**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(MarkOne)**
| **x**                                                                                                                                  | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                   |       |                                                                                               |
| **For the  fiscal year ended December 31, 2006**                                                                                  |
| ** **                                                                                                                             | ** ** | ** **                                                                                         |
| **OR**                                                                                                                                 |
|                                                                                                                                   |       |                                                                                               |
| **o**                                                                                                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                   |       |                                                                                               |
| **For the  transition period  from                to** |

 

**Commission file number 000-28393**

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**eCollege.com**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                    |   | **84-1351729**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
| ** **                                                      |   | ** **                            |
| **One N.  LaSalle Street, Suite 1800, Chicago, Illinois**       |   | **60602**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code **(312) 706-1710**

Securities registered pursuant to Section 12(b) of the Act: 

| **Title of each class**        |   | **Name of  each exchange on which registered** |
|--------------------------------|--------|------------------------------------------------|
| Common Stock,  $0.01 par value |   | Nasdaq Global  Market                          |

 

Securities registered pursuant to Section 12(g) of the Act: **None.**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. o Yes    x No

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. o Yes    x No

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. x Yes    o No

Indicated by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.

See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large  Accelerated Filer  o |   | Accelerated  Filer x |   | Non-Accelerated  Filer o |
|----------------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act. oYes  x No

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant as of June 30, 2006, the last business day of the registrant’s mostrecently completed second fiscal quarter, was approximately $366,734,225, basedon the closing price of the common stock as reported on the Nasdaq GlobalMarket.

As of March 29, 2007, 22,299,267shares of our common stock were outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

[None]

 

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**eCollege.com**

**FORM10-K**

**Forthe Year Ended December 31, 2006**

**TABLEOF CONTENTS**
| **PART I**   |
|--------------|
|         |   |   |   |   |
| ITEM  1:     |   | Business |   |   |
| ITEM  1A:    |   | Risk  Factors |   |   |
| ITEM 1B:     |   | Unresolved  Staff Comments |   |   |
| ITEM  2:     |   | Properties |   |   |
| ITEM 3:      |   | Legal Proceedings |   |   |
| ITEM 4:      |   | Submission  of Matters to a Vote of Security Holders |   |   |
|         |   |   |   |   |
| **PART II**  |
|         |   |   |   |   |
| ITEM 5:      |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |   |
| ITEM 6:      |   | Selected Financial  Data |   |   |
| ITEM 7:      |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
| ITEM 7A:     |   | Quantitative  and Qualitative Disclosures About Market Risk |   |   |
| ITEM 8:      |   | Financial  Statements and Supplementary Data |   |   |
| ITEM 9:      |   | Changes In  and Disagreements With Accountants on Accounting and Financial Disclosure |   |   |
| ITEM 9A:     |   | Controls and  Procedures |   |   |
| ITEM 9B:     |   | Other Information |   |   |
|         |   |   |   |   |
| **PART III** |
|         |   |   |   |   |
| ITEM 10:     |   | Directors,  Executive Officers and Corporate Governance |   |   |
| ITEM 11:     |   | Executive  Compensation |   |   |
| ITEM 12:     |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |   |
| ITEM 13:     |   | Certain  Relationships and Related Transactions and Director Independence |   |   |
| ITEM 14:     |   | Principal  Accountant Fees and Services |   |   |
|         |   |   |   |   |
| **PART IV**  |
|         |   |   |   |   |
| ITEM 15:     |   | Exhibits and  Financial Statement Schedules |   |   |
| Signatures   |   |   |   |   |

 

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**PART I**

References in this Annual Report on Form 10-K to “eCollege,”the “Company,” “we,” “us” or “our” refer to eCollege.com and its subsidiariesunless the context otherwise requires.

**InformationConcerning Forward-Looking Statements.**  This AnnualReport on Form 10-K contains “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 which reflectour current expectations and beliefs regarding the Company’s future results ofoperations and performance and other future developments. You can identifythese forward-looking statements when you see us using words such as “expect,” “anticipate,”“estimate,” “plan,” “believe” and other similar expressions, and suchstatements include, but are not limited to, statements concerning the Company’splans to offer additional products or services, the timing of any suchofferings and the expected benefits to customers of any such offerings;expected technology developments; the Company’s growth strategy; futurefinancial and operating results; future enrollment levels; future levels ofcapital expenditures; expected seasonality; the Company’s plans to divest itsEnrollment division; and any other statements that are not based on historicalfacts.

Wecaution our readers that these forward-looking statements involve risks anduncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of, among otherthings, the factors described in the Risk Factors, Management’s Discussion andAnalysis of Financial Condition and Results of Operations and elsewhere in thisreport, and in the Company’s other filings with the Securities and ExchangeCommission (the “SEC”). We advise readers not to place undue reliance on theforward-looking statements contained in this report, which reflect our beliefsand expectations only as of the date of this report. We undertake no obligationto update or revise these forward-looking statements to reflect new events orcircumstances or any changes in our beliefs or expectations, other than asrequired by law.

**ITEM 1:    BUSINESS**

**General**

eCollegeis an outsource provider of value added information services to thepost-secondary education industry. We were organized as a Delaware corporationin 1999 and operate through two divisions, our eLearning division and ourEnrollment division, Datamark, Inc. (the terms “Datamark” and “Enrollmentdivision” are used interchangeably throughout this report to describe thelatter division). Our eLearning division provides on-demand outsourcedtechnology, products and services that enable colleges, universities andelementary and high schools (“K-12 schools”) to offer online distance andhybrid educational programs as well as on-campus courses. Datamark provides integratedenrollment marketing services, primarily to the proprietary post-secondaryschool industry.

In fall of 2006, theCompany undertook an in-depth strategic analysis of the Enrollment division’sbusiness and prospects and determined that although the prospects for thebusiness remain positive, its projected growth rates were not consistent withthe Company’s strategic plans. In October 2006, the Company’s Board of Directors(the “Board”) determined that the Company should initiate a process for thesale of the Enrollment division, and the Company engaged Evercore Group L.L.C.(“Evercore) to assist in marketing Datamark to prospective purchasers. Themarketing process continues as of the filing date of this Report. As requiredby U.S. generally accepted accounting principles (“GAAP”), the ConsolidatedFinancial Statements included in Item 8 of this Annual Report on Form 10-Kseparately reflect the Datamark operations held for sale as discontinuedoperations for all periods presented, and the Consolidated Financial Statementsfor the years ended December 31, 2005 and 2004 have been reclassified toreflect such treatment. Please refer to Note 3 to the Consolidated FinancialStatements.

**Growth Strategy**

Ourgrowth strategy for the eLearning division is aimed at providing value-addedinformation services along the student life cycle to our target market, whichconsists of for-profit and growth oriented not-for-profit post-secondaryschools, colleges, universities and K-12 schools in the United States andCanada.  The student life cycle is the chain of activities andinteractions a student goes through, from the beginning of the decision to goto school (or go back to school), throughout the completion of courses, tograduation and career placement and progression.  Our goal is to provideour customer institutions with value-added solutions along this chain, therebyhelping to ensure the efficient and effective growth of their educationalprograms. After careful analysis, we decided to invest in the internationalexpansion of our eLearning business, initially by supporting United Statesclients who are expanding internationally and then by moving into selectedinternational markets over the next several years.

The principal componentsof the Company’s growth strategy include:

***Continue fueling the profitable growth of our currentcustomers through existing services and in so doing drive our own revenuegrowth:*****Asour solutions successfully help our clients attract, retain and educate agrowing pool of students, our revenue increases.  Our price structure istied directly to the number of course enrollments on our platform.  

***Add new products and services along the student life cyclethat bring additional value to our target market*:** Thisgrowth strategy involves gaining market acceptance of recent and plannedproduct introductions, planning the development and integration of new productopportunities and analyzing other solution providers in the industry forpotential acquisitions to

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provide additionalproducts and services that are complementary to our core business. 

***Up-sell additional services to current customers*:** eCollege has a successful record of introducing new products and services andupselling them to current customers. The Company is continually evaluating anddeveloping new products and services, and recent new products and products indevelopment include Program Intelligence Manager and Learning Outcome Manager.eCollege.NExT, a new platform currently in development and scheduled forrelease beginning in late 2007, is expected to enable additional upsellingopportunities, including international expansion as discussed below.

***Add additional customers***:  Weexpect to continue to increase our customer base by targeting sales efforts atentrepreneurially-minded institutions that are committed to achievingenrollment growth in both online and on-campus programs.  The emergence ofonline K-12 schools has created an opportunity for eCollege to leverage itscore competencies in an adjacent market, and we offer a “Total ProgramManagement” solution to K-12 school districts that encompasses all the resourcesrequired to support a successful online program. Additionally, we will continueto explore strategic relationships with selected vendors (such as courseevaluation or content providers) where appropriate to drive sales of ourproducts and services. 

***Expandthe business to selected international markets:***Webelieve that certain countries present significant opportunities for onlineeducation as they move towards knowledge-based economies. We have begun ourinternational expansion by internationalizing the eLearning platform as part ofthe .NExT initiative, and in the interim we are customizing the currentplatform to support clients who wish to begin operating with us in selectinternational markets. We will also explore other business opportunities and distributionchannels in international markets. We do not expect our international expansionto generate significant revenue in 2007.

**SegmentInformation**

eCollege has one businesssegment: its eLearning business. Until October 2006, the business of the Enrollmentdivision was reported as a separate segment. As a result of the Company’sdecision to initiate a process for the sale of the Enrollment division, theresults of operations of the Enrollment division are now reported asdiscontinued operations. See Note 3 to the Consolidated FinancialStatements included in Item 8 of this Annual Report on Form 10-K.

**OurSolution**

Ourintegrated eLearning technology, products and services are designed to becomprehensive, powerful and flexible to drive the success and growth of theonline educational programs of our target market. As an on-demand softwarevendor, we provide our customers access to our software products, consisting ofonline campuses, courses, program reporting, content management and programadministration solutions, through hosting services in our reliable datacenters. We also provide services complementing our software, including design,development and management of online campuses and courses, as well as ongoingadministration, faculty and student support. Our suite of products and servicesprovides customers with the flexibility to either outsource the development oftheir online campuses and courses or to select individual products and servicesto meet their unique needs.

*The eCollege Outsource Solution*.    TheeCollege Outsource Solution consists of proprietary, web-based software andservices that facilitate the creation of online programs by our customers andsupport their operational and academic needs. The eCollege Outsource Solutionincludes eCollege Teaching SolutionsSM,the eCollege Program Administration SystemSM and ourtechnology infrastructure.

*eCollege Teaching Solutions.*    eCollegeTeaching Solutions support the development, delivery and efficient managementof quality online courses and the training of online instructors. The eCollegeAU+SM Course Management System is our teaching andlearning system for online course delivery. The eCollege Teaching Solutionsinclude the following:

**eCourse****SM and eCompanion****SM.**    eCourse,our fully-online course designed for distance learning and hybrid learning(which encompasses both online and face-to-face class sessions), includesapplications necessary for managing courses, outlining assignments,facilitating class discussions, conducting lectures, testing, grading andinteracting with and among students. The majority of our eLearning revenue isderived from student technology service fees charged for enrollments ineCourses. eCompanion, our lower-priced online supplement to a face-to-facecourse, offers customers some of the functions of eCourse and providesinstructors with the tools necessary to create an interactive online componentto supplement traditional on-campus courses.

**ContentManager.**The eCollege Content Manager helps our customerscentrally manage, standardize and reuse content across multiple programs,courses, sections and other applications. Content Manager is tightly integratedinto eCollege’s course management system so users do not have to go outside ofa course to create, edit, search for or add content to a course or coursesection.

*eCollegeProgram Administration System.*    TheeCollege Program Administration System includes products and services thatprovide assistance and tools to our customers’ administrators to assist them inenhancing overall program quality and efficient administration. These productsand services include:

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**GatewayCampus****SM andCampusPortal****SM.**    GatewayCampus and CampusPortal are online portal products that offer community,academic and administrative functions similar to those found on a physicalcollege campus. The Gateway Campus provides access to online campus services,courses and course supplements, and includes faculty and administrativeservices. Our customers can choose to add premium features, such as interactivecourse catalogs, online admissions forms and online registration, to theirGateway Campus. CampusPortal is our most comprehensive portal product andincludes all of the functionality of the Gateway Campus and the premiumfeatures.

**ProgramManagement and Reporting.**    We assignevery customer a client services consultant and a back-up team to provideassistance with term and course administration and user management, and toensure that the customer’s communications and reporting needs are met. We alsooffer customers a wide range of standard reports, including activity usage andenrollment reports that analyze student data to help customers manage theironline programs. In addition, we are able to create custom reports that respondto our customers’ unique needs.

**EvaluationSolutions.**    Evaluation Solutions arecomprehensive Internet-based products that automate the entire course andinstructor evaluation process. These products allow our customers to gatherdata from students and faculty online, and then aggregate the data into reportsto help monitor course and program quality and instructor effectiveness.

**ProgramIntelligence Manager.**Program Intelligence Manager is aninteractive analysis toolset that enables customers to identify and act on keydrivers affecting student satisfaction, course and program quality and coursecompletion and student retention rates. The functionality allows customers toanalyze user activity and trends across multiple courses, programs and schools.

*eCollegeServices.*eCollegeoffers a suite of professional and support services that complement itsTeaching Solutions and Program Administration System. These offerings include:

**HelpDesk.**    As part of our core offering, weprovide assistance to students, faculty and administrators 24 hours a day,365 days a year, to ensure that technical questions related to theeCollege outsource solution are resolved quickly and effectively.

**CourseDevelopment and Support, Instructional Design Consulting and Training, andContent Solutions.**    We offer coursedevelopment services to help customers reduce the time it takes to develop newcourse offerings, create enhancements to existing courses with new learningobjects or multi-media, and convert existing course content from othercompanies’ course management systems. Our instructional designers leverage ourproduct and service offerings to help customers deliver quality online courses,instruction and programs.

**TechnicalConsulting.**    Our software developmentteam offers custom technical consulting to meet a customer’s unique needs, suchas a special eLearning-related application, a customized brochure website, orintegrating the customer’s online programs with its student information systemsand other enterprise-wide applications through our open platform initiative.

*TechnologyInfrastructure.*    eCollege’s technologyinfrastructure provides our customers with a turnkey online program solutionand offers reliability, scalability, accessibility, security and performancedesigned to provide program stability and growth. The reliability of aninstitution’s online learning environment and support services can affect itsfaculty and student satisfaction, and thus its student completion, retentionand graduation rates. Our technology infrastructure consists of:

**Hosting.**    Asan on-demand provider, we host our software for our customers in a highlyreliable and scalable hosting environment, allowing customers to provide theironline programs through a standard Web browser. We have two commercial datacenters and have built redundancy into every critical area of the eCollegeSystem, including security, switches, communication servers, networkmanagement, Web servers, application servers, database servers and datastorage. This redundancy enabled us to achieve 99.999% internal systemavailability to our customers during the 2003-2004  academic year, 99.978% availability duringthe 2004-2005 academic year, 99.981% availability during the 2005-2006 academicyear and 99.979% availability thus far in the 2006-2007 academic year.

**InternetConnectivity.**    To ensure maximumup-time for our customers, we provide full OC-3 and Gigabit Ethernet connectionsbalanced over three Tier I Internet providers: multiple Internet providers toinsure instant data rerouting if one of the connections should ever fail; .Alt Access—a completely separate alternate network path to a customer’swebsite; and world-wide network and application performance monitoring.

**ProductAdvancement.**    Our development andquality assurance teams focus not only on features and functionality, but alsoon the usability and scalability of our products. All new product developmentinitiatives go through a rigorous definition, development and quality assuranceprocess. Furthermore, because of our on-demand model, whenever we release anupgrade or enhancement to our Teaching Solutions or Program AdministrationSystem, all of our customers have immediate access to the benefits of the newproduct offering.

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**Customers**

Wedefine customers based on their common ownership. Even though certain schoolgroups do not centralize budgetary or purchasing decisions, a group ofcustomers under common control or otherwise affiliated with each other isregarded as a single customer.

