneficiary.

(b) Upon the death of a Former Participant, the Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of any remaining Vested amounts credited to the accounts of such deceased Former Participant to such Former Participant's Beneficiary.

(c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive.

(d) Unless otherwise elected in the manner prescribed in Section 6.6, the Beneficiary of the Pre-Retirement Survivor Annuity shall be the Participant's surviving spouse. Except, however, the Participant may designate a Beneficiary other than the spouse for the Pre-Retirement Survivor Annuity if:

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(1) the Participant and the Participant's spouse have validly waived the Pre-Retirement Survivor Annuity in the manner prescribed in
Section 6.6, and the spouse has waived the right to be the Participant's Beneficiary,

(2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise),

(3) the Participant has no spouse, or

(4) the spouse cannot be located.

In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke a designation of a Beneficiary or change a Beneficiary by filing written (or in such other form as permitted by the IRS) notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing (or in such other form as permitted by the IRS) to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right.

(e) A Participant may, at any time, designate a Beneficiary for death benefits, if any, payable under the Plan that are in excess of the Pre-Retirement Survivor Annuity without the waiver or consent of the Participant's spouse. In the event no valid designation of Beneficiary exists, or if the Beneficiary is not alive at the time of the Participant's death, the death benefit will be paid in the following order of priority, unless the Employer specifies a different order of priority in an addendum to the Adoption Agreement, to:

(1) The Participant's surviving spouse;

(2) The Participant's children, including adopted children, per stirpes

(3) The Participant's surviving parents, in equal shares; or

(4) The Participant's estate.

If the Beneficiary does not predecease the Participant, but dies prior to distribution of the death benefit, the death benefit will be paid to the Beneficiary's estate.

(f) Notwithstanding anything in this Section to the contrary, if a Participant has designated the spouse as a Beneficiary, then a divorce decree or a legal separation that relates to such spouse shall revoke the Participant's designation of the spouse as a Beneficiary unless the decree or a qualified domestic relations order (within the meaning of Code
Section 414(p)) provides otherwise or a subsequent Beneficiary designation is made.

(g) If the Plan provides an insured death benefit and a Participant dies before any insurance coverage to which the Participant is entitled under the Plan is effected, the death benefit from such insurance coverage shall be limited to the premium which was or otherwise would have been used for such purpose.

(h) In the event of any conflict between the terms of this Plan and the terms of any Contract issued hereunder, the Plan provisions shall control.

6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY

In the event of a Participant's Total and Permanent Disability prior to the Participant's Retirement Date or other termination of employment, all amounts credited to such Participant's Combined Account shall, if elected in the Adoption Agreement, become fully Vested. In the event of a Participant's Total and Permanent Disability, the Administrator, in accordance with the provisions of Sections 6.5 and 6.7, shall direct the distribution to such Participant of the entire Vested interest in the Plan.

6.4 DETERMINATION OF BENEFITS UPON TERMINATION

DEFINED CONTRIBUTION PROTOTYPE PLAN

(a) If a Participant's employment with the Employer is terminated for any reason other than death, Total and Permanent Disability, or retirement, then such Participant shall be entitled to such benefits as are provided herein.

Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability, Early or Normal Retirement). However, at the election of the Participant, the Administrator shall direct that the entire Vested portion of the Terminated Participant's Combined Account be payable to such Terminated Participant provided the conditions, if any, set forth in the Adoption Agreement have been satisfied. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder.

Regardless of whether distributions in kind are permitted, in the event the amount of the Vested portion of the Terminated Participant's Combined Account equals or exceeds the fair market value of any insurance Contracts, the Trustee, when so directed by the Administrator and agreed to by the Terminated Participant, shall assign, transfer, and set over to such Terminated Participant all Contracts on such Terminated Participant's life in such form or with such endorsements, so that the settlement options and forms of payment are consistent with the provisions of Section
6.5. In the event that the Terminated Participant's Vested portion does not at least equal the fair market value of the Contracts, if any, the Terminated Participant may pay over to the Trustee the sum needed to make the distribution equal to the value of the Contracts being assigned or transferred, or the Trustee, pursuant to the Participant's election, may borrow the cash value of the Contracts from the Insurer so that the value of the Contracts is equal to the Vested portion of the Terminated Participant's Combined Account and then assign the Contracts to the Terminated Participant.

Notwithstanding the above, unless otherwise elected in the Adoption Agreement, if the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed $5,000 (or, $3,500 for distributions made prior to the later of the first day of the first Plan Year beginning on or after August 5, 1997, or the date specified in the Adoption Agreement) the Administrator shall direct that the entire Vested benefit be paid to such Participant in a single lump-sum without regard to the consent of the Participant or the Participant's spouse. A Participant's Vested benefit shall not include Qualified Voluntary Employee Contributions within the meaning of Code
Section 72(o)(5)(B) for Plan Years beginning prior to January 1, 1989. Furthermore, the determination of whether the $5,000 (or, if applicable, $3,500) threshold has been exceeded is generally based on the value of the Vested benefit as of the Valuation Date preceding the date of the distribution. However, if the "lookback rule" applies, the applicable threshold is deemed to be exceeded if the Vested benefit exceeded the applicable threshold at the time of any prior distribution. The "lookback rule" generally applies to all distributions made prior to March 22, 1999. With respect to distributions made on or after March 22, 1999, the "lookback rule" applies if either (1) the provisions of Section 6.12 do not apply or (2) a Participant has begun to receive distributions pursuant to an optional form of benefit under which at least one scheduled periodic distribution has not yet been made, and if the value of the Participant's benefit, determined at the time of the first distribution under that optional form of benefit exceeded the applicable threshold. However, the Plan does not fail to satisfy the requirements of this paragraph if, prior to the adoption of this Prototype Plan, the "lookback rule" was applied to all distributions. Notwithstanding the preceding, the "lookback rule" will not apply to any distributions made on or after October 17, 2000.

(b) The Vested portion of any Participant's Account shall be a percentage of such Participant's Account determined on the basis of the Participant's number of Years of Service (or Periods of Service if the Elapsed Time Method is elected) according to the vesting schedule specified in the Adoption Agreement. However, a Participant's entire interest in the Plan shall be non-forfeitable upon the Participant's Normal Retirement Age (if the Participant is employed by the Employer on or after such date).

(c) For any Top Heavy Plan Year, the minimum top heavy vesting schedule elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The minimum top heavy vesting schedule applies to all benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became top heavy. Further, no decrease in a Participant's Vested percentage shall occur in the event the Plan's status as top heavy changes for any Plan Year. However, this Section does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan has initially become top heavy and the Vested percentage of such Employee's Participant's Account shall be determined without regard to this Section 6.4(c).

DEFINED CONTRIBUTION PROTOTYPE PLAN

If in any subsequent Plan Year the Plan ceases to be a Top Heavy Plan, then unless a specific Plan amendment is made to provide otherwise, the Administrator will continue to use the vesting schedule in effect while the Plan was a Top Heavy Plan.

(d) Upon the complete discontinuance of the Employer's contributions to the Plan (if this is a profit sharing plan) or upon any full or partial termination of the Plan, all amounts then credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture.

(e) If this is an amended or restated Plan, then notwithstanding the vesting schedule specified in the Adoption Agreement, the Vested percentage of a Participant's Account shall not be less than the Vested percentage attained as of the later of the effective date or adoption date of this amendment and restatement. The computation of a Participant's nonforfeitable percentage of such Participant's interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Article, or due to changes in the Plan's status as a Top Heavy Plan. Furthermore, if the Plan's vesting schedule is amended, then the amended schedule will only apply to those Participants who complete an Hour of Service after the effective date of the amendment.

(f) If the Plan's vesting schedule is amended, or if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to a top heavy vesting schedule, then each Participant with at least three (3) Years of Service (or Periods of Service if the Elapsed Time Method is elected) as of the expiration date of the election period may elect to have such Participant's nonforfeitable percentage computed under the Plan without regard to such amendment or change. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end sixty (60) days after the latest of

(1) the adoption date of the amendment,

(2) the effective date of the amendment, or

(3) the date the Participant receives written notice of the amendment from the Employer or Administrator.

(g) In determining Years of Service or Periods of Service for purposes of vesting under the Plan, Years of Service or Periods of Service shall be excluded as elected in the Adoption Agreement.

6.5 DISTRIBUTION OF BENEFITS

(a)(1) Unless otherwise elected as provided below, a Participant who is married on the Annuity Starting Date and who does not die before the Annuity Starting Date shall receive the value of all Plan benefits in the form of a Joint and Survivor Annuity. The Joint and Survivor Annuity is an annuity that commences immediately and shall be equal in value to a single life annuity. Such joint and survivor benefits following the Participant's death shall continue to the spouse during the spouse's lifetime at a rate equal to either fifty percent (50%), seventy-five percent (75%) (or, sixty-six and two-thirds percent (66 2/3%) if the Insurer used to provide the annuity does not offer a joint and seventy-five percent (75%) annuity), or one hundred percent (100%) of the rate at which such benefits were payable to the Participant. Unless otherwise elected in the Adoption Agreement, a joint and fifty percent (50%) survivor annuity shall be considered the designated qualified Joint and Survivor Annuity and the normal form of payment for the purposes of this Plan. However, the Participant may, without spousal consent, elect an alternative Joint and Survivor Annuity, which alternative shall be equal in value to the designated qualified Joint and Survivor Annuity. An unmarried Participant shall receive the value of such Participant's benefit in the form of a life annuity. Such unmarried Participant, however, may elect to waive the life annuity. The election must comply with the provisions of this Section as if it were an election to waive the Joint and Survivor Annuity by a married Participant, but without fulfilling the spousal consent requirement. The Participant may elect to have any annuity provided for in this Section distributed upon the attainment of the "earliest retirement age" under the Plan. The "earliest retirement age" is the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits.

(2) Any election to waive the Joint and Survivor Annuity must be made by the Participant in writing (or in such other form as permitted by the IRS) during the election period and be consented to in writing (or in such other form as permitted by the IRS) by the Participant's spouse. If the spouse is legally incompetent to give consent, the spouse's legal guardian, even if such guardian is the Participant, may give consent. Such

DEFINED CONTRIBUTION PROTOTYPE PLAN

election shall designate a Beneficiary (or a form of benefits) that may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without the requirement of further consent by the spouse). Such spouse's consent shall be irrevocable and must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Administrator that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or other circumstances that may be prescribed by Regulations. The election made by the Participant and consented to by such Participant's spouse may be revoked by the Participant in writing (or in such other form as permitted by the IRS) without the consent of the spouse at any time during the election period. A revocation of a prior election shall cause the Participant's benefits to be distributed as a Joint and Survivor Annuity. The number of revocations shall not be limited. Any new election must comply with the requirements of this paragraph. A former spouse's waiver shall not be binding on a new spouse.

(3) The election period to waive the Joint and Survivor Annuity shall be the ninety (90) day period ending on the Annuity Starting Date.

(4) For purposes of this Section, spouse or surviving spouse means the spouse or surviving spouse of the Participant, provided that a former spouse will be treated as the spouse or surviving spouse and a current spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Code Section 414(p).

(5) With regard to the election, except as otherwise provided herein, the Administrator shall provide to the Participant no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date a written (or such other form as permitted by the IRS) explanation of:

(i) the terms and conditions of the Joint and Survivor Annuity,

(ii) the Participant's right to make and the effect of an election to waive the Joint and Survivor Annuity,

(iii) the right of the Participant's spouse to consent to any election to waive the Joint and Survivor Annuity, and

(iv) the right of the Participant to revoke such election, and the effect of such revocation.

(6) Any distribution provided for in this Section made on or after December 31, 1996, may commence less than thirty (30) days after the notice required by Code Section 4l7(a)(3) is given provided the following requirements are satisfied:

(i) the Administrator clearly informs the Participant that the Participant has a right to a period of thirty (30) days after receiving the notice to consider whether to waive the Joint and Survivor Annuity and to elect (with spousal consent) a form of distribution other than a Joint and Survivor Annuity;

(ii) the Participant is permitted to revoke any affirmative distribution election at least until the Annuity Starting Date or, if later, at any time prior to the expiration of the seven
(7) day period that begins the day after the explanation of the Joint and Survivor Annuity is provided to the Participant;

(iii) the Annuity Starting Date is after the time that the explanation of the Joint and Survivor Annuity is provided to the Participant. However, the Annuity Starting Date may be before the date that any affirmative distribution election is made by the Participant and before the date that the distribution is permitted to commence under (iv) below; and

(iv) distribution in accordance with the affirmative election does not commence before the expiration of the seven (7) day period that begins the day after the explanation of the Joint and Survivor Annuity is provided to the Participant.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(b) In the event a married Participant duly elects pursuant to paragraph (a)(2) above not to receive the benefit in the form of a Joint and Survivor Annuity, or if such Participant is not married, in the form of a life annuity, the Administrator, pursuant to the election of the Participant, shall direct the distribution to a Participant or Beneficiary any amount to which the Participant or Beneficiary is entitled under the Plan in one or more of the following methods which are permitted pursuant to the Adoption Agreement:

(1) One lump-sum payment in cash or in property that is allocated to the accounts of the Participant at the time of the distribution;

(2) Partial withdrawals;

(3) Payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. In order to provide such installment payments, the Administrator may (A) segregate the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate or other liquid short-term security or (B) purchase a nontransferable annuity contract for a term certain (with no life contingencies) providing for such payment. The period over which such payment is to be made shall not extend beyond the Participant's life expectancy (or the life expectancy of the Participant and the Participant's designated Beneficiary);

(4) Purchase of or providing an annuity. However, such annuity may not be in any form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and the Participant's designated Beneficiary).

(c) Benefits may not be paid without the Participant's and the Participant's spouse's consent if the present value of the Participant's Joint and Survivor Annuity derived from Employer and Employee contributions exceeds, or has ever exceeded, $5,000 (or $3,500, for distributions made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement) and the benefit is "immediately distributable." However, spousal consent is not required if the distribution will made in the form a Qualified Joint and Survivor Annuity and the benefit is "immediately distributable." A benefit is "immediately distributable" if any part of the benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of the Participant's Normal Retirement Age or age 62.

If the value of the Participant's benefit derived from Employer and Employee contributions does not exceed, and has never exceeded at the time of any prior distribution, $5,000 (or, if applicable, $3,500), then the Administrator will distribute such benefit in a lump-sum without such Participant's consent. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the Participant and the Participant's spouse consent in writing (or in such other form as permitted by the IRS) to such distribution. Any consent required under this paragraph must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). Notwithstanding the preceding, the "lookback rule" (which provides that if the present value at the time of a prior distribution exceeded the applicable dollar threshold, then the present value at any subsequent time is deemed to exceed the threshold) will not apply to any distributions made on or after October 17, 2000.

(d) The following rules will apply with respect to the consent requirements set forth in subsection (c):

(1) No consent shall be valid unless the Participant has received a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan that would satisfy the notice requirements of Code Section 417;

(2) The Participant must be informed of the right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions that are required under Section 6.5(e);

(3) Notice of the rights specified under this paragraph shall be provided no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date;

DEFINED CONTRIBUTION PROTOTYPE PLAN

(4) Written (or such other form as permitted by the IRS) consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than ninety (90) days before the Annuity Starting Date; and

(5) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution.

(e) Notwithstanding any provision in the Plan to the contrary, for Plan Years beginning after December 31, 1996, the distribution of a Participant's benefits, whether under the Plan or through the purchase of an annuity Contract shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2):

(1) A Participant's benefits will be distributed or must begin to be distributed not later than the Participant's "required beginning date." Alternatively, distributions to a Participant must begin no later than the Participant's "required beginning date" and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or the life expectancy of the Participant (or the life expectancies of the Participant and the Participant's designated Beneficiary) in accordance with Regulations. However, if the distribution is to be in the form of a joint and survivor annuity or single life annuity, then distributions must begin no later than the "required beginning date" and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) in accordance with Regulations.

(2) The "required beginning date" for a Participant who is a "five percent (5%) owner" with respect to the Plan Year ending in the calendar year in which such Participant attains age 70 1/2 means April 1st of the calendar year following the calendar year in which the Participant attains age 70 1/2. Once distributions have begun to a "five percent (5%) owner" under this subsection, they must continue to be distributed, even if the Participant ceases to be a "five percent (5%) owner" in a subsequent year.

(3) The "required beginning date" for a Participant other than a "five percent (5%) owner" means, unless the Employer has elected to continue the pre-SBJPA rules in the Adoption Agreement, April 1st of the calendar year following the later of the calendar year in which the Participant attains age 70 1/2 or the calendar year in which the Participant retires.

(4) If the election is made to continue the pre-SBJPA rules, then except as provided below, the "required beginning date" is April 1st of the calendar year following the calendar year in which a Participant attains age 70 1/2.

(i) However, the "required beginning date" for a Participant who had attained age 70 1/2 before January 1, 1988, and was not a five percent (5%) owner (within the meaning of Code
Section 416) at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year, is April 1st of the calendar year following the calendar in which the Participant retires.

(ii) Notwithstanding (i) above, the "required beginning date" for a Participant who was a five percent (5%) owner (within the meaning of Code Section 416) at any time during the five
(5) Plan Year period ending in the calendar year in which the Participant attained age 70 1/2 is April 1st of the calendar year in which the Participant attained age 70 1/2. In the case of a Participant who became a five percent (5%) owner during any Plan Year after the calendar year in which the Participant attained age 70 1/2, the "required beginning date" is April 1st of the calendar year following the calendar year in which such subsequent Plan Year ends.

(5) If this is an amendment or restatement of a plan that contained the pre-SBJPA rules and an election is made to use the post-SBJPA rules, then the transition rules elected in the Adoption Agreement will apply.

(6) Except as otherwise provided herein, "five percent (5%) owner" means, for purposes of this Section, a Participant who is a five percent (5%) owner as defined in Code Section 416 at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(7) Distributions to a Participant and such Participant's Beneficiaries will only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder.

(8) For purposes of this Section, the life expectancy of a Participant and/or a Participant's spouse (other than in the case of a life annuity) shall or shall not be redetermined annually as elected in the Adoption Agreement and in accordance with Regulations. If the Participant or the Participant's spouse may elect, pursuant to the Adoption Agreement, to have life expectancies recalculated, then the election, once made shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor life expectancy shall be computed using the return multiples in Tables V and VI of Regulation Section 1.72-9.

(9) With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2001, or if later, the date specified in the Adoption Agreement, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary.

This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final Regulations under section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service.

However, if the date specified in the Adoption Agreement is a date in 2001 other than January 1, 2001, then with respect to distributions under the Plan made on or after such date for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a participant for 2001 prior to the specified date are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such participant for 2001 on or after such date. If the total amount of required minimum distributions made to a participant for 2001 prior to the specified date are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final Regulations under section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service.

(f) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of this Plan.

(g) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have retirement benefits paid in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

(h) If a distribution is made to a Participant who has not severed employment and who is not fully Vested in the Participant's Account, and the Participant may increase the Vested percentage in such account, then at any relevant time the Participant's Vested portion of the account will be equal to an amount ("X") determined by the formula:

X equals P (AB plus D) - D

For purposes of applying the formula: P is the Vested percentage at the relevant time, AB is the account balance at the relevant time. D is the amount of distribution, and the relevant time is the time at which, under the Plan, the Vested percentage in the account cannot increase.

However, the Employer may attach an addendum to the Adoption Agreement to provide that a separate account shall be established for the Participant's interest in the Plan as of the time of the distribution, and at

DEFINED CONTRIBUTION PROTOTYPE PLAN

any relevant time the Participant's Vested portion of the separate account will be equal to an amount determined as follows: P (AB plus (R x D)) - (R
x D) where R is the ratio of the account balance at the relevant time to the account balance after distribution and the other terms have the same meaning as in the preceding paragraph. Any amendment to change the formula in accordance with the preceding sentence shall not be considered an amendment which causes this Plan to become an individually designed Plan.

(i) If this is a Plan amendment that eliminates or restricts the ability of a Participant to receive payment of the Participant's interest in the Plan under a particular optional form of benefit, then the amendment shall not apply to any distribution with an annuity starting date earlier than the earlier of: (i) the 90th day after the date the Participant receiving the distribution has been furnished a summary that reflects the amendment and that satisfies the Act requirements at 29 CFR 2520.104b-3 relating to a summary of material modifications or (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted.

6.6 DISTRIBUTION OF BENEFITS UPON DEATH

(a) Unless otherwise elected as provided below, a Vested Participant who dies before the Annuity Starting Date and who has a surviving spouse shall have the Pre-Retirement Survivor Annuity paid to the surviving spouse. The Participant's spouse may direct that payment of the Pre-Retirement Survivor Annuity commence within a reasonable period after the Participant's death. If the spouse does not so direct, payment of such benefit will commence at the time the Participant would have attained the later of Normal Retirement Age or age 62. However, the spouse may elect a later commencement date. Any distribution to the Participant's spouse shall be subject to the rules specified in Section 6.6(h).

