Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

         The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes that appear elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 2, 2010, as well as the consolidated financial statements and notes contained therein.

Forward-Looking Statements

        This MD&A and other sections of this report contain "forward-looking statements" as defined by the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of financial resources. These forward-looking statements may include, without limitation, statements regarding: resilience of our enrollments during the economic downturn; our institutions' ability to satisfy composite score requirements under Title IV; proposed new programs; our anticipated growth rate; our anticipated seasonal fluctuations in results of operations; expectations regarding timing and content of new regulations; expectations that regulatory developments or other matters will not have a material adverse effect on our enrollments, financial position, results of operations and our liquidity; expectations regarding our ability to timely transition from the FFEL Program to the Federal Direct Loan Program; expectations regarding the findings in the draft report to be received from the U.S. Department of Education's Office of Inspector General regarding its compliance audit of Ashford University; expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations; projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; management's goals and objectives; expectations regarding the efficacy of investment in advertising and enrollment advisors; and other similar 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 the future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking.

        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 and 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. See "Risk Factors" in Part II, Item 1A of this report for a discussion of some of these risks and uncertainties.

Overview

Background

        We are a regionally accredited provider of postsecondary education services. We offer associate's, bachelor's, master's and doctoral programs in such disciplines as business, education, psychology, social sciences and health sciences.

        We deliver programs online as well as at our traditional campuses located in Clinton, Iowa and Colorado Springs, Colorado. As of March 31, 2010, we offered approximately 1,175 courses, 65 degree programs and 130 specializations and concentrations. We had 65,788 students enrolled in our institutions as of March 31, 2010, 99% of whom were attending classes exclusively online.

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        In March 2005, we acquired the assets of The Franciscan University of the Prairies, located in Clinton, Iowa, and renamed it Ashford University. In September 2007, we acquired the assets of the Colorado School of Professional Psychology, located in Colorado Springs, Colorado, and renamed it the University of the Rockies.

Regulatory developments

        In November 2009, the U.S. Department of Education convened two new negotiated rulemaking committees addressing various topics, including, but not limited to the definition of high school diploma for the purpose of establishing institutional eligibility to participate in the Title IV programs and student eligibility to receive Title IV aid; standards regarding the payment of incentive compensation; establishing a definition of "gainful employment" for purposes of determining whether certain educational programs comply with the Title IV program requirement of preparing students for gainful employment in a recognized occupation; revising the definition of what constitutes a substantial misrepresentation made by an institution; standards regarding the sufficiency of a state's authorization of an institution for the purpose of establishing an institution's eligibility to participate in the Title IV programs; and the definition of a credit hour for purposes of determining program eligibility for Title IV student financial aid.

        The program integrity committee completed its meetings in February 2010 without reaching consensus on proposed regulations. As a result, the U.S. Department of Education is not bound by any of the proposed regulations presented to the committee and is expected to publish proposed regulations later this year which may or may not differ from those presented to the committee. The proposed regulations will be subject to public comment. After the public comment period expires, the U.S. Department of Education must publish final regulations in the Federal Register on or before November 1, 2010, for the regulations to be effective July 1, 2011.

        Additionally, the U.S. Department of Education has issued new regulations to implement the amendments made to the Higher Education Act by the Higher Education Opportunity Act enacted in August 2008. The new regulations were published in October 2009, and cover a broad range of topics including the 90/10 rule, cohort default rates and other matters. The new regulations have an effective date of July 1, 2010, with certain exceptions and with certain provisions subject to early implementation as of November 1, 2009, at the discretion of the institution.

        On March 30, 2010, President Obama signed into law the Health Care and Education Affordability Act of 2010, or HCEAA. Among other things, the HCEAA amended the Higher Education Act to prohibit new federally guaranteed loans from being made under the Federal Family Education Loan, or FFEL, Program, beginning on July 1, 2010, at which time institutions will be required to certify loans through the Federal Direct Loan Program rather than through the FFEL Program. We have begun participating in the Federal Direct Loan Program and expect to fully transition to the Federal Direct Loan program at both of our institutions by the July 1, 2010, phase-out date.

        The HCEAA contains revised versions of student aid provisions in the Student Aid and Fiscal Responsibility Act of 2009, H.R. 3221, or SAFRA, which was passed by the House of Representatives in September 2009, but not enacted into law. The HCEAA does not contain certain provisions contained in the SAFRA legislation that would have created a new Federal Direct Perkins Loan program and would have provided relief to for-profit institutions by amending the 90/10 rule to (i) extend to July 2012 the ability of for-profit institutions to exclude from their Title IV revenues the additional $2,000 per student in certain annual federal student loan amounts that became available in June 2008, (ii) exclude from the 90/10 rule calculation for the period July 1, 2010, through July 1, 2012, the revenue received from loans disbursed under the Federal Direct Perkins Loan program and (iii) give for-profit institutions three years (as opposed to two) to come into compliance with the

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90/10 rule before becoming ineligible to participate in the Title IV programs if the second year ends between July 1, 2008 and June 30, 2011.

