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Minnesota		8221		41-1717955
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

225 South 6th Street, 9th Floor Minneapolis, Minnesota 55402 (888) 227-3552 (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices) Stephen G. Shank Chairman and Chief Executive Officer Capella Education Company 225 South 6th Street, 9th Floor Minneapolis, Minnesota 55402 (888) 227-3552 (Name, address, including zip code, and telephone number, including area code, of agent for service)

David B. Miller, Esq. Michael K. Coddington, Esq. Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Telephone: (612) 766-7000 Facsimile: (612) 766-1600		George A. Stephanakis, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Telephone: (212) 474-1000 Facsimile: (212) 474-3700

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Underwriting

Proceeds to

Price to

Discounts and

Proceeds to

Selling

Public

Commissions

Capella

Shareholders

Per Share

$

$

$

$

Total

$

$

$

$

	Banc of America Securities LLC

	Piper Jaffray

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

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	If we fail to comply with the extensive regulatory requirements for our business, we could face significant restrictions on our operations and monetary penalties, including loss of access to federal loans and grants for our learners on which we are substantially dependent.

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

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

	Congress may change the law or reduce funding for Title IV programs, which could reduce our learner population, revenues or profit margin.

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	If we fail to maintain our institutional accreditation, we would lose our ability to participate in Title IV programs.

	If Capella University does not maintain its authorization in Minnesota, it may not operate or participate in Title IV programs.

	Our regulatory environment and our reputation may be negatively influenced by the actions of other for-profit institutions.

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	We are subject to sanctions if we fail to correctly calculate and timely return Title IV program funds for learners who withdraw before completing their educational program.

	A failure to demonstrate “financial responsibility” may result in the loss of eligibility by Capella University to participate in Title IV programs or require the posting of a letter of credit in order to maintain eligibility to participate in Title IV programs.

	A failure to demonstrate “administrative capability” may result in the loss of Capella University’s eligibility to participate in Title IV programs.

	•	comply with all applicable Title IV program regulations;
	•	have capable and sufficient personnel to administer the federal student financial aid programs;
	•	have acceptable methods of defining and measuring the satisfactory academic progress of its student;
	•	not have cohort default debt rates above specified levels;
	•	have various procedures in place for safeguarding federal funds;
	•	not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;

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	•	provide financial aid counseling to its students;
	•	refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
	•	submit in a timely manner all reports and financial statements required by the regulations; and
	•	not otherwise appear to lack administrative capability.

	•	require the repayment of Title IV funds;
	•	transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment;
	•	place the institution on provisional certification status; or
	•	commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.

	We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities.

	Our failure to comply with regulations of various states could result in actions taken by those states that would have a material adverse effect on our enrollments, revenues and results of operations.

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

	The inability of our graduates to obtain licensure in their chosen professional fields of study could reduce our enrollments and revenues, and potentially lead to litigation that could be costly to us.

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	If regulators do not approve or delay their approval of transactions involving a change of control of our company, our ability to participate in Title IV programs may be impaired.

	Government and regulatory agencies and third parties may conduct compliance reviews, bring claims or initiate litigation against us.

	We may lose eligibility to participate in Title IV programs if the percentage of our revenue derived from those programs is too high, which would significantly reduce our learner population.

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	We may lose eligibility to participate in Title IV programs if our student loan default rates are too high, which would significantly reduce our learner population.

	At present we derive a significant portion of our revenues and all our operating profit from our doctoral programs.

	We may not be able to manage future growth effectively, and we expect our growth rates to decline over time.

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	Our success depends in part on our ability to update and expand the content of existing programs and develop new programs on a timely basis and in a cost-effective manner.

	Our financial performance depends on our ability to continue to develop awareness among, and attract and retain, working adult learners.

	•	the emergence of more successful competitors;
	•	factors related to our marketing, including the costs of Internet advertising and broad-based branding campaigns;
	•	performance problems with our online systems;
	•	learner dissatisfaction with our services and programs;
	•	adverse publicity regarding us, our competitors or online or for-profit education generally;
	•	a decline in the acceptance of online education; and
	•	a decrease in the perceived or actual economic benefits that learners derive from our programs.

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	Strong competition in the post-secondary education market, especially in the online education market, could decrease our market share and put downward pressure on our tuition rates.

	We rely on exclusive proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property of third parties.

	We may incur liability for the unauthorized duplication or distribution of class materials posted online for class discussions.

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	A reclassification of our adjunct faculty by authorities may have a material adverse effect on our results of operations.

	We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.

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

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	Our expenses may cause us to incur operating losses if we are unsuccessful in achieving growth.

	We receive library services through an agreement with Johns Hopkins University and cannot guarantee the continued availability of those services.

	A change in U.S. GAAP accounting standards for employee stock options is expected to have a significant adverse effect on the reporting of our results of operations.

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	Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.

	Capacity constraints, system disruptions and vulnerability from security risks to our online computer networks could impact our ability to generate revenue and damage the reputation of Capella University, limiting our ability to attract and retain learners.

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	Our current success and future growth depend on the continued increased acceptance of the Internet and the corresponding growth in users seeking educational services on the Internet.

	•	inadequate Internet infrastructure;
	•	security and privacy concerns; and
	•	the unavailability of cost-effective Internet service and other technological factors.

	We operate in a highly competitive market with rapid technological change, and we may not have the resources needed to compete successfully.

	Government regulations relating to the Internet could increase our cost of doing business, affect our ability to grow or otherwise have a material adverse effect on our business.

	An increase in interest rates could adversely affect our ability to attract and retain learners.

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	The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

	•	our quarterly or annual earnings or those of other companies in our industry;
	•	the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission, or SEC;
	•	changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of other companies in our industry;
	•	changes in our number of enrolled learners;
	•	new laws or regulations or new interpretations of laws or regulations applicable to our business;
	•	seasonal variations in our learner population;
	•	changes in accounting standards, policies, guidance, interpretations or principles;
	•	changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;
	•	litigation involving our company or investigations by regulators into the operations of our company or our competitors; and
	•	sales of common stock by our directors, executive officers and significant shareholders.

	There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.

	Future sales of our common stock in the public market could lower our stock price.

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	Our executive officers, directors and principal existing shareholders will continue to own a large percentage of our voting stock after this offering, which may allow them to collectively control substantially all matters requiring shareholder approval and, in the case of certain of our principal shareholders, will have other unique rights that may afford them access to our management.

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	Our articles of incorporation, bylaws, Minnesota law and regulations of state and federal education agencies may discourage takeovers and business combinations that our shareholders might consider in their best interests.

	Being a public company will increase our expenses and administrative workload.

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	•	create or expand the roles and duties of our board of directors, our board committees and management;
	•	establish an internal audit function;
	•	institute a more comprehensive compliance function;
	•	design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
	•	prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;
	•	establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
	•	involve and retain to a greater degree outside counsel and accountants in the above activities;
	•	hire a director of investor relations and hire investor relations support personnel; and
	•	hire additional personnel to perform internal accounting functions, including tax accounting functions.

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	We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.

	We will have broad discretion in applying the net proceeds of the offering and may not use those proceeds in ways that will enhance the market value of our common stock.

	You will suffer immediate and substantial dilution.

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	•	our failure to comply with the extensive regulatory framework applicable to our industry, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting agency requirements;
	•	risks associated with changes in applicable federal and state laws and regulations and accrediting agency policies;
	•	our ability to manage future growth effectively;
	•	the pace of growth of our enrollment;
	•	our ability to convert prospective learners to enrolled learners and to retain active learners;
	•	our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;
	•	industry competition;
	•	failure on our part to maintain and expand existing commercial relationships with the U.S. Armed Forces and various corporations and develop new commercial relationships;
	•	general and economic conditions; and
	•	other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Regulatory Environment.”

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	•	on an actual basis;
	•	on a pro forma basis, giving effect to (i) our sale of                      shares of our common stock in this offering (at an assumed initial public offering price of $                     per share, the midpoint of the range set forth on the cover page of this prospectus and after deducting underwriting discounts and estimated expenses payable by us); and (ii) the conversion of all outstanding shares of our Class A, Class B and Class D convertible preferred stock and our Class E and Class G redeemable convertible preferred stock into                      shares of our common stock, which is expected to occur concurrently with the consummation of the offering in accordance with the provisions of each class of preferred stock’s respective certificate of designation.

				As of
				March 31, 2005
				Actual				Pro Forma
				(In thousands,
				except share and
				per share amounts)
Cash, cash equivalents and short-term investments				$	55,635
Debt:
	Line of credit(a)				—
	Capital lease obligations				196
		Total debt			196
Redeemable preferred stock:
	Class E Redeemable Convertible Preferred Stock: $0.01 par value; 2,596,491 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma				34,985
	Class G Redeemable Convertible Preferred Stock: $0.01 par value; 2,184,540 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma				22,661
		Total redeemable preferred stock			57,646
Shareholders’ equity (deficit):
	Class A Convertible Preferred Stock: $1.00 par value; 3,000,000 shares authorized, 2,810,000 shares issued and outstanding, actual; none authorized, issued and outstanding, pro forma				2,810
	Class B Convertible Preferred Stock: $2.50 par value; 1,180,000 shares authorized, 460,000 shares issued and outstanding, actual; none authorized, issued and outstanding, pro forma				1,150
	Class D Convertible Preferred Stock: $4.50 par value; 1,022,222 shares authorized, issued and outstanding, actual; none authorized, issued and outstanding, pro forma				4,600
	Undesignated preferred stock: 1,536,351 authorized, none issued and outstanding, actual; 10,000,000 shares authorized, none issued and outstanding, pro forma				—
	Common stock: $0.10 par value; 15,000,000 shares authorized, 2,100,802 shares issued and outstanding, actual; 100,000,000 shares authorized,            shares issued and outstanding, pro forma(b)				210

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				As of
				March 31, 2005
				Actual				Pro Forma
				(In thousands,
				except share and
				per share amounts)
	Additional paid-in capital				5,275
	Deferred compensation				(46	)
	Accumulated deficit				(11,235	)
		Total shareholders’ equity (deficit)			2,764
Total capitalization				$	60,606

(a)	At March 31, 2005, we had available funds under our revolving line of credit in the amount of $10.0 million. There have been no borrowings to date under our revolving line of credit.
(b)	Excludes:

	•	shares of common stock reserved for future issuance upon the exercise of stock options outstanding as of                     , 2005 under our stock option plans, at a weighted average exercise price of $           per share;
	•	shares of common stock reserved for future issuance upon the vesting of common stock outstanding under our stock purchase plan; and
	•	shares of common stock reserved for future issuance under our stock option plans, of which options to purchase                      shares of common stock are proposed to be issued in connection with this offering at an exercise price equal to the price of shares sold in this offering.

