CAPELLA EDUCATION CO (Form: 10-Q, Received: 07/27/2010 07:10:02)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33140

CAPELLA EDUCATION COMPANY

(Exact name of registrant as specified in its charter)

Minnesota

41-1717955

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

Capella Tower

225 South Sixth Street, 9 ^th Floor

Minneapolis, Minnesota

55402

(Address of principal executive offices)

(Zip code)

(888) 227-3552

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The total number of shares of common stock outstanding as of July 22, 2010, was 16,746,640.

CAPELLA EDUCATION COMPANY

FORM 10-Q

INDEX


		Page
	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4	Controls and Procedures	18

	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	18
Item 1A	Risk Factors	19
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3	Defaults Upon Senior Securities	21
Item 4	Removed and Reserved	21
Item 5	Other Information	21
Item 6	Exhibits	22
SIGNATURES		23

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

CAPELLA EDUCATION COMPANY

Consolidated Balance Sheets

(In thousands, except par value)


	As of June 30, 2010		As of December 31, 2009
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	97,499	$	102,405
Marketable securities		94,795		69,670
Accounts receivable, net of allowance of $2,907 at June 30, 2010 and $2,362 at December 31, 2009		12,953		12,691
Prepaid expenses and other current assets		9,607		6,564
Deferred income taxes		2,156		2,186

Total current assets		217,010		193,516
Property and equipment, net		44,150		37,984

Total assets	$	261,160	$	231,500

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,634	$	5,027
Accrued liabilities		28,969		24,328
Income taxes payable		0		61
Deferred revenue		8,028		7,876

Total current liabilities		44,631		37,292
Deferred rent		3,059		2,952
Other liabilities		434		434
Deferred income taxes		6,555		6,556

Total liabilities		54,679		47,234

Shareholders’ equity:
Common stock, $0.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 16,753 at June 30, 2010 and 16,763 at December 31, 2009		168		168
Additional paid-in capital		144,063		151,445
Accumulated other comprehensive income		1,194		1,333
Retained earnings		61,056		31,320

Total shareholders’ equity		206,481		184,266

Total liabilities and shareholders’ equity	$	261,160	$	231,500

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

CAPELLA EDUCATION COMPANY

Consolidated Statements of Income

(In thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(Unaudited)
Revenues	$	105,157	$	80,096	$	206,390	$	156,531
Costs and expenses:
Instructional costs and services		41,286		33,550		79,161		64,632
Marketing and promotional		28,586		23,573		58,555		48,405
General and administrative		12,803		8,719		22,977		17,052

Total costs and expenses		82,675		65,842		160,693		130,089

Operating income		22,482		14,254		45,697		26,442
Other income		528		702		1,026		1,388

Income before income taxes		23,010		14,956		46,723		27,830
Income tax expense		8,436		5,416		16,987		9,954

Net income	$	14,574	$	9,540	$	29,736	$	17,876


Net income per common share:
Basic	$	0.87	$	0.57	$	1.77	$	1.07

Diluted	$	0.86	$	0.56	$	1.75	$	1.05

Weighted average number of common shares outstanding:
Basic		16,771		16,708		16,776		16,701

Diluted		17,010		17,045		17,029		17,046

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

CAPELLA EDUCATION COMPANY

Consolidated Statements of Cash Flows

(In thousands)


	Six Months Ended June 30,
	2010			2009
	(Unaudited)
Operating activities
Net income	$	29,736		$	17,876
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debts		3,577			3,277
Depreciation and amortization		8,647			6,866
Amortization of investment premium		916			891
Stock-based compensation		1,366			1,541
Excess tax benefits from stock-based compensation		(2,872	)		(1,154	)
Deferred income taxes		111			(173	)
Changes in operating assets and liabilities:
Accounts receivable		(3,839	)		(3,668	)
Prepaid expenses and other current assets		(427	)		(1,179	)
Accounts payable and accrued liabilities		6,020			7,349
Deferred rent		107			1,493
Deferred revenue		152			(1,041	)

Net cash provided by operating activities		43,494			32,078
Investing activities
Capital expenditures		(14,039	)		(7,955	)
Purchases of marketable securities		(26,262	)		0
Maturities of marketable securities		0			6,410

Net cash used in investing activities		(40,301	)		(1,545	)
Financing activities
Excess tax benefits from stock-based compensation		2,872			1,154
Net proceeds from exercise of stock options		4,018			2,637
Repurchase of common stock		(14,989	)		(4,655	)

Net cash used in financing activities		(8,099	)		(864	)


Net increase (decrease) in cash and cash equivalents		(4,906	)		29,669
Cash and cash equivalents at beginning of period		102,405			31,225

Cash and cash equivalents at end of period	$	97,499		$	60,894

Supplemental disclosures of cash flow information
Income taxes paid	$	16,618		$	10,188

Noncash transactions:
Purchase of equipment included in accounts payable and accrued liabilities	$	1,908		$	1,151

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

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Business

Capella Education Company (the Company) was incorporated on December 27, 1991. Through its wholly-owned subsidiary, Capella University, the Company manages its business on the basis of one operating segment. Capella University is an online postsecondary education services company that offers a variety of bachelor’s, master’s and doctoral degree programs primarily delivered to working adults. Capella University is accredited by The Higher Learning Commission and is a member of the North Central Association of Colleges and Schools (NCA).

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and Capella University, after elimination of all intercompany accounts and transactions.

Unaudited Interim Financial Information

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s 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 financial statements and footnotes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (2009 Annual Report on Form 10-K).

Marketable Securities

Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s marketable securities were designated as available-for-sale as of June 30, 2010 and December 31, 2009.

Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs that are either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, reported as a separate component of shareholders’ equity. Management reviews the fair value of the portfolio at least monthly, and evaluates individual securities with fair values below amortized cost at the balance sheet date. In order to determine whether an impairment is other than temporary, management must conclude whether they intend to sell the impaired security and whether it is more likely than not that they will be required to sell the security before the recovery of its amortized cost basis. If management intends to sell an impaired debt security or it is more likely than not they will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of the other-than-temporary impairment related to a credit loss or impairments on securities that management has the intent to sell before recovery are recognized in earnings. The amount of the other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of shareholders’ equity in other comprehensive income or loss.

The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest and dividend income and realized gains and losses are included in investment income. The Company classifies all marketable securities as current assets because the assets are available to fund current operations.

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.

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Contingencies

The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and reasonably estimable. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management’s best estimate of such costs, which may vary from the ultimate cost and expenses associated with any such contingency.

Subsequent Events

The Company has evaluated events and transactions that occurred during the period subsequent to the balance sheet date. There have been no subsequent events that require recognition or disclosure in the financial statements.

Comprehensive Income

Comprehensive income includes net income and all changes in the Company’s equity during a period from non-owner sources which consists exclusively of unrealized gains and losses on available-for-sale marketable securities, net of tax. Total comprehensive income was $29.6 million and $18.4 million for the six months ended June 30, 2010 and 2009, respectively.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, which is included in the Codification under ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). This update requires the disclosure of transfers between Level 1 and Level 2 of the fair value measurement hierarchy. The guidance also requires disclosures about the inputs and valuation techniques used to measure fair value and became effective for the Company’s interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or disclosures.

3. Net Income Per Common Share

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Dilutive shares are computed using the Treasury Stock method and include the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting of restricted stock.

The table below is a reconciliation of the numerator and denominator in the basic and diluted net income per common share calculation.


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(in thousands, except per share data)
Numerator:
Net income	$	14,574	$	9,540	$	29,736	$	17,876
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding		16,771		16,708		16,776		16,701
Effect of dilutive stock options and restricted stock		239		337		253		345

Denominator for diluted net income per common share		17,010		17,045		17,029		17,046

Basic net income per common share	$	0.87	$	0.57	$	1.77	$	1.07

Diluted net income per common share	$	0.86	$	0.56	$	1.75	$	1.05

Options to purchase 0.1 and 0.3 million common shares were outstanding but not included in the computation of diluted net income per common share in the three months ended June 30, 2010 and 2009, respectively, because their effect would be antidilutive. Options to purchase 0 and 0.3 million common shares, respectively, were outstanding but not included in the computation of diluted net income per share in the six months ended June 30, 2010 and 2009, respectively, because their effect would be antidilutive.

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

4. Marketable Securities

The following is a summary of available-for-sale securities:


	June 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
	(in thousands)
Tax-exempt municipal securities	$	92,896	$	1,905	$	(6	)	$	94,795

Total	$	92,896	$	1,905	$	(6	)	$	94,795


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
	(in thousands)
Tax-exempt municipal securities	$	67,551	$	2,119	$	0	$	69,670

Total	$	67,551	$	2,119	$	0	$	69,670

The unrealized gains and losses on the Company’s investments in municipal securities were caused by changes in market values primarily due to interest rate changes. All of the Company’s securities in an unrealized loss position as of June 30, 2010 had been in an unrealized loss position for less than twelve months. The Company intends to hold these securities until maturity and the possibility that the Company will be required to sell these securities prior to the recovery of their amortized cost basis is remote. Based on a review of all relevant information such as revised estimates of cash flows and specific conditions affecting the investment, the Company expects to recover the entire amortized cost basis of these securities. Therefore, there were no other-than-temporary impairment charges recorded during the first half of 2010 or 2009.

The remaining contractual maturities of the Company’s marketable securities are shown below:


	As of June 30, 2010		As of December 31, 2009
	(in thousands)
Due within one year	$	17,376	$	2,038
Due after one year through five years		59,129		47,827
Due after six through ten years		3,868		5,095
Due after ten years		14,422		14,710

	$	94,795	$	69,670

The Company recorded no sales of available-for-sale securities or realized gains or losses during the three or six months ended June 30, 2010 and 2009.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

•

Level 1 – Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;

•

Level 2 – Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

•

Level 3 – Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.

When available, the Company uses quoted market prices to determine fair value, and such measurements are classified within Level 1. In some cases where market prices are not available, the Company makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. Currently, the Company does not have any measurements that are classified within Level 3.

The following tables summarize certain fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:


			Fair Value Measurements as of June 30, 2010 Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Cash and cash equivalents
Money market funds	$	42,304	$	42,304	$	0	$	0
Variable rate demand notes		55,195		55,195		0		0

Total cash and cash equivalents	$	97,499	$	97,499	$	0	$	0

Marketable securities
Tax-exempt municipal securities	$	94,795	$	0	$	94,795	$	0

Total marketable securities	$	94,795	$	0	$	94,795	$	0


			Fair Value Measurements as of December 31, 2009 Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Cash and cash equivalents	$	102,405	$	102,405	$	0	$	0


Tax-exempt municipal securities	$	69,670	$	0	$	69,670	$	0

The Company measures cash and cash equivalents at fair value primarily using real-time quotes for transactions in active exchange markets involving identical assets. The variable rate demand notes contain a feature allowing the Company to require payment by the issuer on a daily or weekly basis. As a result, these securities are highly liquid and are classified as cash and cash equivalents. The Company’s marketable securities are classified within Level 2 and are valued using readily available pricing sources for comparable instruments utilizing market observable inputs. The Company does not hold securities in inactive markets. The Company did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the first half of 2010.

As of June 30, 2010 and December 31, 2009, the Company did not have any liabilities that were required to be measured at fair value on a recurring basis.

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

5. Accrued Liabilities

Accrued liabilities consist of the following:


	As of June 30, 2010		As of December 31, 2009
	(in thousands)
Accrued compensation and benefits	$	8,947	$	10,013
Accrued instructional		4,748		2,817
Accrued vacation		2,484		1,571
Customer deposits		1,396		779
Other		11,394		9,148

	$	28,969	$	24,328

“Other” in the table above consists primarily of vendor invoices accrued in the normal course of business.

6. Commitments and Contingencies

Leasehold Agreements

The Company leases its office facilities and certain office equipment under various noncancelable operating leases and has contractual obligations related to certain software license agreements. Future minimum lease commitments under the leases as of June 30, 2010, are as follows:


	Operating
	(in thousands)
2010	$	2,393
2011		6,017
2012		6,838
2013		6,729
2014		6,920
2015 and thereafter		5,912

Total	$	34,809

The Company recognizes rent expense on a straight-line basis over the term of the leases, although the leases 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. Cash and lease incentives received from lessors are recognized on a straight-line basis as a reduction to rent expense from the date the Company takes possession of the property through the end of the lease term. The Company records the unamortized portion of the incentive as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.

Line of Credit

The Company maintains a $10.0 million unsecured line of credit with Wells Fargo Bank. The line of credit expired on June 30, 2010 and was renewed through July 31, 2011. There were no borrowings under this line of credit as of and for the six months ended June 30, 2010 or as of and for the year ended December 31, 2009. A letter of credit in the amount of $1.6 million, which expires on July 31, 2011, was issued under the $10.0 million unsecured line of credit in favor of the Department of Education in connection with its annual review of student lending activities.

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 its consolidated financial position or results of operations.

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

7. Common Stock

In July 2008, the Company announced that its Board of Directors had authorized the Company to repurchase up to $60.0 million of shares of common stock with no expiration date. As of June 30, 2010, the Company had repurchased 0.6 million shares under this program for total consideration of $38.4 million.

The Company repurchased 0.2 million shares for total consideration of $15.3 million during the six months ended June 30, 2010 and 0.1 million shares for a total consideration of $4.7 million during the six months ended June 30, 2009. Cash spent during the six months ended June 30, 2010 on the purchase of shares totaled $15.0 million. The amount of cash expended excludes $0.3 million for shares purchased prior to quarter end, but due to timing, the cash payments for these purchases were made after June 30, 2010.