As ofDecember 31, 2006, our eLearning division had more than 280 customerslocated primarily in the United States and Canada. Our eLearning customersinclude some of the fastest growing and largest programs for online degrees,certification and professional development. The eLearning division servesfor-profit education companies and post-secondary schools, public and privateuniversities, community colleges, career commuter colleges, state departmentsof education and K-12 school districts. In addition, we have contracts withseveral providers of continuing education and corporate training. For the yearended December 31, 2006, our five largest eLearning customers accounted forapproximately 30% of eLearning revenue and our 30 largest eLearning customersaccounted for approximately 70% of eLearning revenue.

**GeographicInformation**

Substantiallyall of the Company’s assets are located in and substantially all of the Company’soperating results are derived from operations in the United States.

**Salesand Marketing**

We target prospectivecustomers in the United States and Canada. We have a dedicated eLearning salesforce who are responsible for new business development and whom we compensatewith a combination of base salary, revenue-based commissions and bonuses forsales and specified sales activities. Most members of the sales force have abackground in education and/or technology. We divide our sales force into twogroups: post-secondary education and K-12, each managed by a vice presidentresponsible for regional directors located within the geographic territoriesthey serve. Our regional directors focus on selling to institutions with largedistance programs or the potential for large distance programs within a clearlydefined target account list for each geographic region.

Once a customer contractswith us, the account is assigned to our Account Management department, which isresponsible for partnering with our customers to build new online programs fornew schools or departments within customers’ institutions. The AccountManagement department also promotes and sells additional products and serviceofferings to our customers for their existing programs and provides assistanceto program administrators to ensure that customers’ communications andreporting needs are met. We compensate our Account Managers with a combinationof salary, revenue-based commissions and bonuses for contract renewals,up-sales and cross-sales.

Tofurther penetrate the distance education market, we offer our on-campus productand service offerings at significantly reduced prices for customers thatdemonstrate a commitment to building or maintaining a large distance educationprogram as an overall enterprise solution. This pricing strategy is designed toencourage further familiarity with our Teaching Solutions software for studentswho have never taken online distance courses as well as on-campus faculty whomay also wish to teach online in a distance education program. We also plan tocontinue to expand our product offerings, by both offering new products andincreasing the flexibility with which existing products may be deployed.

We market our eLearningtechnology and services through trade shows, eCollege-sponsored symposiums,speaking engagements and direct marketing. Our eCollege.com website includes ademonstration of the eCollege Outsource Solution and provides information onindustry news, trends and important events in online learning. We use pressreleases and communications to the news and trade media to promote onlinelearning and our customers’ programs in order to increase online studentenrollments. We are continuing to strengthen our brand identity byparticipating in trade shows, conferences and executive speaking engagements.

**Competition**

The online learningmarket has evolved quickly over the past ten years and is subject totechnological change.   Some colleges and universities construct onlinelearning systems utilizing in-house personnel and create their own software orpurchase software components from a vendor. Therefore, we face significantcompetition from a variety of entities including software companies withspecific products for the college and university market, some of which providehosting services, as well as service companies that specialize in consulting,system integration, and support in the online learning industry. In addition,we have recently seen a number of open source solutions enter adjacent markets.Our principal competitors include Blackboard, Inc., Desire2Learn Inc. and ANGELLearning, Inc.

We believe that theprincipal competitive factors in our market include:

·                         Theability to provide high quality online learning, meeting the needs of colleges,universities, K-12 schools and their students;

·                         Aproven approach and process to ensure the successful growth of onlineeducational programs;

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·                         Reliabletechnology, with up-time and degradation free usage being the significantmeasures;

·                         Scalabletechnology and support services that ensure continued security and systemperformance as customers grow;

·                         Flexibilityand the ability to integrate other technology-based products;

·                         Theability to offer a full complement of products, services, and hostingcapabilities as a single-source provider;

·                         Singlesource accountability for customer support and satisfaction;

·                         Financialviability and company reputation;

·                         Competitivepricing; and

·                         Thequality of implementation and ongoing support teams.

We believe that we compare favorably to our competitorson the basis of these factors.

**Technology**

Our technology strategyfor the eLearning division is to employ the best available software on stableand scalable platforms. All of our solutions contain our proprietary softwareand include access to certain widely-available software products we licensefrom third parties. To create the custom components of our software, we employMicrosoft’s most current and commonly used Internet programming technologies,allowing applications to communicate and share data over the Internet.

Because our currentbusiness depends on our ability to host Web-based software applications for ourcustomers, one of our primary technical goals is to provide a highly reliable,fault tolerant system. To do so, we have made substantial investments insystems monitoring, fault handling, technology redundancy and other systemup-time enhancements. For example, we continuously monitor our customers’online campuses and our own core systems for availability. All of our primaryservers contain fault-tolerant disk storage technology, backup network cardsand power supplies, which reduce the possibility of a single point of failurein our servers and also reduce downtime. Our database servers contain thelatest clustering technology, which uses a combination of scalable hardware andMicrosoft software technologies. We maintain sophisticated “firewall”technology to prevent access by unauthorized users and to minimize knownvulnerabilities to system security. We also have Intrusion Detection Systemsand offer SSL (Secure Socket Layer) encryption for sensitive data, and VPN(Virtual Private Network) access to safely transfer data.

Our products are delivered to our customers from anetwork of centralized Web servers. Our Web servers are located in two datacenters, commonly known as Web “server farms,” which provide us with scalable,high bandwidth Internet connections. Our primary facility is co-located atViaWest Internet Services, Inc. (“ViaWest”) in Denver, Colorado, and ourback-up facilities are located at our eLearning division headquarters inDenver. Having multiple data centers provides us with the capability to providebackup in the case of failure of a data center, thereby minimizing oreliminating customer downtime. We are engaged in a two-year build-out of anadditional data center at a ViaWest facility outside of Denver which we used asa disaster recovery facility in 2006 and plan to use as a second productionfacility beginning in 2007.

**Researchand Development**

Productdevelopment activities for our eLearning division are managed from Denver,Colorado. In January 2004 we decided, based on timing and costconsiderations, to supplement our development efforts by committing resourcesto offshore development in Sri Lanka. eCollege entered into an agreement with athird party vendor in Sri Lanka to provide supplemental software developmentfor our development projects.  Ourminimum future commitments under this agreement totaled $760,000 at December31, 2006.  In April 2007, we will have theoption of hiring the third party’s staff and establishing our own facility inSri Lanka. The offshore resources support research and development for theeLearning division as well as our MIS activities.

eCollege’stotal expenditures for research and development for continuing operations were$8.5 million in 2006 (of which $1.8 million related to development in SriLanka), $7.2 million in 2005 (of which $1.4 million related to development inSri Lanka) and $6.5 million in 2004 (of which $0.9 million related todevelopment in Sri Lanka). In 2006, 2005 and 2004, we capitalized $1.5 million,$1.1 million and $1.2 million, respectively, in costs for internally developedsoftware used in continuing operations, which reduced research and developmentexpense by corresponding amounts. We anticipate that we will continue to havesignificant research and development expenditures in the future as we continueto develop and provide innovative, high-quality products and services tomaintain and enhance our competitive position. In 2005, the Company announcedthe upcoming introduction of eCollege.NExT, the next generation of eCollege’seLearning platform. eCollege.NExT builds upon eCollege’s tradition of asingle-instance, on-demand eLearning architecture, and is expected to providesignificantly enhanced customization, interoperability and multiple languagesupport. The advancements will be implemented in a series of releases scheduledto begin in late 2007.

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**DiscontinuedOperations**

*Productsand Services.*    Theproducts and services offered by Datamark are focused directly on two stages ofthe student life cycle: recruiting (lead generation) and enrollment (leadconversion). In addition, by generating higher quality leads andcorrespondingly higher conversion rates, Datamark’s services help clientsimprove their results at another stage of the student life cycle: studentretention.

Datamark’slead generation products primarily consist of direct mail, media placement andinteractive marketing solutions that are designed to attract the interest ofthe most likely candidates for enrollment at customers’ institutions. Datamarkprovides sophisticated lead response tracking and utilizes that tracking tooptimize the media mix for customers on a continual basis. With respect to enrollmentproducts and services, Datamark provides lead conversion systems to enhance theperformance of our customers’ admissions employees, as well as post-leadcommunication campaigns to increase the number of leads that actually convertinto enrollments. Datamark’s LeadBoost service is a customized lead contactstrategy that uses a tailored mix of mail, interactive and telephonic media tokeep interested prospects engaged.

*Customers.    *Our Enrollment divisionoperates in three key customer sectors within the post-secondary market:proprietary; continuing education; and growth-oriented non-profit institutions,with the majority of customers coming from the proprietary sector. As ofDecember 31, 2006, the Enrollment division had approximately 150 customers.These customers are located throughout the United States and Canada. For theyear ended December 31, 2006, Datamark’s largest customer accounted forapproximately 29% of revenue from discontinued operations, its five largestcustomers accounted for approximately 64% of revenue from discontinuedoperations and its 30 largest customers accounted for approximately 93% ofrevenue from discontinued operations.

*Sales and Marketing*.      Datamark employs an experienced salesforce which is comprised of a new business development team and an accountmanagement team. Incentive compensation plans for new business sales executivesinclude a base salary plus commissions on gross sales of direct mail,interactive and research services and on net sales of media placement for thefirst 12 months of new business revenue. Incentive compensation plans foraccount management sales executives include a base salary plus commissions ongross sales of direct mail, interactive and research services and on net salesof media placement. The account management team is responsible for overseeingthe projects of our existing client base to ensure quality service and forgrowing business from existing clients by selling additional products andsolutions. Datamark rewards up-selling activities by paying acceleratedcommissions on non-core products and services.

We primarily market ourEnrollment division solutions through the sales efforts of our accountexecutives. We also participate in industry trade shows, sponsorships, e-mailcampaigns, and newsletters. In addition, we rely on our Datamark website andplace advertisements in major trade magazines.

*Competition.*     The primary source of competition for ourEnrollment division comes from large educational institutions that perform asignificant portion of their marketing function in-house and from localadvertising agencies, media companies and printing services companies whocompete for our accounts. There are a few outsourced marketing serviceproviders that we believe are our primary competitors, but we believe that few,if any, of these companies offer as comprehensive a selection of integratedmarketing solutions as we offer. We believe that the principal competitivefactors in our market include:

·                         Theability to deliver an industry-specific solution;

·                         Theability to provide a comprehensive solution for student enrollment andretention;

·                         Knowledgeof the education industry, including an understanding of the drivers ofsuccess;

·                         Theability to provide high quality marketing products and customer service; and

·                         Deliveringto customers a superior return on their marketing investments.

We believe that we compare favorably to ourcompetitors on the basis of these factors.

*Technology.*     Our technology strategy for the Enrollmentdivision is to employ the best available software and systems to provide ourcustomers with integrated, media-neutral marketing and retention solutions.This strategy is supported by a hardware infrastructure that is designed toprovide 99.95% up-time for more than 700 client web/microsites and criticalcorporate systems.  

Datamark recently adopteda new technology platform, Trinitas, with the goal of providing a unifiedinformation platform across all products to facilitate real time datacollection, flexibility and innovation. Management believes that Trinitas willenable Datamark to further increase the range of its products and services.Trinitas is being deployed under a three phase methodology that is currentlyunderway. Datamark is investing in new hardware and network technology tosupport the Trinitas initiative and to increase its up- time capabilities, andthe Company believes that every critical part of its technology will be fullyredundant by May 2007. 

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**Seasonality**

Because the majority ofour eLearning revenue is derived from the number of students our customers haveenrolled in online courses delivered on our Course Management System, ourresults of operations are impacted by the seasonality inherent in thetraditional academic calendar. However, in 2006, we continued to see ourcustomers offer more non-traditional course terms (i.e., quarterly, monthly andbi-monthly), which has somewhat mitigated the seasonality of our results. Weexpect this trend to continue in the future. 

As aresult of the seasonality in our business, sequential quarter-to-quarterfinancial results are not directly comparable.

**Intellectual Property andProprietary Rights**

The Company relies upon federal statutory and commonlaw copyright, trademark and servicemark law, patent law, trade secretprotection and confidentiality and/or license agreements with its employees,customers, partners, and others to protect its proprietary rights. As ofDecember 31, 2006, the Company has six patents, all used in the eLearningdivision, registered with the United States Patent and Trademark Office (“USPTO”)covering certain features of the eCollege Outsource Solution, with expirationdates between 2012 and 2015. eCollege has additional patent applications filedwith the USPTO covering other features of the software included in the eCollegeOutsource Solution.

Wehave certain registered servicemarks and trademarks including eCollege.com®,eCollege® and Datamark®. We will continue to evaluatethe registration of additional servicemarks as appropriate.

**Employees**

As of December 31,2006 we employed 270 people in our eLearning and Corporate divisions combined,and 248 people at Datamark. None of our employees are subject to collectivebargaining agreements, and we consider our relations with our employees to begood.

**AvailableInformation**

We make available free of charge on our website atwww.eCollege.com our annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), as soon as reasonably practicable after weelectronically file or furnish such material to the SEC. You can access suchfilings from the Investor Relations section of our website via a hyperlink to athird-party SEC Filings website. The information found on our website is notpart of this or any other report we file or furnish to the SEC.

**ITEM 1A.RISK FACTORS**

**Risk Factors**

Thissection identifies certain risks and uncertainties that we face. If we areunable to appropriately address these and other circumstances that could have anegative effect on our business, our business may suffer. Negative events maydecrease our revenues, increase our costs, adversely affect our financialresults and decrease our financial strength, thereby causing our stock price todecline. The risks and uncertainties described below are not the only ones weface. Additional risks not presently known to us or other factors not perceivedby us to present significant risks to our business at this time also may have amaterial adverse effect on our business.

*A Significant Portion of Our Revenue Is Generated From a RelativelySmall Number of Customers.*

Revenuefrom a small number of customers has comprised a substantial portion of thehistorical revenue of eLearning and Datamark and is expected to represent asubstantial portion of revenue for the foreseeable future. For the year endedDecember 31, 2006, our five largest eLearning customers accounted forapproximately 30% of eLearning division revenue and our 30 largest eLearningcustomers accounted for approximately 70% of eLearning division revenue. Withrespect to discontinued operations, for the year ended December 31, 2006, onecustomer - Corinthian Colleges – accounted for approximately 29% of revenue,the five largest customers accounted for approximately 64% of revenue and the30 largest customers accounted for approximately 93% of revenue. Anycancellation, deferral, or significant reduction in work performed for theseprincipal customers, or failure to collect accounts receivable from suchcustomers, could have a material adverse effect on our business, financialcondition, and results of operations.

*Our Stock Price Is Likely to be Volatile.*

Themarket price of our common stock has been and is likely to continue to bevolatile and could be subject to significant fluctuations in response tofactors such as the following, some of which are beyond our control:

·                 Quarterlyvariations in our operating results;

·                 Operatingresults that vary from the expectations of securities analysts and investors;

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·                 Changesin expectations as to our future financial performance;

·                 Announcementsof technological innovations or new products by us or our competitors;

·                 Changesin market valuations of other online service companies or our customers;

·                 Futureissuances of our common stock;

·                 Stockmarket price and volume fluctuations;

·                 Generalpolitical and economic conditions, such as a recession, continued or furtherarmed hostilities or additional terrorist attacks, or interest rate or currencyrate fluctuations; and

·                 Otherrisk factors discussed in this report.

Thesefactors may adversely affect the market price of our common stock. In addition,the market prices for stocks of many internet-related and technology companieshave historically experienced extreme price fluctuations that appeared to bearno relationship to the operating performance of these companies. In the eventour stock price fell significantly, investors might sue the Company, causingincreased litigation expenses and, possibly, the payment of large damages orsettlement fees.

*We Depend On Our Customers and Third Parties to Market StudentEnrollments for Online Courses.*

A substantialportion of our eLearning division revenue is derived from fees for eachenrollment in an online course that we host for our customers. Generally, we donot market directly to students to generate enrollments in our customers’courses and therefore have little influence on the number of students thatenroll. We are therefore dependent on the institutions and organizations thatpurchase our products and services to market to individual students. Thefailure of these third parties to effectively attract, maintain, and increasestudent enrollments could affect our revenue growth and have a material adverseeffect on our business and financial results. 