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Assumed initial public offering price per share of common stock			$
	Pro forma net tangible book value per share of common stock as of March 31, 2005		$
	Increase per share of common stock attributable to new investors
Pro forma as adjusted net tangible book value per share of common stock after this offering
Dilution per share of common stock to new investors			$

Shares Purchased

Total Consideration

Average Price

Number

Percent

Amount

Percent

Per Share

(In thousands)

(In thousands)

Existing shareholders

New investors

Total

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																								Three Months Ended
				Year Ended December 31,																				March 31,
				2000				2001				2002				2003				2004				2004				2005
				(In thousands, except per share and enrollment data)
Statement of Operations Data:
Revenues				$	15,896			$	29,806			$	49,556			$	81,785			$	117,689			$	26,488			$	34,610
Costs and expenses:
	Instructional costs and services				12,751				20,489				28,013				43,128				58,168				13,614				16,247
	Selling and promotional				8,330				13,629				15,860				21,446				34,247				8,088				9,621
	General and administrative				6,848				9,382				11,677				13,141				15,409				3,403				4,597
		Total costs and expenses			27,929				43,500				55,550				77,715				107,824				25,105				30,465
Operating income (loss)					(12,033	)			(13,694	)			(5,994	)			4,070				9,865				1,383				4,145
Other income, net					1,332				731				327				427				724				129				372
Income (loss) before income taxes					(10,701	)			(12,963	)			(5,667	)			4,497				10,589				1,512				4,517
Income tax expense (benefit)					—				—				—				104				(8,196	)			46				1,813
Net income (loss)				$	(10,701	)		$	(12,963	)		$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Net income (loss) per common share:
	Basic			$	(7.61	)		$	(8.71	)		$	(3.70	)		$	2.63			$	9.34			$	0.77			$	1.29
	Diluted			$	(7.61	)		$	(8.71	)		$	(3.70	)		$	0.39			$	1.62			$	0.13			$	0.23
Weighted average number of common shares outstanding:
	Basic				1,406				1,489				1,532				1,669				2,011				1,910				2,092
	Diluted				1,406				1,489				1,532				11,154				11,599				11,330				11,845

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																						Three Months Ended
		Year Ended December 31,																				March 31,
		2000				2001				2002				2003				2004				2004				2005
		(In thousands, except per share and enrollment data)
Other Data:
Depreciation and amortization(a)		$	985			$	2,044			$	3,108			$	4,177			$	5,454			$	1,187			$	1,515
Net cash provided by (used in) operating activities		$	(7,895	)		$	(9,249	)		$	177			$	16,028			$	17,494			$	1,231			$	7,480
Capital expenditures		$	4,477			$	5,283			$	3,859			$	4,348			$	8,986			$	861			$	1,760
EBITDA(b)		$	(11,048	)		$	(11,650	)		$	(2,886	)		$	8,247			$	15,319			$	2,570			$	5,660
Enrollment(c)			2,111				3,757				6,380				9,115				12,013				9,919				12,775

																						As of March 31, 2005
		As of December 31,
																										Pro
		2000				2001				2002				2003				2004				Actual				Forma(d)
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	25,368			$	10,655			$	22,060			$	41,190			$	49,980			$	55,635			$	—
Working capital(e)			22,268				6,203				15,340				27,516				37,935				42,541
Total assets			32,763				23,882				35,380				55,402				80,026				83,336
Total redeemable preferred stock			35,150				34,985				50,401				57,646				57,646				57,646
Shareholders’ equity (deficit)			(8,318	)			(20,999	)			(26,250	)			(20,416	)			(5	)			2,764

(a)	Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Amortization includes amounts related to purchased software, capitalized website development costs and internally developed software.
(b)	EBITDA consists of net income (loss) minus other income, net, plus income tax expense (benefit) and plus depreciation and amortization. Other income, net consists primarily of interest income earned on short-term investments, net of any interest expense for capital leases. We use EBITDA as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax payments.

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

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

	•	as a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes; and
	•	in presentations to the members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry.

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

																						Three Months
		Year Ended December 31,																				Ended March 31,
		2000				2001				2002				2003				2004				2004				2005
		(In thousands)
Net income (loss)		$	(10,701	)		$	(12,963	)		$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Other income, net			(1,332	)			(731	)			(327	)			(427	)			(724	)			(129	)			(372	)
Income tax expense (benefit)			—				—				—				104				(8,196	)			46				1,813
Depreciation and amortization			985				2,044				3,108				4,177				5,454				1,187				1,515
EBITDA		$	(11,048	)		$	(11,650	)		$	(2,886	)		$	8,247			$	15,319			$	2,570			$	5,660

(c)	Enrollment reflects the total number of learners registered in a course as of the last day of classes for such periods.
(d)	The consolidated pro forma balance sheet data as of March 31, 2005, give effect to the conversion of all outstanding preferred stock into shares of common stock in connection with this offering, the sale of                      shares of common stock by us in this offering at an offering price of $                    per share (the mid-point of the range set forth on the cover of this prospectus) and our receipt of the estimated net proceeds of that sale, after deducting underwriting discounts and estimated offering expenses.
(e)	Working capital is calculated by subtracting total current liabilities from total current assets.

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	Background

	Our key financial results metrics

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															For the Three
			For the Years Ended												Months Ended
			December 31,												March 31,
			2002				2003				2004				2004				2005
Doctoral				3,187				4,251				5,611				4,648				5,795
Master’s				2,603				3,695				4,543				3,869				5,026
Bachelor’s				590				1,169				1,859				1,402				1,954
	Total			6,380				9,115				12,013				9,919				12,775

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	Factors affecting comparability

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															Three Months
			Year Ended December 31,												Ended March 31,
			2002				2003				2004				2004				2005
			(In thousands, except per share information)
Net income (loss) as reported			$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Deferred compensation expense included in net income (loss) as reported				39				37				4				4				4
Compensation expense determined under the fair-value-based method				(1,623	)			(1,779	)			(2,383	)			(567	)			(545	)
Pro forma net income (loss)			$	(7,251	)		$	2,651			$	16,406			$	903			$	2,163
Net income (loss) per common share:
	Basic — as reported		$	(3.70	)		$	2.63			$	9.34			$	0.77			$	1.29
	Basic — pro forma		$	(4.76	)		$	1.59			$	8.16			$	0.47			$	1.03
	Diluted — as reported		$	(3.70	)		$	0.39			$	1.62			$	0.13			$	0.23
	Diluted — pro forma		$	(4.76	)		$	0.24			$	1.43			$	0.08			$	0.18

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																Three Months
				Year Ended December 31,												Ended March 31,
				2002				2003				2004				2004				2005
Revenues					100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Costs and expenses:
	Instructional costs and services				56.5				52.7				49.5				51.4				46.9
	Selling and promotional				32.0				26.2				29.1				30.5				27.8
	General and administrative				23.6				16.1				13.1				12.9				13.3
		Total costs and expenses			112.1				95.0				91.7				94.8				88.0
Operating income (loss)					(12.1	)			5.0				8.3				5.2				12.0
Other income, net					0.7				0.5				0.6				0.5				1.1
Income (loss) before income taxes					(11.4	)			5.5				8.9				5.7				13.1
Income tax expense (benefit)					0.0				0.1				(7.0	)			0.2				5.2
Net income (loss)					(11.4	)%			5.4	%			15.9	%			5.5	%			7.8	%

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

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	Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

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	Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

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	Quarterly Results and Seasonality

			First				Second				Third				Fourth
			Quarter				Quarter				Quarter				Quarter
			(In thousands, except per share and
			enrollment data)
2003
Revenues			$	17,936			$	19,593			$	20,747			$	23,509
Operating income (loss)				1,432				2,554				(375	)			459
Net income (loss)				1,525				2,659				(273	)			482
Net income (loss) per common share:
	Basic		$	0.99			$	1.68			$	(0.16	)		$	0.27
	Diluted		$	0.14			$	0.24			$	(0.16	)		$	0.04
Enrollment				6,795				7,367				7,923				9,115

			First				Second				Third				Fourth
			Quarter				Quarter				Quarter				Quarter
			(In thousands, except per share and
			enrollment data)
2004
Revenues			$	26,488			$	28,321			$	28,040			$	34,840
Operating income				1,383				1,773				2,147				4,562
Net income				1,466				1,892				2,310				13,117
Net income per common share:
	Basic		$	0.77			$	0.95			$	1.12			$	6.31
	Diluted		$	0.13			$	0.16			$	0.20			$	1.11
Enrollment				9,919				10,370				11,086				12,013

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

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	Liquidity

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	Operating Activities

	Investing Activities

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	Financing Activities

		Payments Due by Period
						Less than												More than
		Total				1 Year				1-3 Years				3-5 Years				5 Years
		(In thousands)
Capital leases		$	333			$	325			$	8			$	—			$	—
Operating leases(a)			12,065				1,617				4,247				4,337				1,864
Adjunct faculty obligations(b)			6,414				6,414				—				—				—
Total contractual obligations		$	18,812			$	8,356			$	4,255			$	4,337			$	1,864

(a)		Minimum lease commitments for our headquarters and miscellaneous office equipment.
(b)		Consists of payment obligations to adjunct faculty as of December 31, 2004, based on existing contractual agreements with them.

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	Market Risk

	Interest Rate Risk

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	Our Approach to Quality

	•	Curricula. We believe the academic rigor of our curricula is commensurate with that of many traditional colleges and universities. The particular competencies targeted in our academic programs are identified and validated through a variety of internal and external sources and reviews. Individual courses are structured to provide learners with an understanding of relevant theories and to teach learners how to apply these theories. We believe this approach of applied instruction helps our learners apply their education in their workplace and also helps them integrate workplace issues or projects into their academic studies.
	•	Faculty. We select our faculty based on their academic achievement and teaching and practitioner experience. Our faculty members tend to be scholars as well as practitioners, and they bring relevant, practical experience from their professional careers into the courses they teach. Approximately 77% of our faculty members hold a doctoral degree in their respective fields. We invest in the professional development of our faculty members through training in online teaching techniques as well as events and discussions designed to foster sharing of best practices.
	•	Learner Support. We establish teams comprised of both academic and administrative personnel that are assigned to serve as the primary support contact point for each of our learners throughout the duration of their studies. All of our support services, including academic, administrative, library and career counseling services are also accessible online, allowing users to access these services at a time and in a manner that is convenient to them.
	•	Academic Oversight. Our academic management organization is structured to provide leadership and continuity across our academic offerings. In addition to regular reviews by accrediting bodies, our academic management team oversees periodic examinations of our curricula by internal and external reviewers. Internal reviews are performed by our assessment and institutional research team to assess academic content, delivery method and learning outcomes for each program. External reviews are performed by individuals with professional certifications in their fields to provide additional evaluation and verification of program quality and workplace applicability.

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	•	Accreditation. In addition to being accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools, we also pursue specialized accreditation, where appropriate, such as our accreditation from the Council for the Accreditation of Counseling and Related Educational Programs (CACREP) for our mental health counseling specialization within our master’s in human services program. Our commitment to maintaining regional and specialized accreditation reflects our goal to provide our learners with an academic experience commensurate with that of traditional post-secondary educational institutions.