(b) Any election to waive the Pre-Retirement Survivor Annuity before the Participant's death must be made by the Participant in writing (or in such other form as permitted by the IRS) during the election period and shall require the spouse's irrevocable consent in the same manner provided for in Section 6.5(a)(2). Further, the spouse's. consent must acknowledge the specific nonspouse Beneficiary. Notwithstanding the foregoing, the nonspouse Beneficiary need not be acknowledged, provided the consent of the spouse acknowledges that the spouse has the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elects to relinquish such right.

(c) The election period to waive the Pre-Retirement Survivor Annuity shall begin on the first day of the Plan Year in which the Participant attains age 35 and end on the date of the Participant's death. An earlier waiver (with spousal consent) may be made provided a written (or such other form as permitted by the IRS) explanation of the Pre-Retirement Survivor Annuity is given to the Participant and such waiver becomes invalid at the beginning of the Plan Year in which the Participant turns age 35. In the event a Participant separates from service prior to the beginning of the election period, the election period shall begin on the date of such separation from service.

(d) With regard to the election, the Administrator shall provide each Participant within the applicable election period, with respect to such Participant (and consistent with Regulations), a written (or such other form as permitted by the IRS) explanation of the Pre-Retirement Survivor Annuity containing comparable information to that required pursuant to Section 6.5(a)(5). For the purposes of this paragraph, the term "applicable period" means, with respect to a Participant, whichever of the following periods ends last:

(1) The period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35;

(2) A reasonable period after the individual becomes a Participant;

(3) A reasonable period ending after the Plan no longer fully subsidizes the cost of the Pre-Retirement Survivor Annuity with respect to the Participant; or

(4) A reasonable period ending after Code Section 401(a)(11) applies to the Participant.

For purposes of applying this subsection, a reasonable period ending after the enumerated events described in (2), (3) and (4) is the end of the two (2) year period beginning one (1) year prior to the date the applicable event occurs, and ending one (1) year after that date. In the case of a Participant who separates from service before the Plan Year in which age 35 is attained, notice shall be provided within the two (2) year period beginning one
(1) year prior to separation and ending one (1) year after separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(e) The Pre-Retirement Survivor Annuity provided for in this Section shall apply only to Participants who are credited with an Hour of Service on or after August 23, 1984. Former Participants who are not credited with an Hour of Service on or after August 23, 1984, shall be provided with rights to the Pre-Retirement Survivor Annuity in accordance with Section 303(e)(2) of the Retirement Equity Act of 1984.

(f) If the value of the Pre-Retirement Survivor Annuity derived from Employer and Employee contributions does not exceed, and has never exceeded at the time of any prior distribution, $5,000 (or, $3,500 for distributions made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement) the Administrator shall direct the distribution of such amount to the Participant's spouse as soon as practicable. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the spouse consents in writing (or in such other form as permitted by the IRS). If the value exceeds, or has ever exceeded at the time of any prior distribution, $5,000 (or, if applicable, $3,500), an immediate distribution of the entire amount may be made to the surviving spouse, provided such surviving spouse consents in writing (or in such other form as permitted by the IRS) to such distribution. Any consent required under this paragraph must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). Notwithstanding the preceding, the "lookback rule" (which provides that if the present value at the time of a prior distribution exceeded the applicable dollar threshold, then the present value at any subsequent time is deemed to exceed the threshold) will not apply to any distributions made on or after October 17, 2000.

(g) Death benefits may be paid to a Participant's Beneficiary in one of the following optional forms of benefits subject to the rules specified in Section 6.6(h) and the elections made in the Adoption Agreement. Such optional forms of distributions may be elected by the Participant in the event there is an election to waive the Pre-Retirement Survivor Annuity, and for any death benefits in excess of the Pre-Retirement Survivor Annuity. However, if no optional form of distribution was elected by the Participant prior to death, then the Participant's Beneficiary may elect the form of distribution:

(1) One lump-sum payment in cash or in property that is allocated to the accounts of the Participant at the time of the distribution.

(2) Partial withdrawals.

(3) Payment in monthly, quarterly, semi-annual, or annual cash installments over a period to be determined by the Participant or the Participant's Beneficiary. In order to provide such installment payments, the Administrator may (A) segregate the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate or other liquid short-term security or (B) purchase a nontransferable annuity contract for a term certain (with no life contingencies) providing for such payment. After periodic installments commence, the Beneficiary shall have the right to reduce the period over which such periodic installments shall be made, and the cash amount of such periodic installments shall be adjusted accordingly.

(4) In the form of an annuity over the life expectancy of the Beneficiary.

(5) If death benefits in excess of the Pre-Retirement Survivor Annuity are to be paid to the surviving spouse, such benefits may be paid pursuant to (1), (2) or (3) above, or used to purchase an annuity so as to increase the payments made pursuant to the Pre-Retirement Survivor Annuity.

(h) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder.

(1) If it is determined, pursuant to Regulations, that the distribution of a Participant's interest has begun and the Participant dies before the entire interest has been distributed, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution elected pursuant to
Section 6.5 as of the date of death.

(2) If a Participant dies before receiving any distributions of the interest in the Plan or before distributions are deemed to have begun pursuant to Regulations, then the death benefit shall be distributed to the Participant's Beneficiaries in accordance with the following rules subject to the elections made in the Adoption Agreement and subsections 6.6(h)(3) and 6.6(i) below:

DEFINED CONTRIBUTION PROTOTYPE PLAN

(i) The entire death benefit shall be distributed to the Participant's Beneficiaries by December 31st of the calendar year in which the fifth anniversary of the Participant's death occurs;

(ii) The 5-year distribution requirement of (i) above shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion shall be distributed over the life of such designated Beneficiary (or over a period not extending beyond the life expectancy of such designated Beneficiary) provided such distribution begins not later than December 31st of the calendar year immediately following the calendar year in which the Participant died (or such later date as may be prescribed by Regulations);

(iii) However, in the event the Participant's spouse (determined as of the date of the Participant's death) is the designated Beneficiary, the provisions of (ii) above shall apply except that the requirement that distributions commence within one year of the Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or
(2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant.

(3) Notwithstanding subparagraph (2) above, or any elections made in the Adoption Agreement, if a Participant's death benefits are to be paid in the form of a Pre-Retirement Survivor Annuity, then distributions to the Participant's surviving spouse must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2.

(i) For purposes of Section 6.6(h)(2), the election by a designated Beneficiary to be excepted from the 5-year distribution requirement (if permitted in the Adoption Agreement) must be made no later than December 31st of the calendar year following the calendar year of the Participant's death. Except, however, with respect to a designated Beneficiary who is the Participant's surviving spouse, the election must be made by the earlier of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died or, if later, December 31st of the calendar year in which the Participant would have attained age 70 1/2; or (2) December 31st of the calendar year which contains the fifth anniversary of the date of the Participant's death. An election by a designated Beneficiary must be in writing (or in such other form as permitted by the IRS) and shall be irrevocable as of the last day of the election period stated herein. In the absence of an election by the Participant or a designated Beneficiary, the 5-year distribution requirement shall apply.

(j) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall or shall not be redetermined annually as elected in the Adoption Agreement and in accordance with Regulations. If the Participant may elect, pursuant to the Adoption Agreement, to have life expectancies recalculated, then the election, once made shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor life expectancy shall be computed using the return multiples in Tables V and VI of Regulation Section 1.72-9.

(k) For purposes of this Section, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority.

(1) In the event that less than one hundred percent (100%) of a Participant's interest in the Plan is distributed to such Participant's spouse, the portion of the distribution attributable to the Participant's Voluntary Contribution Account shall be in the same proportion that the Participant's Voluntary Contribution Account bears to the Participant's total interest in the Plan.

(m) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have death benefits paid in an alternative method acceptable under Code
Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

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6.7 TIME OF DISTRIBUTION

Except as limited by Sections 6.5 and 6.6, whenever a distribution is to be made, or a series of payments are to commence, the distribution or series of payments may be made or begun on such date or as soon thereafter as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the tenth
(10th) anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates service with the Employer.

Notwithstanding the foregoing, the failure of a Participant and, if applicable, the Participant's spouse, to consent to a distribution that is "immediately distributable" (within the meaning of Section 6.5(d)), shall be deemed to be an election to defer the commencement of payment of any benefit sufficient to satisfy this Section.

6.8 DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY

In the event a distribution is to be made to a minor or incompetent Beneficiary, then the Administrator may direct that such distribution be paid to the legal guardian, or if none in the case of a minor Beneficiary, to a parent of such Beneficiary, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor or incompetent Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof.

6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN

In the event that all, or any portion, of the distribution payable to a Participant or Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. Notwithstanding the foregoing, if the value of a Participant's Vested benefit derived from Employer and Employee contributions does not exceed $5,000, then the amount distributable may be treated as a Forfeiture at the time it is determined that the whereabouts of the Participant or the Participant's Beneficiary can not be ascertained. In the event a Participant or Beneficiary is located subsequent to the Forfeiture, such benefit shall be restored, first from Forfeitures, if any, and then from an additional Employer contribution, if necessary. Upon Plan termination, the portion of the distributable amount that is an "eligible rollover distribution" as defined in Plan Section 6.14(b)(1) may be paid directly to an individual retirement account described in Code Section 408(a) or an individual retirement annuity described in Code Section 408(b). However, regardless of the preceding, a benefit that is lost by reason of escheat under applicable state law is not treated as a Forfeiture for purposes of this Section nor as an impermissible forfeiture under the Code.

6.10 IN-SERVICE DISTRIBUTION

For Profit Sharing Plans and 401(k) Profit Sharing Plans, if elected in the Adoption Agreement, at such time as the conditions set forth in the Adoption Agreement have been satisfied, then the Administrator, at the election of a Participant who has not severed employment with the Employer, shall direct the distribution of up to the entire Vested amount then credited to the accounts as elected in the Adoption Agreement maintained on behalf of such Participant. In the event that the Administrator makes such a distribution, the Participant shall continue to be eligible to participate in the Plan on the same basis as any other Employee. Any distribution made pursuant to this Section shall be made in a manner consistent with Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, if an in-service distribution is permitted from more than one account type, the Administrator may determine any ordering of a Participant's in-service distribution from such accounts.

6.11  ADVANCE DISTRIBUTION FOR HARDSHIP

            (a) For Profit Sharing Plans and 401(k) Plans (except to the extent
      Section 12.9 applies), if elected in the Adoption Agreement, the
      Administrator, at the election of the Participant, shall direct the
      distribution to any Participant in any one Plan Year up to the lesser of
      100% of the Vested interest of the Participant's Combined Account valued
      as of the last Valuation Date or the amount necessary to satisfy the
      immediate and heavy financial need of the Participant. Any distribution
      made pursuant to this Section shall be deemed to be made as of the first
      day of the Plan Year or, if later, the Valuation Date immediately
      preceding the date of distribution, and the account from which the

DEFINED CONTRIBUTION PROTOTYPE PLAN

      distribution is made shall be reduced accordingly. Withdrawal under this
      Section shall be authorized only if the distribution is for an immediate
      and heavy financial need. The Administrator will determine whether there
      is an immediate and heavy financial need based on the facts and
      circumstances. An immediate and heavy financial need includes, but is not
      limited to, a distribution for one of the following:

            (1) Medical expenses described in Code Section 213(d) incurred by
            the Participant, the Participant's spouse, or any of the
            Participant's dependents (as defined in Code Section 152) or
            necessary for these persons to obtain medical care as described in
            Code Section 213(d);

            (2) Costs directly related to the purchase (excluding mortgage
            payments) of a principal residence for the Participant;

            (3) Funeral expenses for a member of the Participant's family;

            (4) Payment of tuition, related educational fees, and room and board
            expenses, for the next twelve (12) months of post-secondary
            education for the Participant, the Participant's spouse, children,
            or dependents (as defined in Code Section 152); or

            (5) Payments necessary to prevent the eviction of the Participant
            from the Participant's principal residence or foreclosure on the
            mortgage on that residence.

            (b) If elected in the Adoption Agreement, no distribution shall be
      made pursuant to this Section from the Participant's Account until such
      Account has become fully Vested. Furthermore, if a hardship distribution
      is permitted from more than one account type, the Administrator may
      determine any ordering of a Participant's hardship distribution from such
      accounts.

            (c) Any distribution made pursuant to this Section shall be made in
      a manner which is consistent with and satisfies the provisions of Section
      6.5, including, but not limited to, all notice and consent requirements of
      Code Sections 411(a)(11) and 417 and the Regulations thereunder.

6.12  SPECIAL RULE FOR CERTAIN PROFIT SHARING PLANS

            (a) The provisions of this Section apply to a Participant in a
      Profit Sharing Plan or 401(k) Profit Sharing Plan to the extent elected in
      the Adoption Agreement.

            (b) If an election is made to not offer life annuities as a form of
      distribution, then a Participant shall be prohibited from electing
      benefits in the form of a life annuity and the Joint and Survivor Annuity
      provisions of Section 6.5 shall not apply.

            (c) Notwithstanding anything in Sections 6.2 and 6.6 to the
      contrary, upon the death of a Participant, the automatic form of
      distribution will be a lump-sum rather than a Qualified Pre-Retirement
      Survivor Annuity. Furthermore, the Participant's spouse will be the
      Beneficiary of the Participant's entire Vested interest in the Plan unless
      an election is made to waive the spouse as Beneficiary. The other
      provisions in Section 6.2 shall be applied by treating the death benefit
      in this subsection as though it is a Qualified Pre-Retirement Survivor
      Annuity.

            (d) Except to the extent otherwise provided in this Section, the
      provisions of Sections 6.2, 6.5 and 6.6 regarding spousal consent shall be
      inoperative with respect to this Plan.

            (e) If a distribution is one to which Code Sections 401(a)(a)(11)
      and 417 do not apply, such distribution may. commence less than thirty
      (30) days after the notice required under Regulation 1441(a)11(c) is
      given, provided that:

            (1) the Plan Administrator clearly informs the Participant that the
            Participant has a right to a period of at least thirty (30) days
            after the notice to consider the decision of whether or not to elect
            a distribution (and, if applicable, a particular distribution
            option), and

            (2) the Participant, after receiving the notice, affirmatively
            elects a distribution.

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6.13  QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION

            All rights and benefits, including elections, provided to a

Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meanings set forth under Code Section 414(p).

6.14  DIRECT ROLLOVERS

            (a) Notwithstanding any provision of the Plan to the contrary that
      would otherwise limit a "distributee's" election under this Section, a
      "distributee" may elect, at the time and in the manner prescribed by the
      Administrator, to have any portion of an "eligible rollover distribution"
      that is equal to at least $500 paid directly to an "eligible retirement
      plan" specified by the "distributee" in a "direct rollover."

            (b) For purposes of this Section, the following definitions shall
      apply:

            (1) An "eligible rollover distribution" means any distribution
            described in Code Section 402(c)(4) and generally includes any
            distribution of all or any portion of the balance to the credit of
            the distributee, except that an "eligible rollover distribution"
            does not include: any distribution that is one of a series of
            substantially equal periodic payments (not less frequently than
            annually) made for the life (or life expectancy) of the
            "distributee" or the joint lives (or joint life expectancies) of the
            "distributee" and the "distributee's" designated beneficiary, or for
            a specified period of ten (10) years or more; any distribution to
            the extent such distribution is required under Code Section
            401(a)(9); the portion of any other distribution(s) that is not
            includible in gross income (determined without regard to the
            exclusion for net unrealized appreciation with respect to employer
            securities); for distributions made after December 31, 1998, any
            hardship distribution described in Code Section 401(k)(2)(B)(i)(IV);
            and any other distribution reasonably expected to total less than
            $200 during a year.

            (2) An "eligible retirement plan" is an individual retirement
            account described in Code Section 408(a), an individual retirement
            annuity described in Code Section 408(b), an annuity plan described
            in Code Section 403(a), or a qualified plan described in Code
            Section 401(a), that accepts the "distributee's" "eligible rollover
            distribution." However, in the case of an "eligible rollover
            distribution" to the surviving spouse, an "eligible retirement plan"
            is an individual retirement account or individual retirement
            annuity.

            (3) A "distributee" includes an Employee or former Employee. In
            addition, the Employee's or former Employee's surviving spouse and
            the Employee's or former Employee's spouse or former spouse who is
            the alternate payee under a qualified domestic relations order, as
            defined in Code Section 414(p), are distributees with regard to the
            interest of the spouse or former spouse.

            (4) A "direct rollover" is a payment by the Plan to the "eligible
            retirement plan" specified by the "distributee."

6.15  TRANSFER OF ASSETS FROM A MONEY PURCHASE PLAN

            (a) This Section shall be effective as of the following date:

            (1) for Plans not entitled to extended reliance as described in
            Revenue Ruling 94-76, the first day of the first Plan Year beginning
            on or after December 12, 1994, or if later, 90 days after December
            12, 1994; or

            (2) for Plans entitled to extended reliance as described in Revenue
            Ruling 94-76, as of the first day of the first Plan Year following
            the Plan Year in which the extended reliance period applicable to
            the Plan ends. However, in the event of a transfer of assets to the
            Plan from a money purchase plan that occurs after the date of the
            most recent determination letter, the effective date of the
            amendment shall be the date immediately preceding the date of such
            transfer of assets.

            (b) Notwithstanding any provision of this Plan to the contrary, to
      the extent that any optional form of benefit under this Plan permits a
      distribution prior to the Employee's retirement, death, disability, or
      severance from employment, and prior to Plan termination, the optional
      form of benefit is not available with respect to benefits

DEFINED CONTRIBUTION PROTOTYPE PLAN

      attributable to assets (including the post-transfer earnings thereon) and
      liabilities that are transferred, within the meaning of Code Section
      414(1), to this Plan from a money purchase pension plan qualified under
      Code Section 401 (a) (other than any portion of those assets and
      liabilities attributable to after-tax voluntary Employee contributions or
      to a direct or indirect rollover contribution).

6.16  ELECTIVE TRANSFERS OF BENEFITS TO OTHER PLANS

            (a) If a voluntary, fully-informed election is made by a
      Participant, then if the conditions set forth herein are satisfied, a
      Participant's entire benefit may be transferred between qualified plans
      (other than any direct rollover described in Q&A-3 of Regulation
      1.401(a)(31)-1). As an alternative to the transfer, the Participant may
      elect to retain the Participant's "Section 411(d)(6) protected benefits"
      under the Plan (or, if the plan is terminating, to receive any optional
      form of benefit for which the Participant is eligible under the plan as
      required by Code Section 411(d)(6)). A transfer between qualified plans
      may only be made pursuant to this subsection if the following additional
      requirements are met:

            (i) The transfer occurs at a time at which the participant's
            benefits are distributable. A Participant's benefits are
            distributable on a particular date if, on that date, the Participant
            is eligible, under the terms of the Plan, to receive an immediate
            distribution of these benefits (e.g., in the form of an immediately
            commencing annuity) from that plan under provisions of the plan not
            inconsistent with Code Section 401(a);

            (ii) For transfers that occur on or after January 1, 2002, the
            transfer occurs at a time at which the Participant is not eligible
            to receive an immediate distribution of the participant's entire
            nonforfeitable accrued benefit in a single-sum distribution that
            would consist entirely of an eligible rollover distribution within
            the meaning of Code Section 401(a)(31)(C);

            (iii) The participant is fully Vested in the transferred benefit in
            the transferee plan;

            (iv) In the case of a transfer from a defined contribution plan to a
            defined benefit plan, the defined benefit plan provides a minimum
            benefit, for each Participant whose benefits are transferred, equal
            to the benefit, expressed as an annuity payable at normal retirement
            age, that is derived solely on the basis of the amount transferred
            with respect to such Participant; and

            (v) The amount of the benefit transferred, together with the amount
            of any contemporaneous Code Section 401(a)(31) direct rollover to
            the transferee plan, equals the Participant's entire nonforfeitable
            accrued benefit under the Plan.

            (b) If a voluntary, fully-informed election is made by a
      Participant, then if the conditions set forth herein are satisfied, a
      Participant's entire benefit may be transferred between qualified defined
      contribution plans (other than any direct rollover described in Q&A-3 of
      Regulation 1.401(a)(31)-1). As an alternative to the transfer, the
      Participant may elect to retain the Participant's "Section 411(d)(6)
      protected benefits" under the Plan (or, if the plan is terminating, to
      receive any optional form of benefit for which the Participant is eligible
      under the plan as required by Code Section 411(d)(6)). A transfer between
      qualified plans may only be made pursuant to this subsection if the
      following additional requirements are met:

            (i) To the extent the benefits are transferred from a money purchase
            pension plan, the transferee plan must be a money purchase pension
            plan. To the extent the benefits being transferred are part of a
            qualified cash or deferred arrangement under Code Section 401(k),
            the benefits must be transferred to a qualified cash or deferred
            arrangement under Code Section 401(k). Benefits transferred from a
            profit-sharing plan other than from a qualified cash or deferred
            arrangement, or from a stock bonus plan other than an employee stock
            ownership plan, may be transferred to any type of defined
            contribution plan; and

            (ii) The transfer must be made either in connection with an asset or
            stock acquisition, merger, or other similar transaction involving a
            change in employer of the employees of a trade or business (i.e., an
            acquisition or disposition within the meaning of Regulation
            1.410(b)-2(f)) or in connection with the Participant's change in
            employment status to an employment status with respect to which the
            Participant is not entitled to additional allocations under the
            Plan.