*Our Operating Results May Fluctuate Significantly and May Be Below theExpectations of Analysts and Investors.*

Thesales cycle for our products and services varies widely and can be verylengthy, particularly for the eLearning division. Because of the variabilityand length of the sales cycle, it may be difficult for us to predict the timingof particular sales, the rate at which online campuses, courses, and/or coursesupplements will be implemented, the number of students who will enroll in theonline courses, or the rate of which new or future customers will utilize ourenrollment marketing services. In addition, Datamark typically does not enterinto long-term contracts with its customers, and it may be difficult for us topredict customers’ reductions in marketing expenditures. Because a significantportion of the costs at both divisions are fixed and are based on anticipatedrevenue levels, small variations in the timing of revenue recognition couldcause significant variations in operating results from quarter-to-quarter.Since we may be unable to adjust spending in a timely manner to compensate forany unexpected revenue shortfall, any significant decrease in revenue wouldlikely have an immediate material adverse effect on our business and financialresults.  Further, any such variationscould cause our operating results to fall below the expectations of securitiesanalysts and investors. In such an event, the trading price of our stock wouldlikely fall and investors might sue the Company, causing increased litigationexpenses and, possibly, the payment of large damages or settlement fees.

*We Depend on Our Key Personnel.*

Oursuccess depends on the performance of our key management, technical, sales andother critical personnel and on our ability to continue to attract, motivateand retain management and highly qualified key personnel. Failure to do socould disrupt our operations, adversely affect our customer relationships andimpair our ability to successfully implement and complete Company initiatives.We are facing increased labor costs, particularly with respect to technicalpersonnel; if this trend continues, we may be required to pay highercompensation to attract qualified personnel and our results of operations maybe adversely affected.

Ourfuture success and our ability to pursue our growth strategy will depend to asignificant extent on the continued service of our senior management personnel.Executives have left the Company over the years, and there may be additionaldepartures from time to time. Although we have employment agreements with ourexecutive officers, these agreements do not obligate them to remain employed byus. The loss of services of any senior management personnel could make it moredifficult for us to successfully pursue our business goals.

*We Face Significant Competition in our Markets***.**

Theonline learning market has evolved quickly over the past ten years and issubject to technological change. Some colleges and universities constructonline learning systems using in-house personnel and create their own softwareor purchase software components from a vendor. Therefore we face significantcompetition from a variety of entities including software companies withspecific products for the college and university market and service companiesthat specialize in consulting, system integration and support in the eLearningindustry. We have recently seen a number of open source solutions enteradjacent markets. We also face

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significant competitionin the market for enrollment marketing services to the post-secondary educationindustry. Competition is most intense from colleges and universities thatperform their own enrollment marketing services in-house. Datamark also facescompetition from other enrollment marketing companies, direct marketingcompanies, media placement agencies and online marketing companies.

Someof our current and potential competitors have longer operating histories,larger customer bases, greater brand recognition and significantly greaterfinancial, marketing and other resources than we do. Certain competitors may beable to secure alliances with customers and affiliates on more favorable terms,devote greater resources to marketing and promotional campaigns and devotesubstantially more resources to systems development than we can. In addition,it is possible that certain competitors, or potential competitors, could reducetheir pricing to levels that would make it difficult for us to compete.Increased competition may result in reduced operating margins, as well as lossof market share and brand recognition.

Inaddition, in order to compete effectively in our markets, we may need to changeour business in significant ways. For example, we may change our pricing,product, or service offerings, make key decisions about technology directionsor marketing strategies, or acquire additional businesses or technologies. Anyof these actions could hurt our business, results of operations, and financialcondition.

*Recent Rapid Growth in Our Markets May Not Continue and our Ability toGrow May be Adversely Affected.*

The online learning market and the for-profitpost-secondary education market have grown rapidly in recent years, and therecan be no assurance that such growth levels will continue. Our ability toexecute our growth strategy will depend in part on continued growth in thesemarkets. With respect to the online learning market, our success will depend inpart on the continued adoption by our customers and potential customers ofonline education initiatives. Online education is a relatively new development,and some academics and educators are opposed to it in principle. It is possiblethat their opposition could reduce the demand for our products and services orresult in increased costs or burdens for customers and potential customersoffering online education. With respect to our enrollment marketing services, themarketing strategies and budgets of our current and prospective customers aresubject to frequent change.

*Our Network Infrastructure and Computer Systems May Fail.*

Thecontinuing and uninterrupted performance of our network infrastructure andcomputer systems is critical to our success. Any system failure that causesinterruptions in our ability to provide services could reduce customersatisfaction and, if sustained or repeated, would reduce the attractiveness ofour technology and services to our customers and their students and toprospective customers and could require us to issue credits or pay penaltiesunder our contracts with certain customers. We cannot be certain thatlimitations of liability set forth in our customer contracts would be enforceableor would otherwise protect us from liability for damages. A material liabilityclaim against us, regardless of its merit or its outcome, could result insubstantial costs and significantly harm our business reputation.  In addition, a system failure could expose usto significant remediation expense and could divert management’s attention andother company resources.

Becauseour services involve the storage and transmission of proprietary andconfidential customer and student information, our success depends on ourability to provide superior network security protection and maintain theconfidence of our customers in that ability. Unauthorized disclosure of suchinformation could subject us to liability, have a negative impact on ourreputation and subject us to regulatory action. Our system is designed to prevent unauthorized access from the internetand, to date, our operations have not been affected by security breaks;nevertheless, in the future we may not be able to prevent unauthorizeddisruptions of our network operations, whether caused unintentionally or bycomputer “hackers” or by the failure of our internet service providers toprovide us with adequate bandwidth and service. Despite precautions we havetaken, unanticipated problems affecting our systems have from time to time inthe past caused, and in the future could cause, interruptions or delays in thedelivery of our products and services. Any damage or failure that interrupts ordelays our operations could have a material adverse effect on our business andfinancial results.

We arealmost exclusively dependent on Microsoft for our underlying softwaretechnology platform. We are therefore potentially vulnerable to business oroperational disruption caused by changes in the Microsoft platform, securityflaws in Microsoft software, and/or potential price increases or licensingchanges by Microsoft.

*We May be Unable to Successfully Divest Datamark*

A key component of our business strategy involvesthe divestiture of Datamark. We may be unable to sell this business onacceptable terms. Our failure to sell Datamark could impair our ability to growour revenues and earnings at rates consistent with our strategic planning andthe expectations of securities analysts and investors, and could have a materialadverse effect on the market price of our common stock. In addition,irrespective of whether we are successful in selling the Datamark business, thesale process will require significant resources from our management and ourlegal and finance teams and result in significant legal, accounting and otherexpenses.  Depending upon the outcome ofour attempt to divest Datamark, we could be required to recognize impairmentlosses in addition to the charge recognized in the fourth quarter of 2006.  See Note 3 to the Consolidated FinancialStatements included in Item 8 of this Annual Report on Form 10-K. 

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*We May Not be Able to Protect Our Intellectual Property and ProprietaryRights and We May be Subject to Claims of Infringement by Third Parties.*

Oursuccess depends, in part, on our ability to protect our proprietary rights andtechnology, such as our trade and product names, and the proprietary softwareincluded in our products. We rely on a combination of copyrights, trademarks,servicemarks, patents, trade secret laws, and employee and third-partynondisclosure agreements to protect our proprietary rights. Despite our effortsto protect these rights, unauthorized parties may attempt to duplicate or copyaspects of our services or software or to obtain and use information that weregard as proprietary. If others infringe or misappropriate our copyrights,servicemarks or other proprietary rights, our business could be hurt. Inaddition, our growth strategy includes the expansion of the eLearning businessto selected international markets, and the laws of many countries do notprotect our proprietary rights to as great an extent as the laws of the UnitedStates. Our failure to meaningfully protect our intellectual property couldhave a material adverse effect on our business and financial results.

Inaddition, although we do not believe that we are infringing the intellectualproperty rights of others, other parties might assert infringement claimsagainst us. We may encounter disputes over rights and obligations concerningintellectual property. These disputes, even if without merit, could lead tolitigation, which may be time-consuming and costly (even if we are successful),may require us to redesign our products or services, may require us to enterinto royalty or licensing agreements (which may not be available on acceptableterms or at all), and could be a distraction to management, any of which couldhave a material adverse effect on our business. In addition, our agreementswith our customers require us to indemnify our customers in the event they aresued by a third party claiming that our products and services infringe a thirdparty’s intellectual property rights. In the event of such a lawsuit againstour customers, our performance of these indemnification obligations could havea material adverse effect on our business, financial condition and results ofoperations.

*Government Regulation May Adversely Affect Our Future OperatingResults.*

Thefederal government, through the Higher Education Act and other legislation, mayconsider changes in the laws that affect distance education in highereducation. Legislation could be adopted that would have a material adverseeffect on our business. In addition, it is possible that laws and regulationsmay be adopted with respect to the internet, relating to user privacy, content,taxation, intellectual property ownership and infringement, distribution, andcharacteristics and quality of products and services. The adoption of anyadditional laws or regulations may decrease the popularity or expansion ofonline education, and may cause us to incur unanticipated compliance costs. Theadoption of federal or state laws or regulations concerning privacy of personalinformation could impair Datamark’s ability to purchase lists of prospectivestudents from third party vendors or increase the costs of obtaining suchlists. Our increasing presence in many states across the country may subject usto additional tax laws and government regulations, which may adversely affectour future operating results. Our violation of any state statutes, laws orother regulations could have a material adverse effect on our business andfinancial results. We cannot predict the impact, if any, that future regulationor regulatory changes may have on our business.

*Datamark Does Not Have Long-Term Agreements With Its Customers and MayBe Unable to Retain Customers, Attract New Customers or Replace DepartingCustomers With Customers that Can Provide Comparable Revenues.*

Mostof Datamark’s contracts with its customers are short-term. Datamark’s currentcustomers may not continue to use its products and services, Datamark may notbe able to replace in a timely or effective manner departing customers with newcustomers that generate comparable revenues, and Datamark may not continue toincrease its customer base. Further, there can be no assurance that Datamark’scustomers will continue to generate consistent amounts of revenues over time.Datamark’s failure to develop and sustain long-term relationships with itscustomers could materially and adversely affect the results of operations ofDatamark and eCollege as a whole.

*If We are Unable to Continue to Receive our Current Level of Access toand Costs for Mailing Lists, Our Competitive Advantage Could Be MateriallyAffected.*

OurEnrollment division obtains mailing lists from third party vendors. Because ofour unique relationships with some of our key vendors, we are able to purchasethese lists in high volumes under favorable pricing and in formats compatiblewith our systems. If we were unable to continue to obtain these mailing listsat our current pricing levels and in the formats in which we historically havereceived these lists, it could reduce our competitive advantage and have amaterial adverse effect on our business.

*Increases in Costs of Revenue Could Harm Datamark’s Business.*

Thedirect marketing activities of Datamark may be adversely affected by increasesin certain costs. Customers’ direct mail projects are becoming increasinglysophisticated and complex, leading to increased demands for customization andassociated increased production costs. If Datamark is unable to adjust itspricing to reflect such increased costs, Datamark’s direct mail business may beadversely affected. In addition, Datamark’s direct mail activities may beadversely affected by postal rate increases, especially increases that areimposed without sufficient advance notice to allow adjustments to be made tomarketing budgets. With regards to Datamark’s interactive marketing services,rising demand for online advertising has in the past and may in the futurecause Internet media prices to increase. Because Datamark generally contractsto deliver up to a specified number of leads at a specified price, if internetlead costs increase, Datamark may be unable to meet delivery expectations untilcontracts expire and are renegotiated. Any of

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these occurrences couldmaterially and adversely affect the business, financial condition and resultsof operations of Datamark and eCollege as a whole.

*ContinuedTerrorist Attacks or War Could Lead to Further Economic Instability andAdversely Affect Our Stock Price, Operations, and Profitability.*

The terrorist attacks that occurred in the UnitedStates on September 11, 2001 caused periodic major instability in the U.S. andother financial markets.  Possiblefurther acts of terrorism and current and future war risks could have a similarimpact.  The U.S. continues to take militaryaction against terrorism and has taken military action in Iraq.  Terrorist attacks and continued hostilitiesin the Middle East may lead to additional armed hostilities or to further actsof terrorism and civil disturbance in the U.S. or elsewhere, which may furthercontribute to economic instability.  Anysuch attacks could, among other things, cause further instability in financialmarkets and could directly, or indirectly through reduced demand, negativelyaffect our facilities, operations and financial results or those of ourcustomers and suppliers.

A portion of our software development activities isconducted in Sri Lanka.  Over the lastyear, acts of terrorism including bombings and political assassinations haveoccurred in Sri Lanka.  While ouractivities in Sri Lanka have to date been unaffected by the violence, if the violenceescalates and/or affects areas of the country in which our developers arelocated, our ability to continue to use these offshore developers could becurtailed, which in turn could strain our domestic resources and adverselyaffect our ability to develop and provide innovative products and services on atimely basis.  In addition, our inabilityto continue to use Sri Lankan developers could cause us to incur significantlyincreased development payroll costs as well as costs associated with the shut downof Sri Lankan operations.  These eventscould have a material adverse effect on our business and financial results.

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

None.

**ITEM 2.    PROPERTIES**

In 2004, the Companyrelocated its principal executive office from Denver, Colorado to Chicago,Illinois. The Chicago office houses our Chief Executive Officer, ChiefFinancial Officer and General Counsel as well as certain accounting, financeand administrative employees. The office comprises approximately 6,000 squarefeet and is held under a lease that expires in January 2010, with an option toextend for one additional five year period.

Our other corporateexecutives and our eLearning division continue to be located in Denver,Colorado. The Denver facility was expanded in 2006 to encompass approximately56,000 square feet, and is held under a lease that expires onSeptember 30, 2010. We have the option to extend this lease for oneadditional period of three or five years.

Our Enrollment divisionis located in Salt Lake City, Utah and leases office space and a productionfacility in two buildings. The production facility is approximately 22,000square feet and the office space is approximately 45,000 square feet. TheEnrollment division also has a media placement center in Spokane, Washingtonwhich consists of approximately 8,200 square feet. The lease on our Salt LakeCity facilities expires in June 2012 and the lease on our Spokane facilityexpires in May 2010.  Properties leasedby the Enrollment division and payments related thereto are included indiscontinued operations in our Consolidated Financial Statements.

We believe that ourcurrent facilities are adequate for our current needs and that suitableadditional or alternative space will be available in the future on commerciallyreasonable terms as needed.

**ITEM 3.    LEGAL PROCEEDINGS**

In July 2005, the Company received a letter fromcounsel to Arthur Benjamin, who resigned as Datamark’s chief executive officerin April 2005. The letter alleged unspecified breaches by eCollege and/orDatamark of Mr. Benjamin’s employment agreement and related agreements,including without limitation Mr. Benjamin’s stock appreciation rightsagreement, and demanded that the Company submit such disputes to bindingarbitration as required by the employment agreement. The Company agreed toarbitrate the dispute. On December 12, 2005, Mr. Benjamin filed a lawsuitcaptioned *Arthur Benjamin vs.**Datamark,Inc. and eCollege.com* in the United States District Court, Districtof Utah. The suit alleged, among other things, that Mr. Benjamin terminated hisemployment for “good reason,” and that eCollege and Datamark breached Mr.Benjamin’s employment and stock appreciation rights agreements by failing topay him severance and accelerate the vesting of his stock appreciation rightsand restricted stock. Using an assumed common stock price of up to $150 pershare, Mr. Benjamin seeks compensatory damages of up to $38 million andpunitive damages of up to $380 million.

The Company believes that all disputes between theCompany and Mr. Benjamin must be resolved in arbitration in accordance with theterms of the employment agreement, and in December 2005 the Company filed amotion to dismiss or in the alternative stay the litigation pending arbitrationand to compel arbitration. In April 2006, the Court issued an order grantingthe Company’s motions to stay the litigation and compel arbitration. Theparties have agreed upon a panel of three arbitrators and are currently engagedin discovery. The arbitration hearing is scheduled for September 2007.

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The Company believes that Mr. Benjamin’s allegationsare without merit and that his calculations of alleged damages are in error.The Company intends to vigorously defend against these allegations. However,due to the uncertainty inherent in litigation, we are unable to predict theoutcome of this dispute. An outcome unfavorable to the Company could have amaterial adverse effect on our business, results of operations and financialcondition.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

There were no matters submitted to a vote ofsecurity holders during the fourth quarter of 2006.