8. Stock-Based Compensation

The table below reflects the Company’s stock-based compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2010 and 2009:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(in thousands)				(in thousands)
Instructional costs and services	$	275	$	308	$	399	$	432
Marketing and promotional		117		124		161		208
General and administrative		538		695		806		901

Stock-based compensation expense included in operating income		930		1,127		1,366		1,541
Tax benefit		336		353		511		488

Stock-based compensation expense, net of tax	$	594	$	774	$	855	$	1,053

9. Regulatory Supervision and Oversight

Capella University is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act (HEA) and the regulations promulgated thereunder by the U.S. Department of Education (DOE) subject Capella University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in the various types of federal learner financial assistance under Title IV Programs.

To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited by an accrediting agency recognized by the DOE and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and the DOE’s extensive academic, administrative, and financial regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis.

The Company performs periodic reviews and self audits 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 that would adversely impact its ability to participate in Title IV programs, however, the Office of Inspector General (OIG) has conducted a compliance audit of Capella University. The audit commenced on April 10, 2006 and we subsequently provided the OIG with periodic information, responded to follow up inquiries and facilitated site visits and provided access to Capella University’s records. The OIG completed its field work in January 2007 and Capella University received a draft audit report on August 23, 2007. Capella University provided written comments on the Draft Report to the OIG on September 25, 2007. On March 7, 2008, the OIG’s final report was issued to the Acting Chief Operating Officer (COO) for Federal Student Aid (FSA), which is responsible for primary oversight of the Title IV funding programs. Capella University responded to the final report on April 8, 2008. In 2009, Capella University provided FSA staff with certain additional requested information for financial aid years 2002-2003 through 2006-2007. The FSA will subsequently issue final findings and requirements for Capella University. The FSA may take certain actions, including requiring that we refund certain federal student aid funds, requiring us to modify our Title IV administration procedures, and/or requiring us to pay fines or penalties.

Based on the final audit report for the financial aid years 2002-2003 through 2004-2005, the most significant potential financial exposure from the audit pertains to repayments to the Department of Education that could be required if the OIG concludes that Capella University did not properly calculate the amount of Title IV funds required to be returned for learners that withdrew without providing an official notification of such withdrawal and without engaging in academic activity prior to such withdrawal. If it is determined that Capella University improperly withheld any portion of these funds, Capella

CAPELLA EDUCATION COMPANY

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

University would be required to return the improperly withheld funds. The Company and the OIG have differing interpretations of the relevant regulations regarding what constitutes engagement in the unofficial withdrawal context. As the Company interprets the engagement requirement, it currently estimates that for the three year audit period, and for the subsequent aid years through 2007-2008, the total amount of Title IV funds not returned — for learners who withdrew without providing official notification and without engaging as required in the relevant regulations — was approximately $1.0 million including interest, but not including fines and penalties. If this difference of interpretation is ultimately resolved in a manner adverse to the Company, then the total amount of Title IV funds not returned for learners who withdrew without providing official notification would be greater than the amount the Company has currently estimated.

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 August 2008. Additionally, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations processes. As of June 30, 2010, programs in which the Company’s learners participate are operative and sufficiently funded.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, statements regarding: proposed new programs; regulatory developments; 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, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as updated in our subsequent reports filed with the SEC, including any updates found in Part II, Item 1A of this or other reports on Form 10-Q. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC.

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 for working adults.

We were founded in 1991, and in 1993 we established our wholly owned university subsidiary, then named 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 of Colleges and Schools). 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 2001, we introduced our bachelor’s degree completion program in business. In 2004, we introduced our four-year bachelor’s degree programs in business and information technology. In May 2009, we launched the School of Public Service Leadership. At June 30, 2010, we offered over 1,250 courses and 42 degree programs with 137 specializations at the undergraduate and graduate levels to more than 38,000 learners.

In November 2006, we completed an initial public offering of our common stock. In May 2007, we completed a follow-on offering of our common stock. We implemented an enterprise resource planning (ERP) system from 2006 through 2008 in which the final module was implemented in July 2008. During the third quarter of 2008 we commenced a stock repurchase program for up to $60.0 million of our common stock.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. During the six months ended June 30, 2010, there have been no significant changes in our critical accounting policies.

Results of Operations

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

The following selected financial data table should be referenced in connection with a review of the discussion of our results of operations for the three months ended June 30, 2010:


	Three Months Ended June 30,
	$ (in thousands)						$ Change			% Change		% of Revenue
	2010			2009			2010 vs. 2009					2010		2009		2010 vs. 2009

Revenues	$	105,157		$	80,096		$	25,061		31.3	%	100	%	100	%	0.0	%
Costs and expenses:

Instructional costs and services		41,286			33,550			7,736		23.1		39.3		41.9		(2.6	)
Marketing and promotional		28,586			23,573			5,013		21.3		27.2		29.4		(2.2	)
General and administrative		12,803			8,719			4,084		46.8		12.1		10.9		1.2

Total costs and expenses		82,675			65,842			16,833		25.6		78.6		82.2		(3.6	)

Operating income		22,482			14,254			8,228		57.7		21.4		17.8		3.6
Other income		528			702			(174	)	(24.8	)	0.5		0.9		(0.4	)

Income before income taxes		23,010			14,956			8,054		53.9		21.9		18.7		3.2
Income tax expense		8,436			5,416			3,020		55.8		8.0		6.8		1.2

Effective Tax Rate		36.7	%		36.2	%
Net income		14,574		$	9,540		$	5,034		52.8	%	13.9	%	11.9	%	2.0	%

Revenues. The increase in revenues compared to the same quarter in the prior year is primarily driven by 30.5 percentage points from increased enrollments and 3.9 percentage points from the impact of price increases, offset by a 3.1 percentage point decrease from a larger proportion of master’s and bachelor’s learners, who generated less revenue per learner than our doctoral learners. Similar to our historical trends, we expect a continued slight shift in enrollments to a larger proportion of master’s and bachelor’s learners. End-of-period enrollment increased 32.1% at June 30, 2010 compared to June 30, 2009.

Instructional costs and services expenses. Our instructional costs and services expenses increased compared to the same quarter in the prior year primarily due to our ongoing investment in faculty, including increased total faculty compensation to support higher enrollments and increased taxes and benefits as a result of the transition of our adjunct faculty from independent contractors to employees. There was also an increase in depreciation and amortization as a result of increased capital investments in 2010 and 2009 related to the learner experience and academic quality.

Our instructional costs and services expenses as a percentage of revenues decreased primarily due to scale of fixed costs and productivity gains across our faculty, academic administration, and learner support functions, lower facilities expenses as a result of scaling our fixed costs and the consolidation of our employees to one location in 2009, and lower colloquia costs as a result of a year-over-year decrease in colloquia revenue due to timing of events in 2010.

Marketing and promotional expenses. Our marketing and promotional expenses increased compared to the same quarter in the prior year, primarily driven by an increase in core marketing efforts and brand advertising focused on improving conversion rates and new enrollment growth, and an increase in investments in our enrollment operations.

Our marketing and promotional expenses as a percentage of revenues decreased compared to prior year primarily as a result of fixed cost leverage from strong revenue growth. Also contributing to the improvement were productivity gains in enrollment operations and continued inquiry optimization resulting in decreased inquiry spending as a percentage of revenue, particularly in online sources, and strong conversion rates.

General and administrative expenses. Our general and administrative expenses increased compared to the same quarter in the prior year primarily due to increased investments in strategic business development and an increase in estimated bonus expense.

Our general and administrative expenses as a percentage of revenues increased over prior year primarily attributable to increased investments in strategic business development and an increase in estimated bonus expense. These increases were partially offset by lower bad debt expense and a decrease in compensation expenses, which resulted from severance recorded in the prior year. In addition, there were executive chairman fees paid to our founding Chief Executive Officer in 2009 as part of his retirement transition.

Other income. Other income decreased compared to the same quarter in the prior year primarily due to a decrease in interest income levels as a result of lower interest rates during 2010 compared to 2009, partially offset by a higher average cash, cash equivalents and marketable securities balance.

Income tax expense. Our effective tax rate increased compared to the same quarter in the prior year primarily due to a decrease in the favorable impact of tax-exempt interest.

Net income. Net income increased due to the factors discussed above.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The following selected financial data table should be referenced in connection with a review of the discussion of our results of operations for the six months ended June 30, 2010:


	Six Months Ended June 30,
	$ (in thousands)						$ Change			% Change		% of Revenue
	2010			2009			2010 vs. 2009					2010		2009		2010 vs. 2009

Revenues	$	206,390		$	156,531		$	49,859		31.9	%	100	%	100	%	0.0	%
Costs and expenses:

Instructional costs and services		79,161			64,632			14,529		22.5		38.4		41.3		(2.9	)
Marketing and promotional		58,555			48,405			10,150		21.0		28.4		30.9		(2.5	)
General and administrative		22,977			17,052			5,925		34.7		11.1		10.9		0.2

Total costs and expenses		160,693			130,089			30,604		23.5		77.9		83.1		(5.2	)

Operating income		45,697			26,442			19,255		72.8		22.1		16.9		5.2
Other income		1,026			1,388			(362	)	(26.1	)	0.5		0.9		(0.4	)

Income before income taxes		46,723			27,830			18,893		67.9		22.6		17.8		4.8
Income tax expense		16,987			9,954			7,033		70.7		8.2		6.4		1.8

Effective Tax Rate		36.4	%		35.8	%
Net income	$	29,736		$	17,876		$	11,860		66.3	%	14.4	%	11.4	%	3.0	%

Revenues. The increase in revenues compared to prior year is primarily driven by 31.2 percentage points from increased enrollments and 3.9 percentage points from the impact of price increases, partially offset by a 3.2 percentage point decrease from a larger proportion of master’s and bachelor’s learners, who generated less revenue per learner than our doctoral learners. Similar to our historical trends, we expect a continued slight shift in enrollments to a larger proportion of master’s and bachelor’s learners. End-of-period enrollment increased 32.1% at June 30, 2010 compared to June 30, 2009.

Instructional costs and services expenses. Our instructional costs and services expenses increased compared to prior year primarily due to our ongoing investment in faculty and learner support, including increased total faculty and learner support compensation to support higher enrollments, and increased taxes and benefits as a result of the transition of our adjunct faculty from independent contractors to employees. There was also an increase in depreciation and amortization as a result of increased capital investments in 2010 and 2009 related to the learner experience and academic quality.

Marketing and promotional expenses. Our marketing and promotional expenses increased compared to prior year, primarily driven by an increase in core marketing efforts and brand advertising focused on improving conversion rates and new enrollment growth, and an increase in investments in our enrollment operations.

General and administrative expenses. Our general and administrative expenses increased compared to prior year primarily due to increased spending on strategic business development and an increase in estimated bonus expense.

Our general and administrative expenses as a percentage of revenues increased over prior year primarily attributable to increased spending on strategic business development and an increase in estimated bonus expense. These increases were partially offset by lower bad debt expense and a decrease in compensation expenses, which resulted from severance recorded in the prior year. In addition, there were executive chairman fees paid to our founding Chief Executive Officer in 2009 as part of his retirement transition.

Other income. Other income decreased compared to prior year primarily due to a decrease in interest income levels as a result of lower interest rates during 2010 compared to 2009, partially offset by a higher average cash, cash equivalents and marketable securities balance.

Income tax expense. Our effective tax rate increased compared to prior year primarily due to a decrease in the favorable impact of tax-exempt interest.

Net income. Net income increased due to the factors discussed above.

Liquidity and Capital Resources

Liquidity

We financed our operating activities and capital expenditures during the six months ended June 30, 2010 and 2009 through cash provided by operating activities. Our cash, cash equivalents and marketable securities were $192.3 million and $172.1 million at June 30, 2010 and December 31, 2009, respectively. Our cash, cash equivalents and marketable securities increased primarily due to strong cash flow from operations during the six months ended June 30, 2010.

We maintain a $10.0 million unsecured line of credit with Wells Fargo Bank. The line of credit expired on June 30, 2010 and was renewed through July 31, 2011. There have been no borrowings under this line of credit as of and for the six months ended June 30, 2010 or as of and for the year ended December 31, 2009. A letter of credit in the amount of $1.6 million, which expires on July 31, 2011, was issued under the $10.0 million unsecured line of credit in favor of the Department of Education in connection with its annual review of student lending activities.

A significant portion 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 provided through the William D. Ford Direct Loan program in multiple disbursements for each academic year. The disbursements are usually received by the start of the third week of the term. These factors, together with the timing of when our learners begin their programs, affect our operating cash flow. Based on current market conditions and recent regulatory or legislative actions, we do not anticipate any significant near-term disruptions in the availability of Title IV funding for our learners.

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 marketable securities, will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. If needed, to fund our operations or to fund strategic investments, we also believe that we could further supplement our liquidity position within the capital markets.

Operating Activities

Net cash provided by operating activities was $43.5 million and $32.1 million for the six months ended June 30, 2010 and 2009, respectively. The increase from 2009 to 2010 was primarily due to an $11.9 million increase in net income, an increase in depreciation and amortization as a result of greater capital expenditures in 2010 and 2009, partially offset by an increase in excess tax benefits from stock-based compensation as a result of an increase in stock option exercises at a higher average market value in 2010 compared to 2009.

Investing Activities

Our cash used in investing activities is primarily related to the purchase, sale, or maturity of investments in marketable securities and property and equipment. Net cash used in investing activities was $40.3 million and $1.5 million for the six months ended June 30, 2010 and 2009, respectively. Investments in marketable securities consist primarily of purchases, sales and maturities of tax-exempt municipal securities. Net purchases of these securities were $26.3 million during the six months ended June 30, 2010. There were no sales of these securities during the six months ended June 30, 2010.