DEFINED CONTRIBUTION PROTOTYPE PLAN

ARTICLE VII
TRUSTEE AND CUSTODIAN

7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE

(a) The provisions of this Article, other than Section 7.6, shall not apply to this Plan if a separate trust agreement is being used as specified in the Adoption Agreement.

(b) The Trustee is accountable to the Employer for the funds contributed to the Plan by the Employer, but the Trustee does not have any duty to see that the contributions received comply with the provisions of the Plan. The Trustee is not obligated to collect any contributions from the Employer, nor is it under a duty to see that funds deposited with it are deposited in accordance with the provisions of the Plan.

(c) The Trustee will credit and distribute the Trust Fund as directed by the Administrator. The Trustee is not obligated to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or whether the manner of making any payment or distribution is proper. The Trustee is accountable only to the Administrator for any payment or distribution made by it in good faith on the order or direction of the Administrator.

(d) In the event that the Trustee shall be directed by a Participant (pursuant to the Participant Direction Procedures if the Plan permits Participant directed investments), the Employer, or an Investment Manager or other agent appointed by the Employer with respect to the investment of any or all Plan assets, the Trustee shall have no liability with respect to the investment of such assets, but shall be responsible only to execute such investment instructions as so directed.

(1) The Trustee shall be entitled to rely fully on the written (or other form acceptable to the Administrator and the Trustee, including but not limited to, voice recorded) instructions of a Participant (pursuant to the Participant Direction Procedures), the Employer, or any Fiduciary or nonfiduciary agent of the Employer, in the discharge of such duties, and shall not be liable for any loss or other liability resulting from such direction (or lack of direction) of the investment of any part of the Plan assets.

(2) The Trustee may delegate the duty of executing such instructions to any nonfiduciary agent, which may be an affiliate of the Trustee or any Plan representative.

(3) The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole and absolute discretion, deems such direction improper by virtue of applicable law. The Trustee shall not be responsible or liable for any loss or expense that may result from the Trustee's refusal or failure to comply with any direction from the Participant.

(4) Any costs and expenses related to compliance with the Participant's directions shall be borne by the Participant's Directed Account, unless paid by the Employer.

(5) Notwithstanding anything herein above to the contrary, the Trustee shall not invest any portion of a Participant's Directed Account in "collectibles" within the meaning of Code Section 408(m).

(e) The Trustee will maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report pursuant to Section 7.9.

(f) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature.

(g) The Trustee may employ and pay from the Trust Fund reasonable compensation to agents, attorneys, accountants and other persons to advise the Trustee as in its opinion may be necessary. The Trustee may delegate to any agent, attorney, accountant or other person selected by it any non-Trustee power or duty vested in it by the Plan, and the Trustee may act or refrain from acting on the advice or opinion of any such person.

7.2 INVESTMENT POWERS AND DUTIES OF DISCRETIONARY TRUSTEE

DEFINED CONTRIBUTION PROTOTYPE PLAN

(b) The Trustee shall, except as otherwise provided in this Plan, invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, common or preferred stocks, open-end or closed-end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as a qualified Plan and Trust.

(c) The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Plan, shall have the following powers and authorities to be exercised in the Trustee's sole discretion:

(1) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained;

(2) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement;

(3) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property. However, the Trustee shall not vote proxies relating to securities for which it has not been assigned full investment management responsibilities. In those cases where another party has such investment authority or discretion, the Trustee will deliver all proxies to said party who will then have full responsibility for voting those proxies;

(4) To cause any securities or other property to be registered in the Trustee's own name, in the name of one or more of the Trustee's nominees, in a clearing corporation, in a depository, or in book entry form or in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund;

(5) To invest in a common, collective, or pooled trust fund (the provisions of which are incorporated herein by reference) maintained by any Trustee (or any affiliate of such Trustee) hereunder pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund as the Trustee may deem advisable, and the part of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The name of the trust fund may be specified in an addendum to the Adoption Agreement. The Trustee may withdraw from such common, collective, or pooled trust fund all or such part of the Trust Fund as the Trustee may deem advisable;

(6) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing;

DEFINED CONTRIBUTION PROTOTYPE PLAN

(7) To accept and retain for such time as it may deem advisable any securities or other property received or acquired by it as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder;

(8) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted;

(9) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings;

(10) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agents or counsel may or may not be an agent or counsel for the Employer;

(11) To apply for and procure from the Insurer as an investment of the Trust Fund any annuity or other Contracts (on the life of any Participant or in the case of a Profit Sharing Plan (including a 401(k) plan); on the life of any person in whom a Participant has an insurable interest, or on the joint lives of a Participant and any person in whom the Participant has an insurable interest) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity, or other Contracts as and when entitled to do so under the provisions thereof;

(12) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest or in cash or cash balances without liability for interest thereon, including the specific authority to invest in any type of deposit of the Trustee (or of a financial institution related to the Trustee);

(13) To invest in Treasury Bills and other forms of United States government obligations;

(14) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange regardless of whether such options are covered;

(15) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations including the specific authority to make deposit into any savings accounts or certificates of deposit of the Trustee (or a financial institution related to the Trustee);

(16) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and Trust and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; and

(17) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan.

7.3 INVESTMENT POWERS AND DUTIES OF NONDISCRETIONARY TRUSTEE

(a) This Section applies if the Employer, in the Adoption Agreement or as otherwise agreed upon by the Employer and the Trustee, designates the Trustee to administer all or a portion of the trust as a nondiscretionary Trustee. If so designated, then the Trustee shall have no discretionary authority to invest, manage, or control those Plan assets, but must act solely as a directed Trustee of those Plan assets. A nondiscretionary Trustee, as directed Trustee of the Plan funds it holds, is authorized and empowered, by way of limitation, with the powers, rights and duties set forth herein and in Section 7.14, each of which the nondiscretionary Trustee exercises solely as directed Trustee in accordance with the direction of the party which has the authority to manage and control the investment of the Plan assets. If no directions are provided to the Trustee, the Employer will provide necessary direction. Furthermore, the Employer and the nondiscretionary Trustee may, in writing, limit the powers of the nondiscretionary Trustee to any combination of powers listed within this Section.

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(b) The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Plan, shall have the following powers and authorities:

(1) To invest the assets, without distinction between principal and income, in securities or property, real or personal, wherever situated, including, but not limited to, common or preferred stocks, open-end or closed-end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as a qualified Plan and Trust.

(2) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained;

(3) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement;

(4) At the direction of the party which has the authority or discretion, to vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate powers, and pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property;

(5) To cause any securities or other property to be registered in the Trustee's own name, in the name of one or more of the Trustee's nominees, in a clearing corporation, in a depository, or in book entry form or in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund;

(6) To invest in a common, collective, or pooled trust fund (the provisions of which are incorporated herein by reference) maintained by any Trustee (or any affiliate of such Trustee) hereunder pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund as the party which has the authority to manage and control the investment of the assets shall deem advisable, and the part of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The name of the trust fund may be specified in an addendum to the Adoption Agreement;

(7) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing;

(10) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be an agent or counsel for the Employer;

(11) To apply for and procure from the Insurer as an investment of the Trust Fund any annuity or other Contracts (on the life of any Participant, or in the case of a Profit Sharing Plan (including a 401(k) plan), on the life of any person in whom a Participant has an insurable interest, or on the joint lives of a Participant and

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any person in whom the Participant has an insurable interest) as the Administrator shall deem proper; to exercise, at the direction of the person with the authority to do so, whatever rights and privileges may be granted under such annuity or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof;

(13) To invest in Treasury Bills and other forms of United States government obligations;

(16) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests.

7.4 POWERS AND DUTIES OF CUSTODIAN

If there is a discretionary Trustee, the Employer may appoint a custodian. A custodian has the same powers, rights and duties as a nondiscretionary Trustee. Any reference in the Plan to a Trustee also is a reference to a custodian unless the context of the Plan indicates otherwise. A limitation of the Trustee's liability by Plan provision also acts as a limitation of the custodian's. liability. Any action taken by the custodian at the discretionary Trustee's direction satisfies any provision in the Plan referring to the Trustee taking that action. The resignation or removal of the custodian shall be made in accordance with Section 7.11 as though the custodian were a Trustee.

7.5 LIFE INSURANCE

(a) The Trustee, at the direction of the Administrator and pursuant to instructions from the individual designated in the Adoption Agreement for such purpose and subject to the conditions set forth in the Adoption Agreement, shall ratably apply for, own, and pay all premiums on Contracts on the lives of the Participants or, in the case of Profit Sharing Plan (including a 401(k) plan), on the life of any person in whom the Participant has an insurable interest or on the joint lives of a Participant and any person in whom the Participant has an insurable interest. Any initial or additional Contract purchased on behalf of a Participant shall have a face amount of not less than S 1,000, the amount set forth in the Adoption Agreement, or the limitation of the Insurer, whichever is greater. If a life insurance Contract is to be purchased for a Participant or Former Participant, then the aggregate premium for ordinary life insurance for each Participant or Former Participant must be less than 50% of the aggregate contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. For purposes of this limitation, ordinary life insurance Contracts are Contracts with both non-decreasing death benefits and non-increasing premiums. If term insurance or universal life insurance is purchased, then the aggregate premium must be 25% or less of the aggregate contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. If both term insurance and ordinary life insurance are purchased, then the premium for term insurance plus one-half of the premium for ordinary life insurance may not in the aggregate exceed 25% of the aggregate Employer contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. Notwithstanding the preceding, the limitations imposed herein with respect to the purchase of life insurance shall not apply, in the case of a Profit Sharing Plan (including a 401(k) plan), to the portion of the Participant's Account that has accumulated for at least two (2) Plan Years or to the entire Participant's Account if the Participant has been a Participant in the Plan for at least five (5) years. Amounts transferred to this Plan in accordance with Section 4.6(e)(ii), (iii) or (v) and a Participant's or Former Participant's Voluntary Contribution Account may be used to purchase Contracts without limitation.

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(b) The Trustee must distribute the Contracts to the Participant or Former Participant or convert the entire value of the Contracts at or before retirement into cash or provide for a periodic income so that no portion of such value may be used to continue life insurance protection beyond commencement of benefits. Furthermore, if a Contract is purchased on the joint lives of the Participant and another person and such other person predeceases the Participant, then the Contract may not be maintained under this Plan.

(c) Notwithstanding anything herein above to the contrary, amounts credited to a Participant's Qualified Voluntary Employee Contribution Account pursuant to Section 4.9, shall not be applied to the purchase of life insurance Contracts. Furthermore, no life insurance Contracts shall be required to be obtained on an individual's life if, for any reason (other than the nonpayment of premiums) the Insurer will not issue a Contract on such individual's life.

(d) The Trustee will be the owner of any life insurance Contract purchased under the terms of this Plan. The Contract must provide that the proceeds will be payable to the Trustee; however, the Trustee shall be required to pay over all proceeds of the Contract to the Participant's designated Beneficiary in accordance with the distribution provisions of Article VI. A Participant's spouse will be the designated Beneficiary pursuant to Section 6.2, unless a qualified election has been made in accordance with Sections 6.5 and 6.6 of the Plan, if applicable. Under no circumstances shall the Trust retain any part of the proceeds that are in excess of the cash surrender value immediately prior to death. However, the Trustee shall not pay the proceeds in a method that would violate the requirements of the Retirement Equity Act of 1984, as stated in Article VI of the Plan, or Code Section 401(a)(9) and the Regulations thereunder. In the event of any conflict between the terms of this Plan and the terms of any insurance Contract purchased hereunder, the Plan provisions shall control.

7.6 LOANS TO PARTICIPANTS

(a) If specified in the Adoption Agreement, the Trustee (or the Administrator if the Trustee is a nondiscretionary Trustee or if loans are treated as Participant directed investments pursuant to the Adoption Agreement) may, in the Trustee's (or, if applicable, the Administrator's) sole discretion, make loans to Participants or Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) loans shall provide for periodic repayment over a reasonable period of time. Furthermore, no Participant loan shall exceed the Participant's Vested interest in the Plan.

(b) Loans shall not be made to any Shareholder-Employee or Owner-Employee (including an Owner-Employee's family members as defined in Code Section 267(c)(4)) unless an exemption for such loan is obtained pursuant to Act Section 408 or such loan would otherwise not be a prohibited transaction pursuant to Code Section 4975 and Act Section 408.

(c) An assignment or pledge of any portion of a Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance Contract purchased under the Plan, shall be treated as a loan under this Section.

(d) If the Vested interest of a Participant is used to secure any loan made pursuant to this Section, then the written (or such other form as permitted by the IRS) consent of the Participant's spouse shall be required in a manner consistent with Section 6.5(a), provided the spousal consent requirements of such Section apply to the Plan. Such consent must be obtained within the 90-day period prior to the date the loan is made. Any security interest held by the Plan by reason of an outstanding loan to the Participant or Former Participant shall be taken into account in determining the amount of the death benefit or Pre-Retirement Survivor Annuity. However, unless the loan program established pursuant to this
Section provides otherwise, no spousal consent shall be required under this paragraph if the total interest subject to the security is not in excess of $5,000 (or, $3,500 effective for loans made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement).

(e) The Administrator shall be authorized to establish a participant loan program to provide for loans under the Plan. The loan program shall be established in accordance with Department of Labor Regulation Section 2550.408(b)-1(d)(2) providing for loans by the Plan to parties-in-interest under said Plan, such as Participants or Beneficiaries. In order for the Administrator to implement such loan program, a separate written document forming a part of this Plan must be adopted, which document shall specifically include, but need not be limited to, the following:

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(1) the identity of the person or positions authorized to administer the Participant loan program;

(2) a procedure for applying for loans;

(3) the basis on which loans will be approved or denied;

(4) limitations, if any, on the types and amounts of loans offered;

(5) the procedure under the program for determining a reasonable rate of interest;

(6) the types of collateral which may secure a Participant loan; and

(7) the events constituting default and the steps that will be taken to preserve Plan assets in the event such default.

(f) Notwithstanding anything in this Plan to the contrary, if a Participant or Beneficiary defaults on a loan made pursuant to this
Section that is secured by the Participant's interest in the Plan, then a Participant's interest may be offset by the amount subject to the security to the extent there is a distributable event permitted by the Code or Regulations.

(g) Notwithstanding anything in this Section to the contrary, if this is an amendment and restatement of an existing Plan, any loans made prior to the date this amendment and restatement is adopted shall be subject to the terms of the Plan in effect at the time such loan was made.

7.7 MAJORITY ACTIONS

Except where there has been an allocation and delegation of powers, if there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf.

7.8 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES

The Trustee shall be paid such reasonable compensation as set forth in the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in writing by the Employer and the Trustee. However, an individual serving as Trustee who already receives full-time compensation from the Employer shall not receive compensation from this Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund.

7.9 ANNUAL REPORT OF THE TRUSTEE

(a) Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer's contribution for each Plan Year, the Trustee, or its agent, shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth:

(1) the net income, or loss, of the Trust Fund;

(2) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets;

(3) the increase, or decrease, in the value of the Trust Fund;

(4) all payments and distributions made from the Trust Fund; and

(5) such further information as the Trustee and/or Administrator deems appropriate.

(b) The Employer, promptly upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be

DEFINED CONTRIBUTION PROTOTYPE PLAN

deemed an approval thereof. The approval by the Employer of any statement of account shall be binding on the Employer and the Trustee as to all matters contained in the statement to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties. However, nothing contained in this
Section shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires.

7.10 AUDIT

            (a) If an audit of the Plan's records shall be required by the Act
      and the regulations thereunder for any Plan Year, the Administrator shall
      engage on behalf of all Participants an independent qualified public
      accountant for that purpose. Such accountant shall, after an audit of the
      books and records of the Plan in accordance with generally accepted
      auditing standards, within a reasonable period after the close of the Plan
      Year, furnish to the Administrator and the Trustee a report of the audit
      setting forth the accountant's opinion as to whether any statements,
      schedules or lists, that are required by Act Section 103 or the Secretary
      of Labor to be filed with the Plan's annual report, are presented fairly
      in conformity with generally accepted accounting principles applied
      consistently.

            (b) All auditing and accounting fees shall be an expense of and may,
      at the election of the Employer, be paid from the Trust Fund.

            (c) If some or all of the information necessary to enable the
      Administrator to comply with Act Section 103 is maintained by a bank,
      insurance company, or similar institution, regulated, supervised, and
      subject to periodic examination by a state or federal agency, then it
      shall transmit and certify the accuracy of that information to the
      Administrator as provided in Act Section 103(b) within one hundred twenty
      (120) days after the end of the Plan Year or such other date as may be
      prescribed under regulations of the Secretary of Labor.

7.11  RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE

            (a) Unless otherwise agreed to by both the Trustee and the Employer,
      a Trustee may resign at any time by delivering to the Employer, at least
      thirty (30) days before its effective date, a written notice of
      resignation.

            (b) Unless otherwise agreed to by both the Trustee and the Employer,
      the Employer may remove a Trustee at any time by delivering to the
      Trustee, at least thirty (30) days before its effective date, a written
      notice of such Trustee's removal.

            (c) Upon the death, resignation, incapacity, or removal of any
      Trustee, a successor may be appointed by the Employer;, and such
      successor, upon accepting such appointment in writing and delivering same
      to the Employer, shall, without further act, become vested with all the
      powers and responsibilities of the predecessor as if such successor had
      been originally named as a Trustee herein. Until such a successor is
      appointed, any remaining Trustee or Trustees shall have full authority to
      act under the terms of the Plan.

            (d) The Employer may designate one or more successors prior to the
      death, resignation, incapacity, or removal of a Trustee. In the event a
      successor is so designated by the Employer and accepts such designation,
      the successor shall, without further act, become vested with all the
      powers and responsibilities of the predecessor as if such successor had
      been originally named as Trustee herein immediately upon the death,
      resignation, incapacity, or removal of the predecessor.

            (e) Whenever any Trustee hereunder ceases to serve as such, the
      Trustee shall furnish to the Employer and Administrator a written
      statement of account with respect to the portion of the Plan Year during
      which the individual or entity served as Trustee. This statement shall be
      either (i) included as part of the annual statement of account for the
      Plan Year required under Section 7.9 or (ii) set forth in a special
      statement. Any such special statement of account should be rendered to the
      Employer no later than the due date of the annual statement of account for
      the Plan Year. The procedures set forth in Section 7.9 for the approval by
      the Employer of annual statements of account shall apply to any special
      statement of account rendered hereunder and approval by the Employer of
      any such special statement in the manner provided in Section 7.9 shall
      have the same effect upon the statement as the Employer's approval of an
      annual statement of account. No successor to the Trustee shall have any
      duty or responsibility to investigate the acts or transactions of any
      predecessor who has rendered all statements of account required by Section
      7.9 and this subparagraph.

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7.12  TRANSFER OF INTEREST

            Notwithstanding any other provision contained in this Plan, the

Trustee at the direction of the Administrator shall transfer the interest, if any, of a Participant to another trust forming part of a pension, profit sharing, or stock bonus plan that meets the requirements of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made.

7.13 TRUSTEE INDEMNIFICATION

The Employer agrees to indemnify and hold harmless the Trustee against any and all claims, losses, damages, expenses and liabilities the Trustee may incur in the exercise and performance of the Trustee's powers and duties hereunder, unless the same are determined to be due to gross negligence or willful misconduct.

7.14 EMPLOYER SECURITIES AND REAL PROPERTY

The Trustee shall be empowered to acquire and hold "qualifying Employer securities" and "qualifying Employer real property," as those terms are defined in the Act. However, no more than one hundred percent (100%), in the case of a Profit Sharing Plan or 401(k) Plan, or ten percent (10%), in the case of a Money Purchase Plan, of the fair market value of all the assets in the Trust Fund may be invested in "qualifying Employer securities" and "qualifying Employer real property."

Notwithstanding the preceding, for Plan Years beginning after December 31, 1998, if the Plan does not permit Participants to direct the investment of their Participants' Elective Deferral Accounts, then the Trustee shall only be permitted to acquire or hold "qualifying Employer securities" and "qualifying Employer real property" to the extent permitted under Act Section 407.