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

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	Curricula

Programs		Specializations
Business, Organization and Management
Doctor of Philosophy in		• Business General
Organization and Management		• Human Resource Management
		• Information Technology Management
		• Leadership
Master of Business		• Finance
Administration		• General Business Administration
		• Marketing
Master of Science in		• Business General
Organization and Management		• Human Resource Management
		• Information Technology Management
		• Leadership
Bachelor of Science in		• Business Administration
Business Administration		• Finance
		• Human Resource Management
		• Management and Leadership
		• Marketing
Education
Doctor of Philosophy in		• Instructional Design for
Education		Online Learning
		• Leadership for Higher Education
		• Leadership in Educational Administration
		• Post-Secondary and Adult Education
		• Professional Studies in Education
		• Training and Performance Improvement
Master of Science in		• Enrollment Management
Education		• Instructional Design for Online Learning
		• K-12 Advanced Classroom Instruction
		• K-12 Curriculum and Instruction
		• K-12 Leadership in Educational Administration
		• K-12 Reading and Literacy
		• Leadership for Higher Education
		• Post-Secondary and Adult Education
		• Professional Studies in Education
		• Training and Performance Improvement

Programs		Specializations
Psychology
Doctor of Philosophy in		• Educational Psychology
Psychology		• Industrial/Organizational Psychology
		• General Psychology
Doctor of Psychology		• Clinical Psychology
		• Counseling Psychology
Master of Science in		• Clinical Psychology
Psychology		• Counseling Psychology
		• Educational Psychology
		• General Psychology
		• Industrial/Organizational Psychology
		• School Psychology
		• Sport Psychology
Human Services
Doctor of Philosophy in		• Counseling Studies
Human Services		• Criminal Justice
		• General Human Services
		• Health Care Administration
		• Management of Non-Profit Agencies
		• Social and Community Services
Master of Science in Human		• Counseling Studies
Services		• Criminal Justice
		• General Human Services
		• Health Care Administration
		• Management of Non-Profit Agencies
		• Marital, Couple, and Family Counseling/Therapy
		• Mental Health Counseling
		• Social and Community Services
Information Technology
Master of Science in		• General Information
Information Technology		Technology
		• Information Security
		• Network Architecture and Design
		• Project Management and Leadership
		• System Design and Programming
Bachelor of Science in		• Graphics and Multimedia
Information Technology		• General Information Technology
		• Network Technology
		• Project Management
		• Web Application Development

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	Faculty

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	Learner Support Services

	•	Academic Services. We provide learners with a variety of services designed to support their academic studies. These services include new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and other online tutoring. We also provide appropriate educational accommodations to learners with documented disabilities through our disability support services team.
	•	Administrative Services. We provide learners with the ability to access a variety of administrative services both telephonically and via the Internet. For example, learners can register for classes, apply for financial aid, pay their tuition and access their transcripts online. We believe this online accessibility provides the convenience and self-service capabilities that our learners value.
	•	Library Services. We provide learners with complete online access to the Capella University Library. Our library, provided through a contractual relationship with the Sheridan Libraries at Johns Hopkins University, supplies learners with full-text articles, electronic books, reference assistants and hard copy materials via inter-library loans.
	•	Career Counseling Services. Our staff of professional career counselors use a variety of tools, including individualized phone, email and face-to-face communications, online newsletters, online seminars and conference calls to provide career planning services to learners and alumni. Our counselors also assist our recruitment staff with prospective learners’ selection of the Capella University program and specialization that best suits their professional aspirations.

	Admissions

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	Marketing and Learner Recruitment

	•	Corporate Relationships. We developed our corporate alliance program to offer education opportunities to employees of large companies. Pursuant to these arrangements, program participants make information about Capella University available to their employees. In return, we provide a tuition discount to participants’ employees and their immediate family members. Our corporate alliance program agreements are non-exclusive written agreements that generally have three year terms with automatic renewal provisions, but the parties may generally terminate the agreements at any time on 60 to 90 days prior notice. Through our corporate alliance programs, we presently have learners from approximately 80 corporations.
	•	U.S. Armed Forces Relationships and Discount Program. We offer a discount on tuition to all members of the U.S. Armed Forces and immediate family members of active duty U.S. Armed Forces personnel. We also have arrangements with various educational institutions of the U.S. Armed Forces pursuant to which we have agreed to accept credits from certain military educational programs earned by learners who meet our transfer requirements, which they can apply toward a Capella degree. As part of these arrangements, several of these educational institutions make information about Capella University available to their members. In addition, we have arrangements with the Army National Guard, the U.S. Coast Guard Institute and several military bases pursuant to which these organizations make information about Capella University available to interested service members. Our arrangements with the various educational institutions, the Army National Guard and the U.S. Coast Guard Institute are non-exclusive written agreements with varying terms that may generally be terminated by either party upon 30 to 45 days prior notice. Our arrangements with military bases are established through informal relationships between us and the respective base. For the three months ended March 31, 2005, approximately 19% of our learners received a U.S. Armed Forces tuition discount.
	•	Educational Relationships. We developed our educational alliance program to allow graduates of community colleges to transfer into our programs and to recruit community college faculty to attend our graduate programs. Pursuant to the arrangements between us and approximately 230 community colleges, we provide a tuition discount and an application fee waiver for

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		community college students, alumni, faculty, administrators and staff in exchange for marketing opportunities within each community college. Our educational alliance agreements are non-exclusive written agreements that generally have a one year term which automatically renews in annual increments, but generally either party may terminate the agreement at any time upon 30 to 60 days prior notice.

	Enrollment

		Enrollment
		Number
Degree Level		of Learners				% of Total
Doctoral			5,795				45.4	%
Master’s			5,026				39.3
Bachelor’s			1,954				15.3
Total			12,775				100.0	%

	Tuition and Fees

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	Technology

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	•	relevant, practical and accredited program offerings;
	•	reputation of the college or university and marketability of the degree;
	•	convenient, flexible and dependable access to programs and classes;
	•	qualified and experienced faculty;
	•	relative marketing and selling effectiveness;
	•	level of learner support;
	•	cost of the program; and
	•	the time necessary to earn a degree.

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	•	authorized to offer its programs of instruction by the applicable state educating agencies in the states in which it is physically located (in our case, Minnesota);
	•	accredited by an accrediting agency recognized by the Secretary of the Department of Education; and
	•	certified as an eligible institution by the Department of Education.

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	•	whether the institution and the program were approved by the state in which the graduate seeks licensure, or by a professional association;

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	•	whether the program from which the student graduated meets all state requirements for professional licensure; and
	•	whether the institution is accredited.

	1) FFEL. Under the FFEL program, banks and other lending institutions make loans to learners. If a learner defaults on a loan, payment is guaranteed by a federally recognized guaranty agency, which is then reimbursed by the Department of Education. Students with financial need qualify for interest subsidies while in school and during grace periods. In 2004, we derived approximately 63% of our revenues (calculated on a cash basis) from the FFEL program.
	2) Pell. Under the Pell program, the Department of Education makes grants to students who demonstrate financial need. In 2004, we derived approximately 1% of our revenues (calculated on a cash basis) from the Pell program.

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	•	comply with all applicable Title IV program regulations;
	•	have capable and sufficient personnel to administer the federal student financial aid programs;
	•	have acceptable methods of defining and measuring the satisfactory academic progress of its students;
	•	not have cohort default debt rates above specified levels;
	•	have various procedures in place for safeguarding federal funds;
	•	not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
	•	provide financial aid counseling to its students;
	•	refer to the Office of Inspector General any credible information indicating that any applicant, student, employee or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
	•	submit in a timely manner all reports and financial statements required by the regulations; and
	•	not otherwise appear to lack administrative capability.

	•	require the repayment of Title IV funds;
	•	transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement” system of payment;
	•	place the institution on provisional certification status; or
	•	commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.

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	•	posting a letter of credit in an amount equal to at least 50% of the total Title IV program funds received by the institution during the institution’s most recently completed fiscal year;
	•	posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV program funds received by us, accepting provisional certification, complying with additional Department of Education monitoring requirements and agreeing to receive Title IV program funds under an arrangement other than the Department of Education’s standard advance funding arrangement; or
	•	complying with additional Department of Education monitoring requirements and agreeing to receive Title IV program funds under an arrangement other than the Department of Education’s standard advance funding arrangement such as the “reimbursement” system of payment or cash monitoring.

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Name		Age				Position
Stephen G. Shank			61			Chairman and Chief Executive Officer (Mr. Shank also serves as Chancellor of Capella University)
Michael J. Offerman			57			Senior Vice President (Mr. Offerman also serves as President, Chief Executive Officer, and as a director of Capella University)
Lois M. Martin			42			Senior Vice President and Chief Financial Officer
Paul A. Schroeder			45			Senior Vice President, Business Management (Mr. Schroeder also serves as a director of Capella University)
Elizabeth A. Nordin			49			Vice President of Operations
Heidi K. Thom			41			Senior Vice President of Marketing
Scott M. Henkel			50			Vice President and Chief Information Officer
Gregory W. Thom			48			Vice President, General Counsel, and Secretary
Elizabeth M. Rausch			52			Vice President, Human Resources
Tony J. Christianson			52			Director
Gordon A. Holmes			36			Director
S. Joshua Lewis			42			Director
Jody G. Miller			47			Director
James A. Mitchell			63			Director
David W. Smith			60			Director
Jeffrey W. Taylor			51			Director
Darrell R. Tukua			51			Director
Jon Q. Reynolds, Jr.			37			Director

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	(1) Insight-Salmon River LLC, which has designated Mr. Lewis;
	(2) Cherry Tree Ventures IV, which has designated Mr. Christianson;

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	(3) Forstmann VI, which has designated Mr. Holmes;
	(4) Stephen Shank (so long as he is our Chief Executive Officer or the beneficial owner of not less than 5% of our outstanding capital stock), who has designated himself;
	(5) The holders of 662/3% of our outstanding shares of Class G preferred stock, who at the date of this prospectus have not designated a director; and
	(6) The directors designated under (1) to (5) above, by majority vote; these directors have designated Mr. Taylor.

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															Long Term
															Compensation Awards
			Annual Compensation
															Securities Underlying				All Other
Name and Principal Position			Year				Salary				Bonus				Options (#)				Compensation(a)
Stephen G. Shank				2004			$	375,740			$	173,435				25,616			$	6,150
	Chairman and Chief Executive Officer
Michael J. Offerman(b)				2004			$	250,470			$	77,143				15,211			$	6,150
	Senior Vice President
Paul A. Schroeder				2004			$	250,464			$	77,022				15,211			$	6,150
	Senior Vice President, Business Management
Heidi K. Thom				2004			$	235,756			$	72,192				25,000			$	6,150
	Senior Vice President of Marketing
Scott M. Henkel				2004			$	177,885			$	49,715				35,000			$	5,227
	Vice President and Chief Information Officer

(a)		Represents the value of shares of our common stock contributed to the accounts of the named executives in the Employee Stock Ownership Plan.
(b)		Mr. Offerman also serves as President and Chief Executive Officer of Capella University.