We believe that the credit quality and liquidity of our investment portfolio as of June 30, 2010 was strong. Due to current market conditions, the unrealized gains and losses of the portfolio may remain volatile as changes in the general interest rate environment and supply/demand fluctuations of the securities within our portfolio impact daily market valuations. To mitigate the risk associated with this market volatility, we deploy a relatively conservative investment strategy focused on capital preservation and liquidity. But even with this approach, we may incur investment losses as a result of unusual and unpredictable market developments and we may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further due to unpredictable market developments. In addition, these unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.

Capital expenditures were $14.0 million and $8.0 million for the six months ended June 30, 2010 and 2009, respectively. The increase in 2010 from 2009 was primarily due to the build-out of office space under our office space lease and capital investments focused on improving processes around learner financing, faculty, and our internal and external reporting and analytical tools. We expect that our capital expenditures in 2010 will be approximately six percent of revenues and 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 used in financing activities was $8.1 million and $0.9 million for the six months ended June 30, 2010 and 2009, respectively. Financing activities during the six months ended June 30, 2010 were related to the repurchase of common stock in the amount of $15.0 million, partially offset by $4.0 million in proceeds from stock option exercises and $2.9 million in excess tax benefits from stock option exercises.

Financing activities during the six months ended June 30, 2009 were primarily related to the repurchase of common stock in the amount of $4.7 million, partially offset by $2.6 million in proceeds from stock option exercises and $1.2 million in excess tax benefits from stock option exercises.

Regulation and Oversight

We are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act (“HEA”) and the regulations promulgated thereunder by the U.S. Department of Education (“DOE”) subject us to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in Title IV programs.

Pending Rulemaking by the Department of Education . Under the HEA, proprietary schools are eligible to participate in Title IV programs in respect of educational programs that lead to “gainful employment in a recognized occupation.” Historically, this concept has not been defined in detail. Effective July 26, 2010, the DOE issued a Notice of Proposed Rulemaking (“NPRM”) in respect of the gainful employment issue, with a 45 day public comment period. The DOE has stated its goal is to publish final rules by November 1, 2010, with certain provisions to be effective July 1, 2011 and others July 1, 2012.

The proposed definition of gainful employment in the NPRM would take into consideration whether former students are repaying their federal student loans and the relationship between total student loan debt and average earnings after a postsecondary training program with varying hurdles and consequences for not achieving the various ratios. If this regulation is adopted in a form similar to the DOE’s proposal in the NPRM, it could render some programs ineligible for Title IV funding if we do not meet the test to be considered “fully eligible.” We are currently evaluating the impact of the proposed rules and will continue to monitor developments in this area.

Title IV Compliance Audit of Capella University. We perform periodic reviews and self audits of our compliance with the various applicable regulatory requirements of the DOE and state regulatory authorities. We have not been notified by any of the various regulatory agencies of any significant noncompliance matters that would adversely impact our ability to participate in Title IV programs, however, the Office of Inspector General (“OIG”) of the DOE has conducted a compliance audit of Capella University. The audit commenced on April 10, 2006 and we subsequently provided the OIG with periodic information, responded to follow up inquiries and facilitated site visits and access to the Company’s records. The OIG completed its field work in January 2007 and the Company received a draft audit report on August 23, 2007. Capella University provided written comments on the draft audit report to the OIG on September 25, 2007. On March 7, 2008, the OIG’s final report was issued to the Acting Chief Operating Officer (“COO”) for Federal Student Aid (“FSA”), which is responsible for primary oversight of the Title IV funding programs. We responded to the final report on April 8, 2008. In 2009, we provided FSA staff with certain requested information for financial aid years 2002-2003 through 2006-2007. The FSA will subsequently issue final findings and requirements for Capella University. The FSA may take certain actions, including requiring that we refund certain federal student aid funds, requiring us to modify our Title IV administration procedures, and/or requiring us to pay fines or penalties.

Based on the final audit report for the financial aid years 2002-2003 through 2004-2005, the most significant potential financial exposure pertains to repayments to the DOE that could be required if the FSA concludes that Capella University did not properly calculate the amount of Title IV funds required to be returned for learners that withdrew without providing an official notification of such withdrawal and without engaging in the course room prior to such withdrawal. If the FSA determines that Capella University improperly withheld any portion of these funds, Capella University would be required to return the improperly withheld funds. We and the OIG have differing interpretations of the relevant regulations regarding what constitutes engagement in the unofficial withdrawal context. As we interpret the engagement requirement, the Company currently estimates that for the three year

audit period, and for the subsequent aid years through 2007-2008, the total amount of Title IV funds not returned — for learners who withdrew without providing official notification and without engaging as required in the relevant regulations — was approximately $1.0 million including interest, but not including fines and penalties. If this difference of interpretation is ultimately resolved in a manner adverse to us, then the total amount of Title IV funds not returned for learners who withdrew without providing official notification would be greater than the amount we have currently estimated.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We have no derivative financial instruments or derivative commodity instruments. We believe the risk related to cash equivalents and marketable securities is limited due to the adherence to our investment policy, which focuses on capital preservation and liquidity. In addition, all investments must have a minimum Standard & Poor’s rating of A minus (or equivalent). All of our cash equivalents and marketable securities as of June 30, 2010 and December 31, 2009 were rated A minus or higher. In addition, we utilize money managers who conduct initial and ongoing credit analysis on our investment portfolio to monitor and minimize the potential impact of market risk associated with our cash, cash equivalents and marketable securities. Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments and we may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further in this time of economic uncertainty. In addition, unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.

Interest Rate Risk

We manage interest rate risk by investing excess funds in cash equivalents and marketable securities bearing a combination of fixed and variable interest rates, which are tied to various market indices. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. At June 30, 2010, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our chief executive officer and chief financial officer concluded that the company’s disclosure controls and procedures were effective, as of June 30, 2010, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

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.

Item 1A.

Risk Factors

Other than with respect to the risk factors below, there have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2009, as updated in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

We delete the risk factor captioned “The recently concluded negotiated rulemaking sessions and subsequent rulemaking by the U.S. Department of Education could result in regulatory changes that materially and adversely affect our business” and replace it with the following disclosure.

Pending rulemaking by the U.S. Department of Education could result in regulatory changes that materially and adversely affect our business.

In November 2009, the U.S. Department of Education (“DOE”) convened two new negotiated rulemaking teams related to Title IV program integrity issues and foreign school issues. The team addressing program integrity issues, which included representatives of the various higher education constituencies, was unable to reach consensus on the form of all of the rules addressed by that team. Accordingly, under the negotiated rulemaking protocol, the DOE is free to propose rules without regard to the tentative agreement reached regarding certain of the rules.

Gainful Employment

The proposed program integrity rulemaking addresses numerous topics, the most significant of which for our business is the adoption of a definition of “gainful employment” for purposes of the requirement for Title IV student financial aid that a program of study prepare students for gainful employment in a recognized occupation. Effective July 26, 2010, the DOE issued a Notice of Proposed Rulemaking (“NPRM”) in respect of the gainful employment issue, with a 45 day public comment period. The DOE has stated its goal is to publish final rules by November 1, 2010, with certain provisions to be effective July 1, 2011 and others July 1, 2012.

Under the Higher Education Act of 1965, proprietary schools are eligible to participate in Title IV programs in respect of educational programs that lead to “gainful employment in a recognized occupation.” Historically, this concept has not been defined in detail. The proposed definition of gainful employment in the NPRM would take into consideration whether former students are repaying their federal student loans and the relationship between total student loan debt and average earnings after a postsecondary training program. Individual educational programs would be divided into three groups based on the proposed metrics:

•

Programs with at least 45% of their former students paying down the principal on their federal loans, or with graduates having a debt-to-earnings ratio of less than 20% of discretionary income or 8% of total income, would be deemed fully eligible for Title IV funding. These programs would be required to disclose both their repayment rates and debt-to-earnings ratios unless they pass both of the preceding tests.

•

Programs with less than 35% of their former students paying down the principal on their federal loans, and with graduates having a debt-to-earnings ratio above 30% of discretionary income and 12% of total income, would be deemed ineligible for Title IV funding. Such programs would lose Title IV eligibility as of July 1, 2012, although institutions must warn students in the programs about the high debt-to-earnings ratio effective July 1, 2011. In order to mitigate against large and immediate displacements of students as of July 1, 2012, the DOE has further proposed that no more than 5 percent of a single institution’s programs would be declared ineligible as of that date, with the lowest-performing programs immediately losing eligibility and the remaining non-compliant programs losing eligibility one year later.

•

Programs that are not fully eligible or ineligible under the above standards would be restricted programs and subject to limits on enrollment growth. Such institutions also would be required to demonstrate employer support for the program and warn consumers and current students of high debt levels.

If this regulation is adopted in a form similar to the DOE’s proposal in the NPRM, it could render some of our programs ineligible for Title IV funding if we do not meet the test to be considered “fully eligible.” In addition, the continuing eligibility of our educational programs for Title IV funding would be at risk due to factors beyond our control, such as changes in the income level of persons employed in specific occupations or sectors, increases in interest rates, changes in student mix to persons requiring higher amounts of student loans to complete their programs, changes in student loan delinquency rates and other factors. If a particular program ceased to be eligible for Title IV funding, in most cases it would not be practical to continue offering that course under our current business model. Regulations in the form proposed in the NPRM could result in a significant realignment of the types of educational programs that are offered by us and by proprietary institutions in general, in order to comply with the rules or to avoid the uncertainty associated with compliance over time. This realignment could reduce our enrollment, perhaps materially.

In addition, even for programs that remain eligible for Title IV, we may have to substantially increase our efforts to promote student loan repayment in order to ensure continued Title IV eligibility. Furthermore, if we are required for certain programs to warn consumers and current students of high debt levels and provide the most recent debt measures for the program, the impact could reduce our enrollment, perhaps materially.

Impact of Rulemaking

Certain other topics addressed in a separate NPRM issued by the DOE could also impact our business, including standards regarding the payment of incentive compensation to employees and others involved in student enrollment, and the definition of credit hour for purposes of determining program eligibility for Title IV student financial aid, particularly in the context of distance learning.

We cannot predict the form of any final rules regarding the program integrity issues that may be adopted by the DOE. Compliance with these rules, as presented by the DOE in the NPRMs, which if adopted could be effective as early as July 1, 2011, could reduce our enrollment, increase our cost of doing business, and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We add the following disclosure in “Risk Factors – Risks Related to the Extensive Regulation of Our Business.”

The U.S. Congress has recently commenced a review of the for-profit education sector that could result in legislation or further Department of Education rulemaking restricting Title IV program participation by proprietary schools in a manner that materially and adversely affects our business.

There has been increased focus by the U.S. Congress on the role for-profit educational institutions play in higher education. On June 17, 2010, the Education and Labor Committee of the U.S. House of Representatives held a hearing to examine the manner in which accrediting agencies review higher education institutions’ policies on credit hours and program length. On June 24, 2010, the Health, Education, Labor and Pensions Committee of the U.S. Senate released a report, entitled, “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education” and held the first in a series of hearings to examine the proprietary education sector. Earlier, on June 21, the Chairmen of each of these education committees, together with other members of Congress, requested the Government Accountability Office (“GAO”) to conduct a review and prepare a report with recommendations regarding various aspects of the proprietary sector, including recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in federal student aid programs and the degree to which proprietary institutions’ revenue is composed of Title IV and other federal funding sources.

These hearings and the requested GAO review are not formally related to the U.S. Department of Education’s current negotiated rulemaking process. However, the outcome of the hearings and the requested GAO review could impact the substance of the Department’s rulemaking.

We cannot predict the extent to which, or whether, these hearings and review will result in legislation or further rulemaking affecting our participation in Title IV programs. To the extent any laws or regulations are adopted that limit our participation in Title IV programs or the amount of student financial aid for which our students are eligible, our business would be adversely affected, perhaps materially.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the three months ended June 30, 2010, the Company used $5.9 million to repurchase shares of common stock under its repurchase program. ⁽¹⁾ The Company’s remaining authorization for common stock repurchases was $21.7 million at June 30, 2010.

A summary of the Company’s share repurchases during the quarter is set forth below:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
4/1/2010 to 4/30/2010	0	$	0	0	$	27,583,457
5/1/2010 to 5/31/2010	42,792		89.97	42,792		23,733,462
6/1/2010 to 6/30/2010	24,741		83.23	24,741		21,674,367

Total	67,533		87.50	67,533		21,674,367

(1)

The Company’s repurchase program was announced in July 2008 for repurchases up to an aggregate amount of $60.0 million in value of common stock with no expiration date. As of June 30, 2010, we had purchased 0.6 million shares under this program at an average price of $62.61 totaling $38.4 million. Cash spent on the purchase of shares during the six months ended June 30, 2010 totaled $15.0 million. The amount of cash expended excludes $0.3 million for shares purchased prior to quarter end, but due to timing, the cash payments for these purchases were made after June 30, 2010.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Removed and Reserved

Item 5.

Other Information

None.

Item 6.

Exhibits

(a) Exhibits


Number	Description	Method of Filing

3.1	Amended and Restated Articles of Incorporation.	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 11, 2006.

3.2	Amended and Restated By-Laws.	Incorporated by reference to Exhibit 3.4 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 6, 2006.

4.1	Specimen of common stock certificate.	Incorporated by reference to Exhibit 4.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 19, 2006.

10.1*	Transition Agreement between Capella Education Company and Lois M. Martin, dated May 11, 2010	Filed electronically.