ARTICLE VIII
AMENDMENT, TERMINATION AND MERGERS

8.1 AMENDMENT

(a) The Employer shall have the right at any time to amend this Plan subject to the limitations of this Section. However, any amendment that affects the rights, duties or responsibilities of the Trustee or Administrator may only be made with the Trustee's or Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the amendment affects the duties of the Trustee hereunder.

(b) The Employer may (1) change the choice of options in the Adoption Agreement, (2) add any addendum to the Adoption Agreement that is specifically permitted pursuant to the terms of the Plan; (3) add overriding language to the Adoption Agreement when such language is necessary to satisfy Code Sections 415 or 416 because of the required aggregation of multiple plans, and (4) add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirement under Code Section
412(d), will no longer participate in this Prototype Plan and this Plan will be considered to be an individually designed plan. Notwithstanding the preceding, the attachment to the Adoption Agreement of any addendum specifically authorized by the Plan or a list of any "Section 411(d)(6) protected benefits" which must be preserved shall not be considered an amendment to the Plan.

(c) The Employer expressly delegates authority to the sponsor of this Prototype Plan, the right to amend each Employer's Plan by submitting a copy of the amendment to each Employer who has adopted this Prototype Plan, after first having received a ruling or favorable determination from the Internal Revenue Service that the Prototype Plan as amended qualifies under Code Section 401 (a) and the Act (unless a ruling or determination is not required by the IRS). For purposes of this Section, the mass submitter shall be recognized as the agent of the sponsor. If the sponsor does not adopt any amendment made by the mass submitter, it will no longer be identical to, or a minor modifier of, the mass submitter plan.

(d) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the

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amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer.

(e) Except as permitted by Regulations (including Regulation 1.411(d)-4) or other IRS guidance, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective if it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" which results in a further restriction on such benefits unless such "Section 411(d)(6) protected benefits" are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section
411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. A Plan amendment that eliminates or restricts the ability of a Participant to receive payment of the Participant's interest in the Plan under a particular optional form of benefit will be permissible if the amendment satisfies the conditions in (1) and (2) below:

(1) The amendment provides a single-sum distribution form that is otherwise identical to the optional form of benefit eliminated or restricted. For purposes of this condition (1), a single-sum distribution form is otherwise identical only if it is identical in all respects to the eliminated or restricted optional form of benefit (or would be identical except that it provides greater rights to the Participant) except with respect to the timing of payments after commencement.

(2) The amendment is not effective unless the amendment provides that the amendment shall not apply to any distribution with an Annuity Starting Date earlier than the earlier of: (i) the ninetieth
(90th) day after the date the Participant receiving the distribution has been furnished a summary that reflects the amendment and that satisfies the Act requirements at 29 CFR 2520.104b<172>3 (relating to a summary of material modifications) or (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted.

8.2 TERMINATION

(a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination, all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested and shall not thereafter be subject to forfeiture, and all unallocated amounts, including Forfeitures, shall be allocated to the accounts of all Participants in accordance with the provisions hereof.

(b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets to Participants in a manner that is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash (or in property if permitted in the Adoption Agreement) or through the purchase of irrevocable nontransferable deferred commitments from the Insurer. Except as permitted by Regulations, the termination of the Plan shall not result in the reduction of "Section 41l(d)(6) protected benefits" as described in Section 8.1(e).

8.3 MERGER, CONSOLIDATION OR TRANSFER OF ASSETS

This Plan may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation and such transfer, merger or consolidation does not otherwise result in the elimination or reduction of any "Section 41l(d)(6) protected benefits" as described in
Section 8.1(e).

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ARTICLE IX
TOP HEAVY PROVISIONS

9.1 TOP HEAVY PLAN REQUIREMENTS

Notwithstanding anything in this Plan to the contrary, for any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code
Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.3(f) of the Plan. Except as otherwise provided in the Plan, the minimum allocation shall be an Employer Non-Elective Contribution and, if no vesting schedule has been selected in the Adoption Agreement, shall be subject to the 6 Year Graded vesting schedule described in the Adoption Agreement.

9.2 DETERMINATION OF TOP HEAVY STATUS

(a) This Plan shall be a Top Heavy Plan for any plan year beginning after December 31, 1983, if any of the following conditions exists:

(1) if the "top heavy ratio" for this Plan exceeds sixty percent (60%) and this Plan is not part of any "required aggregation group" or "permissive aggregation group";

(2) if this Plan is a part of a "required aggregation group" but not part of a "permissive aggregation group" and the "top heavy ratio" for the group of plans exceeds sixty percent (60%); or

(3) if this Plan is a part of a "required aggregation group" and part of a "permissive aggregation group" and the "top heavy ratio" for the "permissive aggregation group" exceeds sixty percent (60%).

(b) "Top heavy ratio" means, with respect to a "determination date":

(1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan (as defined in Code
Section 408(k))) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the "determination date" has or has had accrued benefits, the top heavy ratio for this plan alone or for the "required aggregation group" or "permissive aggregation group" as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the "determination date" (including any part of any account balance distributed in the 5-year period ending on the "determination date"), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the "determination date"), both computed in accordance with Code Section 416 and the Regulations thereunder. Both the numerator and denominator of the top heavy ratio are increased to reflect any contribution not actually made as of the "determination date," but which is required to be taken into account on that date under Code Section 416 and the Regulations thereunder.

(2) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the "determination date" has or has had any accrued benefits, the top heavy ratio for any "required aggregation group" or "permissive aggregation group" as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (1) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the "determination date," and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (1) above, and the "present value" of accrued benefits under the defined benefit plan or plans for all participants as of the "determination date," all determined in accordance with Code Section 416 and the Regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the top heavy ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the determination date.

(3) For purposes of (1) and (2) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent "valuation date" that falls within or ends with the 12-month period ending on the "determination date," except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued

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benefits of a participant (i) who is not a Key Employee but who was a Key Employee in a prior year, or (ii) who has not been credited with at least one Hour of Service with any Employer maintaining the plan at any time during the 5-year period ending on the "determination date" will be disregarded. The calculation of the top heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the Regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the top heavy ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the "determination dates" that fall within the same calendar year.

The accrued benefit of a participant other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C).

(c) "Determination date" means, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, "determination date" means the last day of that Plan Year.

(d) "Permissive aggregation group" means the "required aggregation group" of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410.

(e) "Present value" means the present value based only on the interest and mortality rates specified in the Adoption Agreement.

(f) "Required aggregation group" means: (1) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Code Sections 401(a)(4) or 410.

(g) "Valuation date" means the date elected by the Employer in the Adoption Agreement as of which account balances or accrued benefits are valued for purposes of calculating the "top heavy ratio."

ARTICLE X
MISCELLANEOUS

10.1 EMPLOYER ADOPTIONS

(a) Any organization may become the Employer hereunder by executing the Adoption Agreement in a form satisfactory to the Trustee, and it shall provide such additional information as the Trustee may require. The consent of the Trustee to act as such shall be signified by its execution of the Adoption Agreement or a separate agreement (including, if elected in the Adoption Agreement, a separate trust agreement).

(b) Except as otherwise provided in this Plan, the affiliation of the Employer and the participation of its Participants shall be separate and apart from that of any other employer and its participants hereunder.

10.2 PARTICIPANT'S RIGHTS

This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon the Employee as a Participant of this Plan.

10.3 ALIENATION

(a) Subject to the exceptions provided below and as otherwise permitted by the Code and the Act, no benefit which shall be payable to any person (including a Participant or the Participant's Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall

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in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized except to such extent as may be required by law.

(b) Subsection (a) shall not apply to the extent a Participant or Beneficiary is indebted to the Plan by reason of a loan made pursuant to
Section 7.6. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such portion of the amount to be distributed as shall equal such indebtedness shall be paid to the Plan, to apply against or discharge such indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given notice by the Administrator that such indebtedness is to be so paid in whole or part from the Participant's interest in the Plan. If the Participant or Beneficiary does not agree that the indebtedness is a valid claim against the Participant's interest in the Plan, the Participant or Beneficiary shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.10 and 2.11.

(c) Subsection (a) shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan.

(d) Notwithstanding any provision of this Section to the contrary, an offset to a Participant's accrued benefit against an amount that the Participant is ordered or required to pay the Plan with respect to a judgment, order, or decree issued, or a settlement entered into, on or after August 5, 1997, shall be permitted in accordance with Code Sections 401(a)(13)(C) and (D).

10.4 CONSTRUCTION OF PLAN

This Plan and Trust shall be construed and enforced according to the Code, the Act and the laws of the state or commonwealth in which the Employer's (or if there is a corporate Trustee, the Trustee's) principal office is located (unless otherwise designated in the Adoption Agreement), other than its laws respecting choice of law, to the extent not pre-empted by the Act.

10.5 GENDER AND NUMBER

Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply.

10.6 LEGAL ACTION

In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee, the Employer or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee, the Employer or the Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable.

10.7 PROHIBITION AGAINST DIVERSION OF FUNDS

(a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any Trust Fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Former Participants, or their Beneficiaries.

(b) In the event the Employer shall make a contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such contribution at any time within one (1) year following the time of payment and the Trustee shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned.

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(c) Except as specifically stated in the Plan, any contribution made by the Employer to the Plan (if the Employer is not tax-exempt) is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following a final determination of the disallowance, whether by agreement with the Internal Revenue Service or by final decision of a court of competent jurisdiction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned.

10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE

The Employer, Administrator and Trustee, and their successors, shall not be responsible for the validity of any Contract issued hereunder or for the failure on the part of the Insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part.

10.9 INSURER'S PROTECTIVE CLAUSE

Except as otherwise agreed upon in writing between the Employer and the Insurer, an Insurer which issues any Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The Insurer shall be protected and held harmless in acting in accordance with any written direction of the Administrator or Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Administrator or Trustee. Regardless of any provision of this Plan, the Insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the Insurer.

10.10 RECEIPT AND RELEASE FOR PAYMENTS

Any payment to any Participant, the Participant's legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer.

10.11 ACTION BY THE EMPLOYER

Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority.

10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY

The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator, (3) the Trustee (if the Trustee has discretionary authority as elected in the Adoption Agreement or as otherwise agreed upon by the Employer and the Trustee), and (4) any Investment Manager appointed hereunder. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan including, but not limited to, any agreement allocating or delegating their responsibilities, the terms of which are incorporated herein by reference. In general, the Employer shall have the sole responsibility for making the contributions provided for under the Plan; and shall have the sole authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend the elective provisions of the Adoption Agreement or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. If the Trustee has discretionary authority, it shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager or Administrator, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity.

10.13 HEADINGS

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The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof.

10.14 APPROVAL BY INTERNAL REVENUE SERVICE

Notwithstanding anything herein to the contrary, if, pursuant to a timely application filed by or on behalf of the Plan, the Commissioner of the Internal Revenue Service or the Commissioner's delegate should determine that the Plan does not initially qualify as a tax-exempt plan under Code Sections 401 and 501, and such determination is not contested, or if contested, is finally upheld, then if the Plan is a new plan, it shall be void ab initio and all amounts contributed to the Plan, by the Employer, less expenses paid, shall be returned within one (1) year and the Plan shall terminate, and the Trustee shall be discharged from all further obligations. If the disqualification relates to a Plan amendment, then the Plan shall operate as if it had not been amended. If the Employer's Plan fails to attain or retain qualification, such Plan will no longer participate in this prototype plan and will be considered an individually designed plan.

10.15 UNIFORMITY

All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner.

10.16 PAYMENT OF BENEFITS

Except as otherwise provided in the Plan, benefits under this Plan shall be paid, subject to Sections 6.10, 6.11 and 12.9, only upon death, Total and Permanent Disability, normal or early retirement, termination of employment, or termination of the Plan.

ARTICLE XI
PARTICIPATING EMPLOYERS

11.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER

Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any Affiliated Employer may adopt the Employers Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. Regardless of the preceding, an entity that ceases to be an Affiliated Employer may continue to be a Participating Employer through the end of the transition period for certain dispositions set forth in Code Section 410(b)(6)(C). In the event a Participating Employer is not an Affiliated Employer and the transition period in the preceding sentence, if applicable, has expired, then this Plan will be considered an individually designed plan.

11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS

(a) Each Participating Employer shall be required to select the same Adoption Agreement provisions as those selected by the Employer other than the Plan Year, the Fiscal Year, and such other items that must, by necessity, vary among employers.

(b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to pay benefits to all Participants and Beneficiaries under the Plan without regard to the Employer or Participating Employer who contributed such assets.

(c) Unless the Employer otherwise directs, any expenses of the Plan which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants.

11.3 DESIGNATION OF AGENT

Each Participating Employer shall be deemed to be a part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for purposes of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates otherwise, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan.

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11.4 EMPLOYEE TRANSFERS

In the event an Employee is transferred between Participating Employers, accumulated service and eligibility shall be carried with the Employee involved. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred.

11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES

Any contribution or Forfeiture subject to allocation during each Plan Year shall be allocated among all Participants of all Participating Employers in accordance with the provisions of this Plan. However, if a Participating Employer is not an Affiliated Employer (due to the transition rule for certain dispositions set forth in Code Section 410(b)(6)(C)) then any contributions made by such Participating Employer will only be allocated among the Participants eligible to share of the Participating Employer. On the basis of the information furnished by the Administrator, the Trustee may keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Participating Employer shall immediately notify the Trustee thereof.

11.6 AMENDMENT

Amendment of this Plan by the Employer at any time when there shall be a Participating Employer that is an Affiliated Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan.

11.7 DISCONTINUANCE OF PARTICIPATION

Except in the case of a standardized Plan, any Participating Employer that is an Affiliated Employer shall be permitted to discontinue or revoke its participation in the Plan at any time. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new trustee or custodian as shall have been designated by such Participating Employer, in the event that it has established a separate qualified retirement plan for its employees provided, however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 41l(d)(6) protected benefits" as described in Section 8.1(e). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust Fund as it relates to such Participating Employer be used for or diverted to purposes other than for the exclusive benefit of the employees of such Participating Employer.

11.8 ADMINISTRATOR'S AUTHORITY

The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article.

11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE

If any Participating Employer is prevented in whole or in part from making a contribution which it would otherwise have made under the Plan by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it would otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which such Participating Employer was so prevented from making may be made, for the benefit of the participating employees of such Participating Employer, by other Participating Employers who are members of the same affiliated group within the meaning of Code Section 1504 to the extent of their current or accumulated earnings or profits, except that such contribution by each such other Participating Employer shall be limited to the proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution to the Plan made without regard to this paragraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the Participating Employers remaining after adjustment for all contributions made to the Plan without regard to this paragraph.

A Participating Employer on behalf of whose employees a contribution is made under this paragraph shall not be required to reimburse the contributing Participating Employers.

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ARTICLE XII
CASH OR DEFERRED PROVISIONS

Except as specifically provided elsewhere in this Plan, the provisions of this Article shall apply with respect to any 401(k) Profit Sharing Plan regardless of any provisions in the Plan to the contrary.

12.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION

(a) For each Plan Year, the Employer will (or may with respect to any discretionary contributions) contribute to the Plan:

(1) The amount of the total salary reduction elections of all Participants made pursuant to Section 12.2(a), which amount shall be deemed Elective Deferrals, plus

(2) If elected in the Adoption Agreement, a matching contribution equal to the percentage, if any, specified in the Adoption Agreement of the Elective Deferrals of each Participant eligible to share in the allocations of the matching contribution, which amount shall be deemed an Employer's matching contribution or Qualified Matching Contribution as elected in the Adoption Agreement, plus

(3) If elected in the Adoption Agreement, a Prevailing Wage Contribution or a discretionary amount determined each year by the Employer, which amount if any, shall be deemed an Employer's Non-Elective Contribution, plus

(4) If elected in the Adoption Agreement, a Qualified Non-Elective Contribution.

(b) Notwithstanding the foregoing, if the Employer is not a tax-exempt entity, then the Employer's contributions for any Fiscal Year may generally not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. However, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds current or accumulated Net Profit or the amount that is deductible under Code Section
404. All contributions by the Employer shall be made in cash or in such property as is acceptable to the Trustee.

12.2 PARTICIPANT'S SALARY REDUCTION ELECTION

(a) Each Participant may elect to defer a portion of Compensation which would have been received in the Plan Year, but for the salary reduction election, subject to the limitations of this Section and the Adoption Agreement. A salary reduction election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election, or if later, the later of the date the Employer adopts this cash or deferred arrangement or the date such arrangement first became effective. Any elections made pursuant to this Section shall become effective as soon as is administratively feasible. If the automatic election option is elected in the Adoption Agreement, then in the event a Participant fails to make a deferral election and does not affirmatively elect to receive cash, such Participant shall be deemed to have made a deferral election equal to the percentage of Compensation set forth in the Adoption Agreement. The automatic election may, in accordance with procedures established by the Administrator, be applied to all Participants or to Eligible Employees who become Participants after a certain date. For purposes of this Section, the annual dollar limitation of Code Section 401(a)(17) ($150,000 as adjusted) shall not apply.

Additionally, if elected in the Adoption Agreement, each Participant may elect to defer a different percentage or amount of any cash bonus to be paid by the Employer during the Plan Year. A deferral election may not be made with respect to cash bonuses which are currently available on or before the date the Participant executes such election.

The amount by which Compensation and/or cash bonuses are reduced shall be that Participant's Elective Deferrals and shall be treated as an Employer contribution and allocated to that Participant's Elective Deferral Account.

Once made, a Participant's election to reduce Compensation shall remain in effect until modified or terminated. Modifications may be made as specified in the Adoption Agreement, and terminations may be made at any time. Any modification or termination of an election will become effective as soon as is administratively feasible.

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(b) The balance in each Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Contribution Account shall be fully Vested at all times and, except as otherwise provided herein, shall not be subject to Forfeiture for any reason.

(c) Amounts held in a Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Account may only be distributable as provided in (4), (5) or (6) below or as provided under the other provisions of this Plan, but in no event prior to the earlier of the following events or any other events permitted by the Code or Regulations:

(1) the Participant's separation from service, Total and Permanent Disability, or death;

(2) the Participant's attainment of age 59 1/2;

(3) the proven financial hardship of the Participant, subject to the limitations of Section 12.9;

(4) the termination of the Plan without the existence at the time of Plan termination of another defined contribution plan or the establishment of a successor defined contribution plan by the Employer or an Affiliated Employer within the period ending twelve months after distribution of all assets from the Plan maintained by the Employer. For this purpose, a defined contribution does not include an employee stock ownership plan (as defined in Code Section 4975(e)(7) or 409), a simplified employee pension plan (as defined in Code Section 408(k)), or a SIMPLE individual retirement account plan (as defined in Code Section 408(p));

(5) the date of the sale by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) with respect to a Participant who continues employment with the corporation acquiring such assets; or

(6) the date of the sale by the Employer or an Affiliated Employer of its-interest in a subsidiary (within the meaning of Code Section
409(d)(3)) to an entity that is not an Affiliated Employer with respect to a Participant who continues employment with such subsidiary.

Distributions that are made because of (4), (5), or (6) above must be made in a lump-sum.

(d) A Participant's "elective deferrals" made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan during any calendar year shall not exceed the dollar limitation imposed by Code Section 402(g), as in effect at the beginning of such calendar year. This dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. For this purpose, "elective deferrals" means, with respect to a calendar year, the sum of all employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any salary reduction simplified employee pension (as defined in Code Section
408(k)(6)), any SIMPLE IRA plan described in Code Section 408(p), any eligible deferred compensation plan under Code Section 457, any plans described under Code Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement. "Elective deferrals" shall not include any deferrals properly distributed as excess "Annual Additions" pursuant to Section 4.5.

(e) If a Participant has Excess Deferrals for a taxable year, the Participant may, not later than March 1st following the close of such taxable year, notify the Administrator in writing of such excess and request that the Participant's Elective Deferrals under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator shall direct the distribution of such excess amount (and any "Income" allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferrals and "Income" shall be treated as a pro rata distribution of Excess Deferrals and "Income." The amount distributed shall not exceed the Participant's Elective Deferrals under the Plan for the taxable year. Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions:

(1) the Participant shall designate the distribution as Excess Deferrals;

(2) the distribution must be made after the date on which the Plan received the Excess Deferrals; and

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(3) the Plan must designate the distribution as a distribution of Excess Deferrals.

Regardless of the preceding, if a Participant has Excess Deferrals solely from elective deferrals made under this Plan or any other plan maintained by the Employer, a Participant will be deemed to have notified the Administrator of such excess amount and the Administrator shall direct the distribution of such Excess Deferrals in a manner consistent with the provisions of this subsection.

Any distribution made pursuant to this subsection shall be made first from unmatched Elective Deferrals and, thereafter, from Elective Deferrals which are matched. Matching contributions which relate to Excess Deferrals that are distributed pursuant to this Section 12.2(e) shall be treated as a Forfeiture to the extent required pursuant to Code
Section 401(a)(4) and the Regulations thereunder.