																		Potential Realizable
										Option Term								Value at Assumed
																		Annual Rates of Stock
						Percent of Total												Price Appreciation for
		Number of Shares				Options Granted				Exercise or								Option Term(a)
		Underlying				to Employees				Base Price				Expiration
Name		Options Granted				in 2004				Per Share				Date				5% ($)				10% ($)
Stephen G. Shank			19,973	(b)			5%			$	17.72				07/27/2014
			5,643	(c)			1%			$	19.49				07/27/2009
Michael J. Offerman			15,211	(d)			4%			$	17.72				07/27/2014
Paul A. Schroeder			15,211	(e)			4%			$	17.72				07/27/2014
Heidi K. Thom			25,000	(f)			6%			$	17.72				07/27/2014
Scott M. Henkel			35,000	(g)			8%			$	15.13				05/11/2014

(a)		In accordance with the rules of the SEC, the amounts shown on this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually and do not reflect our estimates or projections of the future price of our common stock. These amounts represent assumed rates of appreciation in the value of our common stock from the initial public offering price, assuming an initial public offering price of $           per share. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses

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

										Number of Shares
										Underlying Unexercised								Value of
										Options at								In-the-Money Options
										December 31, 2004								at December 31, 2004(a)
		Shares Acquired				Value
Name		on Exercise				Realized				Exercisable				Unexercisable				Exercisable				Unexercisable
Stephen G. Shank			—				—				98,544				79,471
Michael J. Offerman			—				—				61,296				49,101
Paul A. Schroeder			—				—				80,162				55,700
Heidi K. Thom			—				—				12,500				62,500
Scott M. Henkel			—				—				—				35,000

(a)	There was no public trading market for the common stock as of December 31, 2004. Accordingly, these values have been calculated in accordance with the rules of the Securities and Exchange Commission, on the basis of the initial public offering price per share of $          , less the applicable exercise price.

	Michael J. Offerman, Ed.D.

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	Scott M. Henkel

	Paul A. Schroeder

	Heidi K. Thom

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		Shares of				Shares of
		Class F				Class G
Investors(a)		Preferred Stock(b)				Preferred Stock(c)
Directors and executive officers:
Stephen G. Shank(d)			17,079.00				—
Michael J. Offerman(e)			4,270.00				—
Paul A. Schroeder(e)			6,405.00				—
Elizabeth M. Rausch(e)			4,270.00				—
David W. Smith(c)			—				8,992.00
S. Joshua Lewis(e)			42,699.00				—
Stephen J. Weiss and Piper Jaffray as custodian for Stephen J. Weiss IRA (f)			12,810.00				—
Russell A. Gullotti(g)			10,000.00				—
Piper Jaffray as custodian for Joseph C. Gaylord IRA(h)			4,270.00				—
5% shareholders:
Forstmann VII and VIII(i)			640,478.00				—
Maveron entities(c)(j)			—				674,460.20
Putnam entities(e)			640,478.00				—

(a)		See “Principal and Selling Shareholders” for additional information about ownership of shares held by these shareholders.
(b)		The Class F preferred stock was issued and sold on January 31, 2002, for an aggregate purchase price of $16,692,101.47. In January 2003, all shares of Class F preferred stock were exchanged for shares of Class G preferred stock pursuant to an exchange agreement. Each share of Class F preferred stock was exchanged for 1.053 shares of our Class G preferred stock. As a result, there are no shares of Class F preferred stock currently outstanding.
(c)		The Class G preferred stock was issued and sold on January 15, 2003, for an aggregate purchase price of $7,599,988.42. Each share of Class G preferred stock is convertible into one share of common stock, subject to adjustments. We expect that each share of Class G preferred stock will convert into a share of common stock upon the closing of this offering.
(d)		Mr. Shank originally acquired 17,985.17 shares of Class G preferred stock pursuant to the exchange agreement discussed in footnote (b) above and subsequently transferred 14,967 shares of Class G

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

Directors:		Stephen Shank (Mr. Shank is also an executive officer of the company and beneficially holds more than 5% of our voting securities), David Smith and Joshua Lewis (Mr. Lewis also beneficially holds more than 5% of our voting securities)
Executive Officers:		Elizabeth Rausch, Michael Offerman and Paul Schroeder
5% Shareholders:		Cherry Tree Ventures IV, the Forstmann Little entities, the Maveron entities, the Putnam entities, the entities affiliated with Technology Crossover Ventures, as transferees of Forstmann VII and Forstmann VIII and Insight-Salmon River LLC, as transferee of NCS Pearson, Inc. (NCS Pearson)
Immediate Family Members of the Related Parties:		Judy Shank, Susan Shank, Mary Retzlaff and The S. Joshua and Teresa D. Lewis Issue Trust

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Directors:		Stephen Shank (Mr. Shank is also an executive officer of the company and beneficially holds more than 5% of our voting securities), David Smith and Joshua Lewis (Mr. Lewis also beneficially holds more than 5% of our voting securities)
Executive Officers:		Elizabeth Rausch, Michael Offerman and Paul Schroeder
5% Shareholders:		The Forstmann Little entities, the Maveron entities, the Putnam entities and the entities affiliated with Technology Crossover Ventures, as transferees of Forstmann VII and VIII and Stephen Shank.

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	•	each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding common stock,
	•	each of our directors,
	•	each of our named executive officers,
	•	all of our directors and executive officers as a group, and
	•	each selling shareholder.

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														Shares
		Shares Beneficially												Beneficially												Shares Beneficially
		Owned Prior to the												Owned After												Owned After
		Offering(a)								Shares				Offering								Over-Allotment				Over-Allotment(b)
										Being												Shares Being
Name of Beneficial Owner		Shares				Percent				Offered				Shares				Percent				Offered(b)				Shares				Percent
Principal Shareholders
Forstmann Little entities(c)			1,106,546				9.8%
Cherry Tree Ventures IV, L.P.(d)			1,748,000				15.5%
Entities affiliated with Technology Crossover Ventures(e)			1,858,959				16.5%
Putnam entities(f)			674,459				6.0%
Maveron entities(g)			1,049,248				9.3%
Salmon River and Insight entities(h)			1,178,269				10.4%
Directors and Named Executive Officers
Stephen G. Shank(i)			2,392,223				21.0%
Michael J. Offerman(j)			84,542				*
Paul A. Schroeder(k)			111,906				1.0%
Heidi K. Thom(l)			25,000				*
Scott M. Henkel(m)			8,750				*
Tony J. Christianson(d)			1,748,000				15.5%
Gordon A. Holmes(n)			231,036				2.0%
S. Joshua Lewis(o)			1,216,740				10.8%
Jody G. Miller			—				—
James A. Mitchell(p)			54,775				*
David W. Smith(q)			14,492				*
Jeffrey W. Taylor			—				—
Darrell R. Tukua(r)			5,000				*
Jon Q. Reynolds, Jr.(e)			1,858,959				16.5%
All directors and executive officers as a group (18 persons)			7,788,362				66.7%
Selling Shareholders

*		Less than 1%
(a)		Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities and includes shares of common stock issuable pursuant to the exercise of stock options that are immediately exercisable or exercisable within 60 days. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Percentage ownership calculations prior to the offering, after the offering, and after over-allotment are based on 11,284,312 shares,                      shares and                      shares, respectively, of common stock outstanding.
(b)		Amounts presented assume that the over-allotment option is exercised in full.
(c)		Consists of (1) 875,510 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VI; (2) 144,397 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VII; and (3) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VIII. Each of Forstmann VI, Forstmann VII and Forstmann VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Forstmann VI and Forstmann VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of Forstmann VIII is FLC XXXIII Partnership, L.P. (FLC XXXIII). The general partners of FLC XXXII and FLC XXXIII are Theodore J. Forstmann, Thomas H. Lister, Winston W. Hutchins, Jamie C. Nicholls, Gordon A. Holmes, a director of the company, and T. Geoffrey McKay. Accordingly, each of the individuals named above, other than Messrs. Holmes and McKay for the reasons described below, may be deemed the beneficial owner of shares owned by

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		Forstmann VI, Forstmann VII and Forstmann VIII. Messrs. Holmes and McKay do not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Forstmann VI and, accordingly, neither Mr. Holmes nor Mr. McKay is deemed to be a beneficial owner of these shares. In addition, Mr. McKay does not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Forstmann VII or Forstmann VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares. The address of Forstmann VI, Forstmann VII and Forstmann VIII is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New York 10153.
(d)		Consists of 50,000 shares of common stock and 1,698,000 shares of common stock issuable upon conversion of preferred stock owned by Cherry Tree Ventures IV, L.P. The general partner of Cherry Tree Ventures IV, L.P. is CTV Partners IV. CTV Partners IV is controlled by Tony J. Christianson and Gordon Stofer, its managing partners, who share voting and investment power with respect to the shares beneficially owned by Cherry Tree Ventures IV, L.P. Messrs. Christianson and Stofer disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address of Cherry Tree Ventures IV, L.P. is 301 Carlson Parkway, Suite 103, Minnetonka, MN 55305.
(e)		Consists of (1) 6,289 shares of common stock and 1,818,210 shares of common stock issuable upon conversion of preferred stock owned by TCV V, L.P.; and (2) 119 shares of common stock and 34,341 shares of common stock issuable upon conversion of preferred stock owned by TCV V Member Fund, L.P. The general partner of TCV V, L.P. and TCV V Member Fund, L.P. is Technology Crossover Management V, L.L.C. (TCM V). The investment activities of TCM V are managed by Jon Q. Reynolds, Jr., a director of the company, Jay C. Hoag, Richard H. Kimball, John L. Drew, Henry J. Feinberg and William J.G. Griffith IV (collectively, the TCM Members) who share voting and investment power with respect to the shares beneficially owned by TCV V, L.P. and TCV V Member Fund, L.P. TCM V and the TCM Members disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address of TCV V, L.P. and TCV V Member Fund, L.P. is 528 Ramona Street, Palo Alto, CA 94301.
(f)		Consists of (1) 224,820 shares of common stock issuable upon conversion of preferred stock owned by Putnam OTC & Emerging Growth Fund; and (2) 449,639 shares of common stock issuable upon conversion of preferred stock owned by TH Lee, Putnam Emerging Opportunities Portfolio. The investment adviser of Putnam OTC & Emerging Growth Fund is Putnam Investment Management, LLC, which is a wholly owned subsidiary of Putnam, LLC, which is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., a company traded on the New York Stock Exchange. The investment adviser of TH Lee, Putnam Emerging Opportunities Portfolio is TH Lee, Putnam Capital Management, LLC. TH Lee, Putnam Capital Management, LLC is indirectly majority owned by Putnam, LLC, which is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., a company traded on the New York Stock Exchange. Marsh & McLennan Companies, Inc. and Putnam, LLC disclaim beneficial ownership of all such shares, and further state that neither of them have any power to vote or dispose of, or direct the voting or disposition of, any of such shares. The address for Putnam OTC & Emerging Growth Fund and TH Lee, Putnam Emerging Opportunities Portfolio is One Post Office Square, Boston, MA 02109.
(g)		Consists of (1) 1,089 shares of common stock and 887,691 shares of common stock issuable upon conversion of preferred stock owned by Maveron Equity Partners 2000, L.P.; (2) 42 shares of common stock and 34,350 shares of common stock issuable upon conversion of preferred stock owned by Maveron Equity Partners 2000-B, L.P.; and (3) 161 shares of common stock and 125,915 shares of common stock issuable upon conversion of preferred stock owned by MEP 2000 Associates LLC. The general partner of Maveron Equity Partners 2000, L.P. and Maveron Equity Partners 2000-B, L.P. is Maveron General Partner 2000 LLC. Maveron General Partner 2000 LLC is controlled by Dan Levitan, Howard Schultz, and Debra Somberg, its managing partners, who share voting and investment power with respect to the shares beneficially owned by Maveron Equity Partners 2000, L.P. and Maveron Equity Partners 2000-B, L.P. The managing member of MEP 2000 Associates LLC is Maveron LLC. Maveron LLC is controlled by Dan Levitan, Howard Schultz, and Debra Somberg, its