**PARTII**

**ITEM5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

eCollege’s common stockhas been traded on the NASDAQ Global Market System (“Nasdaq GMS”) under thesymbol “ECLG” since December 15, 1999. The following table sets forth thehigh and low sale prices of the Company’s common stock for the periodsindicated as reported on the Nasdaq GMS.
|                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------|------------|----------|------------|---------|------------|
| **Year  ended December 31, 2005** |       |     |       |    |       |
| 1st Quarter                       |       | $        | 13.26      |    | $          | 9.58 |   |
| 2nd Quarter                       |       | $        | 13.75      |    | $          | 9.01 |   |
| 3rd Quarter                       |       | $        | 15.24      |    | $          | 11.61 |   |
| 4th Quarter                       |       | $        | 19.95      |    | $          | 13.35 |   |
|                              |       |     |       |    |       |
| **Year  ended December 31, 2006** |       |     |       |    |       |
| 1st Quarter                       |       | $        | 21.82      |    | $          | 17.22 |   |
| 2nd Quarter                       |       | $        | 25.73      |    | $          | 18.55 |   |
| 3rd Quarter                       |       | $        | 22.58      |    | $          | 10.96 |   |
| 4th Quarter                       |       | $        | 19.64      |    | $          | 14.97 |   |

 

The closing price for our common stock on March 29,2007 was $18.09 per share.

As of March 29, 2007 there were approximately 92holders of record of our common stock.

The Company has never paid cash dividends on itsstock, and is currently precluded from doing so under its revolving creditagreement.

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**STOCK PERFORMANCE GRAPH**

The following graph shows a comparisonof the cumulative total return on the common stock, based on the market priceof the common stock assuming reinvestment of dividends, with the cumulativetotal return of the Nasdaq Composite (U.S.) Index and a Peer Group, for theperiod beginning December 31, 2001 and ending December 31, 2006.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among eCollege.com, The NASDAQ Composite Index

And A Peer Group

 

 

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|        |   | * $100 invested on 12/31/01 in stock or  index-including reinvestment of dividends.   Fiscal year ending December 31.                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (1)    |   | The graph assumes that on December 31, 2001,  $100 was invested in common stock and in each index, and all dividends were  reinvested. No cash dividends have been declared on the Company’s common  stock.                                                                                                                                                                                                                                                               |
| (2)    |   | Stockholder returns over the indicated period should  not be considered indicative of future returns.                                                                                                                                                                                                                                                                                                                                                                               |
| (3)    |   | The Company’s Peer Group consists of seven public  companies engaged in various aspects of the eLearning industry, and includes:  Blackboard, Inc. (BBBB), Healthstream, Inc. (HSTM), Saba Software, Inc.  (SABA), Scientific Learning Corporation (SCIL), SkillSoft PLC (SKIL), VCampus  Corporation (VCMP) and WebEx Communications, Inc. (WEBX). Blackboard, Inc. is  included in the Company’s Peer Group since June 18, 2004, the date of its  public offering. |

 

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**ITEM6.    SELECTED FINANCIAL DATA**

The following table setsforth our summary consolidated financial data for each of the past five years.Financial data for Datamark is reflected in discontinued operations fromOctober 31, 2003 (the date on which eCollege acquired Datamark) throughDecember 31, 2006. You should read this information together with theConsolidated Financial Statements and the Notes to those statements included inItem 8 of this Annual Report on Form 10-K, as well as the information setforth under the caption “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 7 of this Annual Report onForm 10-K.

**Statement of Operations Data:**
| ** **                                                    | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| Revenue:                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Student fees                                                  |       | $                                                                  | 46,662     |   | $ | 36,818 |   | $ | 31,154 |   | $ | 24,971 |   | $ | 18,058 |   |
| Other                                                         |       | 5,423                                                              |       | 4,642 |   | 3,628 |   | 4,164 |   | 5,634 |   |
| Total revenue                                                 |       | 52,085                                                             |       | 41,460 |   | 34,782 |   | 29,135 |   | 23,692 |   |
| Cost of revenue                                               |       | 14,740                                                             |       | 12,299 |   | 10,008 |   | 10,927 |   | 11,663 |   |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gross profit                                                  |       | 37,345                                                             |       | 29,161 |   | 24,774 |   | 18,208 |   | 12,029 |   |
| Operating expenses:                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product development                                           |       | 8,452                                                              |       | 7,170 |   | 6,519 |   | 5,953 |   | 5,658 |   |
| Selling and marketing                                         |       | 4,820                                                              |       | 4,711 |   | 4,437 |   | 5,130 |   | 5,613 |   |
| General and administrative                                    |       | 11,838                                                             |       | 10,572 |   | 10,310 |   | 6,481 |   | 5,621 |   |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total operating  expenses                                     |       | 25,110                                                             |       | 22,453 |   | 21,266 |   | 17,564 |   | 16,892 |   |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating income (loss)  from continuing operations(1)        |       | 12,235                                                             |       | 6,708 |   | 3,508 |   | 644 |   | (4,863 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest income  (expense)                                    |       | 274                                                                |       | 39 |   | (67 | ) | (2 | ) | (58 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations before income taxes |       | 12,509                                                             |       | 6,747 |   | 3,441 |   | 642 |   | (4,921 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income tax (expense)  benefit (2)                             |       | (4,502                                                             | )          | (2,689 | ) | 15,904 |   | — |   | — |   |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations, net of taxes       |       | 8,007                                                              |       | 4,058 |   | 19,345 |   | 642 |   | (4,921 | ) |
| Income (loss) from  discontinued operations, net of taxes (3) |       | (10,293                                                            | )          | 1,870 |   | 15 |   | (74 | ) | — |   |
| Cumulative effect of  accounting change                       |       | 28                                                                 |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                             |       | $                                                                  | (2,258     | ) | $ | 5,928 |   | $ | 19,360 |   | $ | 568 |   | $ | (4,921 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations per share           |       |                                                               |       |   |   |   |   |   |   |   |   |
| -Basic                                                        |       | $                                                                  | 0.36       |   | $ | 0.19 |   | $ | 0.95 |   | $ | 0.04 |   | $ | (0.30 | ) |
| -Diluted                                                      |       | $                                                                  | 0.35       |   | $ | 0.18 |   | $ | 0.88 |   | $ | 0.03 |   | $ | (0.30 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Loss) income from  discontinued operations per share         |       |                                                               |       |   |   |   |   |   |   |   |   |
| -Basic                                                        |       | $                                                                  | (0.46      | ) | $ | 0.09 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| -Diluted                                                      |       | $                                                                  | (0.45      | ) | $ | 0.08 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net (loss) income per  share                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| -Basic                                                        |       | $                                                                  | (0.10      | ) | $ | 0.27 |   | $ | 0.95 |   | $ | 0.03 |   | $ | (0.30 | ) |
| -Diluted                                                      |       | $                                                                  | (0.10      | ) | $ | 0.26 |   | $ | 0.88 |   | $ | 0.03 |   | $ | (0.30 | ) |
|                                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average shares  outstanding – basic             |       | 22,174                                                             |       | 21,729 |   | 20,358 |   | 17,758 |   | 16,329 |   |
| Weighted average shares outstanding – diluted            |       | 23,016                                                             |       | 22,405 |   | 21,996 |   | 19,578 |   | 16,329 |   |

 

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(1)          Effective January 1,2003, we adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123,*  “Accounting for Stock-BasedCompensation,”* as amended by SFAS No. 148,** “*Accounting for Stock-Based Compensation—Transitionand Disclosure, an amendment of FASB Statement No. 123”*  (“SFAS 123”), using the prospective adoption method. Under this method ofadoption, compensation expense was recognized over the related service periodsbased on the fair value of employee stock awards granted on or after January 1,2003.  Under SFAS 123, stock awardsgranted in periods prior to January 1, 2003 continued to be accounted for underthe intrinsic value method prescribed by Accounting Principles Board (“APB”)Opinion No. 25,*  “Accounting for Stock Issued to Employees”*  (“APB 25”). Accordingly, the results for 2003 and subsequent years are not directlycomparable to 2002 results in this regard. On January 1, 2006 we adopted SFASNo. 123(R),*“Share-Based Payment”*(“SFAS 123(R)”), using the modified-prospective transition method. SFAS 123(R)clarifies and expands the guidance in SFAS 123 in several areas, includingmeasuring fair value and attributing compensation cost to reporting periods.Changes prescribed by SFAS 123(R) include a requirement that we estimateforfeitures of share-based awards at the date of grant, rather than recognizingforfeitures as incurred as permitted by SFAS 123.  The fair values of restricted share rightsare determined using the closing price of our common stock on the date ofgrant, while the fair values of stock options and stock purchase awards areestimated at the date of grant using the Black-Scholes option-pricingmodel.  The fair values of stockappreciation rights are estimated at the date of grant using a Monte Carlosimulation for an Asian type award.  Theestimated fair values of awards are being amortized over the vesting period ofthe applicable award, generally three to five years.  The Company recorded $3.7 million, $2.8million and $3.8 million of stock-based compensation expense in 2006, 2005 and2004 respectively.  Stock-based compensation for continuing operations was$2.7 million, $2.6 million and $2.4 million for 2006, 2005 and 2004respectively.  For discontinued operations, stock-based compensation was$1.0 million, $290,000 and $1.4 million for 2006, 2005 and 2004 respectively.

(2)   We recorded an income taxbenefit of $18.5 million for the year ended December 31, 2004 from the reversalof $21.3 million of the valuation allowance we had previously recorded againstour deferred tax asset as well as the recognition of changes in other temporarydifferences.  For purposes of ourreclassified financial statements for the year ended December 31, 2004, $15.9million of the total net tax benefit has been recorded to continuing operationswhile the remaining $2.6 million net tax benefit is included in the results ofdiscontinued operations. The valuation allowance reversal also resulted in acredit of $1.9 million to additional paid in capital from tax benefits relatedto stock-based compensation, as well as a $907,000 credit to goodwill from taxbenefits associated with the Datamark acquisition.  The goodwill credit is recorded as acomponent of assets held for sale.

        (3)          Following the Company’sdecision in October 2006 to initiate a process for the sale of Datamark, theCompany was required to determine howDatamark’s results would be presented within the Consolidated FinancialStatements and whether the assets of that business are recoverable. The Companyhas determined that under applicable GAAP, the Datamark business meets thecriteria for discontinued operations. See Note 2 to the Consolidated Financial Statements under the heading “Recognitionand Reporting of Planned Datamark Disposition” for a discussion of thesignificant accounting policies and judgments involved in this determination.Results of operations from the Datamark business are reported in the Company’sConsolidated Statements of Operations in income (loss) from discontinuedoperations net of taxes.  The assets andliabilities of discontinued operations are separately reported in the Company’sConsolidated Balance Sheet.  TheConsolidated Statements of Operations for the years ended December 31, 2005 and2004 have been reclassified to present Datamark as a discontinuedoperation.  The Consolidated Financial Statements are included in Item 8of this Annual Report on Form 10-K.

**SelectedBalance Sheet Data**

 
| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                     |       |                                  |       |   |   |   |   |   |   |   |   |
| Assets:                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents, and investments |       | $                                     | 7,540      |   | $ | 9,627 |   | $ | 3,113 |   | $ | 15,009 |   | $ | 13,633 |   |
| Accounts  receivable, net                |       | 6,084                                 |       | 3,506 |   | 3,098 |   | 2,075 |   | 3,282 |   |
| Assets held for  sale                    |       | 20,557                                |       | 25,153 |   | 15,287 |   | 9,802 |   | — |   |
| Total current  assets                    |       | 38,881                                |       | 41,704 |   | 23,761 |   | 27,668 |   | 17,496 |   |
| Assets held for  sale, long term         |       | 56,023                                |       | 67,884 |   | 69,788 |   | 71,431 |   | — |   |
| Total assets                             |       | 122,913                               |       | 140,010 |   | 122,400 |   | 102,023 |   | 22,567 |   |
| Liabilities:                             |       |                                  |       |   |   |   |   |   |   |   |   |
| Liabilities held  for sale               |       | 11,685                                |       | 11,554 |   | 12,210 |   | 7,898 |   | — |   |
| Total current  liabilities               |       | 20,555                                |       | 19,009 |   | 19,266 |   | 23,231 |   | 10,872 |   |
| Liabilities held  for sale, long term    |       | 4,622                                 |       | 25,959 |   | 24,608 |   | 27,785 |   | — |   |
| Total  liabilities                       |       | 25,547                                |       | 45,566 |   | 44,484 |   | 51,590 |   | 12,163 |   |
| Working capital                          |       | 18,326                                |       | 22,695 |   | 4,495 |   | 4,437 |   | 6,624 |   |
| Total stockholders’  equity         |       | $                                     | 97,366     |   | $ | 94,444 |   | $ | 77,916 |   | $ | 50,433 |   | $ | 10,404 |   |

 

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**ITEM7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

Thefollowing discussion and analysis should be read in conjunction with the “SelectedFinancial Data” set forth in Item 6 of this Annual Report on Form 10-K and theConsolidated Financial Statements and Notes thereto included in Item 8 of thisAnnual Report on Form 10-K.

**CriticalAccounting Policies**

Revenuerecognition, accounting for discontinued operations, accounting for stock-basedcompensation, accounting for the issuance of debt obligations, valuation ofgoodwill and identifiable intangible assets, amortization of intangible assets,software development costs and income taxes are all critical accountingpolicies for the Company. The policies in effect in 2006 have been discussedwith and evaluated by our Audit Committee and are substantially consistent withthe policies in effect during 2005 and 2004. Each of these policies isdiscussed in detail below, as well as in the Notes to Consolidated FinancialStatements included in Item 8 of this Annual Report on Form 10-K.

***Revenue Recognition***

Revenue recognition is a critical accounting policyfor our Company, as it affects the timing of when we recognize the fees wecharge our customers for our services. We recognize revenue in accordance withStaff Accounting Bulletin (“SAB”) 101, “*Revenue Recognition in FinancialStatements*,” as modified by SAB 104, “*RevenueRecognition*,” which provides guidance on revenue recognition forpublic companies. Revenue is recognized when all of the following criteria aremet: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services have been rendered; (3) the seller’s price to thebuyer is fixed or determinable; and (4) collectibility is reasonablyassured. We follow Emerging Issues Task Force (“EITF”) 00-21, “*Accounting for Revenue Arrangements with Multiple Deliverables*,”to identify units of accounting in revenue arrangements with multipledeliverables.  Fair value is generallydetermined based on the price charged when the element is sold separately.  In absence of evidence of fair value of adelivered element, revenue is allocated first to the undelivered elements basedon fair value and the residual revenue to the delivered elements.

TheCompany enters into contracts with customers of the eLearning division toprovide online learning products and services.  The contracts typicallyhave initial terms of one to three years. The majority of eLearning divisionrevenue is earned by charging a per-enrollment student technology service feeto customers for access to their online distance education courses and our helpdesk. A smaller percentage of revenue is generated by our eCompanion onlinecampus-based course supplements, for which we typically charge an annuallicense fee for up to a predetermined number of users. For ProgramAdministration Solutions, which include our online portal products as well asprogram management, reporting and evaluation services, the Company generallycharges a one time set-up and design fee to implement an online campus and anannual license, hosting and maintenance fee for access to software. We sell ourprofessional services on a fixed-fee contract basis as well as a standardhourly rate basis.

Studentfees are recognized on a per enrollment basis over each course’s specificacademic term or over the length of the student fee license purchased by thecustomer, depending upon contract terms. An enrollment is generally defined asone user in one course for one academic term. No billing occurs, and no revenueis recognized, for cancelled classes and student withdrawals or drops thatoccur before the agreed-upon enrollment census date. Revenues from oureCompanion product are recognized on a straight-line basis over the contractyear. Campus license, hosting and maintenance fees, including the design anddevelopment of a customer’s campus, are recognized on a straight-line basisfrom the campus launch date through the end of the relevant contract period orthe expected life of the customer relationship, whichever is greater. Theaverage recognition period for these campus fees is approximately three years. Professionalservices revenue is derived from either fixed fee or time and materialsconsulting contracts and recognized as services are performed. The Company alsooffers customers the option to purchase blocks of course development servicehours, based on our standard hourly rates. Revenue from these services is alsorecognized as services are performed.

See Note 4 to theConsolidated Financial Statements for information concerning revenuerecognition policies for discontinued operations.