For the purpose of this subsection, "Income" means the amount of income or loss allocable to a Participant's Excess Deferrals, which amount shall be allocated in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the taxable year of the Participant and the date of the distribution (the "gap period") is not required to be distributed.

(f) Notwithstanding the preceding, a Participant's Excess Deferrals shall be reduced, but not below zero, by any distribution and/or recharacterization of Excess Deferrals pursuant to Section 12.5(a) for the Plan Year beginning with or within the taxable year of the Participant.

(g) In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan maintained by the Employer or from the Participant's Elective Deferral Account pursuant to Section 12.9, then such Participant shall not be permitted to elect to have Elective Deferrals contributed to the Plan for a period of twelve (12) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Elective Deferrals, if any, made pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution.

(h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Deferral Account shall be used to provide benefits to the Participant or the Participant's Beneficiary.

(i) If during a Plan Year, it is projected that the aggregate amount of Elective Deferrals to be allocated to all Highly Compensated Participants under this Plan would cause the Plan to fail the tests set forth in Section 12.4, then the Administrator may automatically reduce the deferral amount of affected Highly Compensated Participants, beginning with the Highly Compensated Participant who has the highest actual deferral ratio until it is anticipated the Plan will pass the tests or until the actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the next highest actual deferral ratio. This process may continue until it is anticipated that the Plan will satisfy one of the tests set forth in Section 12.4. Alternatively, the Employer may specify a maximum percentage of Compensation that may be deferred by Highly Compensated Participants.

(j) The Employer and the Administrator shall establish procedures necessary to implement the salary reduction elections provided for herein. Such procedures may contain limits on salary deferral elections such as limiting elections to whole percentages of Compensation or to equal dollar amounts per pay period that an election is in effect.

12.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS

(b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of Employer contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate contributions as follows:

DEFINED CONTRIBUTION PROTOTYPE PLAN

(1) With respect to Elective Deferrals made pursuant to Section 12.1(a)(1), to each Participant's Elective Deferral Account in an amount equal to each such Participant's Elective Deferrals for the year.

(2) With respect to the Employer's matching contribution made pursuant to Section 12.1(a)(2), to each Participant's Account, or Participant's Qualified Matching Contribution Account, as elected in the Adoption Agreement, in accordance with Section 12.1(a)(2).

Except, however, in order to be entitled to receive any Employer matching contribution, a Participant must satisfy the conditions for sharing in the Employer matching contribution as set forth in the Adoption Agreement. Furthermore, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected).

(3) With respect to the Employer's Non-Elective Contribution made pursuant to Section 12.1(a)(3), to each Participant's Account in accordance with the provisions of Section 4.3(b)(2) or (3) whichever is applicable.

(4) With respect to the Employer's Qualified Non-Elective Contribution made pursuant to Section 12.1(a)(4), to each Participant's (excluding Highly Compensated Employees, if elected in the Adoption Agreement) Qualified Non-Elective Contribution Account in accordance with the Adoption Agreement.

(c) Notwithstanding anything in the Plan to the contrary, in determining whether a Non-Key Employee has received the required minimum allocation pursuant to Section 4.3(f) such Non-Key Employee's Elective Deferrals and matching contributions used to satisfy the ADP tests in
Section 12.4 or the ACP tests in Section 12.6 shall not be taken into account.

(d) Notwithstanding anything herein to the contrary, Participants who terminated employment during the Plan Year shall share in the salary deferral contributions made by the Employer for the year of termination without regard to the Hours of Service credited.

(e) Notwithstanding anything herein to the contrary (other than Sections 4.3(f) and 12.3(f)), Participants shall only share in the allocations of the Employer's matching contribution made pursuant to
Section 12.1(a)(2), the Employer's Non-Elective Contributions made pursuant to Section 12.1(a)(3), the Employer's Qualified Non-Elective Contribution made pursuant to Section 12.1(a)(4), and Forfeitures as provided in the Adoption Agreement. If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than 500 Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected).

(f) Notwithstanding anything in this Section to the contrary, the provisions of this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b) ratio percentage failsafe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year allocation condition or an Hours of Service (or months of service) allocation condition. A plan satisfies the "ratio percentage test" if, on the last day of the Plan Year, the "benefiting ratio" of the Non-Highly Compensated Employees who are "includible" is at least 70% of the "benefiting ratio" of the Highly Compensated Employees who are "includible." The "benefiting ratio" of the Non-Highly Compensated Employees is the number of "includible" Non-Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Employees who are Non-Highly Compensated Employees. The "benefiting ratio" of the Highly Compensated Employees is the number of Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Highly Compensated Employees. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion described in the Code or by reason of the age and service requirements of Article III; and (2) any Employee who incurs a separation from service during the Plan Year and fails to complete at least 501 Hours of Service (or three (3) months of service if the Elapsed Time Method is being used) during such Plan Year.

DEFINED CONTRIBUTION PROTOTYPE PLAN

If the Plan includes Employer matching contributions subject to ACP testing, this subsection applies separately to the Code Section 401(m) portion of the Plan.

12.4 ACTUAL DEFERRAL PERCENTAGE TESTS

(a) Except as otherwise provided herein, this subsection applies if the Prior Year Testing method is elected in the Adoption Agreement. The "Actual Deferral Percentage" (hereinafter "ADP") for a Plan Year for Participants who are Highly Compensated Employees (hereinafter "HCEs") for each Plan Year and the prior year's ADP for Participants who were Non-Highly Compensated Employees (hereinafter "NHCEs") for the prior Plan Year must satisfy one of the following tests:

(1) The ADP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ADP for Participants who were NHCEs for the prior Plan Year multiplied by 1.25; or

(2) The ADP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ADP for Participants who were NHCEs for the prior Plan Year multiplied by 2.0, provided that the ADP for Participants who are HCEs does not exceed the prior year's ADP for Participants who were NHCEs in the prior Plan Year by more than two (2) percentage points.

Notwithstanding the above, for purposes of applying the foregoing tests with respect to the first Plan Year in which the Plan permits any Participant to make Elective Deferrals, the ADP for the prior year's NHCEs shall be deemed to be three percent (3%) unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ADP for these Participants. However, the provisions of this paragraph may not be used if the Plan is a successor plan or is otherwise prohibited from using such provisions pursuant to IRS Notice 98-1 (or superseding guidance).

(b) Notwithstanding the foregoing, if the Current Year Testing method is elected in the Adoption Agreement, the ADP tests in (a)(1) and
(a)(2), above shall be applied by comparing the current Plan Year's ADP for Participants who are HCEs with the current Plan Year's ADP (rather than the prior Plan Year's ADP) for Participants who are NHCEs for the current Plan Year. Once made, this election can only be changed if the Plan meets the requirements for changing to the Prior Year Testing method set forth in IRS Notice 98-1 (or superseding guidance). Furthermore, this Plan must use the same testing method for both the ADP and ACP tests for Plan Years beginning on or after the date the Employer adopts its GUST restated plan.

(c) This subsection applies to prevent the multiple use of the test set forth in subsection (a)(2) above. Any HCE eligible to make Elective Deferrals pursuant to Section 12.2 and to make after-tax voluntary Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer, shall have either the actual deferral ratio adjusted in the manner described in Section 12.5 or the actual contribution ratio adjusted in the manner described in Section 12.7 so that the "Aggregate Limit" is not exceeded pursuant to Regulation 1.401(m)-2. The amounts in excess of the "Aggregate Limit" shall be treated as either an Excess Contribution or an Excess Aggregate Contribution. The ADP and ACP of the HCEs are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such tests

DEFINED CONTRIBUTION PROTOTYPE PLAN

for the Plan Year. Multiple use does not occur if either the ADP or ACP of the HCEs does not exceed 1.25 multiplied by the ADP and ACP of the NHCEs.

"Aggregate Limit" means the sum of (i) 125 percent of the greater of the ADP of the NHCEs for the prior Plan Year or the ACP of such NHCEs under the plan subject to Code Section 401 (m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement and (ii) the lesser of 200% or two (2) plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in (i) above, and "greater" is substituted for "lesser" after "two (2) plus the" in (ii) above if it would result in a larger Aggregate Limit. If the Employer has elected in the Adoption Agreement to use the Current Year Testing method, then in calculating the "Aggregate limit" for a particular Plan Year, the NHCEs ADP and ACP for that Plan Year, instead of the prior Plan Year, is used.

(d) A Participant is an HCE for a particular Plan Year if the Participant meets the definition of an HCE in effect for that Plan Year. Similarly, a Participant is an NHCE for a particular Plan Year if the Participant does not meet the definition of an HCE in effect for that Plan Year.

(e) For the purposes of this Section and Section 12.5, ADP means, for a specific group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the amount of Employer contributions actually paid over to the Plan on behalf of such Participant for the Plan Year to (2) the Participant's
414(s) Compensation for such Plan Year. Employer contributions on behalf of any participant shall include: (1) any Elective Deferrals made pursuant to the Participant's deferral election (including Excess Deferrals of HCEs), but excluding (i) Excess Deferrals of NHCEs that arise solely from Elective Deferrals made under the plan or plans of this Employer and (ii) Elective Deferrals that are taken into account in the ACP tests set forth in Section 12.6 (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (2) at the election of the Employer, Qualified Non-Elective Contributions and Qualified Matching Contributions to the extent such contributions are not used to satisfy the ACP test.

The actual deferral ratio for each Participant and the ADP for each group shall be calculated to the nearest one-hundredth of one percent. Elective Deferrals allocated to each Highly Compensated Participant's Elective Deferral Account shall not be reduced by Excess Deferrals to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer.

(f) For purposes of this Section and Section 12.5, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make salary deferrals pursuant to Section 12.2 for the Plan Year. Such Participants who fail to make Elective Deferrals shall be treated for ADP purposes as Participants on whose behalf no Elective Deferrals are made.

(g) In the event this Plan satisfies the requirements of Code Sections 401(a)(4), 401(k), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this
Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. Any adjustments to the NHCE ADP for the prior year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year and use the same ADP testing method.

(h) The ADP for any Participant who is an HCE for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to such Participant's accounts under two (2) or more arrangements described in Code Section 401(k), that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-Elective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement for purposes of determining such HCE's actual deferral ratio. However, if the cash or deferred arrangements have different Plan Years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under Regulations under Code Section 401.

(i) For purposes of determining the ADP and the amount of Excess Contributions pursuant to Section 12.5, only Elective Deferrals, Qualified Non-Elective Contributions and Qualified Matching Contributions contributed to the Plan prior to the end of the twelve (12) month period immediately following the Plan Year to which the contributions relate shall be considered.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(j) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 12.5 may be applied separately (or will be applied separately to the extent required by Regulations) to each "plan" within the meaning of Regulation 1.401(k)-1(g)(11). Furthermore, for Plan Years beginning after December 31, 1998, the provisions of Code
Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A).

12.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS

(a) In the event (or, with respect to subsection (c) when the Prior Year Testing method is being used, if it is anticipated) that for Plan Years beginning after December 31, 1996, the Plan does not satisfy one of the tests set forth in Section 12.4, the Administrator shall adjust Excess Contributions or the Employer shall make contributions pursuant to the options set forth below or any combination thereof. However, if the Prior Year testing method is being used and it is anticipated that the Plan might not satisfy one of such tests, then the Employer may make contributions pursuant to the options set forth in subsection (c) below.

(b) On or before the fifteenth day of the third month following the end of each Plan Year, but in no event later than the close of the following Plan Year, the Highly Compensated Participant allocated the largest amount of Elective Deferrals shall have a portion of such Elective Deferrals (and "Income" allocable to such amounts) distributed (and/or, at the Participant's election, recharacterized as a after-tax voluntary Employee contribution pursuant to Section 4.8) until the total amount of Excess Contributions has been distributed, or until the amount of the Participant's Elective Deferrals equals the Elective Deferrals of the Highly Compensated Participant having the next largest amount of Elective Deferrals allocated. This process shall continue until the total amount of Excess Contributions has been distributed. Any distribution and/or recharacterization of Excess Contributions shall be made in the following order.

(1) With respect to the distribution of Excess Contributions, such distribution:

(i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable;

(ii) shall be made first from unmatched Elective Deferrals and, thereafter, simultaneously from Elective Deferrals which are matched and matching contributions which relate to such Elective Deferrals. Matching contributions which relate to Excess Contributions shall be forfeited unless the related matching contribution is distributed as an Excess Aggregate Contribution pursuant to Section 12.7;

(iii) shall be adjusted for "Income"; and

(iv) shall be designated by the Employer as a distribution of Excess Contributions (and "Income").

(2) With respect to the recharacterization of Excess Contributions pursuant to (a) above, such recharacterized amounts:

(i) shall be deemed to have occurred on the date on which the last of those Highly Compensated Participants with Excess Contributions to be recharacterized is notified of the recharacterization and the tax consequences of such recharacterization;

(ii) shall not exceed the amount of Elective Deferrals on behalf of any Highly Compensated Participant for any Plan Year;

(iii) shall be treated as after-tax voluntary Employee contributions for purposes of Code Section 401(a)(4) and Regulation 1.401(k)-1(b). However, for purposes of Sections 4.3(f) and 9.2 (top heavy rules), recharacterized Excess Contributions continue to be treated as Employer contributions that are Elective Deferrals. Excess Contributions (and "Income" attributable to such amounts) recharacterized as after-tax voluntary Employee contributions shall continue to be nonforfeitable and subject to the same distribution rules provided for in Section 12.2(c); and

DEFINED CONTRIBUTION PROTOTYPE PLAN

(iv) are not permitted if the amount recharacterized plus after-tax voluntary Employee contributions actually made by such Highly Compensated Participant, exceed the maximum amount of after-tax voluntary Employee contributions (determined prior to application of Section 12.6) that such Highly Compensated Participant is permitted to make under the Plan in the absence of recharacterization.

(3) Any distribution and/or recharacterization of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution and/or recharacterization of Excess Contributions and "Income."

(4) For the purpose of this Section, "Income" means the income or losses allocable to Excess Contributions, which amount shall be allocated at the same time and in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the Plan Year and the date of the distribution (the "gap period") is not required to be distributed.

(5) Excess Contributions shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan.

(c) Notwithstanding the above, within twelve (12) months after the end of the Plan Year (or, if the Prior Year Testing method is used, within twelve (12) months after the end of the prior Plan Year), the Employer may make a special Qualified Non-Elective Contribution or Qualified Matching Contribution in accordance with one of the following provisions which contribution shall be allocated to the Qualified Non-Elective Contribution Account or Qualified Matching Contribution Account of each Non-Highly Compensated Participant eligible to share in the allocation in accordance with such provision. The Employer shall provide the Administrator with written notification of the amount of the contribution being made and to which provision it relates.

(1) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's
414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year.

(2) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's
414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(3) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in equal amounts (per capita).

(4) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in equal amounts (per capita). However, for purposes of this contribution. Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

DEFINED CONTRIBUTION PROTOTYPE PLAN

the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied).

(6) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to
Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(7) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants.

(8) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(9) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to
Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied).

(10) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to
Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(d) Any Excess Contributions (and "Income") which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Employer excise tax imposed by Code Section 4979.

DEFINED CONTRIBUTION PROTOTYPE PLAN

12.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS

(a) Except as otherwise provided herein, this subsection applies if the Prior Year Testing method is elected in the Adoption Agreement. The "Actual Contribution Percentage" (hereinafter "ACP") for Participants who are Highly Compensated Employees (hereinafter "HCEs") for each Plan Year and the prior year's ACP for Participants who were Non-Highly Compensated Employees (hereinafter "NHCEs") for the prior Plan Year must satisfy one of the following tests:

(1) The ACP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ACP for Participants who were NHCEs for the prior Plan Year multiplied by 1.25; or

(2) The ACP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ACP for Participants who were NHCEs for the prior Plan Year multiplied by 2.0, provided that the ACP for Participants who are HCEs does not exceed the prior year's ACP for Participants who were NHCEs in the prior Plan Year by more than two (2) percentage points.

Notwithstanding the above, for purposes of applying the foregoing tests with respect to the first Plan Year in which the Plan permits any Participant to make Employee contributions, provides for matching contributions, or both, the ACP for the prior year's NHCEs shall be deemed to be three percent (3%) unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ACP for these Participants. However, the provisions of this paragraph may not be used if the Plan is a successor plan or is otherwise prohibited from using such provisions pursuant to IRS Notice 98-1 (or superseding guidance).

(b) Notwithstanding the preceding, if the Current Year Testing method is elected in the Adoption Agreement, the ACP tests in (a)(1) and
(a)(2), above shall be applied by comparing the current Plan Year's ACP for Participants who are HCEs with the current Plan Year's ACP (rather than the prior Plan Year's ACP) for Participants who are NHCEs for the current Plan Year. Once made, this election can only be changed if the Plan meets the requirements for changing to the Prior Year Testing method set forth in IRS Notice 98-1 (or superseding guidance). Furthermore, this Plan must use the same testing method for both the ADP and ACP tests for Plan Years beginning on or after the date the Employer adopts its GUST restated plan.

(c) This subsection applies to prevent the multiple use of the test set forth in subsection (a)(2) above. Any HCE eligible to make Elective Deferrals pursuant to Section 12.2 and to make after-tax voluntary Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer, shall have either the actual deferral ratio adjusted in the manner described in Section 12.5 or the actual contribution ratio reduced in the manner described in Section 12.7 so that the "Aggregate Limit" is not exceeded pursuant to Regulation 1.401(m)-2. The amounts in excess of the "Aggregate Limit" shall be treated as either an Excess Contribution or an Excess Aggregate Contribution. The ADP and ACP of the HCEs are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such test for the Plan Year. Multiple use does not occur if either the ADP or ACP of the HCEs does not exceed 1.25 multiplied by the ADP and ACP of the NHCEs.

"Aggregate Limit" means the sum of (i) 125 percent of the greater of the ADP of the NHCEs for the Plan Year or the ACP of such NHCEs under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in (i) above, and "greater" is substituted for "lesser" after "two plus the" in (ii) above if it would result in a larger Aggregate Limit. If the Employer has elected in the Adoption Agreement to use the Current Year Testing method, then in calculating the "Aggregate Limit" for a particular Plan Year, the NHCEs ADP and ACP for that Plan Year, instead of the prior Plan Year, is used.

(d) A Participant is a Highly Compensated Employee for a particular Plan Year if the Participant meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-highly Compensated Employee for a particular Plan Year if the Participant does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.

(e) For the purposes of this Section and Section 12.7, ACP for a specific group of Participants for a Plan Year means the average of the "Contribution Percentages" (calculated separately for each Participant in such group). For this purpose, "Contribution Percentage" means the ratio (expressed as a percentage) of the Participant's "Contribution Percentage Amounts" to the Participant's 414(s) Compensation. The actual contribution ratio for each

DEFINED CONTRIBUTION PROTOTYPE PLAN

Participant and the ACP for each group, shall be calculated to the nearest one-hundredth of one percent of the Participant's 414(s) Compensation.

(f) "Contribution Percentage Amounts" means the sum of (i) after-tax voluntary Employee contributions, (ii) Employer "Matching Contributions" made pursuant to Section 12.1(a)(2) (including Qualified Matching Contributions to the extent such Qualified Matching Contributions are not used to satisfy the tests set forth in Section 12.4), (iii) Excess Contributions recharacterized as nondeductible voluntary Employee contributions pursuant to Section 12.5, and (iv) Qualified Non-Elective Contributions (to the extent not used to satisfy the tests set forth in
Section 12.4). However, "Contribution Percentage Amounts" shall not include "Matching Contributions" that are forfeited either to correct Excess Aggregate Contributions or due to Code Section 401(a)(4) and the Regulations thereunder because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. In addition, "Contribution Percentage Amounts" may include Elective Deferrals provided the ADP test in Section 12.4 is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test.

(g) For purposes of determining the ACP and the amount of Excess Aggregate Contributions pursuant to Section 12.7, only Employer "Matching Contributions" (excluding "Matching Contributions" forfeited or distributed pursuant to Section 12.2(e), 12.5(b), or 12.7(b)) contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer "Matching Contributions" made pursuant to Section 12.1(a)(2) or after-tax voluntary Employee contributions made pursuant to Section 4.7 allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section
401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-l(b)(2) which is incorporated herein by reference. The Plan Year must be the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made.

(h) In the event that this Plan satisfies the requirements of Code Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the-requirements of such sections of the Code only if aggregated with this Plan, then this
Section shall be applied by determining the ACP of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Code section 401(m) only if they have the same Plan Year.

Any adjustments to the NHCE ACP for the prior year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year and use the same ACP testing method.

(i) For the purposes of this Section, if an HCE is a Participant under two (2) or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) which are maintained by the Employer or an Affiliated Employer to which "Matching Contributions," nondeductible voluntary Employee contributions, or both, are made, all such contributions on behalf of such HCE shall be aggregated for purposes of determining such HCP's actual contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan.