Seasonality

        Although not apparent in our results of operations due to our rapid rate of growth, our operations are generally subject to seasonal trends. As our growth rate declines we expect to experience seasonal fluctuations in results of operations as a result of changes in the level of student enrollment. While we enroll students throughout the year, our first and fourth quarter new enrollments and revenue generally are lower than other quarters due to the holiday break in December and January. We generally experience a seasonal increase in new enrollments in August and September of each year when most other colleges and universities begin their fall semesters.

Critical Accounting Policies and Use of Estimates

        For a discussion of our critical accounting policies and estimates, see "Critical Accounting Policies and Use of Estimates" in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 2, 2010.

        We have experienced significant growth in enrollments, revenue and operating income as well as improvement in liquidity since our acquisition of Ashford University in March 2005. We continue to grow in response to the increasing demand in the market for higher education. We believe our enrollment and revenue growth has been driven primarily by (i) our significant investment in enrollment advisors and online advertising which commenced immediately upon our acquisition of Ashford University and (ii) students' acceptance of our value proposition. Our significant growth in operating income is a result of leveraging our fixed costs with increased revenue.

        In recent years, we have seen student enrollments and revenue continue to increase despite difficult general economic conditions. We have not seen any unfavorable impact from the decline in general economic conditions on our liquidity, capital resources or results of operations. While we cannot guarantee that these trends will continue, we believe that the performance of our company, as

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well as the performance of other for-profit education providers generally, has been resilient in the current economic downturn due to (i) the continued availability of Title IV funds to finance student tuition payments, (ii) increased demand for postsecondary education resulting from a deteriorating labor market, (iii) efficiencies in advertising costs and (iv) decreased turnover in enrollment advisors and other personnel. To meet the challenges of the current economy, we plan to continue to invest significantly in enrollment advisors and online advertising, which we expect will result in our total student enrollment and operating income continuing to grow, though perhaps not at the same rate as in the past.

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

        Revenue.     Our revenue for the three months ended March 31, 2010, was $156.1 million, representing an increase of $71.8 million, or 85.2%, as compared to revenue of $84.3 million for the three months ended March 31, 2009. This increase was primarily due to enrollment growth of 56.5%, from 42,025 students at March 31, 2009, to 65,788 students at March 31, 2010. Enrollment growth is driven by various factors including the students' acceptance of our value proposition, the quality of lead generation efforts, the number of enrollment advisors and our ability to retain existing students. In addition to the increase in student enrollment, the revenue increase was also positively impacted by the 5% tuition increase effective April 1, 2009, and the decision to move to a single credit hour price for all Ashford University undergraduate students. The tuition increase and the move to a single credit hour price accounted for approximately 9.6% and 17.2%, respectively, of the revenue increase between periods. These increases were partially offset by an increase in institutional scholarships and promotional vouchers of $8.5 million in the aggregate between periods.

        Instructional costs and services expenses.     Our instructional costs and services expenses for the three months ended March 31, 2010, were $39.4 million, representing an increase of $17.3 million, or 78.2%, as compared to instructional costs and services expenses of $22.1 million for the three months ended March 31, 2009. This increase was primarily due to an increase in educational support services and increases in instructional costs as a result of the increase in total student enrollment. Our instructional costs and services expenses as a percentage of revenue decreased by 1.0% to 25.3% for the three months ended March 31, 2010, as compared to 26.3% for the three months ended March 31, 2009. This decrease in 2010 was driven by improvements in our cost structure due to ongoing work on process improvements, including more efficient course scheduling and use of faculty and offset slightly by increased license fees. Bad debt as a percentage of revenue was 5.1% for the three months ended March 31, 2010, as compared to 5.4% for the three months ended March 31, 2009. This decrease as a percentage of revenue was primarily due to procedural improvements in the processing of receivables.

        Marketing and promotional expenses.     Our marketing and promotional expenses for the three months ended March 31, 2010, were $44.2 million, representing an increase of $15.1 million, or 51.9%, as compared to marketing and promotional expenses of $29.1 million for the three months ended March 31, 2009. This increase was driven by greater spending in targeted marketing and online media as well as in recruitment and marketing staffing. Our marketing and promotional expenses as a percentage of revenue decreased by 6.2% to 28.3% for the three months ended March 31, 2010, from 34.5% for the three months ended March 31, 2009, primarily due to improvements in our cost structure as they relate to advertising and selling labor.