***Discontinued Operations***

We account for discontinued operations, which includethe business of the Enrollment division and related assets currently held forsale, in accordance with the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“SFAS 144”). In accordance withSFAS 144, the net assets held for sale are recorded on our ConsolidatedBalance Sheets at estimated fair value, less costs to sell. The results ofoperations of discontinued operations are segregated from those of continuingoperations and reported as discontinued operations in our ConsolidatedStatements of Operations.  See Note 3 to the Consolidated FinancialStatements included in Item 8 of this Annual Report on Form 10-K forfurther discussion of our accounting for discontinued operations.

***Stock-Based Compensation***

Stock-based compensationis a critical accounting policy for the Company, due primarily to thesignificant judgment required when estimating the fair value of stock-basedcompensation awards, including the selection of a valuation method (*e.g*., Black-

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Scholes) and theunderlying assumptions within such valuation (*e.g*.,estimated lives outstanding and volatility).

EffectiveJanuary 1, 2003, we adopted the fair value recognition provisionsof SFAS 123, using the prospective adoption method. Under this methodof adoption, compensation expense was recognized over the related serviceperiods based on the fair value of employee stock awards granted on or afterJanuary 1, 2003. Under SFAS 123, stock awards granted in periods prior toJanuary 1, 2003 continued to be accounted for under the intrinsic value methodprescribed by APB 25.

OnJanuary 1, 2006 we adopted SFAS 123(R) using the modified-prospectivetransition method. Under this transition method, compensation cost recognizedduring the year ended December 31, 2006 includes: (a) compensation costfor all share-based awards granted prior to, but not yet vested as of, January1, 2006 (including awards granted prior to January 1, 2003), based on thegrant-date fair values and related service periods estimated in accordance withthe original provisions of SFAS 123 and (b) compensation cost for allshare-based awards granted subsequent to January 1, 2006, based on thegrant-date fair values and related service periods estimated in accordance withthe provisions of SFAS 123(R).

SFAS 123(R) clarifies andexpands the guidance in SFAS 123 in several areas, including measuring fairvalue and attributing compensation cost to reporting periods. Changesprescribed by SFAS 123(R) include a requirement that we estimate forfeitures ofshare-based awards at the date of grant, rather than recognizing forfeitures asincurred as permitted by SFAS 123.

 The fair values of restricted share rights aredetermined using the closing price of our common stock on the date of grant,while the fair values of stock options and stock purchase awards are estimatedat the date of grant using the Black-Scholes option-pricing model. The fairvalues of stock appreciation rights are estimated at the date of grant using aMonte Carlo simulation for an Asian type award. The estimated fair values ofawards are amortized over the vesting period of the applicable award, generallythree to five years.

For continuingoperations, the Company recorded $2.7 million of stock-based compensationexpense in 2006, $2.6 million of stock-based compensation expense in 2005 and$2.4 million of stock-based compensation expense in 2004. For discontinuedoperations, the Company recorded $1.0 million of stock-based compensation in2006, $290,000 of stock-based compensation expense in 2005 and $1.4 million ofstock-based compensation in 2004.

On September 13, 2004,the Company granted stock appreciation rights with respect to 1.1 millionshares of common stock to executives and certain other key employees. Therights were granted under the terms and conditions of the Company’s 1999 StockIncentive Plan, as amended and approved by stockholders (the “1999 Stock Plan”).The rights will be settled in common stock. Each grant is separated into fivedifferent levels of base prices to reflect minimum required levels ofstockholder return over a five-year performance period. The base price for thefirst level is 10% higher than the reference price approved by the CompensationCommittee of the Board of Directors, which was the higher of (i) the closingstock price on September 10, 2004 and (ii) the average closing stock price overthe period beginning on August 19, 2004 and ending on September 10, 2004 andthe base price for each successive level is 10% higher than the previous level.Except in the case of a change in control of the Company, as described below, aparticipant will receive a distribution with respect to the shares of commonstock in each grant level only if the average closing price of our common stockfor the last quarter in the five year term exceeds the base price for suchshares. Each participant may elect to receive a distribution with respect to10% of the rights he or she was granted after the third anniversary of thegrant and with respect to an additional 10% after the fourth anniversary of thegrant. In the event of a change in control, participants will be entitled toreceive a distribution with respect to a specified percentage of the sharesgranted (50% if the change in control had occurred on September 13, 2004,increasing by 1/36 each month to 100% if the change of control occurs on orafter September 13, 2007), and will forfeit the right to receive a distributionwith respect to the unvested portion of the shares. The number of shares ofcommon stock issued following a change in control will be based on thedifference between the base prices and the share price as of the date thechange in control occurs. The fair value of each stock appreciation right wasestimated on the date of grant using a Monte Carlo simulation for an Asian typeaward. On March 23, 2005, the Company granted substantially the same recipientsadditional stock appreciation rights with respect to 1.1 million shares of commonstock, and at various times in 2005 and 2006, the Company granted additionalstock appreciation rights to executives in connection with new hires andpromotions. Such grants have the same terms as the 2004 grants, includingwithout limitation the same change in control vesting schedules, except thatthey have different base prices and new five-year performance periods beginningon the grant dates. The Company may in the future grant additional stockappreciation rights to new hires and in connection with promotions and otherspecial circumstances. Compensation expense for each grant is recognizedratably over the five year performance period.

EffectiveNovember 1, 2004, the Company amended its 1999 Employee Stock Purchase Plan (asamended to date, the “ESPP”) to revise certain features. Effective with thepurchase interval that began on November 1, 2004, the ability of planparticipants to increase contributions during an offering period waseliminated, as was a reset feature that established a new offering period ifthe fair market value of the Company’s common stock on any purchase date withinan offering period was less than the fair market value at the beginning of suchoffering period. Effective May 1, 2005, the length of an offering periodwas reduced from two years to one year and the length of each purchase intervalwas increased from six months to one year. The ESPP has been and continues tobe accounted for under the fair value method in accordance with SFAS 123(R),which requires that compensation expense be recognized for the fair value ofawards.

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***Debt Obligations***

InOctober 2003, the Company financed a portion of the purchase of Datamarkwith $20.0 million (face value) senior subordinated secured notes (“SeniorSubordinated Notes”) issued to a lender and $12.0 million (face value)subordinated seller notes (“Seller Notes”) issued to the selling stockholders.The Senior Subordinated Notes required principal payments due in$5.0 million quarterly increments beginning on December 31, 2007,with interest payments due quarterly beginning on December 31, 2003, at arate of 12.5% per annum. The effective interest rate on this debt was 19.7%.The Seller Notes, with interest and principal due in 2008, initially consistedof a series of notes aggregating $7.0 million (face value), with a statedinterest rate of 10.0% per annum, simple interest, and another series of notesaggregating $5.0 million (face value), with an interest rate of 10.0%,interest compounded annually. The effective interest rate on this debt was14.9%.

Inaccordance with GAAP, the Company estimated the fair value of the SeniorSubordinated Notes and the Seller Notes. The initial fair value of the SeniorSubordinated Notes reflected a fair value adjustment to the notes for theestimated fair value of the warrants issued in connection with this debt. Theestimated fair value of the warrants at the date of issuance, using theBlack-Scholes valuation method, was $3.3 million, and was recorded as adebt discount against the face value of the $20.0 million SeniorSubordinated Notes. This discount was being amortized as interest expense overthe five-year term of the Senior Subordinated Notes using the interest method,and was subsequently written off to interest expense in the fourth quarter of 2006when the Company prepaid the Senior Subordinated Notes in full. The prepaymentincluded $20.0 million of principal and resulted in a one time, non-cashinterest charge of $1.9 million.

Theinitial fair value of the Seller Notes was determined by a third party whoconsidered, among other factors, the effective interest rate of our SeniorSubordinated Notes and other comparable debt securities. In December 2004the Company prepaid all of the $7.0 million (face value) of simple interestnotes and $3.0 million (face value) of the annually compounding notes. Thecarrying value of the repaid notes was $7.5 million and the repayment resultedin a $2.5 million charge for the write-off of the unamortized discount on thesenotes. The Company subsequently prepaid an additional $1.9 million carryingvalue ($1.5 million face value) of Seller Notes during the second quarter of2006, resulting in a $226,000 charge for the write-off of unamortizeddiscounts. Seller Notes with a face value of $500,000 and a carrying value of$614,000, which includes an unamortized original discount recorded and accruedinterest payable, remained outstanding at December 31, 2006.  Interest will accrue on the remaining notesuntil they are paid.

***Long-Lived Assets—Including Identified Intangible Assets with FiniteLives***

Intangibleassets with finite lives are amortized using the straight-line method over theestimated economic lives of the assets, ranging from five toeight years.  In accordance withSFAS 144, the Company reviews long-lived assets to be held and used forimpairment whenever there is an indication that the carrying amount may not berecoverable from future estimated cash flows.

Thisstandard requires an impairment analysis when indicators of impairment arepresent.  If such indicators are present,the standard indicates that if the sum of the future expected cash flows fromthe asset, undiscounted and without interest charges, is less than the carryingvalue, an asset impairment must be recognized in the financial statements.  The amount of the impairment is thedifference between the fair value of the asset and the carrying value of theasset.  The Company believes that theaccounting estimate related to an asset impairment is a “critical accountingestimate” because it is highly susceptible to change from period to period andrequires management to make assumptions about future cash flows, and becausethe impact of recognizing an impairment could have a significant effect onoperating results.  Management’sassumptions about future cash flows require significant judgment because actualoperating levels have fluctuated in the past and are expected to continue to doso in the future.

Intangibleassets and related amortization associated with Datamark are reported in discontinuedoperations within the Consolidated Financial Statements.  Assets used in discontinued operations arenot amortized after being classified as held for sale.  See Note 3 to the Consolidated FinancialStatements.  In the third quarter of2006, the Company wrote off $573,000 of capitalized software developed inconnection with a discontinued product line of its Enrollment division.

In the fourth quarter of 2006, the Company recognizedan impairment loss related to its goodwill and other indefinite life intangibleassets associated with discontinued operations. See below under the heading “Goodwilland Identified Intangible Assets with Indefinite****Lives” for a discussion of such loss and resultingadjustments to assets held for sale.

***Goodwill and IdentifiedIntangible Assets with Indefinite Lives***

Goodwill and purchased intangible assets withindefinite useful lives are not amortized. In accordance with SFAS No. 142, *“Goodwill and OtherIntangible Assets”* (“SFAS 142”), the Company reviews goodwill andidentified intangible assets with indefinite lives for impairment on an annualbasis and whenever events or changes in circumstances indicate the carryingvalue of an asset may not be recoverable.

Following the Board’s decision in October 2006 to initiatea process for the sale of Datamark, the Company completed an analysis to assessthe recoverability of the carrying value of the Enrollment division’sassets.  This analysis, as required bySFAS 142,

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consisted of a two-step impairment test.  In the first step we compared the fair valueof the reporting unit to its carrying value. In the second step, we compared the carrying value to the implied fairvalue of the goodwill under a theoretical purchase allocation scenario.  This review was comprehensive across all ofthe identified intangible assets established as part of the acquisition ofDatamark, in addition to those assets reported in the divisional financialstatements of the Enrollment division. Based upon this analysis, it was determined that the overall fair marketvalue of Datamark’s assets was less than the current carrying value of itstangible and intangible assets.

As a result of the Company’s impairment analysis andin accordance with SFAS No. 142 and SFAS No. 144, we recorded $9.7 million, ona pre-tax basis, in impairment charges to discontinued operations during thefourth quarter of 2006.   This impairmentcharge had the balance sheet-effect of reducing assets held for sale: goodwillby $9.3 million and intangible assets by $420,000.   On an after-tax basis, these impairmentcharges amounted to $8.9 million, with corresponding reductions to assets heldfor sale: goodwill and intangible assets by $8.6 million and $260,000respectively.

All goodwill, amortization of intangibles andimpairment charges are reported in discontinued operations within the Company’sfinancial statements.  At December 31,2006, long-term assets held for sale included $45.1 million of goodwill and$7.0 million of other intangible assets.

See Note 3 to the Consolidated Financial Statementsfor further discussion of the Company’s discontinued operations and assets heldfor sale.

***SoftwareDevelopment Costs***

The Company’s activitiesinclude ongoing development of internal-use software used in connection withdelivery of services via our proprietary software platform and network.Pursuant to the provisions of the American Institute of Certified PublicAccountants’ (“AICPA’s”) Statement of Position 98-1, “*Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*,”costs incurred during the application development stage are capitalized andcosts incurred during the preliminary project and post-implementation stagesare expensed as incurred. Capitalized software development costs are amortizedusing the straight-line method over their estimated useful lives, generallythree years. Capitalized software development costs for the years endedDecember 31, 2006, 2005 and 2004 were $1.5 million, $1.1 million and $1.2million, respectively.  Amortizationbegins when the products are ready for their intended use.  Amortizationexpense for the years ended December 31, 2006, 2005 and 2004 was $0.7million, $0.3 million and $0.3 million, respectively.  If the internal-use software developed isdetermined to have a reduced life or is otherwise abandoned or impaired,amortization could be accelerated or a write-off of the asset could result.

***IncomeTaxes***

Income taxes consist offederal, state and local taxes. Accounting for income taxes and any relatedvaluation allowance requires the application of significant judgment andestimates. We incurred significant tax losses from our inception throughDecember 31, 2003 resulting in approximately $66 million of netoperating loss carryforwards which expire in varying amounts beginning in 2019.The Company was profitable in the years ended December 31, 2006, 2005 and2004 and has used net operating loss carryforwards to reduce income taxespayable during such periods. As of December 31, 2006, net operating losscarryforwards of $46 million remained. However, utilization of such net operating loss carryforwards may besubject to certain limitations, such as limitations resulting from significantchanges in ownership. In addition, income taxes may be payable during thistime, due to operating income in certain tax jurisdictions which cannot beoffset by operating loss carryforwards. If we have taxable income and the netoperating loss carryforwards are not available because they have been limitedby tax law, have been exhausted or have expired, we may be liable forsignificant taxes payable.  A windfalltax benefit occurs when the actual tax benefit realized by the Company upon anemployee’s disposition of an equity based award exceeds the deferred tax asset,if any, associated with the award that we had previously recorded.  When assessing whether a tax benefit relatingto share-based compensation has been realized, we follow the tax law orderingmethod, under which current year share-based compensation deductions areassumed to be utilized before net operating loss carryforwards and other taxattributes.

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which temporarydifferences, as determined pursuant to SFAS No. 109, “*Accountingfor Income Taxes*,” become deductible. Management considers thereversal of deferred tax liabilities, projected future taxable income, and taxplanning strategies in making this assessment. Management’s evaluation of therealizability of deferred tax assets must consider both positive and negativeevidence. The weight given to the potential effects of positive and negativeevidence is based on the extent to which it can be objectively verified. Priorto the fourth quarter of 2004, we had provided a full valuation allowance forthe potential benefits of the aforementioned net operating loss carryforwards aswe believed it was more likely than not that the benefits would not berealized. During the fourth quarter of 2004, we reversed $21.3 million of thevaluation allowance related to the net operating loss carryforwards and othertemporary items as we determined it was now more likely than not that we wouldbe able to use the assets to reduce future tax liabilities. Approximately$591,000 in valuation reserves associated with state net operating losscarryforwards were not reversed in the fourth quarter of 2004 as we determinedthat it was more likely than not that the benefits of such carryforwards wouldnot be realized. The reversal resulted in recognition of an income tax benefitof $18.5 million in 2004 and an increase in the deferred tax asset on the ConsolidatedBalance Sheet. The income tax benefit to continuing operations was$15.9 million and the benefit to discontinued operations was $2.6 million.The 2004 reversal also resulted in an increase of $1.9 million to additionalpaid in capital associated with tax benefits from stock-based compensation andan increase of $900,000 to goodwill associated with certain

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tax benefits related to the Datamark acquisition. Thegoodwill adjustment has been recorded as a component of assets held for sale.

We recorded income taxexpense for continuing operations of $4.5 million for the year ended December31, 2006.  During 2006, the Company alsorecorded a $714,000 increase to additional paid in capital related to taxbenefits from stock-based compensation. We recorded an income tax benefit for discontinued operations of $1.4million for the year ended December 31, 2006. This benefit primarily reflects the impact of the pre-tax $11.7 millionloss generated by discontinued operations adjusted for nondeductible impairmentrelated charges.  The Company recorded a$338,000 reduction to goodwill during 2006 associated with tax benefits relatedto the Datamark acquisition.  Thegoodwill reduction and related tax effect are included in assets held for saleat December 31, 2006.