(j) For purposes of this Section and Section 12.7. a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to have "Matching Contributions" made pursuant to Section 12.1(a)(2) (whether or not a deferral election was made or suspended pursuant to Section 12.2(g)) allocated to such Participant's account for the Plan Year or to make salary deferrals pursuant to Section 12.2 (if the Employer uses salary deferrals to satisfy the provisions of this Section) or after-tax voluntary Employee contributions pursuant to Section 4.7 (whether or not nondeductible voluntary Employee contributions are made) allocated to the Participant's account for the Plan Year.

(k) For purposes of this Section and Section 12.7, "Matching Contribution" means an Employer contribution made to the Plan, or to a contract described in Code Section 403(b), on behalf of a Participant on account of a nondeductible voluntary Employee contribution made by such Participant, or on account of a Participant's elective deferrals under a plan maintained by the Employer.

(1) For purposes of determining the ACP and the amount of Excess Aggregate Contributions pursuant to Section 12.7, only Elective Deferrals, Qualified Non-Elective Contributions, "Matching Contributions" and

DEFINED CONTRIBUTION PROTOTYPE PLAN

Qualified Matching Contributions contributed to the Plan prior to the end of the twelve (12) month period immediately following the Plan Year to which the contributions relate shall be considered.

(m) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 12.7 may be applied separately (or will be applied separately to the extent required by Regulations) to each "plan" within the meaning of Regulation 1.401 (k)-1(g)(11). Furthermore, for Plan Years beginning after December 31, 1998, the provisions of Code
Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A).

12.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS

(a) In the event (or, with respect to subsection (g) below when the Prior Year Testing method is being used, if it is anticipated) that for Plan Years beginning after December 31, 1996, the Plan does not satisfy one of the tests set forth in Section 12.6, the Administrator shall adjust Excess Aggregate Contributions or the Employer shall make contributions pursuant to the options set forth below or any combination thereof. However, if the Prior Year testing method is being used and it is anticipated that the Plan might not satisfy one of such tests, then the Employer may make contributions pursuant to the options set forth in subsection (c) below.

(b) On or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year the Highly Compensated Participant having the largest allocation of "Contribution Percentage Amounts" shall have a portion of such "Contribution Percentage Amounts" (and "Income" allocable to such amounts) distributed or, if non-Vested, Forfeited (including "Income" allocable to such Forfeitures) until the total amount of Excess Aggregate Contributions has been distributed, or until the amount of the Participant's "Contribution Percentage Amounts" equals the "Contribution Percentage Amounts" of the Highly Compensated Participant having the next largest amount of "Contribution Percentage Amounts." This process shall continue until the total amount of Excess Aggregate Contributions has been distributed or forfeited. Any distribution and/or Forfeiture of "Contribution Percentage Amounts" shall be made in the following order.

(1) Employer matching contributions distributed and/or forfeited pursuant to Section 12.5(b)(1);

(2) After-tax voluntary Employee contributions including Excess Contributions recharacterized as after-tax voluntary Employee contributions pursuant to Section 12.5(b)(2);

(3) Remaining Employer matching contributions.

(c) Any distribution or Forfeiture of less than the entire amount of Excess Aggregate Contributions (and "Income") shall be treated as a pro rata distribution of Excess Aggregate Contributions and "Income." Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and "Income"). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.3. However, no such Forfeiture may be allocated to a Highly Compensated Participant whose contributions are reduced pursuant to this Section.

(d) For the purpose of this Section, "Income" means the income or losses allocable to Excess Aggregate Contributions, which amount shall be allocated at the same time and in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the Plan Year and the date of the distribution (the "gap period") is not required to be distributed.

(e) Excess Aggregate Contributions attributable to amounts other than nondeductible voluntary Employee contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan.

(f) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as nondeductible voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Employer that ends with or within the Plan Year or which are treated as after-tax voluntary Employee contributions due to recharacterization pursuant to Section 12.5.

(g) Notwithstanding the above, within twelve (12) months after the end of the Plan Year (or, if the Prior Year Testing method is used, within twelve (12) months after the end of the prior Plan Year), the Employer may

DEFINED CONTRIBUTION PROTOTYPE PLAN

make a special Qualified Non-Elective Contribution or Qualified Matching Contribution in accordance with one of the following provisions which contribution shall be allocated to the Qualified Non-Elective Contribution Account or Qualified Matching Contribution Account of each Non-Highly Compensated eligible to share in the allocation in accordance with such provision. The Employer shall provide the Administrator with written notification of the amount of the contribution being made and for which provision it is being made pursuant to.

(1) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's
414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year.

(2) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's
414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(3) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in equal amounts (per capita).

(4) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in equal amounts (per capita). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(5) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to
Section 4.4. This process shall continue until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied).

(6) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to
Section 4.4. This process shall continue until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Employees who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(7) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in
Section 12.6.

DEFINED CONTRIBUTION PROTOTYPE PLAN

Such contribution shall be allocated on behalf of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account.

(8) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in
Section 12.6. Such contribution shall be allocated on behalf of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(9) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in
Section 12.4. Such contribution shall be allocated on behalf of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account.

(10) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in
Section 12.4. Such contribution shall be allocated on behalf of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded.

(h) Any Excess Aggregate Contributions (and "Income") which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Employer excise tax imposed by Code
Section 4979.

12.8 SAFE HARBOR PROVISIONS

(a) The provisions of this Section will apply if the Employer has elected, in the Adoption Agreement, to use the "ADP Test Safe Harbor" or "ACP Test Safe Harbor." If the Employer has elected to use the "ADP Test Safe Harbor" for a Plan Year, then the provisions relating to the ADP test described in Section 12.4 and in Code Section 401(k)(3) do not apply for such Plan Year. In addition, if the Employer has also elected to use the "ACP Test Safe Harbor" for a Plan Year, then the provisions relating to the ACP test described in Section 12.6 and in Code Section

DEFINED CONTRIBUTION PROTOTYPE PLAN

401(m)(2) do not apply for such Plan Year. Furthermore, to the extent any other provision of the Plan is inconsistent with the provisions of this Section, the provisions of this Section will govern.

(b) For purposes of this Section, the following definitions apply:

(1) "ACP Test Safe Harbor" means the method described in subsection
(c) below for satisfying the ACP test of Code Section 401(m)(2).

(2) "ACP Test Safe Harbor Matching Contributions" means "Matching Contributions" described in subsection (d)(1).

(3) "ADP Test Safe Harbor" means the method described in subsection
(c) for satisfying the ADP test of Code Section 401(k)(3).

(4) "ADP Test Safe Harbor Contributions" means "Matching Contributions" and nonelective contributions described in subsection
(c)(1) below.

(5) "Compensation" means Compensation as defined in Section 1.11, except, for purposes of this Section, no dollar limit, other than the limit imposed by Code Section 401(a)(17), applies to the Compensation of a Non-Highly Compensated Employee. However, solely for purposes of determining the Compensation subject to a Participant's deferral election, the Employer may use an alternative definition to the one described in the preceding sentence, provided such alternative definition is a reasonable definition within the meaning of Regulation 1.414(s)-1(d)(2) and permits each Participant to elect sufficient Elective Deferrals to receive the maximum amount of "Matching Contributions" (determined using the definition of Compensation described in the preceding sentence) available to the Participant under the Plan.

(6) "Eligible Participant" means a Participant who is eligible to make Elective Deferrals under the Plan for any part of the Plan Year (or who would be eligible to make Elective Deferrals but for a suspension due to a hardship distribution described in Section 12.9 or to statutory limitations, such as Code Sections 402(g) and 415) and who is not excluded as an "Eligible Participant" under the
401(k) Safe Harbor elections in the Adoption Agreement.

(7) "Matching Contributions" means contributions made by the Employer on account of an "Eligible Participant's" Elective Deferrals.

(1) The "ADP Test Safe Harbor Contribution" is the contribution elected by the Employer in the Adoption Agreement to be used to satisfy the "ADP Test Safe Harbor." However, if no contribution is elected in the Adoption Agreement, the Employer will contribute to the Plan for the Plan Year a "Basic Matching Contribution" on behalf of each "Eligible Employee." The "Basic Matching Contribution" is equal to (i) one-hundred percent (100%) of the amount of an "Eligible Participant's" Elective Deferrals that do not exceed three percent (3%) of the Participant's "Compensation" for the Plan Year, plus (ii) fifty percent (50%) of the amount of the Participant's Elective Deferrals that exceed three percent (3%) of the Participant's "Compensation" but do not exceed five percent (5%) of the Participant's "Compensation."

(2) Except as provided in subsection (e) below, for purposes of the Plan, a Basic Matching Contribution or an Enhanced Matching Contribution will be treated as a Qualified Matching Contribution and a Nonelective Safe Harbor Contribution will be treated as a Qualified Non-Elective Contribution. Accordingly, the "ADP Test Safe Harbor Contribution" will be fully Vested and subject to the distribution restrictions set forth in Section 12.2(c) (i.e., may generally not be distributed earlier than separation from service, death, disability, an event described in Section 401(k)(1), or, in case of a profit sharing plan, the attainment of age 59 1/2.). In addition, such contributions must satisfy the "ADP Test Safe Harbor" without regard to permitted disparity under Code Section 401(1).

(3) At least thirty (30) days, but not more than ninety (90) days, before the beginning of the Plan Year, the Employer will provide each "Eligible Participant" a comprehensive notice of the Participant's rights and obligations under the Plan, written in a manner calculated to be understood by the average Participant. However, if an Employee becomes eligible after the 90th day before the beginning of the Plan Year and does

DEFINED CONTRIBUTION PROTOTYPE PLAN

not receive the notice for that reason, the notice must be provided no more than ninety (90) days before the Employee becomes eligible but not later than the date the Employee becomes eligible.

(4) In addition to any other election periods provided under the Plan, each "Eligible Participant" may make or modify a deferral election during the thirty (30) day period immediately following receipt of the notice described in subsection (3) above. Furthermore, if the "ADP Test Safe Harbor" is a "Matching Contribution" each "Eligible Employee" must be permitted to elect sufficient Elective Deferrals to receive the maximum amount of "Matching Contributions" available to the Participant under the Plan.

(d) The provisions of this subsection apply if the Employer has elected to satisfy the "ACP Test Safe Harbor."

(1) In addition to the "ADP Test Safe Harbor Contributions," the Employer will make any "Matching Contributions" in accordance with elections made in the Adoption Agreement. Such additional "Matching Contributions" will be considered "ACP Test Safe Harbor Matching Contributions."

(2) Notwithstanding any election in the Adoption Agreement to the contrary, an "Eligible Participant's" Elective Deferrals in excess of six percent (6%) of "Compensation" may not be taken into account in applying "ACP Test Safe Harbor Matching Contributions." In addition, effective with respect to Plan Years beginning after December 31, 1999, any portion of an "ACP Test Safe Harbor Matching Contribution" attributable to a discretionary "Matching Contribution" may not exceed four percent (4%) of an "Eligible Participant's" "Compensation."

(e) The Plan is required to satisfy the ACP test of Code Section
401(m)(2), using the current year testing method, if the Plan permits after-tax voluntary Employee contributions or if matching contributions that do not satisfy the "ACP Test Safe Harbor" may be made to the Plan. In such event, only "ADP Test Safe Harbor Contributions" or "ACP Test Safe Harbor Contributions" that exceed the amount needed to satisfy the "ADP Test Harbor" or "ACP Test Safe Harbor" (if the Employer has elected to use the "ACP Test Safe Harbor") may be treated as Qualified Nonelective Contributions or Qualified Matching Contributions in applying the ACP test. In addition, in applying the ACP test, elective contributions may not treated as matching contributions under Code Section 401(m)(3). Furthermore, in applying the ACP test, the Employer may elect to disregard with respect to all "Eligible Participants" (1) all "Matching Contributions" if the only "Matching Contributions" made to the Plan satisfy the "ADP Test Safe Harbor Contribution" (the "Basic Matching Contribution" or the "Enhanced Matching Contribution") and (2) if the "ACP Test Safe Harbor" is satisfied, "Matching Contributions" that do not exceed four percent (4%) of each Participant's "Compensation."

12.9 ADVANCE DISTRIBUTION FOR HARDSHIP

(a) The Administrator, at the election of a Participant, shall direct the Trustee to distribute to the Participant in any one Plan Year up to the lesser of (1) 100% of the accounts as elected in the Adoption Agreement valued as of the last Valuation Date or (2) the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the Valuation Date immediately preceding the date of distribution, and the account from which the distribution is made shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is for one of the following or any other item permitted under Regulation 1.401(k)-1(d)(2)(iv):

(1) Medical expenses described in Code Section 213(d) incurred by the Participant, the Participant's spouse, or any of the Participant's dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care as described in Code Section 213(d);

(2) Costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant;

(3) Payment of tuition and related educational fees, and room and board expenses, for the next twelve (12) months of post-secondary education for the Participant, the Participant's spouse, children, or dependents (as defined in Code Section 152); or

(4) Payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence.

DEFINED CONTRIBUTION PROTOTYPE PLAN

(b) No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied:

(1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant (including any amounts necessary to pay any federal, state, or local taxes or penalties reasonably anticipated to result from the distribution);

(2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer (to the extent the loan would not increase the hardship);

(3) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and nondeductible voluntary Employee contributions will be suspended for at least twelve (12) months after receipt of the hardship distribution; and

(4) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution.

(c) Notwithstanding the above, distributions from the Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Account pursuant to this Section shall be limited solely to the Participant's Elective Deferrals and any income attributable thereto credited to the Participant's Elective Deferral Account as of December 31, 1988. Furthermore, if a hardship distribution is permitted from more than one account type, the Administrator may determine any ordering of a Participant's hardship distribution from such accounts.

(d) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(l 1) and 417 and the Regulations thereunder.

ARTICLE XIII
SIMPLE 401(K) PROVISIONS

13.1 SIMPLE 401(K) PROVISIONS

(a) If elected in the Adoption Agreement, this Plan is intended to be a SIMPLE 401(k) plan which satisfies the requirements of Code Sections 401(k)(l1) and 401(m)(10).

(b) The provisions of this Article apply for a "year" only if the following conditions are met:

(1) The Employer adopting this Plan is an "eligible employer." An "eligible employer" means, with respect to any "year," an Employer that had no more than 100 Employees who received at least $5,000 of "compensation" from the Employer for the preceding "year." In applying the preceding sentence, all employees of an Affiliated Employer are taken into account.

An "eligible employer" that has elected to use the SIMPLE 401(k) provisions but fails to be an "eligible employer" for any subsequent "year," is treated as an "eligible employer" for the two (2) "years" following the last "year" the Employer was an "eligible employer." If the failure is due to any acquisition, disposition, or similar transaction involving an "eligible employer," the preceding sentence applies only if the provisions of Code Section 410(b)(6)(C)(i) are satisfied.

(2) No contributions are made, or benefits accrued for services during the "year," on behalf of any "eligible employee" under any other plan, contract, pension, or trust described in Code Section 219(g)(5)(A) or (B), maintained by the Employer.

(c) To the extent that any other provision of the Plan is inconsistent with the provisions of this Article, the provisions of this Article govern.

DEFINED CONTRIBUTION PROTOTYPE PLAN

13.2 DEFINITIONS

(a) "Compensation" means, for purposes of this Article, the sum of the wages, tips, and other compensation from the Employer subject to federal income tax withholding (as described in Code Section 6051(a)(3)) and the Employee's salary reduction contributions made under this or any other 401(k) plan, and, if applicable, elective deferrals under a Code
Section 408(p) SIMPLE plan, a SARSEP, or a Code Section 403(b) annuity contract and compensation deferred under a Code Section 457 plan, required to be reported by the Employer on Form W-2 (as described in Code Section 6051(a)(8)). For self-employed individuals, "compensation" means net earnings from self-employment determined under Code Section 1402(a) prior to subtracting any contributions made under this Plan on behalf of the individual. The provisions of the plan implementing the limit on Compensation under Code Section 401(a)(17) apply to the "compensation" under this Article.

(b) "Eligible employee" means, for purposes of this Article, any Participant who is entitled to make elective deferrals described in Code
Section 402(g) under the terms of the Plan.

13.3 CONTRIBUTIONS

(a) Salary Reduction Contributions

(1) Each "eligible employee" may make a salary reduction election to have "compensation" reduced for the "year" in any amount selected by the Employee subject to the limitation in subsection (c) below. The Employer will make a salary reduction contribution to the Plan, as an Elective Deferral, in the amount by which the Employee's "compensation" has been reduced.

(2) The total salary reduction contribution for the "year" cannot exceed $6,000 for any Employee. To the extent permitted by law, this amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS.

(b) Other Contributions

(1) Matching Contributions. Unless (2) below is elected, each "year" the Employer will make a matching contribution to the Plan on behalf of each Employee who makes a salary reduction election under Section
13.3(a). The amount of the matching contribution will be equal to the Employee's salary reduction contribution up to a limit of three percent (3%) of the Employee's "compensation" for the full "year."

(2) Nonelective Contributions. For any "year," instead of a matching contribution, the Employer may elect to contribute a nonelective contribution of two percent (2%) of "compensation" for the "year" for each "eligible employee" who received at least $5,000 of "compensation" from the Employer for the "year."

No Employer or Employee contributions may be made to this Plan for the "year" other than salary reduction contributions described in
Section 13.3(a), matching or nonelective contributions described in
Section 13.3(b) and rollover contributions described in Regulation
Section 1.402(c)-2, Q&A-1(a). Furthermore, the provisions of Section 4.4 which implement the limitations of Code Section 415 apply to contributions made pursuant to this Section.

13.4 ELECTION AND NOTICE REQUIREMENTS

(a) Election Period

(1) In addition to any other election periods provided under the Plan, each "eligible employee" may make or modify a salary reduction election during the 60-day period immediately preceding each January 1st.

(2) For the "year" an Employee becomes eligible to make salary reduction contributions under this Article, the 60-day election period requirement of subsection (a)(1) is deemed satisfied if the Employee may

DEFINED CONTRIBUTION PROTOTYPE PLAN

make or modify a salary reduction election during a 60-day period that includes either the date the Employee becomes eligible or the day before.

(3) Each "eligible employee" may terminate a salary reduction election at any time during the "year."

(b) Notice Requirements

(1) The Employer will notify each "eligible employee" prior to the 60-day election period described in Section 13.4(a) that a salary reduction election or a modification to a prior election may be made during that period.

(2) The notification described in (1) above will indicate whether the Employer will provide a matching contribution described in
Section 13.3(b)(1) or a two percent (2%) nonelective contribution described in section 13.3(b)(2).

13.5 VESTING REQUIREMENTS

All benefits attributable to contributions made pursuant to this Article are nonforfeitable at all times, and all previous contributions made under the Plan are nonforfeitable as of the beginning of the Plan Year that the
401(k) SIMPLE provisions apply.

13.6 TOP-HEAVY RULES

The Plan is not treated as a top heavy plan under Code Section 416 for any year for which the provisions of this Article are effective and satisfied.

13.7 NONDISCRIMINATION TESTS

The Plan is treated as meeting the requirements of Code Sections 401(k)(3)(A)(ii) and 401(m)(2) for any "year" for which the provisions of this Article are effective and satisfied. Accordingly, Sections 12.4, 12.5, 12.6 and 12.7 shall not apply to the Plan.

DEFINED CONTRIBUTION PROTOTYPE PLAN

AMENDMENT TO
DEFINED CONTRIBUTION PLAN AND TRUST

Effective with respect to Employers adopting this prototype plan on or after July 1, 2002, Section 7.1(a) of the Plan is amended in its entirety to read as follows:

(a) The provisions of this Article, other than Section 7.6, shall not apply to this Plan if a separate trust agreement, that has been approved by the Internal Revenue Service for use with this Plan, is being used.

Pursuant to Section 8.1(c) of the Plan, the mass submitter of the prototype plan has made this amendment (as evidenced by the submission of the amendment to the Internal Revenue Service for inclusion with the mass submitter prototype plan) on behalf of minor modifier sponsors that received opinion letters prior to March 1, 2002, and all identical sponsors of the mass submitter prototype plan.

EXHIBIT 10.11
CAPELLA EDUCATION COMPANY
EXECUTIVE SEVERANCE PLAN

(AS ORIGINALLY EFFECTIVE FEBRUARY 1, 2003 AND AS AMENDED MAY 11, 2005)

I. INTRODUCTION

Capella Education Company ("CEC") has established the Capella Education Company Executive Severance Plan (the "Plan") to provide severance pay and other benefits to eligible employees of CEC and its subsidiaries whose employment terminates under certain covered circumstances. CEC, in its complete and sole discretion, will determine who is an eligible employee, the requirements to receive severance benefits, and the amount of any benefits.