        General and administrative expenses.     Our general and administrative expenses for the three months ended March 31, 2010 were $22.3 million, representing a decrease of $3.6 million, or 13.7%, as compared to general and administrative expenses of $25.9 million for the three months ended March 31, 2009. This decrease was primarily attributable to the charge of $11.1 million taken in first quarter of 2009 relating to the settlement of a stockholder dispute, offset by increases in administrative wages, rent and stock-based compensation expense. Our general and administrative expenses as a

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percentage of revenue decreased by 16.4% to 14.3% for the three months ended March 31, 2010, from 30.7% for the three months ended March 31, 2009, primarily due to impact of the charge relating to the stockholder settlement taken in the first quarter of 2009, as well as decreases in administrative labor and professional fees. These decreases were offset slightly by increases in stock-based compensation expense.

        Other income (expense), net.     Other income was $0.2 million for the three months ended March 31, 2010, as compared to $0.1 million for the three months ended March 31, 2009, representing an increase of $0.1 million. The increase was primarily due to increased levels of interest income on higher average cash balances.

        Income tax expense.     We recognized tax expense for the three months ended March 31, 2010, and 2009, of $20.5 million and $3.3 million, respectively, at effective tax rates of 40.7% and 46.2%, respectively. The decrease in our effective tax rate in 2010 as compared to 2009 was primarily due to a one-time increase in an uncertain tax position in 2009.

        Net income.     Net income was $29.8 million for the three months ended March 31, 2010, compared to net income of $3.9 million for the three months ended March 31, 2009, an increase of $25.9 million, as a result of the factors discussed above.

Liquidity and Capital Resources

        We financed our operating activities and capital expenditures during the three months ended March 31, 2010 and 2009, primarily through cash provided by operating activities. Our cash and cash equivalents were $177.0 million at March 31, 2010, and $125.6 million at December 31, 2009. Our restricted cash was $25,000 at March 31, 2010, and December 31, 2009. At March 31, 2010, and December 31, 2009, we had marketable securities of $45.0 million.

Available borrowing facilities

        On January 29, 2010, we entered into a $50 million revolving line of credit with Comerica Bank, or Comerica, pursuant to a Credit Agreement, Revolving Credit Note and Security Agreement, which agreements we collectively refer to as the Loan Documents. Under the Loan Documents, Comerica has agreed to make loans to us and issue letters of credit on our behalf, subject to the terms and conditions of the Loan Documents. Amounts subject to letters of credit issued under the Loan Documents are treated as limitations on available borrowings under the line of credit. Interest is paid monthly under the line of credit, and principal is paid on the maturity date of the line of credit. The line of credit has a two-year term and matures on January 29, 2012. Interest accrues on amounts outstanding under the line of credit, at our option, at either (1) Comerica's prime reference rate + 0.00% or (2) one month, two month or three month LIBOR + 2.25%. As security for the performance of our obligations under the Loan Documents, we granted Comerica a first priority security interest in substantially all of our assets, including our real property.

        The Loan Documents contain financial covenants requiring (i) our educational institutions to maintain Title IV eligibility and (ii) our maintenance of specified adjusted quick ratios, minimum profitability, minimum cash balances and U.S. Department of Education financial responsibility composite scores. The Loan Documents contain other customary affirmative and negative covenants (including cash controls, financial reporting covenants and prohibitions on acquisitions, dividends, stock redemptions and other cash expenditures over a specified amount without Comerica's reasonable consent), representations and warranties and events of default (including the occurrence of a "material adverse effect," as defined in the Loan Documents). We were in compliance with all financial covenants in the Loan Documents as of March 31, 2010.

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        The Loan Documents were used, in part, to refinance the outstanding letters of credit under the Loan and Security Agreement between us and Comerica dated April 12, 2004, as amended, which we refer to as the Prior Agreement. Upon the effectiveness of the Loan Documents, the Prior Agreement was terminated, except that letters of credit outstanding under the Prior Agreement were deemed to be letters of credit issued under the Loan Documents.

        As of March 31, 2010, we used the availability under the line of credit to issue letters of credit aggregating $7.2 million. We had no borrowings outstanding under the line of credit as of March 31, 2010.

        As part of our normal business operations, we are required to provide surety bonds in certain states where we do business. In May 2009, we entered into a surety bond facility with an insurance company to provide such bonds when required. As of March 31, 2010, the total available surety bond facility was $1.5 million and we had issued surety bonds totaling $1.1 million under such facility.