10.2	Fourth Amendment to Lease, dated as of May 14, 2010, by and between the Registrant and Minneapolis 225 Holdings, LLC.	Filed electronically.

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed electronically.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed electronically.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed electronically.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed electronically.

EX-101.INS	XBRL Instance Document ⁽¹⁾

EX-101.SCH	XBRL Taxonomy Extension Schema Document ⁽¹⁾

EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾

EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾

EX-101.LAB	XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾

EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾

*	Management contract or compensatory plan or arrangement.

⁽¹⁾

The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


CAPELLA EDUCATION COMPANY

/ S / J. K EVIN G ILLIGAN		July 27, 2010
J. Kevin Gilligan
Chief Executive Officer
(Principal Executive Officer)

/ S / L OIS M. M ARTIN		July 27, 2010
Lois M. Martin
Senior Vice President and Chief
Financial Officer (Principal Financial Officer)

/ S / A MY L. R ONNEBERG		July 27, 2010
Amy L. Ronneberg
Vice President and Corporate Controller
(Principal Accounting Officer)

Exhibit 10.1

TRANSITION AGREEMENT

This Transition Agreement (the “ Agreement ”) is made as of May 11, 2010 (the “Effective Date”), by and between Capella Education Company (the “ Company ”) and Lois Martin (“ Executive ”).

WHEREAS, Executive is employed by the Company as Senior Vice President and Chief Financial Officer (“ CFO ”), pursuant to an Offer Letter dated October 20, 2004 and the Addendum A to Lois Martin Offer Letter (together, the “ Offer Letter ”).

WHEREAS, Executive has indicated her desire to leave the Company for personal reasons.

WHEREAS, the Company considers it desirable for Executive to remain employed for a period of time to facilitate a smooth transition while the Company identifies a successor Chief Financial Officer and such successor commences employment.

WHEREAS, the parties have mutually agreed to continue Executive’s employment for a transition period, on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants set forth below, as well as other good and valuable consideration, the Parties hereby agree as follows:

1. Transition Period . Subject to the terms and conditions of this Agreement, the Company will continue to employ Executive and Executive will remain employed with the Company from the Effective Date through January 3, 2011, unless Executive’s employment with the Company is earlier terminated pursuant to Section 6 below (the “ Transition Period ”). If Executive’s employment is not earlier terminated pursuant to Section 6, Executive will cease to be an employee and officer of the Company effective January 3, 2011, without further action by either Executive or the Company; such termination will be deemed a voluntary resignation by Executive and she will not be entitled to benefits under the Capella Education Company Senior Executive Severance Plan (the “ Severance Plan ”). The date of termination of Executive’s employment with the Company for any reason shall be the “ Separation Date .”

2. Compensation and Benefits . During the Transition Period, the Company will pay Executive a base salary at the same base salary rate in effect for Executive on the Effective Date, subject to normal withholdings and payable in accordance with the Company’s normal payroll practices. In addition, during the Transition Period Executive will continue to participate in such employee benefit plans and programs for which she may be eligible and in which she participated on the Effective Date, pursuant to the terms and conditions of such plans (including without limitation an annual physical for 2010 which may be taken through January 31, 2011 and the Capella Education Company Management Incentive Plan pursuant to the terms of the 2010 Plan Document (the “ 2010 Incentive Plan ”)). Upon Executive’s termination of employment by reason of her voluntary resignation effective January 3, 2011 in accordance with Section 1 above, Executive will not be entitled to receive severance benefits under either the Offer Letter or the Severance Plan.

3. Expenses . The Company shall reimburse Executive for all reasonable and necessary out-of-pocket business expenses incurred by her in the performance of her duties and responsibilities for the Company during the Transition Period, subject to the Company’s normal policies and procedures for expense verification and documentation.

4. Duties and Authority . During the Transition Period, Executive will continue to have the responsibilities and to perform the duties of CFO until such time that the Company appoints a successor CFO. Following appointment by the Company of a successor CFO, Executive’s title will be Senior Vice President, she will continue to report to the Company’s Chief Executive Officer, and her duties and responsibilities will include providing transition assistance, completing projects related to her prior responsibilities as CFO, and providing such advice, expertise, or knowledge with respect to her prior duties as CFO or other matters in which she was involved, and such other duties of an executive nature as may be requested by the Company’s Chief Executive Officer. Executive’s employment during the Transition Period will continue on a full-time basis and she will devote her full time, attention, skill and efforts as necessary to the faithful performance of such duties in a professional, diligent, trustworthy and businesslike manner. In addition, Executive will timely execute and deliver such acknowledgements, instruments, certificates, and other ministerial documents (including without limitation, certification as to specific actions performed by Executive in her capacity as an officer of the Company) as may be necessary or appropriate to formalize and complete the applicable corporate records and to ensure compliance with federal securities laws.

5. Retention Bonus .

a. As an incentive to Executive to remain with the Company through the Transition Period, the Company will pay to Executive a retention bonus in the amount of $281,250 (the “ Retention Bonus ”), subject to the conditions of Section 5(b) of this Agreement. The Retention Bonus will be paid to Executive in bi-weekly installments in accordance with the Company’s regular payroll schedule over a twelve-month period following the Separation Date.

b. Notwithstanding any other provision of this Agreement, the Company will pay to Executive the Retention Bonus described in Section 5(a) above only if she satisfies all of the following conditions: (i) Executive does not resign from employment with the Company and is not terminated by the Company for Cause (as defined in the Severance Plan) before January 3, 2011, (ii) following the Separation Date but on or before January 24, 2011, Executive signs and does not rescind a release of claims in favor of the Company and its affiliates and related entities, and their directors, officers, insurers, employees and agents, in the form attached to this Agreement as Exhibit A (subject to revisions due to changes in applicable laws) (the “Release”), and (iii) Executive is in compliance with her obligations pursuant to the terms of this Agreement and the Confidentiality Agreement (which term is defined in Section 7 of this Agreement).

6. No Early Termination; Cause . Executive’s employment with the Company may be terminated prior to the end of the Transition Period only upon Executive’s death or by the Company for Cause (as defined in the Severance Plan). Notwithstanding the foregoing, the Company may relieve Executive of her active performance of her duties during the Transition Period at any time in its sole discretion.

7. Confidentiality, Noncompetition and Inventions Agreement . Executive acknowledges that, as a condition of her initial employment with the Company and for valid consideration, she executed a Confidentiality, Non-Competition and Inventions Agreement, dated November 15, 2004 (“ Confidentiality Agreement ”). Executive acknowledges and agrees that the Confidentiality Agreement remains in full force and effect and she affirms her continuing obligations to the Company under the Confidentiality Agreement.

8. Other Post-Termination Obligations .

a. Upon termination of Executive’s employment with the Company, or upon the earlier request of the Company, Executive will resign all positions then held as a director or officer of the Company and of any subsidiary, parent or affiliated entity of the Company, and will promptly execute and provide to the Company any further documentation, as requested by the Company, to confirm such resignation.

b. Executive acknowledges and agrees that she will continue to be a designated insider under the Capella Education Company Insider Trading Policy until either (i) her Separation Date, if such date occurs during an open trading window; or (ii) such date that the trading window for insiders opens following the Company’s next earnings release, if her Separation Date occurs during a closed trading window.

c. For a period of nine months following the Separation Date, without payment by the Company of additional compensation but at no cost to Executive, Executive will, upon reasonable request of the Company or its designee, cooperate with the Company in connection with the transition of Executive’s duties and responsibilities for the Company; consult with the Company regarding business matters that she was directly and substantially involved with while employed by the Company; and be reasonably available, with or without subpoena, to be interviewed, review documents or things, give depositions, testify, or engage in other reasonable activities in connection with any litigation or investigation, with respect to matters that Executive then has or may have knowledge of by virtue of Executive’s employment by or service to the Company or any related entity. In the event that the Company desires to obtain cooperation and consultation from Executive more than nine months following the Separation Date, such cooperation and consultation will be on terms and conditions mutually agreed upon by the parties.

9. Public Statements . Executive hereby acknowledges and agrees that the Company will be required under federal securities laws to disclose the terms of this Agreement and to file a copy of this Agreement with the Securities and Exchange Commission. Executive will not defame or disparage the reputation, character, image, products or services of the Company, or the reputation or character of the Company’s directors, officers, employees or agents. Officers and directors of the Company will not defame or disparage the reputation or character of Executive. Nothing in this Section 9 will be construed to limit or restrict Executive or the Company from taking any action that such party in good faith reasonably believes is necessary to fulfill such party’s fiduciary obligations to the Company, from making any statement internal to the Company’s operations for legitimate business reasons, or from providing truthful information in connection with any legal proceeding, government investigation or other legal matter.

10. Tax Withholding . The Company may withhold from any amounts payable under this Agreement such federal, state and local income and employment taxes as the Company shall determine are required to be withheld pursuant to any applicable law or regulation. The Company makes no assurances to Executive as to the tax treatment of any payments hereunder and, except with respect to tax amounts withheld by the Company, Executive will be responsible for payment and remittance of all taxes due with respect to compensation received or imputed under this Agreement.

11. Section 409A . This Agreement and the payments hereunder are intended to be exempt from or to satisfy the requirements of Section 409A(a)(2), (3) and (4) of the Internal Revenue Code of 1986, as amended, including current and future guidance and regulations interpreting such provisions, and should be interpreted accordingly.

12. Assignment . This Agreement is binding on Executive and on the Company and its successors and assigns. The rights and obligations of the Company under this Agreement may be assigned to a successor, including, but not limited to, a purchaser of all or substantially all of the business or assets of the Company. No rights or obligations of Executive hereunder may be assigned by her to any other person or entity.

13. Entire Agreement . This Agreement, the Confidentiality Agreement, any written stock option agreements and restricted stock unit award agreements to which Executive and the Company are parties, and the employee benefit plans sponsored by the Company in which Executive is a participant are intended to define the full extent of the legally enforceable undertakings of the parties, and no promises or representations, written or oral, that are not set forth or referenced explicitly in this Agreement are intended by either party to be legally binding. This Agreement supercedes any and all prior agreements or understandings between the parties, including the Offer Letter, which shall terminate and have no further force and effect as of the Effective Date.

14. Amendments . No amendment or modification of this Agreement will be effective unless made in writing and signed by Executive and the Company.

15. No Waiver . No term or condition of this Agreement shall be deemed to have been waived, except by a statement in writing signed by the party against whom enforcement of the waiver is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

16. Headings . The descriptive headings of the paragraphs and subparagraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

17. Governing Law . All matters relating to the interpretation, construction, application, validity and enforcement of this Agreement shall be governed by the laws of the State of Minnesota without giving effect to any choice or conflict of law provision or rule, whether of the State of Minnesota or any other jurisdiction, that would cause the application of laws of any jurisdiction other than the State of Minnesota.

18. Jurisdiction and Venue . Executive and the Company consent to jurisdiction of the courts of the State of Minnesota and/or the United States District Court, District of Minnesota, for the purpose of resolving all issues of law, equity, or fact arising out of or in connection with this Agreement. Any action involving claims of a breach of this Agreement must be brought exclusively in such courts. Each party consents to personal jurisdiction over such party in the state and/or federal courts of Minnesota and hereby waives any defense of lack of personal jurisdiction.

19. Waiver of Jury Trial . To the extent permitted by law, Executive and the Company waive any and all rights to a jury trial with respect to any dispute arising out of or relating to this Agreement.

20. Notices . Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when (i) delivered personally; (ii) one business day after being sent by a national overnight courier service; or (iii) three business days after being sent by registered or certified mail, postage prepaid, and addressed as follows:


If to the Company:				General Counsel Capella Education Company Capella Tower 225 South Sixth Street, 9 ^th Floor Minneapolis, MN 55402

If to Executive:				Lois M. Martin 2460 Sunrise Drive Little Canada, MN 55117

21. Counterparts . This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement.

IN WITNESS WHEREOF, the parties have executed this Transition Agreement on the date first stated above.


				CAPELLA EDUCATION COMPANY

/s/ Lois M. Martin				/s/ J. Kevin Gilligan
Lois M. Martin				J. Kevin Gilligan, Chief Executive Officer

RELEASE BY LOIS MARTIN

Definitions . I intend all words used in this Release to have their plain meanings in ordinary English. Specific terms that I use in this Release have the following meanings:

I , me , and my include both me and anyone who has or obtains any legal rights or claims through me.

Capella means Capella Education Company, any company related to Capella Education Company in the present or past (including, without limitation, its predecessors, parents, subsidiaries, affiliates, and divisions), and any successors of Capella Education Company.

Company means Capella; the present and past officers, directors, committees, shareholders, and employees of Capella; any company providing insurance to Capella in the present or past; the present and past employee benefit plans sponsored or maintained by Capella (other than multiemployer plans) and the present and past fiduciaries of such plans; the attorneys for Capella; and anyone who acted on behalf of Capella or on instructions from Capella.

Agreement means the Transition Agreement between Capella and me made as of May 11, 2010, including all of the documents attached to the Agreement.