The Plan was originally effective February 1, 2003. The Plan, as amended in this document, is effective May 11, 2005. This Plan supersedes and replaces any policy, plan or practice that may have existed in the past regarding the payment of severance benefits to eligible employees. However, any written employment contract or agreement between CEC (or a subsidiary) and an eligible employee that specifically provides for the payment of severance benefits remains in force, as detailed below.

This document is both the "Plan document" and the "Summary Plan Description" for the Plan.

Any reference in this Plan to "Capella" includes CEC and its subsidiaries.

II. ELIGIBILITY

Only those employees who have been designated in writing by CEC's Chief Executive Officer ("CEO") as eligible to participate in the Plan are eligible to become participants in the Plan. Such designations will state whether the employee is classified as a Level 1 Participant or a Level 2 Participant for purposes of the Plan. The terms of the written designation by the CEO, not the employee's job title or classification for other purposes, determine whether an employee is eligible for benefits under the Plan, and, if so, for what level of benefits. The written designation for a particular employee may be changed from time to time at the discretion of the CEO.

If you are designated as an eligible employee, you must also complete 90 days of service with Capella, measured from your most recent date of hire, prior to becoming a participant in the Plan.

You will cease to be a participant in this Plan when your employment with CEC (or a subsidiary) terminates, or when you cease to be classified by CEC as an eligible employee, if earlier.

III. SEVERANCE EVENTS

In general, if you are an eligible participant in this Plan, and you comply with all provisions and requirements of the Plan, you will receive severance benefits if your employment with Capella is involuntarily terminated other than for Cause. A voluntary termination by you for Good Reason within 24 months following a qualified Change in Control is also a severance eligible event. These concepts are described in detail below.

"FOR CAUSE". You will not be eligible for benefits under this Plan if your employment is terminated by Capella "for Cause." "Cause" means 1) employee's commission of a crime or other act that could materially damage the reputation of Capella; 2) employee's theft, misappropriation, or embezzlement of Capella property; 3) employee's falsification of records maintained by Capella; 4) employee's failure substantially to comply with the written policies and procedures of Capella as they may be published or revised from time to time (in writing, on the Faculty Center website, or on the Stella intranet); 5) employee's misconduct directed toward learners, employees, or adjunct faculty; or 6) employee's failure substantially to perform the material duties of employee's Capella employment, which failure is not cured within 30 days after written notice from Capella specifying the act of non-performance.

"GOOD REASON". If you terminate employment with Capella voluntarily, you will be eligible for Plan benefits only if you terminated with Good Reason following a qualified Change in Control, as defined below. "Good Reason" means 1) the demotion or reduction of your job responsibilities upon a Change in Control; or 2) a reassignment of your principal place of work, without your consent, to a location more than 50 miles from your principal place of work upon a Change of Control. To be eligible for Plan benefits, you must terminate employment for Good Reason within 24 months after the date of the qualified Change in Control. In addition, you must have provided written notice to CEC of the asserted Good Reason not later than 30 days after the occurrence of the event on which Good Reason is based and at least 30 days prior to your proposed termination date. CEC may take action to cure your stated Good Reason within this 30-day period. If CEC does so, you will not be eligible for Plan benefits if you voluntarily terminate.

"CHANGE IN CONTROL". For purposes of this Plan, a qualifying "Change in Control" of CEC shall be deemed to occur if any of the following occur:

(1) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the

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Exchange Act), directly or indirectly, of securities of CEC representing the following: (i) 50% or more of the combined voting power of CEC's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities") at any time prior to CEC 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 CEC's then outstanding Voting Securities at any time after CEC 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:

(A) any acquisition or beneficial ownership by CEC or a subsidiary;

(B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by CEC 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 CEC's then outstanding Voting Securities and the Shares of CEC is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of CEC 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 acquisitions;

(D) any acquisition of Shares or Voting Securities in CEC's initial public offering pursuant to a registration statement filed under the Securities Act.

(2) A majority of the members of the Board of Directors of CEC shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of CEC, (B) individuals elected as directors of CEC subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of CEC or (C) any individual elected or appointed by the Board of Directors of CEC to fill vacancies on the Board of Directors of CEC caused by death or resignation (but not by removal) or to fill newly-created directorships;

(3) Approval by the stockholders of CEC of a reorganization, merger or consolidation of CEC or a statutory exchange of outstanding Voting Securities of CEC, 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 CEC immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 50% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and

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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 CEC as the case may be; or

(4) Approval by the stockholders of CEC of (x) a complete liquidation or dissolution of CEC or (y) the sale or other disposition of all or substantially all of the assets of CEC (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% 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 CEC 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 CEC, as the case may be.

At all times after CEC 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 (1)(C), (3) and (4) above shall be changed to 65%.

RELEASE REQUIRED. Regardless of the reason for your termination, you will not be eligible for Plan benefits unless you sign a release form after your employment with CEC or a subsidiary actually terminates. You may obtain a copy of the current release form at any time by contacting the CEC Human Resources Department. However, CEC will determine the contents of the release form, and may revise it from time to time as appropriate to deal with particular severance situations. As such, the release form you will be required to sign to receive benefits under the Plan may differ from any release form you previously received.

The release will generally include provisions regarding noncompetition with Capella for a period of time after your employment terminates, confidentiality, return of Capella property and other topics, including a release of all claims against Capella and its representatives. Severance benefits will be paid only after any period for rescinding the release has expired. If you violate the noncompetition or confidentiality provisions of the release, CEC will no longer be required to pay you any remaining severance benefits due to you under the Plan.

INELIGIBILITY FOR BENEFITS. Severance benefits will not be paid under this Plan in any of the following circumstances:

- You are offered another position with Capella (or the successor/purchasing entity) and you refuse to accept that position,

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other than for Good Reason in connection with a qualified Change in Control.

- You voluntarily terminate your employment with Capella (or the successor/purchasing entity), other than for Good Reason in connection with a qualified Change in Control.

- Your termination of employment does not qualify as a "separation from service" under Section 409A or any guidance issued thereunder.

- Your employment is terminated by Capella (or the successor/purchasing entity) for Cause, whether or not in connection with a Change in Control.

- You are placed on a temporary layoff.

- Your employment terminates due to death, disability, or failure to return to work for Capella following a leave of absence, layoff or any other period of authorized absence from Capella.

- You refuse to sign the release form prepared by CEC, or you rescind the release before it becomes final.

- You leave Capella under any other program in which management solicits and accepts voluntary terminations (in which case, severance pay will be determined and paid only under the other program).

- You are covered by a written employment contract or agreement with Capella at the time your employment terminates that provides for severance pay or other benefits upon termination, except as described below.

IV. PLAN BENEFITS

A Participant who experiences a qualifying severance event under Section III will be eligible to receive severance benefits under the Plan, including severance pay, outplacement assistance and continuation coverage under certain employee benefit plans.

SEVERANCE PAY

The amount and type of severance pay provided under the Plan depends on the severance event and your benefit classification level under the Plan at the time of termination.

INVOLUNTARY TERMINATION. If your employment is involuntarily terminated by Capella, other than for Cause or within 24 months after a qualified Change in Control, the amount of your severance pay depends on your benefit classification level.

If you are classified as an eligible Level 1 Participant at the time of your termination, you will be entitled to severance pay equal to four months of your base salary. If four months after your termination you have not secured new employment paying at least

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75% of your prior base salary, you will be entitled to an additional severance amount equal to two months of your base salary. In no event will you receive severance benefits for such a termination in excess of six months base salary.

If you are classified as an eligible Level 2 Participant at the time of your termination, you will be entitled to severance pay equal to nine months of your base salary. If nine months after your termination you have not secured new employment paying at least 75% of your prior base salary, you will be entitled to an additional severance amount equal to three months of your base salary. In no event will you receive benefits for such a termination in excess of twelve months base salary.

However, to receive the additional months of severance pay described above, you must be actively seeking new employment throughout your initial period of severance. The additional severance will not be paid if you die, become disabled, retire, or otherwise stop seeking new employment during your initial severance period.

Notwithstanding anything to the contrary in the immediately preceding two paragraphs, any Level 2 Participant (or the estate of such person, as applicable) with the title Sr. Vice President or higher shall receive severance pay equal to 12 months of base salary, without regard to whether such person secured new employment, sought new employment, died, became disabled or retired during the period of severance payments.

CHANGE IN CONTROL. If you voluntarily terminate for Good Reason following a Change in Control, or if you are involuntarily terminated other than for Cause, within 24 months after a qualified Change in Control, you will be entitled to severance pay equal to twelve months of your base salary. You will also be entitled to 80% of the amount of any targeted bonus for the year in which you terminate, prorated to the date of termination, without regard to performance.

YOUR "BASE SALARY." Severance pay under this Plan is calculated using your base salary at the time your employment terminates. Base salary excludes all bonuses (such as signing bonuses and incentive bonuses), stock options, profit sharing, benefits, taxable fringes, expenses allowances or reimbursements, imputed income, or any other special compensation.

PAYMENT. Generally, you will receive any severance pay you are entitled to in bi-weekly payments, spread out over the number of months on which your severance amount is based. Severance payments will begin as soon as administratively feasible after the date the release becomes irrevocable. However, all benefit payments under the Plan will be delayed for 6 months following separation from service, if necessary for the Plan to comply with Section 409A of the Internal Revenue Code.

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OUTPLACEMENT ASSISTANCE

Level 2 Participants eligible for benefits under this Plan will also be eligible for up to 12 months of outplacement assistance. Level 1 Participants eligible for benefits under this Plan will be eligible for up to 6 months of outplacement assistance. Any outplacement assistance provided under this Plan will be paid directly to the outplacement agency.

CONTINUATION COVERAGE

Federal and state laws require CEC to offer certain departing employees (and where applicable, their dependents) the right to continue coverage, at their own expense, under our group health, dental and life insurance programs. For health and dental benefits, this continuation coverage is called COBRA. Upon termination of employment, you will receive information further describing how this continuation coverage works, its limitations, and your rights and duties to maintain coverage.

If you are eligible for benefits under this Plan, CEC will pay the regular employer portion towards your continued coverage under CEC's group health, dental and basic life insurance plans for the number of months upon which your severance pay is based. For example, if you are a Level 1 Participant entitled to four months of severance pay, CEC will contribute to your continuation coverage for four months, subject to the limitations described below. After that time, you must pay the entire cost of continuation coverage if you wish to continue coverage.

To receive this continuation coverage benefit, you must elect continuation coverage in accordance with the documents you receive. In addition, you must pay the remaining portion of the cost of your continued coverage. If CEC changes the portion it contributes toward benefit coverage for active employees, it may also change its employer portion for purposes of continuation coverage benefits under this Plan.

IF YOU LOSE ELIGIBILITY FOR COBRA OR OTHER CONTINUATION COVERAGE, AS DESCRIBED IN THE COBRA DOCUMENTS YOU WILL RECEIVE, CEC WILL STOP PAYING ITS PORTION OF THE PREMIUMS FOR YOUR CONTINUATION COVERAGE.

REDUCTIONS OF SEVERANCE BENEFITS

All severance benefits payable under this Plan will be reduced by the amount of any severance or similar payment required to be paid to you by CEC under applicable federal, state, and local laws. Severance payments are also subject to all applicable withholding, including state and federal income tax withholding and FICA and Medicare tax withholding.

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In addition, in no event will the severance amount you receive exceed two times your yearly salary for the twelve months preceding your termination (or the amount you would have earned had you worked a full year).

Severance pay under this Plan will be reduced (offset) by the amount of any payment made by CEC to you pursuant to an employment contract, agreement or other severance arrangement, to the extent such payment is called a severance payment or otherwise becomes payable due to a termination. If such an agreement, contract or arrangement provides for severance payments in excess of those provided under this Plan, no severance pay will be due under this Plan, however, you may still be eligible for other benefits under the Plan, to the extent benefits are not duplicative of what you are receiving under the agreement, contract or arrangement.

TERMINATION OF SEVERANCE BENEFITS

All severance benefits payable under this Plan (including severance pay, outplacement assistance and continuation coverage premiums) will be terminated if CEC determines that you have violated the noncompetition or confidentiality provisions contained in your release form.

V. AMENDMENT AND TERMINATION OF THE PLAN

Except as provided below, CEC reserves the right in its discretion to amend or terminate this Plan, or to alter, reduce, or eliminate any severance benefit, practice or policy hereunder, in whole or in part, at any time and for any reason without the consent of or notice to any employee or any other person having any beneficial interest in this Plan. Such action may be taken by the Board of Directors of CEC, by the Chief Executive Officer of CEC, or by any other individual or committee to whom such authority has been delegated by the Board of Directors.

However, during the 24-month period following a Change in Control, the Plan may not be amended, terminated or otherwise altered to reduce the amount (or change the terms) of any severance benefit that becomes payable to a Participant who was a Participant in the Plan on the day prior to the Change in Control.

In addition, if a Change in Control occurs within the 6-month period following the effective date of an amendment to terminate the Plan or otherwise reduce the amount (or alter the terms) of any severance benefit under the Plan, such amendment (or portion of such amendment) will become null and void upon the Change in Control. Upon the Change in Control, the Plan will automatically revert to the terms in effect prior to the adoption of said amendment. (This paragraph does not apply to the changes made to the Plan by this May 11, 2005 amendment.)

Notwithstanding the above limitations, the Plan may be amended at any time (and such amendment will be given affect) if such amendment is required to bring the Plan

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into compliance with applicable law, including but not limited to Section 409A of the Internal Revenue Code.

This Plan shall terminate immediately upon CEC's filing for relief in bankruptcy or on such date as an order for relief in bankruptcy is entered against CEC. A Participant who experiences a severance event after such termination will not be eligible for benefits under this Plan.

VI. SUBMITTING CLAIMS FOR BENEFITS

Normally, CEC will determine an employee's eligibility and benefit amount on its own and without any action on the part of the terminating employee, other than returning the release form. The severance payments will begin as soon as administratively feasible after the date the release becomes irrevocable.

FORMAL CLAIMS FOR BENEFITS. If CEC has not acted on a termination (or if you disagree with a decision made by CEC), you or your authorized representative may submit a written claim for benefits. The claim must be submitted to CEC's Human Resources Department in Minneapolis, Minnesota within six months after the date you terminated employment. Claims received after that time will not be considered.

CEC will ordinarily respond to the claim within 90 days of the date on which it is received. However, if special circumstances require an extension of the period of time for processing a claim, the 90-day period can be extended for an additional 90 days by giving you written notice of the extension and the reason why the extension is necessary.

CEC will give you a written notice of its decision if it denies your claim for benefits in whole or in part. The notice will explain the specific reasons for the decision, including references to the relevant plan provision upon which the decision is based, and the procedures for appealing the decision.

APPEALS. If you disagree with the initial claim determination, you or your authorized representative can request that the decision be reviewed by filing a written request for review with CEC's Human Resources Department in Minneapolis, Minnesota within 60 days after receiving notice that the claim has been denied. You or your representative may present written statements or other documentation supporting your claim. Upon request to CEC, you may review all documents relevant to your claim. (You may also receive copies of these documents free of charge.)

Generally, the decision will be reviewed within 60 days after CEC receives a request for review. However, if special circumstances require a delay, the review may take up to 120 days. (If a decision cannot be made within the 60-day period, you will be notified of this fact in writing.) You will receive a written notice of the decision on

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the appeal, which will explain the reasons for the decision by making specific reference to the Plan provisions on which the decision is based.

VII. PLAN ADMINISTRATION

The following information relates to the administration of the Plan and the determination of Plan benefits.

NAME OF PLAN:

Capella Education Company Executive Severance Plan

TYPE OF PLAN:

The Plan is a "welfare benefits plan" that provides severance benefits in the event a participant's employment with CEC or its subsidiaries terminates under certain circumstances. All benefits are paid from the general assets of CEC. No trust fund, insurance contract or other pool of assets is maintained to provide Plan benefits.

PLAN ADMINISTRATOR/PLAN SPONSOR:

CEC is the "Plan Sponsor" and "Plan Administrator" of this Plan. Communications to CEC regarding the Plan should be addressed to:

Capella Education Company
ATTN: Human Resources Department 225 South Sixth Street, 8th Floor Minneapolis, MN 55402

Telephone: (612) 977-5299

As Plan Administrator, CEC has complete discretionary authority to interpret the provisions of the Plan and to determine which employees are eligible for Plan benefits, the requirements to receive severance benefits, and the amount of those benefits. CEC also has authority to correct any errors that may occur in the administration of the Plan, including recovering any overpayment of benefits from the person who received it.

EMPLOYER IDENTIFICATION NUMBER: 41-1717955

PLAN NUMBER: 506

PLAN YEAR: The calendar year.

AGENT FOR SERVICE OF LEGAL PROCESS:

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Legal process regarding the Plan may be served on CEC at the address listed above.

ASSIGNMENT OF BENEFITS:

You cannot assign your benefits under this Plan to anyone else, and your benefits are not subject to attachment by your creditors. CEC will not pay Plan benefits to anyone other than you (or your estate, if you die after having a qualifying severance event but before receiving the complete severance amount payable to you up to the date of your death).

STATEMENT OF RIGHTS OF PARTICIPANTS:

As a participant in this Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA provides that all Plan participants are entitled to:

1. Examine, without charge, at CEC's Human Resources Department and at other specified locations, such as worksites, all documents governing the Plan and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration, if required.

2. Obtain, upon written request to CEC's Human Resources Department, copies of documents governing the operation of the Plan and copies of the latest annual report (Form 5500 Series), if required, and updated summary plan description. CEC may make a reasonable charge for the copies.

3. Receive a summary of the Plan's annual financial report (if the Plan is required to file such a report). CEC is required by law to furnish each participant with a copy of this summary financial report.

In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one may fire you or otherwise discriminate against you in any way to prevent you from obtaining a welfare benefit or exercising your rights under ERISA.

If your claim for a welfare benefit is denied or ignored, in whole or in part, you have the right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all with certain time schedules.

Under ERISA there are steps you can take to enforce the above rights. For instance, if you request a copy of plan documents or the latest annual report from the Plan and

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do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require CEC to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond its control. If you have a claim for benefits which is denied or ignored, in whole or in part, and you have exhausted your appeal rights under the Plan's claims procedure, you may file suit in a state or federal court. If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in federal court. The court will decide who should pay costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.

If you have any questions about the Plan, you should contact CEC's Human Resources Department. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from CEC, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C., 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

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EXHIBIT 10.12

CAPELLA EDUCATION COMPANY
EMPLOYEE STOCK PURCHASE PLAN

1. Purpose and Scope of Plan. The purpose of this employee stock purchase plan (the "Plan") is to provide the employees of Capella Education Company (the "Company") and its subsidiaries with an opportunity to acquire a proprietary interest in the Company through the purchase of its common stock and, thus, to develop a stronger incentive to work for the continued success of the Company. The Plan is intended to be an "employee stock purchase plan" within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended, and shall be interpreted and administered in a manner consistent with such intent.

2. Definitions.

2.1. The terms defined in this section are used (and capitalized) elsewhere in this Plan:

(a) "Affiliate" means any corporation that is a "parent corporation" or "subsidiary corporation" of the Company, as defined in Sections 424(e) and 424(f) of the Code or any successor provision, and whose participation in the Plan has been approved by the Board of Directors.

(b) "Board of Directors" means the Board of Directors of the Company.

(d) "Committee" means two or more Non-Employee Directors designated by the Board of Directors to administer the Plan under Section 13.

(e) "Common Stock" means the common stock, par value $.10 per share (as such par value may be adjusted from time to time), of the Company.

(f) "Company" means Capella Education Company, a Minnesota corporation.

(g) "Compensation" means the gross cash compensation (including wage, overtime, salary, commission, but excluding bonus earnings) paid by the Company or any Affiliate to a Participant in accordance with the terms of employment.

(h) "Eligible Employee" means any employee of the Company or an Affiliate who has been employed for at least 90 days prior to the start of a Purchase Period and whose customary employment is at least 20 hours per week; provided, however, that "Eligible Employee" shall not include any person who would be

deemed, for purposes of Section 423(b)(3) of the Code, to own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company.

(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.

(j) "Fair Market Value" of a share of Common Stock as of any date means, if the Company's Common Stock is listed on a national securities exchange or traded in the national market system, the closing price for such Common Stock on such exchange or market on said date, or, if no sale has been made on such exchange or market on said date, on the last preceding day on which any sale shall have been made. If such determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury applicable to plans intended to qualify as an "employee stock purchase plan" within the meaning of Section 423(b) of the Code, however, Fair Market Value shall be determined in accordance with such regulations. The determination of Fair Market Value shall be subject to adjustment as provided in Section 14.

(k) "Non-Employee Director" means a member of the Board of Directors who is considered a non-employee director within the meaning of Exchange Act Rule 16b-3 or any successor definition.

(l) "Participant" means an Eligible Employee who has elected to participate in the Plan in the manner set forth in
Section 4.

(m) "Plan" means this Capella Education Company Employee Stock Purchase Plan, as amended from time to time.