We recorded income taxexpense for continuing operations of $2.7 million for the year endedDecember 31, 2005. We recorded income tax expense for discontinuedoperations of $1.4 million for the year ended December 31, 2005. In2005, the Company recorded a $3.1 million increase to additional paid incapital related to tax benefits associated with stock-based compensation,including $2.7 million related to the exercise of 972,335 options held byBlumenstein/Thorne Information Partners I, L.P. (“BTIP”), an investment fundaffiliated with the Company’s Chief Executive Officer.  The Company recorded a $353,000 reduction togoodwill during 2005 associated with tax benefits related to the Datamarkacquisition. ****We recorded an income tax benefit for continuing operations of $15.9million for the year ended December 31, 2004.  This primarily reflects thereversal of the valuation reserves associated with net operating losscarryforwards.  We recorded an income tax benefit for discontinuedoperations of $2.6 million for the year ended December 31, 2004, alsoreflecting the impact of the reversal of valuation reserves.  The goodwill reduction and related tax effectare reflected as a component of assets held for sale.****

**Descriptionof Significant Components of our Consolidated Statement of Operations**

The following discussion relates solely to ourcontinuing operations. See Note 3 to the Consolidated Financial Statements fordetailed information regarding discontinued operations.

***Revenue***

Our revenue in 2006primarily consisted of eLearning student technology fees for students enrolledin online courses and online course supplements. We also recognized a smallerportion of revenue from online campus and course design and developmentservices (including licensing and hosting services fees for online campuses),and other professional services.

***Cost of Revenue***

Cost of revenue consistsprimarily of employee compensation and benefits for our account management,online campus development, course design, technical personnel, and help deskdepartments as well as sales commissions. Our cost of revenue also includessoftware, hardware, and other direct costs associated with maintaining our datacenter operations and our network infrastructure. Amortization of capitalizedsoftware development costs is also included in cost of revenue.

***Product Development***

Product developmentexpenses include costs of maintaining, developing, creating and improving ouronline solutions and software products. These costs consist primarily ofemployee compensation and benefits, consulting fees, occupancy costs, anddepreciation expenses. Product development costs in the future may be reducedby any software development costs that are capitalized in accordance withrelevant accounting standards.

***Selling and Marketing***

The principal componentsof our selling and marketing expenses are employee compensation and benefits,advertising, industry conferences, and travel. Other significant componentsinclude marketing collaterals and direct mailings, consulting fees, occupancycosts, and depreciation expenses.

***General and Administrative***

General andadministrative expense includes costs incurred by the eLearning division aswell as the portion of corporate expense that is allocable to continuingoperations under GAAP. These costs include executives, human resources,corporate facilities, corporate and divisional accounting and finance, legal,internal technical network administration and support and managementinformation systems. Employee compensation and benefits, including stock-basedcompensation, represents the most significant component of general andadministrative expense. Other components include rent, depreciation,communications, insurance and professional and consulting fees, including feesrelating to the audit of our financial statements and our compliance withSarbanes-Oxley.

***Other Income (Expense), Net***

Other income (expense),net consists primarily of interest expense associated with various debtobligations, as well as interest income from invested cash and cashequivalents.

**Resultsof Operations**

The following discussion compares the historicalresults of operations for the years ended December 31, 2006, 2005, and2004. Datamark’s business has been classified as a discontinued operation inthe Company’s Consolidated Financial Statements under

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applicableaccounting policies. Results ofoperations from discontinued businesses are reported in the Company’sConsolidated Statements of Operations, net of taxes, in income (loss) fromdiscontinued operations.  The assets andliabilities of discontinued operations are separately reported in the Company’sConsolidated Balance Sheet.  TheConsolidated Statements of Operations for the years ended December 31, 2005 and2004 have been reclassified to present Datamark as a discontinued operation,and the Consolidated Balance Sheet as of December 31, 2005 has beenreclassified to present the assets and liabilities of Datamark (current andlong-term) as held for sale.  The Consolidated Financial Statements areincluded in Item 8 of this Annual Report on Form 10-K.

***Years EndedDecember 31, 2006 and 2005***

***ContinuingOperations***

*Revenue.*  eLearningrevenue increased $10.6 million, or 26%, to $52.1 million for the year endedDecember 31, 2006 from $41.5 million for the year ended December 31,2005, primarily due to a $9.8 million increase in student fees from onlinecourses.

Student fees represented$46.7 million and $36.8 million of total revenue for the years endedDecember 31, 2006 and 2005, respectively, an increase of $9.8 million, or27%. Our eLearning customers benefit from volume discounts on their studenttechnology fees based on the success of their distance programs. In addition,they often guarantee a minimum amount of student technology fees for each yearthey are under contract with us, for which they receive further discounts onour services. Therefore, the 27% increase in our student fee revenue was notdirectly proportional to the increase in our customers’ online student enrollments.Student enrollments in eCourses increased 69% to approximately 1,240,000 in2006 from approximately 735,000 in the prior year, while the correspondingrevenue earned from eCourse enrollments increased 27% to $45.4 million in 2006from $35.7 million in 2005.  We expectthe trend of distance enrollment growth outpacing associated revenue growth tocontinue in 2007.

Campus and coursedevelopment fees remained flat at $1.1 million of total revenue for the yearsended December 31, 2006 and 2005.

Other eLearning revenueincreased by $820,000, or 23%, to $4.3 million for the year endedDecember 31, 2006 from $3.5 million for the year ended December 31,2005. The increase is primarily attributable to a greater demand for ourtechnical and academic consulting services during 2006 as compared to 2005,especially by new customers adopting eLearning’s technology platform.

*Cost ofRevenue.*  Cost of revenue increased by $2.4million, or 20%, to $14.7 million for the year ended December 31, 2006 from$12.3 million for the year ended December 31, 2005. As a percentage of revenue,cost of revenue decreased from 30% for 2005 to 28% for 2006. The decrease as apercentage of revenue is attributable to an increase in the relativecontribution of higher margin student fee revenue to the overall revenuemix.  Lower stock-based compensationexpense in the 2006 period also contributed to the lower cost of revenuepercentage.

*GrossProfit.*  We realized gross profit of $37.3 millionand $29.2 million for the years ended December 31, 2006 and 2005,respectively, resulting in a 28% or $8.2 million increase.  Gross profit margin improved from 70% in 2005to 72% in 2006.

*ProductDevelopment.*  Including the impact of capitalizedsoftware development costs, product development expenses increased $1.3million, or 18%, to $8.5 million for the year ended December 31, 2006 from$7.2 million for the year ended December 31, 2005.  This wasprimarily due to increases in our offshore development efforts in Sri Lanka inaddition to increases in staffing and related personnel expenses, onlypartially offset by an increase in the amount of capitalized softwaredevelopment costs during the period. For the years ended December 31, 2006and 2005, capitalized software development costs were $1.5 million and $1.1million, respectively, an increase of $424,000 or 38%. This increase wasprimarily due to the development of our international platform and other newproduct lines. We continue to focus our efforts on increasing thefunctionality of all products and the development of new product lines thatenhance our current offerings.

*Sellingand Marketing.*  Selling and marketing expensesincreased by $109,000, or 2%, to $4.8 million for the year endedDecember 31, 2006 from $4.7 million for the year ended December 31,2005. Increased payroll-related costs associated with staff growth werepartially offset by reductions in new business development expenses and generalmarketing expenses.

*Generaland Administrative.*  General and administrativeexpenses increased by $1.2 million, or 12%, to $11.8 million for the year endedDecember 31, 2006 from $10.6 million for the year ended December 31,2005. This was primarily due toincreased system and staffing costs related to a reorganization of certainbusiness operations and support functions, as well as increased depreciationexpense.

We record non-cashstock-based compensation expense in connection with the grant of stock options,stock awards under our ESPP, stock appreciation rights and restricted sharerights to employees, officers, and directors in accordance with SFAS 123(R),which we adopted January 1, 2006, and for prior years in accordance withSFAS 123, adopted January 1, 2003. The deferred charges are amortized over therelevant vesting periods of such awards, which range from one tofive years.  Our continuingoperations recorded $2.7 million of stock-based compensation in the year endedDecember 31, 2006, an increase of $170,000 from the $2.6 million recordedin the year ended December 31, 2005.

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*Other Income.*  Net interest andother income increased by $235,000 to $274,000 for the year ended December 31,2006, from $39,000 for the year ended December 31, 2005. The increase isentirely attributable to interest earned on increased cash balances.

*Incometaxes.*  Income tax expense for continuingoperations increased by $1.8 million, or 67%, to $4.5 million for the yearended December 31, 2006 from $2.7 million for the year ended December 31,2005.  The increase is due to ourincreasing profitability.

*Net income.*  Netincome from continuing operations increased by $3.9 million to $8.0 million forthe year ended December 31, 2006 from $4.1 million for the year endedDecember 31, 2005.

***Discontinued Operations***

*Revenue.*  Revenuefrom discontinued operations increased by $3.0 million, or 5%, to $64.4 millionfor the year ended December 31, 2006 from $61.4 million for the yearended December 31, 2005, primarily due to increased revenue frominteractive marketing services, offset in part by a decrease in revenue fromdirect mail marketing services.

*Operating Income (Loss).*Operatingincome decreased $13.8 million to a loss of $7.0 million for the year endedDecember 31, 2006 from income of $6.8 million for the year ended December 31,2005. This decrease was primarily due to $9.7 million of non-cash goodwillimpairment charges recorded in the fourth quarter of 2006.  Also contributing to reduced operating incomewere increased selling, general and administrative expenses, which wereprimarily attributable to a $698,000 increase in stock-based compensation, aswell as a lower gross profit margin that resulted primarily from increasedproduction and other costs related to direct mail services and a write-off ofcapitalized software developed in connection with Datamark’s retention productline, which was discontinued on September 30, 2006.

*Income (Loss) Before IncomeTaxes.*Income before income taxes decreased by $15.0 millionto a loss of $11.7 million for the year ended December 31, 2006 from income of$3.3 million for the year ended December 31, 2005. The decrease resultedprimarily from reduced operating income combined with a $1.2 million increasein net interest expense resulting from the prepayment of the SeniorSubordinated Notes in October 2006.

*Income Taxes.*Incometax expense for discontinued operations decreased by $2.8 million to a taxbenefit of $1.4 million for the year ended December 31, 2006 from a $1.4million tax expense for the year ended December 31, 2005.  The decrease is due to decreasing profitabilitycombined with the tax effect of the impairment charges recorded during thefourth quarter of 2006.

*Net Income (Loss).*  Net income from discontinued operationsdecreased by $12.2 million to a net loss of $10.3 million for the year endedDecember 31, 2006, from net income of $1.9 million for the year endedDecember 31, 2005.

For more information ondiscontinued operations, see Note 3 to the Consolidated Financial Statementsincluded in Item 8 of this Annual Report on Form 10-K.

***Consolidated***

*Consolidated Net Income (Loss).*Ourconsolidated net income decreased by $8.2 million to a net loss of $2.3 millionor $.10 per basic share and $.10 per diluted share for the year endedDecember 31, 2006, from consolidated net income of $5.9 million or $.27per basic share and $.26 per diluted share for the year ended December 31,2005.

***Years Ended December 31,2005 and 2004***

***ContinuingOperations***

*Revenue.*  eLearning revenue increased $6.7 million, or19%, to $41.5 million for the year ended December 31, 2005 from $34.8 millionfor the year ended December 31, 2004, primarily due to a $5.7 millionincrease in student fees from online courses.

Student fees represented$36.8 million and $31.2 million of total revenue for the years endedDecember 31, 2005 and 2004, respectively, an increase of $5.6 million, or18%. Our eLearning customers benefit from volume discounts on their studenttechnology fees based on the success of their distance programs. In addition,they often guarantee a minimum amount of student technology fees for each yearthey are under contract with us, for which they receive further discounts onour services. Therefore, the 18% increase in our student fee revenue was notdirectly proportional to the increase in our customers’ online studentenrollments. Student enrollments in eCourses increased 55% to 773,424 in 2005from 499,489 in the prior year, while the corresponding revenue earned fromeCourse enrollments increased 23% to $35.7 million in 2005 from$29.0 million in 2004. The 2005 and 2004 enrollment numbers are notdirectly comparable because 2004 includes approximately 20,000 enrollments inshort-term faculty training courses that generated significantly less revenueper enrollment than other eCourses.

Campus and coursedevelopment fees represented $1.1 million and $1.8 million of total revenue forthe years ended 

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December 31, 2005 and 2004, respectively, adecrease of $630,000, or 36%. The decrease is primarily the result of a declinein course development and course maintenance revenue attributable to anincreasing number of customers taking advantage of our products and tools todesign and develop their own courses.

Other revenue increasedby $1.6 million, or 88%, to $3.5 million for the year ended December 31,2005 from $1.9 million for the year ended December 31, 2004. The increaseis primarily attributable to a greater demand for our technical and academicconsulting services during 2005 as compared to 2004, especially by newcustomers adopting eLearning’s technology platform.

*Cost of Revenue. *Cost of revenue increasedby $2.3 million, or 23% to $12.3 million for the year ended December 31, 2005from $10.0 million for the year ended December 31, 2004.  As a percentage of revenue, eLearning cost ofrevenue increased from 29% for the 2004 period to 30% for the 2005 period. Theincrease as a percentage of revenue is attributable to a $2.0 million increasein salaries for information technology, professional services, and clientservices employees; software licensing costs; and the write-off of third partysoftware no longer in use.

*GrossProfit.*  We realized gross profit from continuingoperations of $29.2 million and $24.8 million for the years endedDecember 31, 2005 and 2004, respectively, resulting in an 18% or $4.4million increase.  Gross profit margindeclined from 71% in 2004 to 70% in 2005.

*ProductDevelopment.*  Including the impact of capitalizedsoftware development costs, product development expenses increased $651,000, or10%, to $7.2 million for the year ended December 31, 2005 from $6.5 millionfor the year ended December 31, 2004. The increase results primarily from a reduction in the amount ofcapitalized software development, an increase in our offshore developmentefforts in Sri Lanka and an increase in personnel costs.  For the years endedDecember 31, 2005 and 2004, capitalized software development costs were$1.1 million and $1.2 million, respectively, a decrease of $88,000 or 7%. Thedecrease is primarily a result of development projects in process during 2004being completed and released into production during 2005.

*Sellingand Marketing.*  Selling and marketing expensesincreased by $274,000, or 6% to $4.7 million for the year endedDecember 31, 2005, up from $4.4 million for the year endedDecember 31, 2004.  Higherpayroll-related expenses relating to increased staff were only partially offsetby reductions in new business development expenses and general marketingexpenses.

*Generaland Administrative.*  General and administrativeexpenses increased by $262,000, or 3% to $10.6 million for the year endedDecember 31, 2005 from $10.3 million for the year ended December 31,2004. The increase was primarily due to payroll expense associated withincreased staffing levels.

Our continuing operationsrecorded $2.6 million of stock-based compensation expense for the year endedDecember 31, 2005 and $2.4 million for the year ended December 31,2004.

*Other Income (Expense).*  Interestand other income increased by $106,000 to income of $39,000 for the year endedDecember 31, 2005, from expense of $67,000 for the year ended December 31,2004. The increase is primarily attributable to interest earned on increasedcash balances and the implementation of improved cash management processes,including the use of interest bearing sweep accounts.

*IncomeTax (Benefit).*  Income tax expense for continuingoperations increased by $18.6 million to $2.7 million for the year endedDecember 31, 2005 from a tax benefit of $15.9 million for the year endedDecember 31, 2004.  The 2004 taxbenefit included a $15.9 million tax benefit from the reversal of valuationreserves that had been established against net operating losscarryforwards.  The decision to reversethese reserves was based on management’s belief that it is more likely than notthat the Company will be able to use the benefit to reduce future taxliabilities generated by future profitability. Prior to this conclusion, and the resulting recognition of deferred taxassets relating to net operating loss carryforwards, income tax expense wasoffset by equivalent reductions in the valuation reserve against the deferredtax asset.   Increased profitability in2005 also contributed to the increased tax provision as compared to 2004.

*Netincome.*  Our net income from continuing operationsdecreased by $15.3 million to $4.1 million for the year ended December 31,2005, from $19.3 million for the year ended December 31, 2004.  Net income for 2004 included a $15.9 milliontax benefit from the reversal of tax-related valuation reserves as discussedabove.