My Claims means all of my rights that I now have to any relief of any kind from the Company, including without limitation:

all claims arising out of or relating to my employment with Capella or the termination of that employment including, without limitation, all claims arising out of or relating to the Company’s Offer Letter to me dated October 20, 2004 and Addendum A thereto and the Capella Education Company Senior Executive Severance Plan;

all claims arising out of or relating to the statements, actions, or omissions of the Company;

all claims for any alleged unlawful discrimination, harassment, retaliation or reprisal, or other alleged unlawful practices arising under the laws of the United States or any other country or of any state, province, municipality, or other unit of government, including without limitation, claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, 42 U.S.C. § 1981, the Employee Retirement Income Security Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, the Sarbanes-Oxley Act, the Lilly Ledbetter Fair Pay Act of 2009, the Minnesota Human Rights Act, the Genetic Information Nondiscrimination Act, the Fair Credit Reporting Act, the Minneapolis Civil Rights Ordinance, and workers’ compensation non-interference or non-retaliation statutes (such as Minn. Stat. § 176.82);

EXHIBIT A

all claims for alleged wrongful discharge; breach of contract; breach of implied contract; failure to keep any promise; breach of a covenant of good faith and fair dealing; breach of fiduciary duty; estoppel; my activities, if any, as a “whistleblower”; defamation; infliction of emotional distress; fraud; misrepresentation; negligence; harassment; retaliation or reprisal; constructive discharge; assault; battery; false imprisonment; invasion of privacy; interference with contractual or business relationships; any other wrongful employment practices; and violation of any other principle of common law;

all claims for compensation of any kind, including without limitation, bonuses, commissions, stock-based compensation or stock options, vacation pay, perquisites, relocation expenses, and expense reimbursements;

all claims for back pay, front pay, reinstatement, other equitable relief, compensatory damages, damages for alleged personal injury, liquidated damages, and punitive damages;

all claims that a past unlawful decision has or has had a continuing effect on my compensation; and

all claims for attorneys’ fees, costs, and interest.

However, My Claims does not include any claims that the law does not allow to be waived; any claims that may arise after the date on which I sign this Release; any claims for breach of the Agreement; any rights I have under any written stock option of restricted stock unit award agreement with Capella; my right to benefits under any employee benefit plan sponsored by Capella in which I am currently a participant; or any rights that I may have to indemnification from Capella as a current or former officer, director, or employee of Capella, including without limitation indemnification rights under applicable laws, the charter documents of Capella, or any liability insurance policy maintained by Capella.

Agreement to Release My Claims . I will receive consideration from Capella as set forth in the Agreement if I sign and do not rescind this Release as provided below. I understand and acknowledge that that consideration is in addition to anything of value that I would be entitled to receive from Capella if I did not sign this Release or if I rescinded this Release. In exchange for that consideration I give up and release all of My Claims. I will not make any demands or claims against the Company for compensation or damages relating to My Claims. The consideration that I am receiving is a fair compromise for the release of My Claims.

Additional Agreements and Understandings . Even though Capella will provide consideration for me to settle and release My Claims, the Company does not admit that it is responsible or

legally obligated to me. In fact, the Company denies that it is responsible or legally obligated to me for My Claims, denies that it engaged in any unlawful or improper conduct toward me, and denies that it treated me unfairly.

Advice to Consult with an Attorney . I understand and acknowledge that I am hereby being advised by the Company to consult with an attorney prior to signing this Release and I have done so. My decision whether to sign this Release is my own voluntary decision made with full knowledge that the Company has advised me to consult with an attorney.

Period to Consider the Release . I understand that I have 21 days from the day that I receive this Release, not counting the day upon which I receive it, to consider whether I wish to sign this Release. If I sign this Release before the end of the 21-day period, it will be my voluntary decision to do so because I have decided that I do not need any additional time to decide whether to sign this Release.

My Right to Rescind this Release . I understand that I may rescind this Release at any time within 15 days after I sign it, not counting the day upon which I sign it. This Release will not become effective or enforceable unless and until the 15-day rescission period has expired without my rescinding it.

Procedure for Accepting or Rescinding the Release. To accept the terms of this Release, I must deliver the Release, after I have signed and dated it, to Capella by hand or by mail within the 21 -day period that I have to consider this Release. To rescind my acceptance, I must deliver a written, signed statement that I rescind my acceptance to Capella by hand or by mail within the 15-day rescission period. All deliveries must be made to Capella at the following address:

General Counsel

Capella Education Company

Capella Tower

225 South Sixth Street, 9th Floor

Minneapolis, MN 55402

If I choose to deliver my acceptance or the rescission of my acceptance by mail, it must be:

(1)

postmarked within the period stated above; and

(2)

properly addressed to Capella at the address stated above.

Interpretation of the Release. This Release should be interpreted as broadly as possible to achieve my intention to resolve all of My Claims against the Company. If this Release is held by a court to be inadequate to release a particular claim encompassed within My Claims, this Release will remain in full force and effect with respect to all the rest of My Claims.

My Representations. I am legally able and entitled to receive the consideration being provided to me in settlement of My Claims. I have not been involved in any personal bankruptcy or other insolvency proceedings at any time since I began my employment with Capella. No child support orders, garnishment orders, or other orders requiring that money owed to me by Capella be paid to any other person are now in effect.

I have read this Release carefully. I understand all of its terms. In signing this Release, I have not relied on any statements or explanations made by the Company except as specifically set forth in the Agreement. I am voluntarily releasing My Claims against the Company. I intend this Release and the Agreement to be legally binding.


Dated:
				Lois M. Martin

Exhibit 10.2

FOURTH AMENDMENT TO LEASE

THIS FOURTH AMENDMENT TO LEASE AGREEMENT (this “ Amendment ” or “ Fourth Amendment ”) is made and entered into by and between Minneapolis 225 Holdings, LLC, a Delaware limited liability company (“ Landlord ”) and Capella Education Company, a Minnesota corporation (“ Tenant ”), as of the 25th day of June, 2010 (the “ Fourth Amendment Effective Date ”).

RECITALS

A. Landlord and Tenant are parties to that certain Office Lease dated as of February 23, 2004 (the “ Original Lease ”) by and between Tenant, as tenant and Landlord’s predecessor-in-interest, 601 Second Avenue Limited Partnership, as landlord, which was amended by First Amendment to Lease dated as of May 16, 2006, Second Amendment to Lease dated as of March 17, 2008 (“ Second Amendment ”) and Third Amendment to Lease dated as of June 10, 2009 (as so amended, the “ Existing Lease ” and as further amended by this Amendment, the “ Lease ”).

B. The parties have agreed to amend the Lease as set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

Application of Lease Terms . Except to the extent inconsistent with this Amendment and except to the extent that the terms of this Amendment specifically address a topic, the terms and conditions of the Existing Lease shall apply. Those capitalized terms used and not defined herein shall have the meanings given to them under the Existing Lease.

2.	Reference Subjects . (a) The following definitions are hereby added to Section 1 of the Lease:

“ Amendment Brokers ” means CB Richard Ellis and TEGRA Group (“ Tegra ”).

“ Fourth Amendment Applicable Improvement Allowance ” means (i) Twenty-Four and 36/100 Dollars ($24.36) per square foot of Rentable Area of the Fourth Floor Expansion Space and (ii) Nineteen and 74/100 Dollars ($19.74) per square foot of Rentable Area of the Twelfth Floor Expansion Space.

“ Fourth Amendment Applicable Improvement Allowance Expiration Date ” means (i) June 1, 2011, with respect to the Fourth Amendment Applicable Improvement Allowance for the Fourth Floor Expansion Space and (ii) June 1, 2012, with respect to the Fourth Amendment Applicable Improvement Allowance for the Twelfth Floor Expansion Space.

“ Fourth Amendment Expansion Space ” means (i) the Fourth Floor Expansion Space, or (ii) the Twelfth Floor Expansion Space.

“ Fourth Amendment Expansion Spaces ” means the Fourth Floor Expansion Space and the Twelfth Floor Expansion Space.

“ Fourth Amendment Expansion Space Delivery Date ” means (i) the Fourth Floor Expansion Space Delivery Date with respect to the Fourth Floor Expansion Space and (ii) the Twelfth Floor Expansion Space Delivery Date with respect to the Twelfth Floor Expansion Space.

“ Fourth Amendment Expansion Space Rent Commencement Date ” means (i) the Fourth Floor Expansion Space Rent Commencement Date or (ii) the Twelfth Floor Expansion Space Rent Commencement Date.

“ Fourth Expansion Space Occupancy Date ” means April 1, 2010.

“ Fourth Floor Expansion Space ” means the approximately 29,394 square feet of Rentable Area which is located on the 4th Floor of the Tower and which is depicted on Exhibit V-1 that is attached to this Amendment.

“ Fourth Floor Expansion Space Delivery Date ” means August 1, 2010.

“ Fourth Floor Expansion Space Rent Commencement Date ” means the date that is one (1) month after the earlier of (i) December 1, 2010 and (ii) that date that Tenant occupies any portion of the Fourth Floor Expansion Space for the conduct of Tenant’s business.

“ Interim Occupancy Charge ” means an amount, to be paid by Tenant to Landlord as a partial operating expense and tax reimbursement with respect to the Fourth Expansion Space, equal to $9,741.60 per month for each of April, 2010 and May, 2010 and $29,520 per month for each of June, 2010, July, 2010, August, 2010 and September, 2010.

“ Twelfth Floor Expansion Space ” means the approximately 55,020 square feet of Rentable Area on the 12th floor of the Project, which is comprised of 26,923 square feet of Rentable Area located on the 12th floor of the Tower and 28,097 square feet of Rentable Area located on the 12th floor of the Building, and which is depicted on Exhibit V-2 that is attached to this Amendment.

“ Twelfth Floor Expansion Space Delivery Date ” means August 1, 2011.

“ Twelfth Floor Expansion Space Rent Commencement Date ” means April 1, 2012.

In addition, the following definitions already included in Section 1 of the Lease are hereby amended and restated to read as follows:

“ Existing Premises ” means the 396,771 square feet of Rentable Area (including the Rentable Area of the Fourth Expansion Space, as defined in the Second Amendment) that Tenant is currently leasing from Landlord pursuant to the Existing Lease (subject to, in the case of said Fourth Expansion Space, the provisions of Section 3 of this Fourth Amendment).

-2-

“ Fourth Expansion Space Rent Commencement Date ” means October 1, 2010.

“ Premises ” means the Existing Premises (as defined in this Amendment) and all other space which is added to the Premises from and after the Fourth Amendment Effective Date.

Fourth Expansion Space . The Fourth Expansion Space (as defined in the Second Amendment) has been delivered to Tenant and Tenant has constructed improvements therein, all as contemplated by the provisions of the Second Amendment. Tenant has elected to operate its business in the Fourth Expansion Space prior to October 1, 2010. The provisions of this Amendment with respect to the Fourth Expansion Space represent the parties’ agreement with respect to such early occupancy and the payment of Rent with respect to such space. Notwithstanding anything to the contrary set forth in the Second Amendment:

(a)

During the period commencing on the Fourth Expansion Space Occupancy Date until the Fourth Expansion Space Rent Commencement Date, Tenant shall pay no Base Rent or Tenant’s Additional Rent with respect to the Fourth Expansion Space, but shall instead pay to Landlord on the first day of each month, on account of Tenant’s occupancy of the Fourth Expansion Space during such period, the Interim Occupancy Charge; the Interim Occupancy Charge shall serve as (and be invoiced as) a partial operating expense and tax reimbursement to Landlord and shall be treated as Rent for all purposes under the Lease;

(b)

Tenant’s obligation to pay Tenant’s Additional Rent with respect to the Fourth Expansion Space shall commence on the Fourth Expansion Space Rent Commencement Date (as defined in this Amendment); and

(c)

Tenant’s obligation to pay Base Rent with respect to the Fourth Expansion Space shall commence November 1, 2010.

4.	Delivery of Fourth Amendment Expansion Spaces .

(a)

Landlord shall deliver possession of each Fourth Amendment Expansion Space to Tenant on the applicable Fourth Amendment Expansion Space Delivery Date. Tenant acknowledges, however, that Landlord shall not be liable to Tenant for any delays in delivering possession of any portion of the Fourth Amendment Expansion Space to Tenant because of any holding over by any previous tenant or occupant of the Fourth Amendment Expansion Space, nor shall any such delay or failure impair the validity of this Lease. Landlord, however, shall use all reasonable efforts (including the institution of any eviction action needed to recover space from any holdover tenant) to deliver possession of each portion of

-3-

the Fourth Amendment Expansion Space to Tenant on the applicable Fourth Amendment Expansion Space Delivery Date for such space. If Landlord does not deliver possession of any Fourth Amendment Expansion Space to Tenant on or before the applicable Fourth Amendment Expansion Space Delivery Date, then the Fourth Amendment Expansion Space Rent Commencement Date for such space shall be delayed by one day for each day of such delay until the space is delivered to Tenant in accordance with the requirements of this Lease, but the foregoing shall not affect Tenant’s obligation to pay the Interim Occupancy Charge pursuant to Section 3 of this Amendment with respect to the Fourth Expansion Space.

(b)

Landlord hereby certifies to Tenant that the Rentable Area of each of the Fourth Amendment Expansion Spaces, as set forth in Section 2 of this Fourth Amendment, has been calculated on the basis of the definitions contained in Section 3.1 of the Original Lease.

Addition to Premises; Declarations . Each Fourth Amendment Expansion Space shall be added to the Premises on the applicable Fourth Amendment Expansion Space Delivery Date for such space as set forth in Section 4 of this Fourth Amendment and from and after such Fourth Amendment Expansion Space Delivery Date, the term “Premises” wherever it appears in this Lease and any Exhibits thereto shall include such Fourth Amendment Expansion Space; except that Tenant shall not be obligated to pay any Base Rent or Tenant’s Additional Rent with respect to such Fourth Amendment Expansion Space until the applicable Expansion Space Rent Commencement Date for such space. Landlord shall promptly after each Fourth Amendment Expansion Space Rent Commencement Date prepare a declaration (substantially in the form of Exhibit C attached to the Second Amendment) confirming the Commencement Date for the applicable Fourth Amendment Expansion Space and the other information set forth thereon. Tenant shall execute and return such declaration within twenty (20) days after submission. If Tenant fails to execute and return such declaration to Landlord within said twenty (20) day period, Tenant shall be conclusively deemed to have agreed that the information in the declaration is accurate and Tenant shall have thereby waived any right to object to the accuracy of such information unless Landlord has, during said twenty (20) day period, received a written notice from Tenant objecting to such information and describing in detail Tenant’s reasons for so objecting.