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		managing members, who share voting and investment power with respect to the shares beneficially owned by MEP 2000 Associates LLC. Mr. Levitan, Mr. Schultz, and Ms. Somberg disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The address for Maveron LLC is 505 Fifth Avenue South, Suite 600, Seattle, WA 98104.
(h)		Consists of (1) 750,000 shares of common stock issuable upon conversion of preferred stock owned by Insight-Salmon River LLC; (2) 10,000 shares of common stock owned by Insight Venture Partners IV, L.P.; (3) 272,222 shares of common stock issuable upon conversion of preferred stock owned by Salmon River Capital I LLC; and (4) 146,047 shares of common stock issuable upon conversion of preferred stock owned by Salmon River CIP LLC. The managing member of Insight-Salmon River LLC is Salmon River Capital LLC, and the non-managing members of Insight-Salmon River LLC are Insight Venture Partners IV, L.P., Insight Venture Partners (Fund B) IV, L.P., Insight Venture Partners (Co-Investor) IV, L.P., and Insight Venture Partners (Cayman) IV, L.P. (the Insight Partnerships). Salmon River Capital LLC, as managing member of Insight-Salmon River LLC, generally controls the voting power over the shares held by Insight-Salmon River LLC, but the Insight Partnerships have shared voting power with Salmon River Capital LLC over such shares with respect to certain matters. In addition, Salmon River Capital LLC and the Insight Partnerships have shared investment power over the shares held by Insight-Salmon River LLC. The managing member of Salmon River Capital LLC is S. Joshua Lewis, a director of the company. The general partner of the Insight Partnerships is Insight Venture Associates, LLC. The managing member of Insight Venture Associates, LLC is Insight Holdings Group, LLC. Insight Holdings Group, LLC is managed by its board of managers. Accordingly, Mr. Lewis, Insight Venture Associates, LLC, and Insight Holdings Group, LLC have shared voting and investment powers with respect to the shares beneficially owned by Insight-Salmon River LLC. The foregoing is not an admission by such persons that such persons are the beneficial owners of the shares held by Insight-Salmon River LLC, and each disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. Insight Venture Associates, LLC and Insight Holdings Group, LLC have voting and investment power with respect to the shares beneficially owned by Insight Venture Partners IV, L.P. The foregoing is not an admission by Insight Venture Associates, LLC or Insight Holdings Group, LLC that they are the beneficial owners of the shares held by Insight Venture Partners IV, and each of disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. The managing member of Salmon River Capital I LLC and Salmon River CIP LLC is Salmon River Capital LLC. The managing member of Salmon River Capital LLC is Mr. Lewis. Mr. Lewis has voting and investment powers with respect to the shares beneficially owned by Salmon River Capital I LLC and Salmon River CIP LLC. The foregoing is not an admission by Mr. Lewis that he is the beneficial owner of the shares held by Salmon River Capital I LLC and Salmon River CIP LLC, and Mr. Lewis disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The address for the Salmon River and Insight entities is 680 Fifth Avenue, 8th Floor, New York, NY 10019.
(i)		Consists of (1) 597,094 shares of common stock owned by Stephen G. Shank, 1,380,188 shares of common stock issuable upon conversion of preferred stock owned by Mr. Shank, and 98,544 shares of common stock underlying options that are exercisable within 60 days granted to Mr. Shank; (2) 115,000 shares of common stock controlled by Mary Shank Retzlaff, Mr. Shank’s daughter, as trustee of the Stephen Shank 2004 Grantor Retained Annuity Trust; (3) 85,397 shares of common stock issuable upon conversion of preferred stock owned by Judy Shank, Mr. Shank’s wife; (4) 115,000 shares of common stock controlled by Susan Shank, Mr. Shank’s daughter, as trustee of the Judith Shank 2004 Grantor Retained Annuity Trust; and (5) 1,000 shares of common stock controlled by Susan Shank, as trustee of the Emma Jia Chen Retzlaff 2004 Irrevocable Trust.
(j)		Includes 4,496 shares of common stock issuable upon conversion of preferred stock and 80,046 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Offerman.
(k)		Includes 6,744 shares of common stock issuable upon conversion of preferred stock and 105,162 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Schroeder.

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(l)		Consists of 25,000 shares of common stock underlying options, that are exercisable within 60 days, granted to Ms. Thom.
(m)		Consists of 8,750 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Henkel.
(n)		Consists of (1) 144,397 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VII; and (2) 86,639 shares of common stock issuable upon conversion of preferred stock owned by Forstmann VIII. Each of Forstmann VI, Forstmann VII and Forstmann VIII disclaims beneficial ownership of shares owned by the other entities. The general partner of Forstmann VII is FLC XXXII Partnership, L.P. (FLC XXXII) and the general partner of Forstmann VIII is FLC XXXIII Partnership, L.P. (FLC XXXIII). The general partners of FLC XXXII and FLC XXXIII are Theodore J. Forstmann, Thomas H. Lister, Winston W. Hutchins, Jamie C. Nicholls, Gordon A. Holmes, and T. Geoffrey McKay. Accordingly, each of the individuals named above, other than Mr. McKay for the reasons described below, may be deemed the beneficial owners of shares owned by Forstmann VII and Forstmann VIII, and have shared voting and investment powers with respect to the shares owned by Forstmann VII and Forstmann VIII. Mr. McKay does not have any voting or investment power with respect to, or any economic interest in, the shares of our common stock held by Forstmann VII or Forstmann VIII and, accordingly, Mr. McKay is not deemed to be a beneficial owner of these shares.
(o)		Consists of (1) 750,000 shares of common stock issuable upon conversion of preferred stock owned by Insight-Salmon River LLC; (2) 272,222 shares of common stock issuable upon conversion of preferred stock owned by Salmon River Capital I LLC; (3) 146,047 shares of common stock issuable upon conversion of preferred stock owned by Salmon River CIP LLC; (4) 35,971 shares of common stock issuable upon conversion of preferred stock owned by S. Joshua Lewis; and (5) 12,500 shares of common stock underlying options that are exercisable within 60 days granted to S. Joshua Lewis. The managing member of Insight-Salmon River LLC is Salmon River Capital LLC, and the non-managing members of Insight-Salmon River LLC are Insight Venture Partners IV, L.P., Insight Ventures Partners (Fund B) IV, L.P., Insight Venture Partners (Co-Investor) IV, L.P., and Insight Venture Partners (Cayman) IV, L.P. (The Insight Partnerships). Salmon River Capital LLC, as managing member of Insight-Salmon River LLC, generally controls the voting power over the shares held by Insight-Salmon River LLC, but The Insight Partnerships have shared voting power with Salmon River Capital LLC over such shares with respect to certain matters. In addition, Salmon River Capital LLC and The Insight Partnerships have shared investment power over the shares held by Insight-Salmon River LLC. The managing member of Salmon River Capital LLC is S. Joshua Lewis. The general partner of The Insight Partnerships is Insight Venture Associates, LLC. The managing member of Insight Venture Associates, LLC is Insight Holdings Group, LLC. The managing member of Insight Holdings Group, LLC is managed by its board of managers. Accordingly, Mr. Lewis, Insight Venture Associates, LLC, and Insight Holdings Group, LLC have shared voting and investment powers with respect to the shares beneficially owned by Insight-Salmon River LLC. The foregoing is not an admission by such persons that such persons are the beneficial owners of the shares held by Insight-Salmon River LLC, and each disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. The managing member of Salmon River Capital I LLC and Salmon River CIP LLC is Salmon River Capital LLC. The managing member of Salmon River Capital LLC is Mr. Lewis. Mr. Lewis has voting and investment powers with respect to the shares beneficially owned by Salmon River Capital I LLC and Salmon River CIP LLC. The foregoing is not an admission by Mr. Lewis that he is the beneficial owner of the shares held by Salmon River Capital I LLC and Salmon River CIP LLC, and Mr. Lewis disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.
(p)		Consists of (1) 41,275 shares of common stock controlled by James A. Mitchell, as trustee of the James A. Mitchell Trust; and (2) 13,500 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Mitchell.

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(q)		Consists of 8,992 shares of common stock issuable upon conversion of preferred stock and 5,500 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Smith.
(r)		Consists of 5,000 shares of common stock underlying options, that are exercisable within 60 days, granted to Mr. Tukua.

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	•	In connection with the sale of our Class D preferred stock, on June 16, 1998, we issued to Legg Mason Wood Walker, Incorporated a warrant to purchase 131,238 shares of common stock at an exercise price of $5.40 per share. The warrant was amended on April 20, 2000, February 21, 2002 and January 22, 2003. The warrant expires on June 16, 2005, and was exercisable immediately upon issuance.
	•	In connection with the sale of our Class E preferred stock, on May 11, 2000, we issued to Legg Mason Wood Walker, Incorporated a warrant to purchase 135,088 shares of common stock at an exercise price of $17.10 per share. The warrant was amended on February 21, 2002 and January 22, 2003. The warrant was exercisable immediately upon issuance. Legg Mason Wood Walker exercised the warrant on May 9, 2005.

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	Minnesota Law

	Articles of Incorporation and Bylaws

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	•	any action required or permitted to be taken by the shareholders at an annual meeting or special meeting of shareholders may only be taken if it is properly brought before such meeting;
	•	special meetings of the shareholders may only be called by our chief executive officer, chief financial officer, our board of directors or holders of at least 10% of the voting power of all shares then entitled to vote, provided that any special meeting called by one or more shareholders to take action concerning a proposed business combination may be called only by holders of at least 25% of the voting power of all shares then entitled to vote; and
	•	in order for any matter to be considered properly brought before a meeting, a shareholder must comply with requirements to provide advance notice to us.

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	•	shares will be eligible for immediate sale on the date of this prospectus because such shares may be sold pursuant to Rule 144(k);
	•	shares will be eligible for sale at various times beginning 90 days after the date of this prospectus pursuant to Rules 144, 144(k) and 701; and
	•	shares subject to the lock-up agreements will be eligible for sale at various times beginning 180 days after the date of this prospectus pursuant to Rules 144, 144(k) and 701.

	•	one percent of the number of shares of common stock then outstanding, which will equal approximately                      shares immediately after this offering, or
	•	the average weekly trading volume of our common stock on The Nasdaq National Market during the four calendar weeks preceding the date of filing of a notice on Form 144 with respect to the sale.