***Discontinued Operations***

*Revenue.*  Revenuefrom discontinued operations increased by $6.9 million, or 13%, to $61.4million for the year ended December 31, 2005 from $54.5 million forthe year ended December 31, 2004, primarily due to increased revenues frominteractive marketing and other enrollment marketing services.

*Operating Income.*Operatingincome increased by $2.1 million, or 43%, to $6.8 million for the year endedDecember 31, 2005 from $4.8 million for the year ended December 31, 2004. Thisincrease was primarily due to increased revenues combined with a slightimprovement in operating margins.

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*Income Before Income Taxes.*Incomebefore income taxes increased by $5.9 million to $3.3 million for the yearended December 31, 2005 from a $2.6 million loss for the year ended December31, 2004, primarily due to increased operating income combined with lowerinterest expense related to debt prepayment in 2004.

*Income Tax (Benefit).*Incometax expense for discontinued operations increased by $4.0 million to $1.4million for the year ended December 31, 2005 from a $2.6 million taxbenefit for the year ended December 31, 2004.  The increase is due to a $2.6 million taxbenefit from the reversal of valuation reserves recorded in 2004 combined withincreasing profitability in 2005.

*Net Income (Loss).*  Net income from discontinued operationsincreased by $1.9 million to $1.9 million for the year ended December 31,2005 from $15,000 for the year ended December 31, 2004.

For more information ondiscontinued operations, see Note 3 to the Consolidated Financial Statementsincluded in Item 8 in this Annual Report on Form 10-K.

***Consolidated***

*Consolidated Net Income.*Ourconsolidated net income decreased by $13.4 million to $5.9 million or $.27 perbasic share and $.26 per diluted share for the year ended December 31,2005, from consolidated net income of $19.4 million or $.95 per basic share and$.88 per diluted share for the year ended December 31, 2004.  Consolidated net income for 2004 included an$18.5 million tax benefit from the reversal of tax-related valuation reservesas discussed above.

**Liquidityand Capital Resources**

The Company’s total cashand cash equivalents (including $8.7 million of cash and cash equivalentsrelated to assets held for sale) decreased by $6.8 million from $23.0 millionat December 31, 2005 to $16.3 million at December 31, 2006.

Operating activitiesduring 2006 provided cash flows of $14.0 million.  Cash flows used for investing activitiestotaled $5.6 million for 2006.  Cash usedin investing activities consisted of $4.4 million of property and equipmentpurchases and $1.5 million of capitalized software development costs.  Total cash flows used in financing activitieswere $15.2 million.  Cash flows used infinancing activities primarily included the prepayment of $20.0 million (facevalue) of Senior Subordinated Notes in the fourth quarter of 2006 andprepayment of $1.5 million (face value) of Seller Notes during the secondquarter of 2006.

The Company had cash taxpayments of $426,000, $120,000 and $115,000 for the years ended December 31,2006, 2005 and 2004 respectively.

The Company believes thatcash flows generated from continuing operations will not be adversely affectedby a divestiture of the Enrollment division.

We expect our current cash and cash equivalents,together with cash generated from operations, to meet our working capital andcapital expenditure requirements for at least the next twelve months. TheCompany expects its capital expenditures for continuing operations anddiscontinued operations to increase by approximately $1.9 million and $2.0million, respectively, in 2007 as compared to 2006 due to investments thatinclude developing eCollege.NExT as the next generation eLearning platform,building a second data center to support eLearning and investing in hardwareand software as part of Datamark’s Trinitas technology initiative.

***Borrowings***

The Company obtained a$3.0 million term loan (“Term Loan”) with a bank in October 2003 andrepaid the Term Loan in full in March 2005. The Term Loan, which boreinterest at 7% per annum, refinanced a previous term loan and the outstandingdebt on an equipment financing facility. The Company incurred approximately $56,000 in debt issuance costs inconnection with obtaining this loan, which costs were amortized as interestexpense over the loan’s term.

As apart of the master debt agreement with the bank that provided the Term Loan,the Company also obtained a $10.0 million revolving line of credit (the “PriorRevolver”) which matured on October 31, 2005. The Prior Revolver replaceda previous revolving line of credit. The interest rate on the Prior Revolverwas equal to the bank’s prime rate plus 1.25% but not less than 5.25%.

InOctober 2005, the Company restructured its bank credit facility andobtained a $15.0 million revolving line of credit (the

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“Revolver”) that matureson October 31, 2007. The interest rate on the Revolver is equal to thebank’s prime rate (8.25% at December 31, 2006). The Revolver is secured byall of the Company’s assets and contains certain financial covenants, includingrequirements that the Company maintain a specified minimum ratio of quickassets to current liabilities and a specified minimum level of EBITDA. TheCompany was in compliance with all financial covenants of the Revolver atDecember 31, 2006.

TheCompany drew $9.7 million under the Prior Revolver in each of March,June and September 2004. Each draw was repaid in the month followingthe draw. No amounts were drawn under the Revolvers during the years endedDecember 31, 2006 and 2005.

TheCompany anticipates that borrowings under the Revolver in 2007, if any, will befor short-term working capital needs and expects to be able to extend orrefinance the Revolver on acceptable terms at maturity should it wish to do so.

See Note 3 to theConsolidated Financial Statements for a discussion of borrowings related todiscontinued operations and recent repayments thereof.

**ContractualObligations, Commitments and Off-Balance Sheet Arrangements**

The following table summarizes, as ofDecember 31, 2006, the obligations of our continuing operations to makefuture payments under current contracts (in thousands):
| ** **                       | ** ** | **Total** | ** ** | **Less than 1 Year** | ** ** | **1 - 3 Years** | ** ** | **4 - 5 Years** | ** ** | **More than  5 Years** | ** ** |
|----------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Capital lease  obligations       |       | $         | 640        |                                | $          | 360                            |       | $                              | 280        |                             | $          | — |   | $ | — |   |
| Operating lease  obligations (1) |       | 5,299     |       | 1,331                               |       | 3,968                          |       | —                         |       | —                           |       |
| Purchase  commitments (2)        |       | 763       |       | 763                                 |       | —                         |       | —                         |       | —                           |       |
| Total                            |       | $         | 6,702      |                                | $          | 2,454                          |       | $                              | 4,248      |                             | $          | — |   | $ | — |   |

 

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(1)          The Company leasesoffice space and equipment under various non-cancelable operating leases.

(2)          eCollege entered into anagreement with a third party vendor in January 2004 to providesupplemental software development for our development projects. Minimum futurecommitments under this contract aggregated $763,000 at December 31, 2006.If eCollege terminates the agreement prior to April 2007, it will berequired to pay a termination penalty equal to six months expense at thethen-current minimum staffing level.

Rent expense for theyears ended December 31, 2006, 2005 and 2004 was $1.0 million, $1.0million and $1.1 million, respectively.

TheCompany maintains two letters of credit with the bank in the amounts of$300,000 and $62,000 under which the vendor of the Company’s back-up computersystems and the landlord for the Company’s Denver facility are the respectivebeneficiaries.  The letters of crediteffectively reduce the borrowing ability under the Revolver by $362,000.

Inaddition, the Company maintains a letter of credit in the amount of $250,000with Colorado Business Bank under which Silicon Valley Bank is the beneficiary.Such letter of credit is secured by a certificate of deposit in the amount of$253,000 as of December 31, 2006. The letter of credit will automatically renewfor one year on May 5, 2007 and on each May 5 thereafter unless the Companyprovides notice of its desire not to renew.

**RecentAccounting Pronouncements**

In September 2006, theFASB issued Statement No. 157, “*Fair Value Measurements” (*“SFAS157”). SFAS 157 defines fair value, establishes a framework and gives guidanceregarding the methods used for measuring fair value, and expands disclosuresabout fair value measurements. SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007 and interim periodswithin those fiscal years. We are currently assessing the impact that SFAS 157will have on our results of operations and financial position.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108, “*Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*” (“SAB 108,”).  SAB 108 provides guidance on how the effectsof carryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. This interpretation was first effective for our fiscal year endedDecember 31, 2006.  The adoption of thisinterpretation did not have an impact on our financial position or results ofoperations.

In July 2006, the FASBissued FASB Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes: An Interpretation of FASB Statement 109”*(“FIN 48”),which clarifies the accounting for uncertain tax positions. FIN 48 providesthat the tax effects from an uncertain tax position will be recognized in theCompany’s financial statements only if the position if more likely than not tobe sustained on audit, based on its technical merits. The provisions of FIN 48were effective for eCollege as of January 1, 2007. The Company is currentlyevaluating the impact on our consolidated financial statements of adopting FIN48.

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In June 2006, the EITFratified the consensus on EITF Issue No. 06-03,  “ *HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)*(“EITF 06-03”).** EITF 06-03concluded that the presentation of taxes assessed by a governmental authoritythat are directly imposed on a revenue-producing transaction between a sellerand a customer, such as sales, use, value added and certain excise taxes, is anaccounting policy decision that should be disclosed in a company’s financialstatements. In addition, companies that record such taxes on a gross basisshould disclose the amounts of those taxes in interim and annual financialstatements for each period for which an income statement is presented if thoseamounts are significant. EITF 06-03 is effective for interim and annualreporting periods beginning after December 15, 2006. The Company is currentlyevaluating the impact of adopting EITF 06-03 on our Consolidated FinancialStatements.

In February 2007, theFASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities – including an amendment of FASBStatement No. 115*” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affectexisting standards which require assets or liabilities to be carried at fairvalue.  Under SFAS 159, a company mayelect to use fair value to measure accounts and loans receivable,available-for-sale and held-to-maturity securities, equity method investments,accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instrumentsthat otherwise would not be recognized at inception and non-cash warrantyobligations where a warrantor is permitted to pay a third party to provide thewarranty goods or services.  If the useof fair value is elected, any upfront costs and fees related to the item mustbe recognized in earnings and cannot be deferred, *e.g*.,debt issuance costs.  The fair valueelection is irrevocable and generally made on an instrument-by-instrumentbasis, even if a company has similar instruments that it elects not to measurebased on fair value.  At the adoption date,unrealized gains and losses on existing items for which fair value has beenelected are reported as a cumulative adjustment to beginning retainedearnings.  Subsequent to the adoption ofSFAS 159, changes in fair value are recognized in earnings.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany currently is determining whether fair value accounting is appropriatefor any of its eligible items and cannot estimate the impact, if any, whichSFAS 159 will have on its consolidated results of operations and financialcondition.

**ITEM7A.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

Market risk representsthe risk of loss that may impact our financial position, operating results orcash flows due to adverse changes in financial market prices and rates. TheCompany is, or may become, exposed to market risk in the areas of changes inUnited States interest rates and changes in foreign currency exchange rates asmeasured against the United States dollar. These exposures are directly relatedto our normal operating and funding activities. Historically, and as ofDecember 31, 2006, we have not used derivative instruments or engaged inhedging activities.

The Company does not havesignificant exposure to changing interest rates that would impact its cashbalance.  At December 31, 2006, total cash balances were $16.3million with continuing operations and discontinued operations holding balancesof $7.5 million and $8.8 million, respectively.  All assets and liabilitiesof discontinued operations have been reclassified as held for sale on ourConsolidated Balance Sheets. Our short-term investment portfolio is managed inaccordance with our investment policy, which allows us to invest in investmentsecurities of less than one year in maturity including money market accounts,certificates of deposit, investment grade commercial paper, United Statesgovernment debt obligations and other securities guaranteed by or carrying theimplied guarantee of the United States government. Since October 2001,substantially all of our available cash has been invested in money marketaccounts.  As a result, the interest ratemarket risk implicit in these investments at December 31, 2006 is low.

A hypothetical tenpercent change in market interest rates over the next year would not have amaterial effect on the fair value of the Company’s debt instruments or our cashequivalents, nor would it materially impact the earnings or cash flowassociated with our cash investments. See Note 2 to the ConsolidatedFinancial Statements included in Item 8 of this Annual Report on Form 10-Kfor further information on the fair value of the Company’s financialinstruments. Although borrowings under the Revolver bear interest at anadjustable rate equal to the prime rate, a hypothetical ten percent change inthe market rates as of December 31, 2006 would not have a material effecton our earnings and cash flows in 2007, because we expect drawings on theRevolver during 2007, if any, to be for short-term working capital needs.

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**ITEM8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**ECOLLEGE.COM AND SUBSIDIARIES**

**INDEX TO FINANCIAL STATEMENTS**

**FinancialStatements**
| Report of Independent  Registered Public Accounting Firm                                                   |   |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                       |   |   |
| Report of Independent  Registered Public Accounting Firm                                                   |   |   |
|                                                                                                       |   |   |
| Consolidated Balance Sheets as of  December 31, 2006 and 2005                                              |   |   |
|                                                                                                       |   |   |
| Consolidated Statements of  Operations for the years ended December 31, 2006, 2005 and 2004                |   |   |
|                                                                                                       |   |   |
| Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004 |   |   |
|                                                                                                       |   |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2006, 2005 and 2004                |   |   |
|                                                                                                       |   |   |
| Notes to Consolidated  Financial Statements                                                                |   |   |

 

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**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors and Stockholders

eCollege.com:

We have audited theaccompanying consolidated balance sheet of eCollege.com and subsidiaries as ofDecember 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for the years ended December31, 2006 and 2005. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of eCollege.com as ofDecember 31, 2006 and 2005 and the results of their operations and cashflows for the years ended December 31, 2006 and 2005, in conformity withaccounting principles generally accepted in the United States of America.

We have also audited theadjustments to the December 31, 2004 financial statements related to thepresentation of discontinued operations as described in Note 3. In our opinion,such adjustments are appropriate and have been properly applied. We were notengaged to audit, review or apply any procedures to the December 31, 2004financial statements of the Company other than with respect to the adjustmentsand accordingly, we do not express an opinion or any other form of assurance onthe December 31, 2004 financial statements taken as a whole.

As discussed inNote 2 to the Consolidated Financial Statements, effective January 1,2006, the Company adopted Statement of Financial Accounting Standards number123 (revised 2004), “Share Based Payments.”

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of eCollege.com’s internal control overfinancial reporting as of December 31, 2006, based on the criteriaestablished in Internal Control – Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), and our reportdated April 2, 2007 expressed an unqualified opinion on management’sassessment and the effectiveness of eCollege.com’s internal control overfinancial reporting.
|                    |   | /s/ GRANT THORNTON LLP |   |   |
|--------------------|--------|------------------------|--------|--------|
|               |   |                   |   |   |
|               |   |                   |   |   |
| Chicago, Illinois  |   |                   |   |   |
| April 2, 2007 |   |                   |   |   |

 

31

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**Report of Independent Registered Public Accounting Firm**

The Board of Directorsand Stockholders

eCollege.com:

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting appearing under Item 9A, thateCollege.com (the Company) maintained effective internal control over financialreporting as of December 31, 2006 based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion,management’s assessment that the Company maintained effective internal control over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Also,in our opinion,  the Company hasmaintained, in all material aspects, effective internal control over financialreporting as of December 31, 2006, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

****We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheets of eCollege.com as of December 31, 2006 and2005 and the related statements of operations, stockholders’ equity and cashflows for the years ended December 31, 2006 and 2005, and our report dated April 2,2007 expressed an unqualified opinion on those financial statements andincluded an explanatory paragraph regarding the Company’s adoption of Statementof Financial Accounting Standards (“SFAS”) No. 123(R), “*Share-BasedPayment*”, in 2006.****
| /s/ Grant Thornton, LLP    |   |   |
|----------------------------|--------|--------|
|                       |   |   |
| Chicago, Illinois          |   |   |
| ****April 2****, 2007 |   |   |

 

32

----

 

**Reportof Independent Registered Public Accounting Firm**

The Board of Directorsand StockholderseCollege.com:

We have audited, beforethe effects of the adjustments to retrospectively reflect the discontinuedoperations discussed in note 3, the accompanying consolidated statements ofoperations, stockholders’ equity, and cash flows of eCollege.com andsubsidiaries for the year ended December 31, 2004 (the 2004 financialstatements before the effects of the adjustments discussed in note 3 are notpresented herein). These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements, before the effects of the adjustments toretrospectively reflect the discontinued operations discussed in note 3,referred to above present fairly, in all material respects, the results ofoperations and the cash flows of eCollege.com and subsidiaries for the yearended December 31, 2004, in conformity with U.S. generally accepted accountingprinciples.