“As Is” Condition . Tenant agrees to accept each Fourth Amendment Expansion Space in its “as is” condition on the date possession of such space is delivered to Tenant; provided that each Fourth Amendment Expansion Space must comply with the Space Delivery Standards, and Landlord shall deliver such space broom clean, with all personal property removed. Tenant shall notify the Landlord of any base building systems or equipment that Tenant proposes to relocate or modify that are not in working order prior to relocating or modifying such systems or equipment. Tenant acknowledges that Landlord shall not be obligated to make any improvements to any of the Fourth Amendment Expansion Spaces and that Tenant shall not be entitled to any construction, build-out or other allowance with respect thereto, except as otherwise provided in Section 7 of this Fourth Amendment.

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Improvement Allowances . To help pay for those costs which are incurred by Tenant in designing and constructing those improvements which Tenant desires to make to the Fourth Amendment Expansion Spaces (the “ Fourth Amendment Improvements ”), Landlord shall make each Fourth Amendment Applicable Improvement Allowance available to Tenant. Landlord shall disburse each Fourth Amendment Applicable Improvement Allowance on a monthly basis in accordance with customary construction disbursement procedures and upon receipt of a sworn construction statement and draw requests, with supporting invoices for actual costs incurred and lien waivers from all material contractors and subcontractors delivered one month in arrears; it being agreed, however, that Landlord shall not be required to disburse any portion of a Fourth Amendment Applicable Improvement Allowance if Tenant is then in default of its obligations under the Lease. If the actual cost of the Fourth Amendment Improvements for any Fourth Amendment Expansion Space exceeds the amount of the Fourth Amendment Applicable Improvement Allowance for such Fourth Amendment Expansion Space, Tenant shall pay the excess costs without reimbursement from Landlord as and when such excess costs become due and payable. If Tenant has not submitted requisitions covering all of the Fourth Amendment Applicable Improvement Allowance for any Fourth Amendment Expansion Space on or before the Fourth Amendment Applicable Improvement Allowance Expiration Date for such Fourth Amendment Expansion Space, then up to, but not more than, $5.00 per square foot of any unused portion of the Fourth Amendment Applicable Improvement Allowance may be applied as a credit against the next installments of Rent due under this Lease. Notwithstanding anything to the contrary in the foregoing, Tenant may pool the Fourth Amendment Applicable Improvement Allowances for use in paying the costs of designing and constructing improvements to any one or more of the Fourth Amendment Expansion Spaces, but Tenant shall not be entitled to draw upon a Fourth Amendment Applicable Improvement Allowance prior to the Fourth Amendment Expansion Space Delivery Date for such Fourth Amendment Expansion Space, or after the Fourth Amendment Applicable Improvement Allowance Expiration Date. Landlord shall be permitted to offset against any Fourth Amendment Applicable Improvement Allowance any amounts past due to Landlord by Tenant under this Lease.

Each Fourth Amendment Applicable Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed and paid for with each Fourth Amendment Applicable Improvement Allowance shall be owned by Landlord. When Tenant submits a draw request and other supporting materials to Landlord requesting an advance of funds under any Fourth Amendment Applicable Improvement Allowance (each, an “ Advance ”), Tenant shall in writing advise Landlord whether the check (or checks) in the amount of the requested Advance should be payable to Tenant and/or to one or more of Tenant’s contractors. If Tenant requests that a check for any Advance be made payable to any of Tenant’s contractors, Landlord shall nonetheless deliver such check to Tenant, so that Tenant may deliver the check to the relevant contractor. Promptly following disbursement in full of any Fourth Amendment Applicable Improvement Allowance, Tenant will submit to Landlord a statement identifying the categories of work with respect to which the Fourth Amendment Applicable Improvement Allowance was disbursed, allocating to one or more of such categories of work amounts (in the

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aggregate) equal to the total of the Advances made by Landlord under the Fourth Amendment Applicable Improvement Allowance. Landlord will execute and return such statement within twenty (20) days after submission by Tenant. If Landlord fails to execute and return such statement and allocation to Landlord within said twenty (20) day period, Landlord shall be conclusively deemed to have agreed with such statement. If Landlord fails to pay any portion of an Fourth Amendment Applicable Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten (10) business days after receiving written notice from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

Improvements . Any leasehold improvements that Tenant elects to make to the Fourth Amendment Expansion Spaces shall be completed in accordance with Section 9 of the Second Amendment and the remainder of the Lease, except that Ted Campbell is hereby designated at Landlord’s Designated Representative.

9.	Base Rent .

(a)

Commencing on November 1, 2010, Tenant shall pay as monthly “Base Rent” for the Fourth Expansion Space the amounts set forth in Section 1(d) of the Second Amendment. For the avoidance of doubt, the provisions of Section 3 of this Amendment (and not the provisions of Section 12(d) of the Second Amendment) shall govern the amount due from Tenant for the month of October, 2010.

(b)

Tenant shall pay as monthly “Base Rent” for the Fourth Floor Expansion Space one twelfth of the product of:

Fourteen and 48/100 Dollars ($14.48) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on the Fourth Floor Expansion Space Rent Commencement Date and ending on October 31, 2011.

Fourteen and 91/100 Dollars ($14.91) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on November 1, 2011 and ending on October 31, 2012.

Fifteen and 36/100 Dollars ($15.36) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on November 1, 2012 and ending on October 31, 2013.

Fifteen and 82/100 Dollars ($15.82) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on November 1, 2013 and ending on October 31, 2014.

Sixteen and 30/100 Dollars ($16.30) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on November 1, 2014 and ending on October 31, 2015.

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(c)

Tenant shall pay as monthly “Base Rent” for the Twelfth Floor Expansion Space one twelfth of the product of:

Fourteen and 91/100 Dollars ($14.91) times the number of square feet of the Rentable Area of the Fourth Floor Expansion Space for the period beginning on the Twelfth Floor Expansion Space Rent Commencement Date and ending on October 31, 2012.

10.

Tenant’s Additional Rent . Tenant shall remain obligated to pay Tenant’s Additional Rent for the Existing Premises throughout the Lease Term, as the same may be hereafter extended, and Tenant shall be obligated to pay Tenant’s Additional Rent for the Fourth Floor Expansion Space from and after December 1, 2010 and Tenant shall be obligated to pay Tenant’s Additional Rent for the Twelfth Floor Expansion Space from and after December 1, 2011 (except that if the applicable Fourth Amendment Expansion Space Rent Commencement Date is delayed for either Fourth Amendment Expansion Space by operation of the final sentence of Section 4(a) of this Amendment, the December 1, 2010 date or December 1, 2011 date, as applicable, set forth in this Section 10 shall be similarly delayed as to the Fourth Floor Expansion Space with respect to which delivery was delayed) until the end of the Lease Term, in accordance with the provisions of the Lease.

11.	Expansion Options . Exhibits I-1 and I-2 to the Second Amendment (entitled “Expansion Options” and “Potential Expansion Floors”) are hereby deleted and replaced in their entirety with Exhibit I which is attached to this Fourth Amendment.

12.

Acknowledgment . Tenant hereby acknowledges that Tenant now has no extension, renewal, expansion contraction or early termination rights (except for rights to terminate based on damage, condemnation or Landlord’s default and except as set forth in Section 10.10 of the Original Lease and in Section 30 of the Second Amendment) or rights of first offer or refusal with respect to the Premises or any other space in the Project (collectively, “ Modification Rights ”) except for (i) the Extension Options set forth in Section 15 of the Second Amendment and Exhibit G attached to the Second Amendment, (ii) the Expansion Options described in Section 11 above and in Exhibit I attached hereto, and (iii) the Right of Offer set forth in Section 17 of the Second Amendment and in Exhibit J attached thereto. Any provision in the Existing Lease or in any Exhibits thereto that establishes or that might be interpreted to establish any other Modification Right is hereby deleted.

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13.

Brokers . Landlord and Tenant each warrant and defend to the other that it has not dealt with any broker in connection with this Amendment other than the Amendment Brokers; and Landlord and Tenant each agrees to indemnify and save the other for its breach of this warranty and representation, which will survive the termination of the Lease Term. Landlord agrees to pay any commission due to the Amendment Brokers as a result of this Amendment. The commission paid to CB Richard Ellis will be as set forth in a separate written agreement. As described in Section 26(b) of the Second Amendment, Landlord agrees to pay or caused to be paid to Tegra a commission in an amount equal to (i) $3.77 per square foot of the Rentable Area of the Fourth Floor Expansion Space and (ii) $3.05 per square foot of the Rentable Area of the Twelfth Floor Expansion Space, which commissions shall be due and payable within thirty (30) days after the date on which this Fourth Amendment has been fully executed and delivered. If Tenant exercises its Expansion Option pursuant to Exhibit I attached to this Fourth Amendment, then Landlord agrees to pay to Tenant, or at Tenant’s request, to Tenant’s broker, a commission in an amount equal to $0.086 per square foot of the Rentable Area of the space that has been leased pursuant to the Expansion Option for each month that Tenant will pay Base Rent with respect to such Seventh Expansion Space (as defined in Exhibit I ) during the First Extension Term, with such commission being due and payable within thirty (30) days after such Seventh Expansion Space has been leased to Tenant.

14.	Right of First Offer . Notwithstanding anything to the contrary set forth in the Lease, the Right of Offer shall not apply to 14th floor of the Building until the Seventh Expansion Option expires.

15.	Landlord Notice Address . The Landlord’s notice (and copy) addresses specified in Section 28 of the Original Lease are hereby amended to read as follows:

Minneapolis 225 Holdings, LLC

c/o Ryan Companies U.S., Inc.

225 South Sixth Street, Suite 1200

Minneapolis, MN 55402

Attention: Property Manager

With a copy to:

Minneapolis 225 Holdings, LLC

c/o ASB Capital Management, LLC

7501 Wisconsin Avenue

Bethesda, MD 20814

Attention: Asset Manager – 225 South Sixth

16.

Counterparts . This Amendment may be executed in counterparts and it shall be sufficient that the signature of each party appear in one or more of such counterparts. Signatures on this Amendment which are transmitted by facsimile or e-mail shall be valid for all purposes. Any party, however, shall deliver an original signature for this Amendment to the other party upon request.

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17.	Reference . Except as otherwise provided above, the Lease is ratified and confirmed and remains in full force and effect. All references in the Lease and this Amendment to the “Lease” or this “Lease” shall mean the Lease as amended by this Amendment.

18.	Recitals . Recitals A through B above are incorporated herein by reference.

19.	Amendment to Short Form Lease . Each of Landlord and Tenant agrees to execute and deliver to the other upon request an amendment to short form lease, reflecting the terms of this Amendment.

20.	Successors and Assigns . This Fourth Amendment shall be binding upon and be enforceable by Landlord and Tenant and their successors and permitted assigns.

21.

Lender Consent and Confirmation . Landlord represents and warrants to Tenant that: (a) Landlord owns fee simple title to the Project, subject to a Mortgage, Assignment of Leases and Rents, Fixture Filing and Security Agreement dated August 16, 2006, recorded on August 17, 2006, as Document No. 4294846, in the Office of the Registrar of Titles in and for Hennepin County, Minnesota (the “ Mortgage ”); (b) the Mortgage is currently held by Bank of America, National Association, as successor by merger to LaSalle Bank, National Association, as Trustee for Bear Stearns Commercial Mortgage Securities Inc., Commercial Mortgage Pass-Through Certificates, Series 2006-TOP24 (“ Mortgage Holder ”); and (c) except for the Mortgage, the Landlord’s interest in the Project is not subject to any mortgages or monetary liens. Landlord agrees to obtain and deliver to Tenant as soon as reasonably possible, but in no event later than July 31, 2010, a Subordination, Non-Disturbance and Attornment Agreement (the “ Mortgage Holder SNDA ”), in the form attached hereto as Exhibit T , or with such changes thereto as are approved by Tenant, executed and acknowledged by the Mortgage Holder. If the Mortgage Holder SNDA is executed on behalf of the Mortgage Holder by a servicer or other third party purporting to act for and bind the Mortgage Holder, then the Mortgage Holder SNDA shall be accompanied by recordable evidence of the authority of such servicer or third party to so act for and bind the Mortgage Holder, which recordable evidence of authority shall be in form and substance acceptable to Tenant.

If Landlord shall fail to deliver to Tenant a recordable original of the Mortgage Holder SNDA (and, if applicable, recordable evidence of authority of any servicer or third party purporting to act for and bind the Mortgage Holder, as described above) by July 31, 2010, Tenant may by written notice to Landlord terminate this Fourth Amendment at any time on or before August 31, 2010, and upon any such termination, this Fourth Amendment shall be of no further force or effect, except that Landlord shall reimburse Tenant for the actual out-of-pocket costs and expenses incurred by Tenant in connection with this Fourth Amendment, including, without limitation, design fees, construction costs and expenses, attorneys’ fees and consultants’ fees.

[Continued on Next Page]

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IN WITNESS WHEREOF, Landlord has executed this Amendment to be effective as of the date first above written.