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	•	198,745 shares of common stock were reserved pursuant to our 1993 Plan for future issuance in connection with the exercise of outstanding options previously awarded under this plan, and options with respect to 196,245 of shares had vested;
	•	1,390,954 shares of common stock were reserved pursuant to our 1999 Plan for future issuance in connection with the exercise of outstanding options previously awarded under this plan, and options with respect to 614,380 of shares had vested;
	•	1,613,000 shares of common stock were reserved pursuant to our 2005 Plan for future issuance under this plan; and
	•	450,000 shares of common stock were reserved pursuant to our ESPP for future employee purchases under this plan.

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	•	a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the “substantial presence” test under section 7701(b)(3) of the Code;
	•	a corporation (or an entity treated as a corporation) created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia;
	•	an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
	•	a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or certain other trusts that have a valid election to be treated as a U.S. person in effect.

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	•	the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, in which case the branch profits tax discussed above may also apply if the Non-U.S. Holder is a corporation;
	•	the Non-U.S. Holder is an individual who holds shares of common stock as capital assets and is present in the United States for 183 days or more in the taxable year of disposition and various other conditions are met.

	•	the broker has documentary evidence in its files that the holder is a Non-U.S. Holder and other conditions are met; or
	•	the holder otherwise establishes an exemption.

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			Number of
Underwriter			Shares
Credit Suisse First Boston LLC
Banc of America Securities LLC
Piper Jaffray & Co.
	Total

Per Share

Total

Without

With

Without

With

Over-allotment

Over-allotment

Over-allotment

Over-allotment

Underwriting Discounts and Commissions paid by us

$

$

$

$

Expenses payable by us

$

$

$

$

Underwriting Discounts and Commissions paid by selling shareholders

$

$

$

$

Expenses payable by the selling shareholders

$

$

$

$

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	•	the information presented in this prospectus and otherwise available to the underwriters;
	•	the history of and the prospectus for the industry in which we will compete;
	•	the ability of our management;
	•	the prospects for our future earning;
	•	the present state of our development and our current financial condition;

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	•	the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and
	•	the general condition of the securities markets at the time of the offering.

	•	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
	•	Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.
	•	Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over- allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
	•	Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

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	•	the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws,
	•	where required by law, that the purchaser is purchasing as principal and not as agent, and
	•	the purchaser has reviewed the text above under Resale Restrictions.

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113

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114

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

F-1

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	/s/ Ernst & Young LLP

F-2

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Table of Contents

				As of								As of
				December 31,								March 31, 2005
				2003				2004				Actual				Pro Forma
												(Unaudited)				(Unaudited)
				(In thousands, except per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents			$	1,340			$	5,480			$	9,173
	Restricted cash												391
	Short-term investments				39,850				44,500				46,462
	Accounts receivable, net of allowance of $713 in 2003, $1,065 in 2004 and $1,116 in 2005				2,976				5,878				5,278
	Prepaid expenses and other current assets				1,151				3,056				2,677
	Deferred income taxes				—				1,398				1,486
Total current assets					45,317				60,312				65,467
Restricted cash					471				391				—
Property and equipment, net					9,614				12,126				12,357
Deferred income taxes					—				7,197				5,512
Total assets				$	55,402			$	80,026			$	83,336
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable			$	2,522			$	3,144			$	1,818
	Accrued liabilities				10,672				12,253				14,093
	Income taxes payable				—				140				122
	Deferred revenue				4,027				6,526				6,697
	Current portion of capital lease obligations				580				314				196
Total current liabilities					17,801				22,377				22,926
Capital lease obligations					371				8				—
Total liabilities					18,172				22,385				22,926
Redeemable preferred stock:
	Class E Redeemable Convertible Preferred Stock, $0.01 par value:
		Authorized shares – 2,596
		Issued and outstanding shares – 2,596
		Redemption value: $37,000			34,985				34,985				34,985				—
	Class G Redeemable Convertible Preferred Stock, $0.01 par value:
		Authorized shares – 2,185
		Issued and outstanding shares – 2,185
		Redemption value: $24,292			22,661				22,661				22,661				—
Total redeemable preferred stock					57,646				57,646				57,646				—
Shareholders’ equity (deficit):
	Class A Convertible Preferred Stock, $1.00 par value:
		Authorized shares – 3,000
		Issued and outstanding shares – 2,810			2,810				2,810				2,810				—
	Class B Convertible Preferred Stock, $2.50 par value:
		Authorized shares – 1,180
		Issued and outstanding shares – 460			1,150				1,150				1,150				—
	Class D Convertible Preferred Stock, $4.50 par value:
		Authorized shares – 1,022
		Issued and outstanding shares – 1,022			4,600				4,600				4,600				—
	Common stock, $0.10 par value:
		Authorized shares – 15,000
		Issued and outstanding shares – 1,826 in 2003, 2,074 in 2004 and 2,101 in 2005			183				208				210				1,128
	Additional paid-in capital				3,569				5,166				5,275				70,563
	Deferred compensation				(4	)			—				(46	)			(46	)
	Accumulated deficit				(32,724	)			(13,939	)			(11,235	)			(11,235	)
Total shareholders’ equity (deficit)					(20,416	)			(5	)			2,764				60,410
Total liabilities, redeemable preferred stock and shareholders’ equity (deficit)				$	55,402			$	80,026			$	83,336			$	83,336

F-3

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															Three Months Ended
			Year Ended December 31,												March 31,
			2002				2003				2004				2004				2005
															(Unaudited)
			(In thousands, except per share amounts)
Revenues			$	49,556			$	81,785			$	117,689			$	26,488			$	34,610
Costs and expenses
Instructional costs and services				28,013				43,128				58,168				13,614				16,247
Selling and promotional				15,860				21,446				34,247				8,088				9,621
General and administrative				11,677				13,141				15,409				3,403				4,597
	Total costs and expenses			55,550				77,715				107,824				25,105				30,465
Operating income (loss)				(5,994	)			4,070				9,865				1,383				4,145
Other income, net				327				427				724				129				372
Income (loss) before income taxes				(5,667	)			4,497				10,589				1,512				4,517
Income tax expense (benefit)				—				104				(8,196	)			46				1,813
Net income (loss)			$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Net income (loss) per common share:
	Basic		$	(3.70	)		$	2.63			$	9.34			$	0.77			$	1.29
	Diluted		$	(3.70	)		$	0.39			$	1.62			$	0.13			$	0.23
Weighted average number of common shares outstanding:
	Basic			1,532				1,669				2,011				1,910				2,092
	Diluted			1,532				11,154				11,599				11,330				11,845

F-4

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Table of Contents

		Class A								Class B								Class D
		Convertible								Convertible								Convertible
		Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Additional
																																		Paid-In				Deferred				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Deficit				Total
		(In thousands)
Balance at December 31, 2001			2,810			$	2,810				460			$	1,150				1,022			$	4,600				1,502			$	150			$	1,821			$	(80	)		$	(31,450	)		$	(20,999	)
Exercise of stock options			—				—				—				—				—				—				12				1				44				—				—				45
Issuance of common stock to the Employee Stock Ownership Plan			—				—				—				—				—				—				35				4				334				—				—				338
Employee Stock Ownership Plan distribution			—				—				—				—				—				—				(1	)			—				(6	)			—				—				(6	)
Amortization of deferred compensation			—				—				—				—				—				—				—				—				—				39				—				39
Net loss			—				—				—				—				—				—				—				—				—				—				(5,667	)			(5,667	)
Balance at December 31, 2002			2,810				2,810				460				1,150				1,022				4,600				1,548				155				2,193				(41	)			(37,117	)			(26,250	)
Exercise of stock options			—				—				—				—				—				—				176				17				789				—				—				806
Exercise of stock warrants			—				—				—				—				—				—				56				6				120				—				—				126
Issuance of common stock to the Employee Stock Ownership Plan			—				—				—				—				—				—				48				5				485				—				—				490
Amortization of deferred compensation			—				—				—				—				—				—				—				—				—				37				—				37
Employee Stock Ownership Plan distribution			—				—				—				—				—				—				(2	)			—				(18	)			—				—				(18	)
Net income			—				—				—				—				—				—				—				—				—				—				4,393				4,393
Balance at December 31, 2003			2,810				2,810				460				1,150				1,022				4,600				1,826				183				3,569				(4	)			(32,724	)			(20,416	)
Exercise of stock options			—				—				—				—				—				—				205				21				837				—				—				858
Income tax benefits associated with stock-based compensation			—				—				—				—				—				—				—				—				150				—				—				150
Issuance of common stock to the Employee Stock Ownership Plan			—				—				—				—				—				—				47				4				637				—				—				641
Amortization of deferred compensation			—				—				—				—				—				—				—				—				—				4				—				4
Employee Stock Ownership Plan distribution			—				—				—				—				—				—				(4	)			—				(27	)			—				—				(27	)
Net income			—				—				—				—				—				—				—				—				—				—				18,785				18,785
Balance at December 31, 2004			2,810				2,810				460				1,150				1,022				4,600				2,074				208				5,166				—				(13,939	)			(5	)
Exercise of stock options (unaudited)																											24				2				59												61
Amortization of deferred compensation (unaudited)																																							4								4
Issuance of restricted stock (unaudited)																											3				0				50				(50	)							—
Net income (unaudited)																																											2,704				2,704
Balance at March 31, 2005 (unaudited)			2,810			$	2,810				460			$	1,150				1,022			$	4,600				2,101			$	210			$	5,275			$	(46	)		$	(11,235	)		$	2,764