Title IV funding

        A significant portion of our revenue is derived from tuition funded by Title IV programs. As such, the timing of disbursements under Title IV programs is based on federal regulations and our ability to successfully and timely arrange financial aid for our students. Title IV funds are generally provided in multiple disbursements before we earn a significant portion of tuition and fees and incur related expenses over the period of instruction. Students must apply for new loans and grants each academic year. These factors, together with the timing of our students beginning their programs, affect our operating cash flow.

Financial responsibility

        For the fiscal year ended December 31, 2007, Ashford University and the University of the Rockies did not satisfy the composite score requirement of the financial responsibility test, which institutions must satisfy in order to participate in Title IV programs. As a result, (i) Ashford University posted a letter of credit in favor of the U.S. Department of Education in the amount of $12.1 million, which was scheduled to remain in effect through September 30, 2009, and (ii) the University of the Rockies posted a letter of credit in favor of the U.S. Department of Education in the amount of $0.7 million, which was scheduled to remain in effect through June 30, 2009.

        In July 2009, the U.S. Department of Education notified us that the University of the Rockies received a composite score of 1.7 for the fiscal year ended December 31, 2008, and was released from the requirement to post a letter of credit. In August 2009, the U.S. Department of Education notified us that Ashford University received a composite score of 1.6 for the fiscal year ended December 31, 2008, and was released from the requirement to post a letter of credit based on the financial responsibility test.

        For the year ended December 31, 2009, we expect our composite score on a consolidated basis to be approximately 2.9. We believe that this composite score will not require us to post a letter of credit in favor of the U.S. Department of Education or to conform to the regulations of the heightened cash monitoring level one method of payment, based upon the financial responsibility test. However, this is subject to determination by the U.S. Department of Education once it reviews our audited financial statements for the year ended December 31, 2009.

Operating activities

        Net cash provided by operating activities was $54.6 million and $32.3 million for the three months ended March 31, 2010 and 2009, respectively. The increase from 2009 to 2010 was primarily due to increases in net income based upon increased tuition and fees resulting from a substantial increase in total student enrollment at our academic institutions. We expect to continue to generate cash from our operating activities for the foreseeable future.

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Investing activities

        Net cash used in investing activities, which consisted primarily of capital expenditures in both periods, was $3.6 million and $7.2 million for the three months ended March 31, 2010 and 2009, respectively. We will continue to invest in computer equipment and office furniture and fixtures to support our increasing employee headcount. For the year ending December 31, 2010, we expect our capital expenditures to be approximately $48.0 million.

        We manage our excess cash pursuant to the quantitative and qualitative operational guidelines of our cash investment policy. Our cash investment policy, which was adopted by our audit committee and our board of directors in May 2009 and is managed by our chief financial officer, has the following primary objectives (in order of priority): preserving principal, meeting our liquidity needs, minimizing market and credit risk, and providing after-tax returns. Under the policy's guidelines, we invest our excess cash exclusively in high-quality, short-term, U.S. dollar-denominated financial instruments. For a discussion of the measures we use to mitigate the exposure of our cash investments to market risk, credit risk and interest rate risk, see "Quantitative and Qualitative Disclosures About Market Risk" in Part I, Item 3 of this report.

Financing activities

        Net cash provided by financing activities was $0.5 million for the three months ended March 31, 2010, and net cash used in financing activities was $2.4 million for the three months ended March 31, 2009. During the three months ended March 31, 2010, net cash provided by financing activities was generated primarily from warrant and option exercises of $0.9 million and the excess tax benefit of option exercises of $0.2 million, offset by payments made on capital lease obligations of $0.6 million.

        We expect to continue to utilize commercial financing, lines of credit and term debt for the purpose of expansion of our online business infrastructure and to expand and improve our ground campuses in Clinton, Iowa and Colorado Springs, Colorado. Based on our current level of operations and anticipated growth in enrollments, we believe that our cash flow from operations, existing cash and cash equivalents and other sources of liquidity will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.

Off-Balance Sheet Arrangements

        We have no off-balance sheet arrangements.

Recent Accounting Pronouncements Not Yet Adopted

        In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, Revenue Recognition. This update changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. We do not believe that the adoption of ASU 2009-13 will have a material effect on our consolidated financial statements.

        In October 2009, the FASB issued ASU 2009-14 which amends ASC Topic 985, Certain Revenue Arrangements That Include Software Elements. This update changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. We do not believe that the adoption of ASU 2009-14 will have a material effect on our consolidated financial statements.

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