LANDLORD:

MINNEAPOLIS 225 HOLDINGS, LLC , a Delaware limited liability company

By:		/s/ M. L. Wedin
Name:		M. L. Wedin
Title:		VP

This is a signature page to that certain Fourth Amendment to Lease between Minneapolis 225 Holdings, LLC, a Delaware limited liability company, as Landlord, and Capella Education Company, a Minnesota corporation, as Tenant, with respect to certain Premises located in the office project now known as Capella Tower or 225 South Sixth in Minneapolis, Minnesota.

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IN WITNESS WHEREOF, Tenant has executed this Amendment to be effective as of the date first above written.


TENANT:

CAPELLA EDUCATION COMPANY, a Minnesota corporation

By:		/s/ Lois M. Martin
Name:		Lois M. Martin
Title:		SVP & CFO

EXHIBIT I

EXPANSION OPTION

1. Subject to the terms and conditions set forth in this Exhibit I , Landlord hereby grants Tenant the option (the “ Seventh Expansion Option ”) to add the Seventh Expansion Space to the Premises. As used herein, the “ Seventh Expansion Space ” shall mean at least 15,000 square feet of the Rentable Area located, at Landlord’s election, on the 4th Floor of the Building, 3rd floor of the Tower, 13th floor of the Building or 14th floor of the Building, but in no event will the Rentable Area of such Seventh Expansion Space be greater than one full floor in the Building or Tower, as applicable. Possession of the Seventh Expansion Space shall be delivered to Tenant on the first day of any month chosen by Landlord during the period from (and including) July 1, 2012 to (and including) July 1, 2013 (the “ Expansion Commencement Delivery Period ”). Landlord shall give Tenant at least 60 days prior written notice of the date within the Expansion Commencement Delivery Period (the “ Seventh Expansion Space Delivery Date ”) that Landlord anticipates to deliver the Seventh Expansion Space to Tenant, but a later delivery shall have no effect on Tenant’s obligations under the Lease as long as the Seventh Expansion Space Delivery Date occurs by July 1, 2013. If Landlord fails to deliver said written notice, then July 1, 2013, shall be the Seventh Expansion Space Delivery Date.

2. Tenant shall have the right to exercise the Seventh Expansion Option by delivering written notice (“ Tenant’s Expansion Notice ”) of such election no later than December 31, 2011. Failure by Tenant to give timely notice of its exercise of the Seventh Expansion Option (“ Tenant’s Exercise Notice ”) shall constitute Tenant’s decision not to exercise the Seventh Expansion Option, which shall thereupon automatically terminate; it being agreed that time is of the essence and timely notice shall be an express and agreed condition of such exercise.

3. The Seventh Expansion Space shall be added to the Premises and leased to Tenant upon the same terms and conditions of this Lease (including, without limitation, Tenant’s obligation to pay Tenant’s Additional Rent), except:

(a) Tenant shall not be obligated to pay any Base Rent or Tenant’s Additional Rent for the Seventh Expansion Space until the earlier of (i) the date which is one hundred twenty (120) days after the date on which possession of the Seventh Expansion Space is delivered to Tenant, and (ii) the date on which Tenant takes occupancy of any portion of the Seventh Expansion Space for the conduct of its business (the “ Seventh Expansion Space Rent Commencement Date ”); provided that from and after the date on which possession of the Seventh Expansion Space is delivered to Tenant, the Seventh Expansion Space shall be part of the Premises for all purposes of this Lease other than Tenant’s obligation to pay Base Rent and Tenant’s Additional Rent and Tenant shall be bound by and shall comply with all of the provisions of this Lease (including those terms and conditions pertaining to acts or omissions of Tenant or Tenant’s representatives, employees, agents, and contractors);

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(b) the Base Rent which Tenant shall pay for the Seventh Expansion Space shall be the same as the Base Rent as Tenant is obligated to pay from time to time for the First Expansion Space, as set forth in the Second Amendment;

(c) Tenant shall accept the Seventh Expansion Space in its “as is” condition on the date that possession of the Seventh Expansion Space is delivered to Tenant; except that the Seventh Expansion Space shall be delivered in accordance with the Space Delivery Standards, and Landlord shall deliver such space broom clean, with all personal property removed, and except that Landlord shall make an allowance available to Tenant in an amount equal to $0.42 per square foot of the Rentable Area of the Seventh Expansion Space for each month (or a pro rata portion thereof for any partial month) remaining in the First Extension Term as of the Seventh Expansion Space Rent Commencement Date during which Tenant shall pay Base Rent with respect to such Seventh Expansion Space to pay for those costs which are incurred by Tenant in designing and constructing those leasehold improvements which Tenant desires to make to the Seventh Expansion Space (the “ Seventh Expansion Space Improvement Allowance ”). For so long as Tenant is not in default under this Lease, Landlord shall pay the Seventh Expansion Space Improvement Allowance on a monthly basis in accordance with customary construction disbursement procedures and upon receipt of a sworn construction statement and draw request, with supporting lien waivers from all material contractors and subcontractors delivered one month in arrears. Landlord shall be permitted to offset against the Seventh Expansion Space Improvement Allowance any amounts past due to Landlord by Tenant under this Lease. If Tenant has not submitted requisitions covering all of the Seventh Expansion Space Improvement Allowance or before the date (the “ Seventh Expansion Space Improvement Allowance Expiration Date ”) that is twelve months after the Seventh Expansion Space Rent Commencement Date, then up to, but not more than, $5.00 per square foot of any unused portion of the Seventh Expansion Space Improvement Allowance may be applied as a credit against the next installments of Rent due under the Lease. Notwithstanding anything to the contrary in the foregoing, Tenant shall not be entitled to draw upon the Seventh Expansion Space Improvement Allowance after the Seventh Expansion Space Improvement Allowance Expiration Date;

(d) The Term of this Lease for the Seventh Expansion Space shall expire upon the expiration of the Lease Term for the Existing Premises;

(e) The Seventh Expansion Space Improvement Allowance shall be treated by Landlord and Tenant as a tenant improvement allowance and all of the leasehold improvements that are constructed and paid for with the Seventh Expansion Space Improvement Allowance shall be owned by Landlord;

(f) If Landlord fails to pay any portion of the Seventh Expansion Space Improvement Allowance which is properly due and payable, the unpaid amount shall bear interest until paid at the Interest Rate, and if Landlord fails to pay such properly due and payable amount within ten (10) business days after receiving

I-2

written notice from Tenant that such amount was not paid when due, then Tenant shall be entitled to offset said amounts (including interest) against Rent due and payable under the Lease.

4. Tenant shall have no right to exercise the Seventh Expansion Option if Capella Education Company has assigned this Lease other than to an Affiliate or in connection with a Permitted Transfer (as defined in Section 10.7 of the Lease) or if Capella Education Company has subleased more than twenty percent (20%) of the Rentable Area of the Premises other than to an Affiliate or in connection with a Permitted Transfer.

5. Tenant shall have no right to exercise the Seventh Expansion Option if on the date Tenant delivers a Tenant’s Expansion Notice an Event of Default exists under this Lease and, if at any time after Tenant exercises the Seventh Expansion Option until the date on which Landlord is scheduled to deliver possession of the Seventh Expansion Space to Tenant, an Event of Default exists under this Lease, Landlord shall, in addition to any other rights which Landlord may have under this Lease, have the right to terminate Tenant’s right to lease the Seventh Expansion Space by giving Tenant written notice of such termination.

6. Landlord shall promptly after the Seventh Expansion Space Rent Commencement Date prepare a declaration confirming the Seventh Expansion Space Rent Commencement Date and the Rentable Area of the Seventh Expansion Space and deliver such declaration to Tenant. If such declaration is complete and correct, Tenant shall execute and return such declaration within thirty (30) days after submission, failing which, Tenant shall be conclusively deemed to have agreed that the information in the declaration is accurate and Tenant shall have thereby waived any right to object to the accuracy of such information unless within such thirty (30) day period Tenant notifies Landlord of its reasons for objecting to the declaration.

7. Landlord shall not be liable for any delay in delivering or any failure to deliver possession of the Seventh Expansion Space to Tenant by reason of any holding over by any previous tenants or occupants of same, nor shall such failure impair the validity of the Lease. Landlord shall, however, use all reasonable efforts to deliver possession of the Seventh Expansion Space in accordance with the provisions of this Exhibit I .

8. Tenant’s Seventh Expansion Option shall be independent of Tenant’s Right of Offer (as the same is modified by this Amendment) and no failure by Tenant to exercise its Right of Offer with respect to any Available Space shall affect Tenant’s Seventh Expansion Option.

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EXHIBIT T

SUBORDINATION, NON-DISTURBANCE

AND ATTORNMENT AGREEMENT

BANK OF AMERICA, NATIONAL ASSOCIATION, as successor by merger to LaSalle Bank

National Association, as Trustee for Bear Stearns Commercial Mortgage Securities Inc.,

Commercial Mortgage Pass-Through Certificates, Series 2006-TOP 24

(“ Lender ”)

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CAPELLA EDUCATION COMPANY

(“ Tenant ”)

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MINNEAPOLIS 225 HOLDINGS, LLC

(“ Landlord ”)

Dated: , 2010

Location: 225 South Sixth Street, Minneapolis, Minnesota

THIS INSTRUMENT WAS DRAFTED BY:

Faegre & Benson LLP

2200 Wells Fargo Center

90 S. Seventh Street

Minneapolis, MN 55402

T-1

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

This Subordination, Non-Disturbance and Attornment Agreement (this “ Agreement ”) is entered into effective as of , 2010, by and among Bank of America, National Association, as successor by merger to LaSalle Bank National Association, as Trustee for Bear Stearns Commercial Mortgage Securities Inc., Commercial Mortgage Pass-Through Certificates, Series 2006-TOP 24, having an address c/o Wells Fargo Bank, N.A., 1320 Willow Pass Rd Suite 300, Concord, CA 94520 and its successors and assigns (collectively, “ Lender ”), Capella Education Company, a Minnesota corporation (“ Tenant ”), and Minneapolis 225 Holdings, LLC, a Delaware limited liability company, having an address at 225 South Sixth Street, Suite 2590, Minneapolis, Minnesota 55402 (“ Landlord ”).

RECITALS:

A. 601 Second Avenue Limited Partnership (“ Original Landlord ”), as Landlord, and Capella Education Company, as Tenant, entered into an Office Lease dated February 23, 2004 (the “ Original Lease ”), which was amended by a First Amendment to Lease dated May 16, 2006, a Second Amendment to Lease dated March 17, 2008, and a Third Amendment to Lease dated June 10, 2009 (as so amended, the “ Existing Lease ”) relating to certain premises (as may be modified from time to time, the “ Premises ”) situated in the office project which is now commonly known as 225 South Sixth in Minneapolis, Minnesota, and which is located on the real property that is legally described on Exhibit A attached hereto (the “ Property ”). The Original Lease is evidenced by a Memorandum of Lease dated March 10, 2004 and recorded on March 26, 2004 as Document No. 3938420 in the Office of the Registrar of Titles of Hennepin County, Minnesota (the “ Original Memorandum ”). The Original Memorandum was amended by the First Amendment to Memorandum of Lease dated March 17, 2008 and recorded on April 7, 2008 as Document No. 4485084 in the Office of the Registrar of Titles of Hennepin County, Minnesota.

B. Landlord purchased the Property from Original Landlord on August 17, 2006, in part with acquisition financing (the “ Acquisition Loan ”) that was obtained from Morgan Stanley Mortgage Capital, Inc. (the “ Original Lender ”).

C. The Acquisition Loan was secured by a Mortgage, Assignment of Leases and Rents, Fixture Filing and Security Agreement dated August 16, 2006, against the Property that was recorded on August 17, 2006, as Document No. 4294846, in the Office of the Registrar of Titles in and for Hennepin County, Minnesota (the “ Mortgage ”).

D. Lender acquired the Acquisition Loan from the Original Lender and Lender is now the present owner and holder of the Mortgage pursuant to an Assignment of Mortgage, Assignment of Leases and Rents, Fixture Financing Statement and Security Agreement and Assignment of Assignment of Leases and Rents dated October 31, 2006, which was recorded on February 9, 2007, as Document No. 4356462 in the Registrar of Titles Office in and for Hennepin County, Minnesota (such Loan now being identified as Loan No.:70-0401222).

T-2

E. Landlord and Tenant are entering into a Fourth Amendment to Lease with an effective date of , 2010 (the “ Fourth Amendment ”), pursuant to which Landlord and Tenant have agreed to increase the size of the Premises being leased to Tenant under the Existing Lease and to modify the Existing Lease in various other respects, all as set forth in the Fourth Amendment (the Existing Lease as modified by the Fourth Amendment and as the same may be hereafter amended or modified is referred to in this Agreement as the “ Lease ”).

F. As a condition to making the Acquisition Loan, Tenant, Landlord and Original Lender executed a Non-Disturbance and Attornment Agreement dated August 8, 2006 (the “ First NDA ”).

G. Landlord, Tenant and Lender executed and recorded a Subordination, Non-Disturbance and Attornment Agreement dated as of March 18, 2008, and recorded on April 7, 2008 as Doc. No. 4485087 in the Office of the Registrar of Titles of Hennepin County, Minnesota (the “ Existing SNDA ”), which replaced in its entirety the First NDA.

H. Landlord and Tenant are required under the Existing SNDA to obtain the Lender’s consent to the Fourth Amendment and Tenant has required, as a condition to its execution and delivery of the Fourth Amendment, that Lender execute this Agreement.