F-5

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Table of Contents

																Three Months Ended
				Year Ended December 31,												March 31,
				2002				2003				2004				2004				2005
																(Unaudited)
				(In thousands)
Operating activities
Net income (loss)				$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Provision for bad debts				3,001				616				1,376				246				437
	Depreciation and amortization				3,108				4,177				5,454				1,187				1,515
	Gain on disposal of assets				—				—				—				—				(35	)
	Asset impairment				223				359				1,020				—				49
	Noncash equity-related expense				506				578				1,135				244				412
	Deferred income taxes				—				—				(8,445	)			—				1,597
	Changes in operating assets and liabilities:
		Accounts receivable			(2,067	)			(271	)			(4,278	)			(1,653	)			163
		Prepaid expenses and other assets			359				(348	)			(1,905	)			(703	)			379
		Accounts payable			(455	)			1,420				622				(300	)			(1,326	)
		Accrued liabilities			(626	)			4,682				1,091				(1,068	)			1,432
		Income taxes payable			—				—				140				—				(18	)
		Deferred revenue			1,795				422				2,499				1,812				171
Net cash provided by operating activities					177				16,028				17,494				1,231				7,480
Investing activities
Capital expenditures					(3,859	)			(4,348	)			(8,986	)			(861	)			(1,760	)
Purchases of short-term investments					(23,175	)			(53,000	)			(39,700	)			(7,000	)			(1,962	)
Sales of short-term investments					11,225				30,600				35,050				5,500				—
Net cash used in investing activities					(15,809	)			(26,748	)			(13,636	)			(2,361	)			(3,722	)
Financing activities
Payments of capital lease obligations					(136	)			(469	)			(629	)			(155	)			(126	)
Change in restricted cash					(231	)			(241	)			80				—				—
Proceeds from exercise of stock options					45				806				858				355				61
Proceeds from exercise of warrants					—				126				—				—				—
Employee Stock Ownership Plan distributions					(6	)			(18	)			(27	)			—				—
Net proceeds from issuance of Class F Redeemable Convertible Preferred Stock					15,416				—				—				—				—
Net proceeds from issuance of Class G Redeemable Convertible Preferred Stock					—				7,245				—				—				—
Net cash provided by/(used in) financing activities					15,088				7,449				282				200				(65	)
Net increase (decrease) in cash and cash equivalents					(544	)			(3,271	)			4,140				(930	)			3,693
Cash and cash equivalents at beginning of period					5,155				4,611				1,340				1,340				5,480
Cash and cash equivalents at end of period				$	4,611			$	1,340			$	5,480			$	410			$	9,173
Supplemental disclosures of cash flow information
Interest paid				$	16			$	78			$	56			$	19			$	6
Income taxes paid				$	—			$	104			$	109			$	28			$	252
Noncash transactions:
	Purchase of equipment through capital lease obligations			$	626			$	837			$	—			$	—			$	—
	Issuance of common stock to the Employee Stock Ownership Plan			$	338			$	490			$	641			$	—			$	—
	Issuance of restricted stock			$	—			$	—			$	—			$	—			$	50

F-6

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Table of Contents

1.	Nature of Business

2.	Summary of Significant Accounting Policies

	Consolidation

	Interim Financial Data (Unaudited)

	Pro Forma Balance Sheet Data (Unaudited)

	Revenue Recognition

	Cash and Cash Equivalents

F-7

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Table of Contents

	Short-Term Investments

		As of
		December 31,								As of
										March 31,
		2003				2004				2005
										(Unaudited)
Due in one year or less		$	—			$	—			$	1,962
Due after ten years			39,850				44,500				44,500
		$	39,850			$	44,500			$	46,462

	Allowance for Doubtful Accounts

	Concentration of Credit Risk

F-8

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Table of Contents

	Property and Equipment

Computer equipment		2-3 years
Furniture and office equipment		5-7 years
Computer software		3 years

F-9

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Table of Contents

	Income Taxes

	Use of Estimates

	Stock-Based Compensation

														Three Months
		Years Ended												Ended
		December 31,												March 31,
		2002				2003				2004				2004				2005
														(Unaudited)
Expected life (in years)			6.0				6.0				6.0				6.0				6.0
Expected volatility			58.7	%			53.9	%			44.1	%			44.1	%			44.1	%
Risk-free interest rate			3.4	%			3.8	%			3.9	%			3.9	%			3.9	%
Dividend yield			0.0	%			0.0	%			0.0	%			0.0	%			0.0	%

F-10

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Table of Contents

															Three Months Ended
			Years Ended December 31,												March 31,
			2002				2003				2004				2004				2005
															(Unaudited)
Net income (loss) as reported			$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Deferred compensation expense included in net income (loss) as reported				39				37				4				4				4
Compensation expense determined under fair-value-based method				(1,623	)			(1,779	)			(2,383	)			(567	)			(545	)
Pro forma net income (loss)			$	(7,251	)		$	2,651			$	16,406			$	903			$	2,163
Net income (loss) per common share:
	Basic – as reported		$	(3.70	)		$	2.63			$	9.34			$	0.77			$	1.29
	Basic – pro forma		$	(4.76	)		$	1.59			$	8.16			$	0.47			$	1.03
	Diluted – as reported		$	(3.70	)		$	0.39			$	1.62			$	0.13			$	0.23
	Diluted – pro forma		$	(4.76	)		$	0.24			$	1.43			$	0.08			$	0.18

	Impairment of Long-Lived Assets

	Advertising

	Net Income (Loss) Per Common Share

F-11

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Table of Contents

															Three Months
			Year Ended December 31,												Ended March 31,
			2002				2003				2004				2004				2005
															(Unaudited)
Numerator:
	Net income (loss)		$	(5,667	)		$	4,393			$	18,785			$	1,466			$	2,704
Denominator:
	Denominator for basic net income (loss) per common share – weighted average shares outstanding			1,532				1,669				2,011				1,910				2,092
	Effect of preferred stock			—				9,135				9,178				9,178				9,179
	Effect of dilutive stock options and warrants			—				350				410				242				574
	Denominator for diluted net income (loss) per common share			1,532				11,154				11,599				11,330				11,845
	Basic net income (loss) per common share		$	(3.70	)		$	2.63			$	9.34			$	0.77			$	1.29
	Diluted net income (loss) per common share		$	(3.70	)		$	0.39			$	1.62			$	0.13			$	0.23

	Reclassification

	Comprehensive Income

	New Accounting Standards

F-12

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Table of Contents

3.	Property and Equipment

		As of
		December 31,
		2003				2004
Computer software		$	10,162			$	12,076
Computer equipment			3,943				5,077
Furniture and office equipment			3,587				5,445
Leasehold improvements			1,303				1,318
			18,995				23,916
Less accumulated depreciation and amortization			(9,381	)			(11,790	)
Property and equipment, net		$	9,614			$	12,126

F-13

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4.	Accrued Liabilities

		As of
		December 31,
		2003				2004
Accrued instructional fees		$	2,786			$	2,626
Accrued compensation and benefits			3,546				3,952
Customer deposits			1,277				924
Accrued vacation			1,039				1,494
Other			2,024				3,257
		$	10,672			$	12,253

5.	Financing Arrangements

6.	Operating and Capital Lease Obligations

		Capital				Operating
2005		$	325			$	1,617
2006			8				2,100
2007			—				2,147
2008			—				2,143
2009			—				2,194
2010 and thereafter			—				1,864
Total minimum payments			333			$	12,065
Less amount representing interest			(11	)
Present value of net minimum payments			322
Less current portion			(314	)
Long-term portion of capital lease obligations		$	8

F-14

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Table of Contents

7.	Litigation

8.	Preferred Stock

	Class A Convertible Preferred Stock

	Class B Convertible Preferred Stock

F-15

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Table of Contents

	Class D Convertible Preferred Stock

9.	Redeemable Preferred Stock

	Class E Redeemable Convertible Preferred Stock

F-16

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Table of Contents

	Class F Redeemable Convertible Preferred Stock

	Class G Redeemable Convertible Preferred Stock

F-17

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Table of Contents

10.	Stock Option Plan

		Shares				Plan Options Outstanding												Weighted Average
		Available																Exercise Price
		for Grant				Incentive				Non-Qualified				Price Per Share				Per Share
Balance at December 31, 2001			706				901				283			$	2.50 - $15.68			$	9.42
Granted			(341	)			286				55				11.71 - 12.88				11.77
Exercised			—				(11	)			—				2.50 - 14.25				3.90
Canceled			105				(88	)			(17	)			2.50 - 14.25				12.25
Balance at December 31, 2002			470				1,088				321				2.50 - 15.68				9.86
Granted			(481	)			375				106				11.12 - 13.11				12.07
Exercised			—				(146	)			(33	)			2.50 - 14.25				4.71
Canceled			100				(100	)			(28	)			4.50 - 14.25				12.18
Additional shares reserved			500				—				—				—				—
1993 plan expiration			(98	)			—				—				—				—
Balance at December 31, 2003			491				1,217				366				2.50 - 15.68				10.93
Granted			(415	)			247				167				15.13 - 20.00				17.83
Exercised			—				(190	)			(20	)			2.50 - 14.25				4.42
Canceled			138				(140	)			(11	)			4.50 - 15.13				11.66
Balance at December 31, 2004			214				1,134				502				2.50 - 20.00				13.45

F-18

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Table of Contents

		Options Outstanding												Options Exercisable
		Number				Weighted								Number
		Outstanding				Average				Weighted				Exercisable				Weighted
		as of				Remaining				Average				as of				Average
Range of		December 31,				Contractual				Exercise				December 31,				Exercise
Exercise Prices		2004				Life (Years)				Price				2004				Price
$2.01 - $4.00			17				—			$	2.50				17			$	2.50
4.01 - 6.00			118				3.8				4.50				118				4.50
6.01 - 8.00			—				—				—				—				—
8.01 - 10.00			10				5.2				10.00				10				10.00
10.01 - 12.00			458				8.1				11.74				198				11.70
12.01 - 14.00			192				7.6				12.78				61				12.75
14.01 - 16.00			520				6.7				14.47				364				14.37
16.01 - 18.00			193				9.6				17.72				—				—
18.01 - 20.00			128				9.6				19.98				1				20.00
			1,636				7.5			$	13.45				769			$	11.72

			2002								2003								2004
			Fair				Exercise				Fair				Exercise				Fair				Exercise
			Value				Price				Value				Price				Value				Price
Weighted average:
	Stock price greater than exercise price		$	—			$	—			$	—			$	—			$	—			$	—
	Stock price equal to exercise price			6.73				11.71				6.57				11.99				8.56				17.80
	Stock price less than exercise price			6.47				12.88				6.25				13.11				8.02				19.49

11.	Deferred Compensation

12.	Warrants

F-19

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Table of Contents

13.	Income Taxes

			Year Ended December 31,
			2002				2003				2004
Current:
	Federal		$	—			$	104			$	187
	State			—				—				62
Deferred				—				—				(8,445	)
			$	—			$	104			$	(8,196	)

F-20

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		Year Ended December 31,
		2002				2003				2004
Statutory rate			(34.0	)%			34.0	%			35.0	%
State income taxes			(5.7	)			7.0				3.5
Other			(0.5	)			0.1				2.0
Change in rate applied to deferred tax assets and liabilities			—				—				3.6
Change in valuation allowance			40.2				(38.8	)			(121.5	)
			—	%			2.3	%			(77.4	)%

			As of
			December 31,
			2003				2004
Deferred tax assets:
	Net operating loss carryforwards		$	12,450			$	8,613
	Accounts receivable			285				415
	Alternative minimum tax credit			104				327
	Goodwill			122				105
	Accrued liabilities			807				981
	Other			5				36
				13,773				10,477
Deferred tax liabilities:
	Property and equipment			(910	)			(1,882	)
				(910	)			(1,882	)
Net deferred tax asset before valuation allowance				12,863				8,595
Valuation allowance				(12,863	)			—
Net deferred tax asset			$	—			$	8,595

14.	Regulatory

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15.	Employee Benefit Plan

16.	Employee Stock Ownership Plan (ESOP)

F-22

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17.	Quarterly Financial Summary (unaudited)

			First				Second				Third				Fourth(a)				Total
2003
Revenues			$	17,936			$	19,593			$	20,747			$	23,509			$	81,785
Operating income (loss)				1,432				2,554				(375	)			459				4,070
Net income (loss)(b)				1,525				2,659				(273	)			482				4,393
Net income (loss) per common share
	Basic		$	0.99			$	1.68			$	(0.16	)		$	0.27			$	2.63
	Diluted		$	0.14			$	0.24			$	(0.16	)		$	0.04			$	0.39

			First				Second				Third				Fourth(c)				Total
2004
Revenues			$	26,488			$	28,321			$	28,040			$	34,840			$	117,689
Operating income				1,383				1,773				2,147				4,562				9,865
Net income(b)				1,466				1,892				2,310				13,117				18,785
Net income per common share
	Basic		$	0.77			$	0.95			$	1.12			$	6.31			$	9.34
	Diluted		$	0.13			$	0.16			$	0.20			$	1.11			$	1.62

(a)	During the fourth quarter of 2003, we recorded an impairment charge of $359 related to previously capitalized software development costs for software projects that were abandoned.
(b)	Because the Company achieved three years of cumulative taxable income and expects profitability in future years, the Company concluded that it is more likely than not that all of its net deferred tax assets will be realized. As a result, in accordance with SFAS No. 109, the remaining valuation allowance applied to net deferred tax assets of $10,619 was reversed during the fourth quarter of 2004.
(c)	During the fourth quarter of 2004, we also recorded an impairment charge of $1,020 related to previously capitalized software development costs for software projects that were abandoned.