(n) "Purchase Period" means, except as otherwise determined by the Committee, a semi-annual period commencing January 1 and ending June 30, or commencing July 1 and ending December 31.

(o) "Recordkeeping Account" means the account maintained in the books and records of the Company recording the amount withheld from each Participant through payroll deductions made under the Plan.

3. Scope of the Plan. Shares of Common Stock may be sold to Eligible Employees pursuant to this Plan as hereinafter provided, but not more than 450,000 shares of Common Stock (subject to adjustment as provided in
Section 14) shall be sold to Eligible Employees pursuant to this Plan. All sales of Common Stock pursuant to this Plan shall be subject to the same terms, conditions, rights and privileges. The shares of Common Stock sold to Eligible Employees pursuant to this Plan may be shares acquired by purchase on the open market or in privately negotiated transactions, by direct issuance from the Company (whether newly issued or treasury shares) or by any combination thereof.

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4. Eligibility and Participation. To be eligible to participate in the Plan for a given Purchase Period, an employee must be an Eligible Employee on the first day of such Purchase Period. An Eligible Employee may elect to participate in the Plan by filing an enrollment form with the Company before the first day of such Purchase Period that authorizes regular payroll deductions from Compensation beginning with the first payday in such Purchase Period and continuing until the Eligible Employee withdraws from the Plan, modifies his or her authorization, or ceases to be an Eligible Employee, as hereinafter provided.

5. Amount of Common Stock Each Eligible Employee May Purchase.

5.1. Subject to the provisions of this Plan, each Eligible Employee shall be offered the right to purchase on the last day of the Purchase Period the number of shares of Common Stock (including fractional shares) that can be purchased at the price specified in
Section 5.2 with the entire credit balance in the Participant's Recordkeeping Account; provided, however, that the Fair Market Value (determined on the first day of any Purchase Period) of shares of Common Stock that may be purchased by a Participant during such Purchase Period shall not exceed the excess, if any, of (i) $25,000 (or such lesser amount designated by the Committee) over (ii) the Fair Market Value (determined on the first day of the relevant Purchase Period) of shares of Common Stock previously acquired by the Participant in any prior Purchase Period during such calendar year. Notwithstanding the foregoing, no Eligible Employee shall be granted an option to acquire shares of Common Stock under this Plan which permits the Eligible Employee's rights to purchase shares of Common Stock under this Plan and all other "employee stock purchase plans" within the meaning of Section 423(b) of the Code maintained by the Company and the Affiliates to accrue at a rate which exceeds $25,000 of Fair Market Value (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. If the purchases by all Participants would otherwise cause the aggregate number of shares of Common Stock to be sold under the Plan to exceed the number specified in Section 3, however, each Participant shall be allocated a ratable portion of the maximum number of shares of Common Stock which may be sold.

5.2. The purchase price of each share of Common Stock sold pursuant to this Plan shall be established from time to time by the Committee, but shall be no less than the lesser of (a) or (b) below:

(a) 85% of the Fair Market Value of such share on the first day of the Purchase Period; or

(b) 85% of the Fair Market Value of such share on the last day of the Purchase Period.

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6. Method of Participation.

6.1. The Company shall give notice to each Eligible Employee of the opportunity to purchase shares of Common Stock pursuant to this Plan and the terms and conditions for such offering. Such notice is subject to revision by the Company at any time prior to the date of purchase of such shares. The Company contemplates that for tax purposes the first day of a Purchase Period will be the date of the offering of such shares.

6.2. Each Eligible Employee who desires to participate in the Plan for a Purchase Period shall signify his or her election to do so by delivering an executed election on a form developed by the Committee. An Eligible Employee may elect to have any whole percent of Compensation withheld, but not exceeding 10% per pay period. An election to participate in the Plan and to authorize payroll deductions as described herein must be made before the first day of the Purchase Period to which it relates and shall remain in effect unless and until such Participant withdraws from the Plan, modifies his or her authorization, or ceases to be an Eligible Employee, as hereinafter provided.

6.3. Any Eligible Employee who does not make a timely election as provided in Section 6.2, shall be deemed to have elected not to participate in the Plan. Such election shall be irrevocable for such Purchase Period.

7. Recordkeeping Account.

7.1. The Company shall maintain a Recordkeeping Account for each Participant. Payroll deductions pursuant to Section 6 shall be credited to such Recordkeeping Accounts on each payday.

7.2. No interest shall be credited to a Participant's Recordkeeping Account.

7.3. The Recordkeeping Account is established solely for accounting purposes, and all amounts credited to the Recordkeeping Account shall remain part of the general assets of the Company.

7.4. A Participant may not make any separate cash payment into the Recordkeeping Account.

8. Right to Adjust Participation or to Withdraw.

8.1. A Participant may, at any time during a Purchase Period, direct the Company to adjust the amount withheld from his or her future Compensation, subject to the limitation in Section 6.2. Upon any such action, future payroll deductions with respect to such Participant shall be adjusted in accordance with the Participant's direction.

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8.2. Any Participant who stops payroll deductions may not thereafter resume payroll deductions during such Purchase Period.

8.3. At any time before the end of a Purchase Period, any Participant may withdraw from the Plan. In such event, all future payroll deductions shall cease and the entire credit balance in the Participant's Recordkeeping Account will be paid to the Participant, without interest, in cash within 15 days. A Participant who withdraws from the Plan will not be eligible to reenter the Plan until the next succeeding Purchase Period.

8.4. Notification of a Participant's election to increase, decrease, or terminate deductions, or to withdraw from the Plan, shall be made by filing an appropriate form with the Company. Notification to increase or decrease deductions will take effect as soon as administratively feasible following such notification.

9. Termination of Employment. If the employment of a Participant terminates for any reason, including death, disability, or retirement, the entire balance in the Participant's Recordkeeping Account shall be refunded in cash within 15 days.

10. Purchase of Shares.

10.1. As of the last day of each Purchase Period, the entire credit balance in each Participant's Recordkeeping Account shall be used to purchase shares (including fractional shares) of Common Stock (subject to the limitations of Section 5) unless the Participant has filed an appropriate form with the Company in advance of that date (which elects to receive the entire credit balance in cash). Any amount in a Participant's Recordkeeping Account that is not used to purchase shares pursuant to this Section 10.1 shall be refunded to the Participant, without interest, in cash within 15 days after the end of the Purchase Period.

10.2. Shares of Common Stock acquired by each Participant shall be held in a general securities brokerage account maintained for the benefit of all Participants with a registered securities broker/dealer selected by the Company (the "Agent"). The Agent shall maintain individual subaccounts for each Participant in such general account to which shall be allocated such Participant's shares of Common Stock (including fractional shares to four decimal places).

10.3. Prior to the last day of each Purchase Period, the Company shall determine whether some or all of the shares of Common Stock to be purchased as of the last day of such Purchase Period will be purchased by the Agent for the accounts of Participants on the open market or in privately negotiated transactions. If some or all of such shares are to be so purchased by the Agent, the Company shall advise the Agent of the number of shares to be so purchased and shall provide to the Agent such funds, in addition to the funds available from Participants' Recordkeeping Accounts, as may be necessary to permit the Agent to so purchase such number of shares (including all brokerage fees and expenses).

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10.4. Each Participant shall be entitled to vote all shares held for the benefit of such Participant in the general securities brokerage account maintained by the Agent.

10.5. Certificates for the number of whole shares of Common Stock, determined as aforesaid, purchased by each Participant shall be issued and delivered to him or her, registered in the form directed by the Participant, only upon the request of the Participant or his or her representative. Any such request shall be made by filing an appropriate form with the Company. No certificates for fractional shares will be issued. Instead, Participants will receive a cash distribution representing any fractional shares.

11. Rights as a Stockholder. A Participant shall not be entitled to any of the rights or privileges of a stockholder of the Company with respect to shares of Common Stock under the Plan, including the right to receive any dividends which may be declared by the Company, until (i) he or she actually has paid the purchase price for such shares and (ii) either the shares have been credited to the general securities brokerage account maintained by the Agent for the Participant's benefit or certificates have been issued to the Participant, both as provided in Section 10.

12. Rights Not Transferable. A Participant's rights under this Plan are exercisable only by the Participant during his or her lifetime, and may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution. Any attempt to sell, pledge, assign or transfer the same shall be null and void and without effect. The amounts credited to a Recordkeeping Account may not be assigned, transferred, pledged or hypothecated in any way, and any attempted assignment, transfer, pledge, hypothecation or other disposition of such amounts will be null and void and without effect.

13. Administration of the Plan. This Plan shall be administered by the Committee, which is authorized to make such uniform rules as may be necessary to carry out its provisions. Subject to the terms of this Plan, the Committee shall determine the term of each Purchase Period and the manner of determining the purchase price of the shares of Common Stock to be sold during such Purchase Period. The Committee shall also determine any other questions arising in the administration, interpretation and application of this Plan, and all such determinations shall be conclusive and binding on all parties.

14. Adjustment upon Changes in Capitalization. In the event of any change in the Common Stock by reason of stock dividends, split-ups, corporate separations, recapitalizations, mergers, consolidations, combinations, exchanges of shares and the like, the aggregate number and class of shares available under this Plan and the number, class and purchase price of shares available but not yet purchased under this Plan, shall be adjusted appropriately by the Committee.

15. Registration of Certificates. Stock certificates to be issued and delivered upon the request of the Participant or his or her representative, as provided in Section 10.5, shall be registered in the name of the Participant, or jointly, as joint tenants with the right of survivorship,

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in the name of the Participant and another person, as the Participant or his or her representative may direct on an appropriate form filed with the Company.

16. Amendment of Plan. The Board of Directors may at any time amend this Plan in any respect which shall not adversely affect the rights of Participants pursuant to shares previously acquired under the Plan, except that, without stockholder approval on the same basis as required by Section 19.1, no amendment shall be made (i) to increase the number of shares to be reserved under this Plan, (ii) to decrease the minimum purchase price, (iii) to withdraw the administration of this Plan from the Committee, or (iv) to change the definition of employees eligible to participate in the Plan.

17. Effective Date of Plan. This Plan shall be effective upon approval by the stockholders of the Company. All rights of Participants in any offering hereunder shall terminate at the earlier of (i) the day that Participants become entitled to purchase a number of shares of Common Stock equal to or greater than the number of shares remaining available for purchase or (ii) at any time, at the discretion of the Board of Directors, after 30 days' notice has been given to all Participants. Upon termination or suspension of this Plan, shares of Common Stock shall be purchased for Participants in accordance with Section 10.1, and cash, if any, remaining in the Participants' Recordkeeping Accounts shall be refunded to them, as if the Plan were terminated at the end of a Purchase Period.

18. Governmental Regulations and Listing. All rights granted or to be granted to Eligible Employees under this Plan are expressly subject to all applicable laws and regulations and to the approval of all governmental authorities required in connection with the authorization, issuance, sale or transfer of the shares of Common Stock reserved for this Plan, including, without limitation, there being a current registration statement of the Company under the Securities Act of 1933, as amended, covering the shares of Common Stock purchasable on the last day of the Purchase Period applicable to such shares, and if such a registration statement shall not then be effective, the term of such Purchase Period shall be extended until the first business day after the effective date of such a registration statement, or post-effective amendment thereto. If applicable, all such rights hereunder are also similarly subject to effectiveness of an appropriate listing application to a national securities exchange or a national market system, covering the shares of Common Stock under the Plan upon official notice of issuance.

19. Miscellaneous.

19.1. This Plan shall not be deemed to constitute a contract of employment between the Company or any Affiliate and any Participant, nor shall it interfere with the right of the Company or any Affiliate to terminate any Participant and treat him or her without regard to the effect which such treatment might have upon him or her under this Plan.

19.2. Wherever appropriate as used herein, the masculine gender may be read as the feminine gender, the feminine gender may be read as the masculine gender, the singular may be read as the plural and the plural may be read as the singular.

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19.3. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Minnesota.

19.4. Delivery of shares of Common Stock or of cash pursuant to the Plan shall be subject to any required withholding taxes. A person entitled to receive shares of Common Stock may, as a condition precedent to receiving such shares, be required to pay the Company a cash amount equal to the amount of any required withholdings.

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EXHIBIT 10.13

CAPELLA EDUCATION COMPANY
ANNUAL INCENTIVE PLAN
MANAGEMENT EMPLOYEES -- 2005
UPDATED APRIL, 2005

PLAN OBJECTIVE

To recognize and reward eligible management employees for the achievement of company financial goals.

PLAN SUMMARY
o The plan is based upon company performance components, revenue and profit as compared to plan, for eligible participants as follows:

- 70% of the incentive opportunity is based on 2005 total company performance, measured by achievement of revenue and profit to plan.

- 30% of the incentive opportunity is based on achievement of the total company revenue and profit achievement in Q3 and Q4, cumulatively, compared to the Q3/Q4 plan.

o You have the opportunity to earn from 0% -- 170% of your target incentive amount. The financial performance and payout matrices will be reviewed periodically as to progress during the year.

o Your incentive earnings will be paid within two and a half months after the end of the plan year based on year-end company financial achievement (plan funding).

NOTE: The remaining pages and exhibits provide further explanation regarding plan design, payout criteria, and administration.

SEE EXHIBIT 1 FOR SPECIFIC INFORMATION, INCLUDING DEFINITIONS, TERMS AND CONDITIONS, AND PAYOUT CRITERIA.

EXHIBIT 10.13

ELIGIBILITY CRITERIA

Select management-level employees who meet the Eligibility Criteria (see Definition of Eligibility Criteria) are eligible for plan participation. Criteria the plan administrator will consider when selecting eligible employees for participation include scope and level of responsibility, organizational impact, internal equity and external competitiveness.
Incentive awards for employees who work less than full-time will be prorated accordingly.

PLAN ADMINISTRATOR

The Compensation Committee of the Board of Directors of the Company will administer the plan. The Committee may delegate to the Chief Executive Officer and the Vice President of Human Resources the authority to determine incentive awards under the plan for eligible employees who are not executive officers of the Company. Awards granted pursuant to such delegated authority shall be made consistent with the criteria established by the Committee and shall be subject to any other restrictions placed on the delegation by the Committee. Any incentive award under the plan to the Company's Chief Executive Officer will be approved and administered by the Executive Committee of the Board of Directors.

To the full extent permitted by law, (i) no member of the Committee or other plan adminstrator shall be liable for any action or determination taken or made in good faith with respect to the plan or any award made under the plan, and
(ii) the members of the Committee and the other plan administrators shall be entitled to indemnification by the Company with regard to such actions.

SIZE OF AWARD OPPORTUNITY

Incentive potential for plan participants is expressed as a percentage of base compensation as of December 31st of the plan year (see Definition section for Base Compensation). At target level performance, the size of the incentive award opportunity is based upon your position as determined by the plan administrator.

PAYOUT CRITERIA -- COMPANY FINANCIAL RESULTS

TOTAL YEAR REVENUE AND PROFIT

o 70% of your targeted incentive potential is based on total year, year-end company financial results, combining revenue and profit against the plan.

o At the beginning of the year, an annual financial target will be established at the Company level, approved by the Board of Directors. The Chief Executive Officer or designate will communicate this financial target to you. Incentive potential will be based on the level of Company financial performance within a specified range.

EXHIBIT 10.13

o All participants, unless otherwise communicated to you, will have a financial target that reflects overall Company financial results.

o If the Company exceeds the target financial level on the full year performance, you will be eligible to receive a greater than target level incentive award for this portion of the plan.

o This portion of the plan pays out for a range of financial performance with an upward potential of 140% OF your target incentive award opportunity. The total plan pays out for financial results in a range of 0% to 170% (Please see the financial matrices for the specific payout schedule).

Q3 AND Q4 REVENUE AND PROFIT

o 30% of your targeted incentive potential is based on Q3 and Q4 cumulative results for revenue and profit. 0-30% is the incentive potential for this factor. The maximum target level for this component of the plan is 30%.

QUALIFICATION OF AWARD PAYMENT

The plan administrator reserves the right to withhold incentive payment in the event an individual fails to perform his or her day-to-day job in a satisfactory manner after the Company has provided reasonable notice of such failure.

EXHIBIT 10.13

EXHIBIT 1

CAPELLA EDUCATION COMPANY

MANAGEMENT INCENTIVE PLAN

I. DEFINITIONS OF TERMS

The following terms as used in the plan have meaning as described below:

COMPANY -- Capella Education Company.

BASE COMPENSATION -- total base salary wages for the plan year. (Note:
excludes any incentive compensation payment(s), lump sump merit increases and taxable fringes). Base salary wages will be reduced for any leave of absence, paid or unpaid, beyond 90 days.

ELIGIBILITY CRITERIA -- Individuals need to be regular status, work a minimum of half time to be eligible for plan participation (average of 40 hours per pay period), and be considered a management level employee (functional leader or above). Incentive awards for employees who work less than full-time will be prorated according to his/her total annual base salary wages.

FINANCIAL OBJECTIVE -- the level of company performance against any financial measure approved by the Committee to define operating performance. The Committee may amend the goals to reflect material adjustment in or changes to the Company's policies; to reflect material company changes such as mergers or acquisitions; and to reflect such other events having a material impact on goals.

PLAN YEAR -- the fiscal year of the Company.

PAYOUT -- the actual amount to be paid to a participant based upon achievement of Company financial objectives.

II. PLAN ADMINISTRATION

NEW HIRES -- new hires must start by October 1st to qualify. For individuals hired by October 1st of the plan year, eligibility begins on the first date of employment. Individual incentive awards will be prorated from the date of hire based on an individual's year-to-date total annual wages.

PROMOTIONS -- individuals must be promoted into an eligible management level position by October 1st to be eligible for participation in that plan year. Note: if an individual is promoted October 1st or after of the plan year it will be at the

EXHIBIT 10.13

Committee's discretion to determine the percentage of incentive payout that an employee will receive at year-end.

TERMINATION OF EMPLOYMENT -- in the event any eligible participant ceases to be an employee during any year in which he/she is participating in the plan, he/she will not be eligible to receive any incentive compensation for such year unless otherwise provided for in the Executive Severance Plan. Individuals need to be employed at the time of award payment to be eligible for any incentive payments unless otherwise provided for in the Executive Severance Plan. Incentive awards to individuals who are subject to the Executive Severance Plan will be determined in accordance with the plan, as adjusted in accordance with the Executive Severance Plan, and all payouts will be made in accordance with the Executive Severance Plan. Employees who become disabled or retire during the year will be eligible to receive a prorated portion of the incentive payment, if earned.

RIGHT TO CONTINUE EMPLOYMENT -- nothing contained in the plan shall be construed to confer upon any employee the right to continue in the employment of, or the Company's right to terminate his/her employment at any time.

TAX WITHHOLDING - The Company shall have the right to withhold from cash payments under the plan to a participant or other person an amount sufficient to cover any required withholding taxes.

UNFUNDED PLAN - The plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by awards under the plan.

PLAN AMENDMENT, MODIFICATION, OR TERMINATION - from time to time the Committee may amend the plan as it believes appropriate and/or may terminate the plan, provided that no such amendment or termination will affect the right of any participant to receive incentive compensation in accordance with the terms of the plan for the portion of any year up to the date of the amendment or termination. Typically, any such modification would be made on an annual basis.

GOVERNING LAW - To the extent that federal laws do not otherwise control, the plan and all determinations made and actions taken pursuant to the plan shall be governed by the laws of Minnesota and construed accordingly.

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, and Note 18, as to which the date is May 11, 2005) in amendment No. 1 to Form S-1 (No. 333-124199) and related Prospectus of Capella Education Company for the registration of its common stock.

                                               /s/ Ernst & Young LLP

Minneapolis, Minnesota
June 1, 2005


		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.



		preferred stock to the entities affiliated with Technology Crossover Ventures 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 Capella from 1998 to 2003.



(g)		Russell A. Gullotti was a director of Capella from 2001 to 2004.



(h)		Joseph C. Gaylord was an executive officer of Capella from 2003 to 2004.



(i)		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 Forstmann VII and Forstmann VIII. Forstmann VII and Forstmann VIII originally obtained 674,460.20 shares of Class G preferred stock pursuant to the exchange agreement described in footnote (b) above. Forstmann VII and Forstmann VIII subsequently transferred 369,023 shares of Class G preferred stock to the entities affiliated with Technology Crossover Ventures 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 Forstmann VII and Forstmann VIII.



		Forstmann VI, Forstmann VII and Forstmann 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 Forstmann 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 Forstmann VII or Forstmann VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares. The address of Forstmann VI, Forstmann VII and Forstmann 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 1,818,210 shares of common stock issuable upon conversion of preferred stock owned by TCV V, L.P.; and (2) 119 shares of common stock and 34,341 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 887,691 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 34,350 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 125,915 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 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 98104.



(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) 146,047 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.


(j)		Includes 4,496 shares of common stock issuable upon conversion of preferred stock and 80,046 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.