I. Landlord, Tenant and Lender have agreed that the Existing SNDA shall have no further force or effect and shall be replaced in its entirety with the provisions of this Agreement.

AGREEMENT:

For good and valuable consideration, Tenant, Lender and Landlord agree as follows:

1. Subordination . The Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to the terms, covenants and provisions of the Mortgage and to the lien thereof, including without limitation, all renewals, increases, modifications, spreaders, consolidations, replacements and extensions thereof and to all sums secured thereby and advances made thereunder with the same force and effect as if the Mortgage had been executed, delivered and recorded prior to the execution and delivery of the Lease.

2. Non-Disturbance . If any action or proceeding is commenced by Lender for the foreclosure of the Mortgage or the sale of the Property, Tenant shall not be named as a party therein unless such joinder shall be required by law, provided, however, such joinder shall not result in the termination of the Lease or disturb the Tenant’s possession or use of the Premises demised thereunder, and the sale of the Property in any such action or proceeding and the exercise by Lender of any of its other rights under the Mortgage shall be made subject to all rights of Tenant under the Lease, provided that at the time of the commencement of any such action or proceeding or at the time of any such sale or exercise of any such other rights (a) the Lease shall be in full force and effect, and (b) Tenant shall not be in default (after any applicable notice and cure period) of any of the terms, covenants or conditions of the Lease or of this Agreement on Tenant’s part to be observed or performed.

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3. Attornment . If Lender or any other subsequent purchaser of the Property shall become the owner of the Property by reason of the foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or by reason of any other enforcement of the Mortgage (Lender or such other purchaser being hereinafter referred as “ Purchaser ”), and the conditions set forth in Section 2 above have been met at the time Purchaser becomes owner of the Property, the Lease shall not be terminated or affected thereby but shall continue in full force and effect as a direct lease between Purchaser and Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that event, Tenant agrees to attorn to Purchaser and Purchaser by virtue of such acquisition of the Property shall be deemed to have agreed to accept such attornment, provided, however, that Purchaser shall not be (a) liable for the failure of any prior landlord (any such prior landlord, including Landlord and any successor landlord, being hereinafter referred to as a “ Prior Landlord ”) to perform any of its obligations under the Lease which have accrued prior to the date on which Purchaser shall become the owner of the Property, provided that the foregoing shall not limit Purchaser’s obligations under the Lease to correct any conditions of a continuing nature that (i) existed as of the date Purchaser became the owner of the Property and (ii) violate Purchaser’s obligations as landlord under the Lease; provided further, however, that Purchaser shall have received written notice of such omissions, conditions or violations and shall have had a reasonable opportunity to cure the same, all pursuant to the terms and conditions of the Lease, (b) subject to any offsets, defenses, abatements or counterclaims which shall have accrued in favor of Tenant against any Prior Landlord prior to the date upon which Purchaser shall become the owner of the Property, except to the extent that such offsets are otherwise expressly provided for under the Lease or were used to fund any Improvement Allowance under the Lease including interest thereon or to fund the repairs, maintenance or other actions which would otherwise be an obligation of Purchaser upon its acquisition of the Property, (c) liable for the return of rental security deposits, if any, paid by Tenant to any Prior Landlord in accordance with the Lease unless such sums are actually received by Purchaser, (d) bound by any payment of rents, additional rents or other sums which Tenant may have paid more than one (1) month in advance to any Prior Landlord unless (i) such sums are actually received by Purchaser or (ii) such prepayment shall have been expressly approved of by Lender or Purchaser, (e) bound by any agreement terminating or amending or modifying the rent, term, commencement date or other material term of the Lease (except for Amendments to the Lease which are executed to memorialize rights granted in the Lease), or any voluntary surrender of the Premises demised under the Lease, made without Lender’s or Purchaser’s prior written consent prior to the time Purchaser succeeded to Landlord’s interest or (f) bound by any assignment of the Lease or sublease of the Property, or any portion thereof, made prior to the time Purchaser succeeded to Landlord’s interest other than if pursuant to the provisions of the Lease. In the event that any liability of Purchaser does arise pursuant to this Agreement, such liability shall be limited and restricted to Purchaser’s interest in the Property and shall in no event exceed such interest. Alternatively, upon the written request of Lender or its successors or assigns, Tenant shall enter into a new lease of the Premises with Lender or such successor or assign for the then remaining term of the Lease, upon the same terms and conditions as contained in the Lease (including, without limitation, any extension rights), except as otherwise specifically provided in this Agreement.

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4. Notice to Tenant . After notice is given to Tenant by Lender that (a) the Landlord is in default under the Mortgage, (b) Lender has exercised its right under the assignment of leases and rents executed and delivered by Landlord to Lender in connection with the Mortgage (the “ Assignment of Leases ”), and has revoked the license granted to Landlord to collect rentals and monies due under the Lease, and (c) the rentals under the Lease should be paid to Lender pursuant to the terms of the Assignment of Leases, Tenant shall thereafter pay to Lender or as directed by the Lender, all rentals and all other monies due or to become due to Landlord under the Lease and Landlord hereby expressly authorizes Tenant to make such payments to Lender and hereby releases and discharges Tenant from any liability to Landlord on account of any such payments.

5. Lender’s Consent . None of the following shall be binding upon Lender without such action being taken with Lender’s prior consent: (a) any agreement amending, modifying or terminating the Lease (except for amendments to the Lease which are executed to memorialize rights granted in the Lease), (b) prepayment by Tenant of any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due dates thereof, (c) except as expressly permitted under the Lease, Tenant’s voluntarily surrender of the Premises demised under the Lease, termination of the Lease, or shortening of the term thereof, or (d) assignment of the Lease or sublease of the premises demised under the Lease or any part thereof other than as permitted by and pursuant to the provisions of the Lease.

6. Notice to Lender and Right to Cure . Notwithstanding any provisions of the Lease to the contrary, no notice of cancellation thereof or of an abatement shall be effective unless Lender shall have received notice of default giving rise to such cancellation or abatement and (i) in the case of any such default that can be cured by the payment of money, until thirty (30) days shall have elapsed following the giving of such notice, or (ii) in the case of any other such default, until a reasonable period for remedying such default shall have elapsed following the giving of such notice. Notwithstanding the foregoing, Lender shall have no obligation to cure any such default.

7. Notices . All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:


If to Landlord:		Minneapolis 225 Holdings, LLC

		c/o Ryan Companies U.S., Inc. 225 South Sixth Street, Suite 1200 Minneapolis, MN 55402 Attention: Property Manager

With a copy to:		Minneapolis 225 Holdings, LLC c/o ASB Capital Management, LLC
		7501 Wisconsin Avenue Bethesda, MD 20814 Attention: Asset Manager – 225 South Sixth

T-5


If to Tenant:		Capella Education Company
		225 South Sixth Street
		Minneapolis, Minnesota 55402
		Attention: General Counsel

If to Lender:		Wells Fargo Bank, N.A. – Commercial Mortgage Servicing Portfolio Services Group – Leases and SNDA’s 1901 Harrison Street, 5 ^th Floor Oakland, CA 94612 Fax: 510/446-4468

or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section 7, the term “ Business Day ” shall mean a day on which commercial banks are not authorized or required by law to close in the state where the Property is located. Either party by notice to the other may designate additional or different addresses for subsequent notices or communications.

8. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of Lender, Tenant and Purchaser and their respective successors and assigns.

9. Governing Law . This Agreement shall be deemed to be a contract entered into pursuant to the laws of the State where the Property is located and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State where the Property is located.

10. Miscellaneous . This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto. If any term, covenant or condition of this Agreement is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa.

11. Definitions . The term “ Lender ” as used herein shall include the successors and assigns of Lender and any person, party or entity which shall become the owner of the Property by reason of a foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise. The term “ Landlord ” as used herein shall mean and include the present landlord under the Lease and such landlord’s predecessors and successors in interest

T-6

under the Lease, but shall not mean or include Lender. The term “ Property ” as used herein shall mean the Property, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage.

12. Further Acts . Tenant will, at the cost of Tenant, and without expense to Lender, do, execute, acknowledge and deliver all and every such reasonable further acts and assurances as Lender shall, from time to time, require, for the better assuring and confirming unto Lender the property and rights hereby intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of this Agreement or for filing, registering or recording this Agreement, or for complying with all applicable laws.

13. Limitations on Purchaser’s Liability . In no event shall the Purchaser, nor any heir, legal representative, successor, or assignee of the Purchaser have any personal liability for the obligations of Landlord under the Lease and should the Purchaser succeed to the interests of the Landlord under the Lease, Tenant shall look only to the estate and property of any such Purchaser in the Property for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) requiring the payment of money in the event of any default by any Purchaser as landlord under the Lease, and no other property or assets of any Purchaser shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under or with respect to the Lease; provided, however, that the Tenant may exercise any other right or remedy provided thereby or by law in the event of any failure by Landlord to perform any such material obligation.

[NO FURTHER TEXT ON THIS PAGE]

T-7

IN WITNESS WHEREOF, Lender, Tenant and Landlord have duly executed this Agreement to be effective as of the date first above written.


LENDER: Bank of America, National Association, as successor by merger to LaSalle Bank National Association, as Trustee for Bear Stearns Commercial Mortgage Securities Inc., Commercial Mortgage Pass-Through Certificates, Series 2006-TOP 24

BY: Wells Fargo Bank, National Association, as Master Servicer under the Pooling and Servicing Agreement dated as of October 1, 2006, among BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC. as Depositor, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Master Servicer, CENTERLINE SERVICING INC. (f/k/a ARCap Servicing, Inc.), as Special Servicer, BANK OF AMERICA, NATIONAL ASSOCIATION, as successor by merger to LASALLE BANK, NATIONAL ASSOCIATION, as Trustee and Custodian, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Paying Agent, Certificate Registrar and Authenticating Agent

By:
Name:
Title:

T-8


STATE OF CALIFORNIA	)
	)	ss.
COUNTY OF CONTRA COSTA	)

On of , 2010, before me, , the undersigned Notary Public in and for said County and State, personally appeared , who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), as of Wells Fargo Bank, National Association, as Master Servicer under the Pooling and Servicing Agreement dated as of October 1, 2006, among BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC. as Depositor, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Master Servicer, CENTERLINE SERVICING INC. (f/k/a ARCap Servicing, Inc.), as Special Servicer, BANK OF AMERICA, NATIONAL ASSOCIATION, as successor by merger to LASALLE BANK, NATIONAL ASSOCIATION, as Trustee and Custodian, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Paying Agent, Certificate Registrar and Authenticating Agent, on behalf of Bank of America, National Association, as successor by merger to LaSalle Bank National Association, as Trustee for Bear Stearns Commercial Mortgage Securities Inc., Commercial Mortgage Pass-Through Certificates, Series 2006-TOP 24, and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.


WITNESS my hand and official seal.


Signature of Notary Public
Commissioned for said County and State				(Seal)

T-9

IN WITNESS WHEREOF, Lender, Tenant and Landlord have duly executed this Agreement to be effective as of the date first above written.


TENANT:

CAPELLA EDUCATION COMPANY a Minnesota corporation

By:
Name:
Title:


STATE OF MINNESOTA	)
	)	ss.
COUNTY OF HENNEPIN	)

The foregoing instrument was acknowledged before me this day of , 2010, by , the of Capella Education Company, a Minnesota corporation, on behalf of said corporation.

Notary Public

Notarial Stamp or Seal

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IN WITNESS WHEREOF, Lender, Tenant and Landlord have duly executed this Agreement to be effective as of the date first above written.


LANDLORD:

MINNEAPOLIS 225 HOLDINGS, LLC, a Delaware limited liability company

By:
Name:
Title:


STATE OF	)
	)	ss.
COUNTY OF	)

The foregoing instrument was acknowledged before me this day of , 2010, by , the of Minneapolis 225 Holdings, LLC, a Delaware limited liability company, on behalf of said limited liability company.

Notary Public

Notarial Stamp or Seal

T-11

EXHIBIT A

LEGAL DESCRIPTION OF PROPERTY

Lot 6, Block 219, Town of Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

The Northeasterly 7 feet of Lots 1, 2, and 3; the Northeasterly 7 feet of the Northwesterly half of Lot 4; the Southeasterly half of Lot 4; and Lots 5, 6, 7, 8, 9 and 10;

all in Block 219, Brown and Jackins’ Addition to Minneapolis, according to the plat thereof on file or of record in the office of the Register of Deeds in and for Hennepin County.

T-A-12

EXHIBIT V-1

DEPICTION OF FOURTH FLOOR EXPANSION SPACE

LOGO

V-1-1

EXHIBIT V-2

DEPICTION OF TWELFTH FLOOR EXPANSION SPACE

LOGO

V-2-1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, J. Kevin Gilligan, certify that:

I have reviewed this quarterly report on Form 10-Q of Capella Education Company;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 27, 2010

/s/ J. Kevin Gilligan

J. Kevin Gilligan

Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Lois M. Martin, certify that:

I have reviewed this quarterly report on Form 10-Q of Capella Education Company;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 27, 2010

/s/ Lois M. Martin

Lois M. Martin

Senior Vice President and Chief Financial Officer

Exhibit 32.1

Certification of Principal Executive Officer

Pursuant to 18 U.S.C. 1350

(Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Capella Education Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Kevin Gilligan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. Kevin Gilligan

J. Kevin Gilligan

Chief Executive Officer

July 27, 2010

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

Certification of Principal Financial Officer

Pursuant to 18 U.S.C. 1350

(Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Capella Education Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lois M. Martin, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Lois M. Martin

Lois M. Martin

Senior Vice President and Chief Financial Officer

July 27, 2010

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