18.	Subsequent Events

F-23

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Item 13.	Other Expenses of Issuance and Distribution

SEC registration fee			$	10,152
NASD filing fee				9,125
Nasdaq listing fee				*
Legal fees and expenses				*
Accounting fees and expenses				*
Blue sky fees and expenses				*
Printing expenses				*
Transfer agent fees and expenses				*
Miscellaneous expenses				*
	Total		$	*

*	To be completed by Amendment.

Item 14.	Indemnification of Directors and Officers

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Item 15.	Recent Sales of Unregistered Securities

	•	In January 2002, we issued 1,425,457 shares of our Class F preferred stock to accredited investors at a purchase price of $11.71 per share for an aggregate amount of $16,692,101.47. The sales were made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933.
	•	In January 2003, we issued 2,184,540.49 shares of our Class G preferred stock to accredited investors. Of the total shares issued, 683,452.20 shares were sold at a purchase price of $11.12 per share for an aggregate amount of $7,599,988.46. The sales were made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933. The remaining 1,501,088.29 shares were issued in full exchange of 1,425,457 shares of our Class F preferred stock. We received no proceeds from this exchange. The exchange was made in reliance on Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Securities Act of 1933.

Item 16.	Exhibits and Financial Statement Schedules

Exhibit
Number				Description
	1	.1*		Form of Underwriting Agreement.
	3	.1		Articles of Incorporation of the Registrant, as amended to date and as currently in effect, including all Certificates of Designation.
	3	.2		Form of Amended and Restated Articles of Incorporation of the Registrant to be effective upon completion of this offering.
	3	.4		Amended and Restated By-Laws of the Registrant.
	4	.1*		Specimen of common stock certificate.

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

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Exhibit
Number				Description
	10	.9		Capella Education Company Employee Stock Ownership Plan.
	10	.10		Capella Education Company Retirement Plan with Adoption Agreement and EGTRRA Amendment.
	10	.11		Capella Education Company Form of Executive Severance Plan.
	10	.12		Capella Education Company Employee Stock Purchase Plan.
	10	.13		Capella Education Company Annual Incentive Plan Management Employees – 2005.
	10	.14#		Confidentiality, Non-Competition and Inventions Agreement, dated as of April 16, 2001, by and between the Registrant and Michael J. Offerman.
	10	.15#		Confidentiality, Non-Competition and Inventions Agreement, dated as of May 9, 2001, by and between the Registrant and Paul A. Schroeder.
	10	.16#		Form of Confidentiality, Non-Competition and Inventions Agreement (executed by Scott M. Henkel).
	10	.17#		Offer Letter, dated as of March 9, 2001, by and between the Registrant and Paul A. Schroeder.
	10	.18#		Offer Letter, dated as of November 10, 2003, by and between the Registrant and Michael J. Offerman.
	10	.19#		Offer Letter, dated as of December 22, 2003, by and between the Registrant and Scott M. Henkel.
	10	.20#		Offer Letter, dated June 3, 2003, by and between the Registrant and Heidi K. Thom.
	10	.21#		Form of Nondisclosure Agreement (executed by Scott M. Henkel, Paul A. Schroeder, Stephen G. Shank, Heidi K. Thom, and Michael J. Offerman).
	10	.22#		Office Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.23#		Short Term Office Space Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.24#		Memorandum of Lease, dated as of March 10, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.25#		Office Lease, dated as of June 28, 2000, as amended, by and between the Registrant and 222 South Ninth Street Limited Partnership and ND Properties, Inc. as successor in interest to 222 South Ninth Street Limited Partnership.
	10	.26*		Library and Information Services Agreement, dated as of September 1, 2004, by and between Capella University and Milton S. Eisenhower Library of the Johns Hopkins University.
	10	.27*		Software License Agreement, dated as of November 10, 2003, by and between Capella University and WebCT, Inc.
	21	.1#		Subsidiaries of the Registrant.
	23	.1		Consent of Ernst & Young.
	23	.2*		Consent of Faegre & Benson LLP (to be included in Exhibit No. 5.1 to Registration Statement).
	24	.1#		Powers of Attorney.

#	Previously filed

*	To be filed by Amendment

	(b)	Financial Statement Schedule

	Schedule II – Valuation and Qualifying Accounts.
	Other schedules are omitted because they are not required.

II-4

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	/s/ Ernst & Young LLP

II-5

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						Additions
		Beginning				Charged to								Ending
		Balance				Expense				Deductions				Balance
		(In thousands)
Allowance accounts for the years ended:
December 31, 2002
Allowance for doubtful accounts		$	1,368			$	3,001			$	(3,147	) (a)		$	1,222
Deferred tax asset valuation allowance			12,328				2,137	(b)			—				14,465
December 31, 2003
Allowance for doubtful accounts			1,222				616				(1,125	) (a)			713
Deferred tax asset valuation allowance			14,465				—				(1,602	) (c)			12,863
December 31, 2004
Allowance for doubtful accounts			713				1,376				(1,024	) (a)			1,065
Deferred tax asset valuation allowance			12,863				—				(12,863	) (d)			—

(a)		Write-off of accounts receivables.
(b)		Increase in valuation allowance necessary to fully reserve for the related increase in net deferred tax assets.
(c)		Reversal of valuation allowance in an amount equal to the reduction in net deferred tax assets due primarily to utilization of net operating loss carryforwards.
(d)		Reversal of deferred tax valuation allowance as a result of achieving three years of cumulative taxable income in 2004 along with expectations of future profitability.

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Item 17.	Undertakings.

	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
	(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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	Capella Education Company

	By	/s/ Stephen G. Shank

	Stephen G. Shank
	Chairman of the Board of Directors
	and Chief Executive Officer

Signature				Title
/s/ Stephen G. Shank   Stephen G. Shank				Chairman and Chief Executive Officer (Principal Executive Officer)
/s/ Lois M. Martin   Lois M. Martin*				Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ Joseph C. Gaylord   Joseph C. Gaylord*				Vice President and Corporate Controller (Principal Accounting Officer)
/s/ S. Joshua Lewis   S. Joshua Lewis*				Director
/s/ James A. Mitchell   James A. Mitchell*				Director
/s/ David W. Smith   David W. Smith*				Director
/s/ Tony J. Christianson   Tony J. Christianson*				Director
/s/ Gordon A. Holmes   Gordon A. Holmes*				Director
/s/ Jody G. Miller   Jody G. Miller*				Director
/s/ Jeffrey W. Taylor   Jeffrey W. Taylor*				Director
/s/ Darrell R. Tukua   Darrell R. Tukua*				Director
/s/ Jon Q. Reynolds, Jr.   Jon Q. Reynolds, Jr.*				Director

*	Stephen G. Shank, by signing his name hereto, does hereby sign this document on behalf of each of the above-named officers and/or directors of the Registrant pursuant to powers of attorney duly executed by such persons.

	By	/s/ Stephen G. Shank

	Stephen G. Shank
	Attorney-in-Fact

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

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Exhibit
Number				Description
	10	.5#		Form of Non-Statutory Stock Option Agreement (Employee) for the Capella Education Company 1999 Stock Option Plan.
	10	.6#		Form of Incentive Stock Option Agreement for the Capella Education Company 1999 Stock Option Plan.
	10	.7#		Learning Ventures International, Inc. 1993 Stock Option Plan, as amended.
	10	.8#		Form of Option Agreement for the Learning Ventures International, Inc. 1993 Stock Option Plan.
	10	.9		Capella Education Company Employee Stock Ownership Plan.
	10	.10		Capella Education Company Retirement Plan with Adoption Agreement and EGTRRA Amendment.
	10	.11		Capella Education Company Form of Executive Severance Plan.
	10	.12		Capella Education Company Employee Stock Purchase Plan.
	10	.13		Capella Education Company Annual Incentive Plan Management Employees — 2005.
	10	.14#		Confidentiality, Non-Competition and Inventions Agreement, dated as of April 16, 2001, by and between the Registrant and Michael J. Offerman.
	10	.15#		Confidentiality, Non-Competition and Inventions Agreement, dated as of May 9, 2001, by and between the Registrant and Paul A. Schroeder.
	10	.16#		Form of Confidentiality, Non-Competition and Inventions Agreement (executed by Scott M. Henkel).
	10	.17#		Offer Letter, dated as of March 9, 2001, by and between the Registrant and Paul A. Schroeder.
	10	.18#		Offer Letter, dated as of November 10, 2003, by and between the Registrant and Michael J. Offerman.
	10	.19#		Offer Letter, dated as of December 22, 2003, by and between the Registrant and Scott M. Henkel.
	10	.20#		Offer Letter, dated June 3, 2003, by and between the Registrant and Heidi K. Thom.
	10	.21#		Form of Nondisclosure Agreement (executed by Scott M. Henkel, Paul A. Schroeder, Stephen G. Shank, Heidi K. Thom, and Michael J. Offerman).
	10	.22#		Office Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.23#		Short Term Office Space Lease, dated as of February 23, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.24#		Memorandum of Lease, dated as of March 10, 2004, by and between the Registrant and 601 Second Avenue Limited Partnership.
	10	.25#		Office Lease, dated as of June 28, 2000, as amended, by and between the Registrant and 222 South Ninth Street Limited Partnership and ND Properties, Inc. as successor in interest to 222 South Ninth Street Limited Partnership.
	10	.26*		Library and Information Services Agreement, dated as of September 1, 2004, by and between Capella University and Milton S. Eisenhower Library of the Johns Hopkins University.
	10	.27*		Software License Agreement, dated as of November 10, 2003, by and between Capella University and WebCT, Inc.
	21	.1#		Subsidiaries of the Registrant.
	23	.1		Consent of Ernst & Young.
	23	.2*		Consent of Faegre & Benson LLP (to be included in Exhibit No. 5.1 to Registration Statement).
	24	.1#		Powers of Attorney.

#	Previously filed

*	To be filed by Amendment