We were not engaged toaudit, review, or apply any procedures to the adjustments to retrospectivelyreflect the discontinued operations discussed in note 3 and, accordingly, we donot express an opinion or any other form of assurance about whether suchadjustments are appropriate and have been properly applied. Those adjustmentswere audited by Grant Thornton LLP.

**KPMG LLP**

Denver, ColoradoMarch 31, 2005

33

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**eCollege.com**

**CONSOLIDATED BALANCE SHEETS**

**(inthousands except per share data)**
| ** **                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                                                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                       |       | $                     | 7,540      |   | $ | 9,627 |   |
| Accounts receivable,  net of allowances of $49 and $86, respectively                                                                                             |       | 6,084                 |       | 3,506 |   |
| Accrued revenue  receivable                                                                                                                                      |       | 1,795                 |       | 1,191 |   |
| Deferred income taxes                                                                                                                                            |       | 1,827                 |       | 1,481 |   |
| Other current assets                                                                                                                                             |       | 1,078                 |       | 746 |   |
| Current assets of  discontinued operations held for sale                                                                                                         |       | 20,557                |       | 25,153 |   |
| Total current assets                                                                                                                                             |       | 38,881                |       | 41,704 |   |
|                                                                                                                                                             |       |                  |       |   |   |
| Property and equipment,  net                                                                                                                                     |       | 4,427                 |       | 3,434 |   |
| Software development  costs, net                                                                                                                                 |       | 2,871                 |       | 1,986 |   |
| Other assets                                                                                                                                                     |       | 270                   |       | 261 |   |
| Deferred income taxes                                                                                                                                            |       | 20,441                |       | 24,741 |   |
| Noncurrent assets of  discontinued operations held for sale                                                                                                      |       | 56,023                |       | 67,884 |   |
| TOTAL ASSETS                                                                                                                                                     |       | $                     | 122,913    |   | $ | 140,010 |   |
|                                                                                                                                                             |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                                                             |       |                  |       |   |   |
| Accounts payable                                                                                                                                                 |       | $                     | 396        |   | $ | 643 |   |
| Other accrued  liabilities                                                                                                                                       |       | 4,618                 |       | 3,999 |   |
| Deferred revenue, current  portion                                                                                                                               |       | 3,456                 |       | 2,493 |   |
| Current income taxes                                                                                                                                             |       | 40                    |       | — |   |
| Current portion of  capital lease obligations                                                                                                                    |       | 360                   |       | 320 |   |
| Current liabilities of  discontinued operations held for sale                                                                                                    |       | 11,685                |       | 11,554 |   |
| Total current  liabilities                                                                                                                                       |       | 20,555                |       | 19,009 |   |
|                                                                                                                                                             |       |                  |       |   |   |
| LONG-TERM LIABILITIES:                                                                                                                                           |       |                  |       |   |   |
| Deferred revenue, net  of current portion                                                                                                                        |       | 41                    |       | 26 |   |
| Other liabilities                                                                                                                                                |       | 49                    |       | 322 |   |
| Capital lease  obligations, net of current portion                                                                                                               |       | 280                   |       | 250 |   |
| Long-term liabilities  of discontinued operations held for sale                                                                                                  |       | 4,622                 |       | 25,959 |   |
| Total long-term  liabilities                                                                                                                                     |       | 4,992                 |       | 26,557 |   |
| Total liabilities                                                                                                                                                |       | 25,547                |       | 45,566 |   |
|                                                                                                                                                             |       |                  |       |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                   |       |                  |       |   |   |
|                                                                                                                                                             |       |                  |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                       |       |                  |       |   |   |
| Preferred stock, no par  value; 5,000 shares authorized; none issued or outstanding                                                                              |       | —                |       | — |   |
| Common stock, $0.01 par  value, 50,000 shares authorized, 22,314 and 22,002 shares issued,  respectively, and 22,299 and 21,987 shares outstanding, respectively |       | 223                   |       | 220 |   |
| Additional paid-in  capital                                                                                                                                      |       | 148,796               |       | 139,943 |   |
| Treasury stock at cost,  15 shares                                                                                                                               |       | (148                  | )          | (148 | ) |
| Warrants, restricted  stock rights, and options for common stock                                                                                                 |       | 3,304                 |       | 6,982 |   |
| Deferred compensation                                                                                                                                            |       | —                |       | (2 | ) |
| Accumulated deficit                                                                                                                                              |       | (54,809               | )          | (52,551 | ) |
| Total stockholders’  equity                                                                                                                                 |       | 97,366                |       | 94,444 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       | $                     | 122,913    |   | $ | 140,010 |   |

 

The accompanyingnotes to consolidated financial statements are an integral part of these statements.

34

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**eCollege.com**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**
| ** **                                                                                                                | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CONTINUING OPERATIONS**                                                                                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUE:                                                                                                                  |       |                                        |       |   |   |   |   |
| Student fees                                                                                                              |       | $                                           | 46,662     |   | $ | 36,818 |   | $ | 31,154 |   |
| Campus and course fees                                                                                                    |       | 1,092                                       |       | 1,131 |   | 1,761 |   |
| Other                                                                                                                     |       | 4,331                                       |       | 3,511 |   | 1,867 |   |
| Total revenue                                                                                                             |       | 52,085                                      |       | 41,460 |   | 34,782 |   |
| COST OF REVENUE                                                                                                           |       | 14,740                                      |       | 12,299 |   | 10,008 |   |
| Gross profit                                                                                                              |       | 37,345                                      |       | 29,161 |   | 24,774 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| OPERATING EXPENSES:                                                                                                       |       |                                        |       |   |   |   |   |
| Product development                                                                                                       |       | 8,452                                       |       | 7,170 |   | 6,519 |   |
| Selling and marketing                                                                                                     |       | 4,820                                       |       | 4,711 |   | 4,437 |   |
| General and  administrative                                                                                               |       | 11,838                                      |       | 10,572 |   | 10,310 |   |
| Total operating  expenses                                                                                                 |       | 25,110                                      |       | 22,453 |   | 21,266 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| INCOME FROM OPERATIONS                                                                                                    |       | 12,235                                      |       | 6,708 |   | 3,508 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| Interest income and  other income (expense)                                                                               |       | 422                                         |       | 146 |   | — |   |
| Interest expense                                                                                                          |       | (148                                        | )          | (107 | ) | (67 | ) |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| INCOME FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE                     |       | 12,509                                      |       | 6,747 |   | 3,441 |   |
| Income tax (expense)  benefit                                                                                             |       | (4,502                                      | )          | (2,689 | ) | 15,904 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| INCOME FROM CONTINUING  OPERATIONS BEFORE DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE                                   |       | 8,007                                       |       | 4,058 |   | 19,345 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| **DISCONTINUED OPERATIONS**                                                                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss) from  discontinued operations, net of tax (benefit) expense of $(1,398), $1,403 and  $(2,593), respectively |       | (10,293                                     | )          | 1,870 |   | 15 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| INCOME BEFORE  ACCOUNTING CHANGE                                                                                          |       | (2,286                                      | )          | 5,928 |   | 19,360 |   |
| Cumulative effect of  accounting change, net of tax                                                                       |       | 28                                          |       | — |   | — |   |
| ** **                                                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET (LOSS) INCOME**                                                                                                     |       | $                                           | (2,258     | ) | $ | 5,928 |   | $ | 19,360 |   |
| ** **                                                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **BASIC INCOME (LOSS) PER SHARE  AMOUNTS**                                                                                | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from continuing  operations before accounting change                                                               |       | $                                           | 0.36       |   | $ | 0.19 |   | $ | 0.95 |   |
| Income (loss) from  discontinued operations, net of tax (benefit)                                                         |       | (0.46                                       | )          | 0.09 |   | — |   |
| Income (loss) before  accounting change                                                                                   |       | (0.10                                       | )          | 0.27 |   | 0.95 |   |
| Cumulative effect of  accounting change, net of tax                                                                       |       | —                                      |       | — |   | — |   |
| BASIC NET INCOME (LOSS)  PER SHARE                                                                                        |       | $                                           | (0.10      | ) | $ | 0.27 |   | $ | 0.95 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| **DILUTED INCOME (LOSS) PER SHARE  AMOUNTS**                                                                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from continuing  operations before accounting change                                                               |       | $                                           | 0.35       |   | $ | 0.18 |   | $ | 0.88 |   |
| Income (loss) from  discontinued operations, net of tax (benefit)                                                         |       | (0.45                                       | )          | 0.08 |   | - |   |
| Income (loss) before accounting  change                                                                                   |       | (0.10                                       | )          | 0.26 |   | 0.88 |   |
| Cumulative effect of  accounting change, net of tax                                                                       |       | —                                      |       | — |   | — |   |
| DILUTED NET (LOSS)  INCOME PER SHARE                                                                                      |       | $                                           | (0.10      | ) | $ | 0.26 |   | $ | 0.88 |   |
|                                                                                                                      |       |                                        |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES  OUTSTANDING—BASIC                                                                           |       | 22,174                                      |       | 21,729 |   | 20,358 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING—DILUTED                                                                          |       | 23,016                                      |       | 22,405 |   | 21,996 |   |

 

The accompanyingnotes to consolidated financial statements are an integral part of thesestatements.

35

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**eCollege.com**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(inthousands)**
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury Stock** | ** ** | **Warrants,  Restricted  Stock Rights And** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------------------------------------|------------|--------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                | ** ** | **Shares**            | ** ** | **Par Value**      | ** ** | **Capital**             | ** ** | **Shares**                                            | ** ** | **Amount**   | ** ** | **Options**     | ** ** | **Compensation** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | ** **            | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                                            | ** ** | ** **   | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| BALANCES, JANUARY 1,  2004                                           |       | 20,119                |       | $                       | 201        |                    | $          | 121,301                                               |       | (11          | )          | $               | (81        | )                | 6,880      |   | $ | (29 | ) | $ | (77,839 | ) | $ | 50,433 |   |
| Stock issuance costs                                                      |       | —                |       | —                  |       | (10                     | )          | —                                                |       | —       |       | —          |       | —           |       | — |   | (10 | ) |
| Stock-based compensation  awards to employees                             |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | 3,794           |       | —           |       | — |   | 3,794 |   |
| Forfeited options                                                         |       | —                |       | —                  |       | 24                      |       | —                                                |       | —       |       | (24             | )          | —           |       | — |   | — |   |
| Issuance of common stock  upon exercise of options and warrants           |       | 413                   |       | 4                       |       | 1,659                   |       | —                                                |       | —       |       | (15             | )          | —           |       | — |   | 1,648 |   |
| Issuance of common stock  in connection with employee stock purchase plan |       | 163                   |       | 2                       |       | 2,475                   |       | —                                                |       | —       |       | (1,541          | )          | —           |       | — |   | 936 |   |
| Issuance of common stock  for restricted share awards                     |       | 24                    |       | —                  |       | 393                     |       | —                                                |       | —       |       | (493            | )          | —           |       | — |   | (100 | ) |
| Amortization of deferred  compensation                                    |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | —          |       | 25               |       | — |   | 25 |   |
| Acquisition of treasury  stock at cost                                    |       | —                |       | —                  |       | —                  |       | (4                                                    | )          | (67          | )          | —          |       | —           |       | — |   | (67 | ) |
| Tax benefit from stock  option exercises                                  |       | —                |       | —                  |       | 1,897                   |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 1,897 |   |
| Net income                                                                |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | —          |       | —           |       | 19,360 |   | 19,360 |   |
|                                                                      |       |                  |       |                    |       |                    |       |                                                  |       |         |       |            |       |             |       |   |   |   |   |
| BALANCES,  DECEMBER 31, 2004                                         |       | 20,719                |       | $                       | 207        |                    | $          | 127,739                                               |       | (15          | )          | $               | (148       | )                | 8,601      |   | $ | (4 | ) | $ | (58,479 | ) | $ | 77,916 |   |
| Stock-based compensation  awards to employees                             |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | 3,680           |       | —           |       | — |   | 3,680 |   |
| Forfeited awards                                                          |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | (802            | )          | —           |       | — |   | (802 | ) |
| Issuance of common stock  upon exercise of options and warrants           |       | 1,149                 |       | 11                      |       | 6,995                   |       | —                                                |       | —       |       | (2,580          | )          | —           |       | — |   | 4,426 |   |
| Issuance of common stock  in connection with employee stock purchase plan |       | 78                    |       | 1                       |       | 1,386                   |       | —                                                |       | —       |       | (886            | )          | —           |       | — |   | 501 |   |
| Issuance of common stock  for restricted share awards                     |       | 56                    |       | 1                       |       | 747                     |       | —                                                |       | —       |       | (1,031          | )          | —           |       | — |   | (283 | ) |
| Amortization of deferred  compensation                                    |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | —          |       | 2                |       | — |   | 2 |   |
| Tax benefit from stock  option exercises                                  |       | —                |       | —                  |       | 3,076                   |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 3,076 |   |
| Net income                                                                |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | —          |       | —           |       | 5,928 |   | 5,928 |   |
|                                                                      |       |                  |       |                    |       |                    |       |                                                  |       |         |       |            |       |             |       |   |   |   |   |
| BALANCES,  DECEMBER 31, 2005                                         |       | 22,002                |       | $                       | 220        |                    | $          | 139,943                                               |       | (15          | )          | $               | (148       | )                | 6,982      |   | $ | (2 | ) | $ | (52,551 | ) | $ | 94,444 |   |
|  Reclassification upon adoption of SFAS 123R                         |       | —                |       | —                  |       | 3,676                   |       | —                                                |       | —       |       | (3,678          | )          | 2                |       | — |   | — |   |
| Stock-based compensation  expense                                         |       | —                |       | —                  |       | 3,752                   |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 3,752 |   |
| Issuance of common stock  for restricted share awards                     |       | 81                    |       | 1                       |       | (750                    | )          | —                                                |       | —       |       | —          |       | —           |       | — |   | (749 | ) |
| Issuance of common stock  upon exercise of options and warrants           |       | 135                   |       | 1                       |       | 563                     |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 564 |   |
| Issuance of common stock  in connection with employee stock purchase plan |       | 96                    |       | 1                       |       | 898                     |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 899 |   |
| Tax benefit from stock  option exercises                                  |       | —                |       | —                  |       | 714                     |       | —                                                |       | —       |       | —          |       | —           |       | — |   | 714 |   |
| Net income                                                                |       | —                |       | —                  |       | —                  |       | —                                                |       | —       |       | —          |       | —           |       | (2,258 | ) | (2,258 | ) |
|                                                                      |       |                  |       |                    |       |                    |       |                                                  |       |         |       |            |       |             |       |   |   |   |   |
| BALANCES, DECEMBER 31, 2006                                               |       | 22,314                |       | $                       | 223        |                    | $          | 148,796                                               |       | (15          | )          | $               | (148       | )                | 3,304      |   | $ | — |   | $ | (54,809 | ) | $ | 97,366 |   |

 

The accompanyingnotes to consolidated financial statements are an integral part of thesestatements.

36

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**eCollege.com**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**
| ** **                                                                              | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |       |                                                          |       |   |   |   |   |
|                                                                                    |       |                                                          |       |   |   |   |   |
| Net income                                                                              |       | $                                                             | (2,258     | ) | $ | 5,928 |   | $ | 19,360 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities— |       |                                                          |       |   |   |   |   |
| Depreciation                                                                            |       | 3,401                                                         |       | 2,702 |   | 2,438 |   |
| Loss on dispositions  of assets                                                         |       | 6                                                             |       | 69 |   | 73 |   |
| Accrued interest                                                                        |       | (284                                                          | )          | — |   | 37 |   |
| Provision for  doubtful accounts                                                        |       | 104                                                           |       | 117 |   | 60 |   |
| Amortization of  capitalized internal-use software development costs                    |       | 796                                                           |       | 583 |   | 325 |   |
| Amortization of  intangible assets                                                      |       | 1,372                                                         |       | 1,614 |   | 1,492 |   |
| Impairment of  goodwill and indefinite life intangible assets                           |       | 9,692                                                         |       | — |   | — |   |
| Impairment of  capitalized software                                                     |       | 573                                                           |       | — |   | — |   |
| Amortization of  debt issuance costs and discounts on debt                              |       | 865                                                           |       | 887 |   | 890 |   |
| Loss on early  repayment of debt                                                        |       | 2,143                                                         |       | — |   | 2,479 |   |
| Stock-based  compensation                                                               |       | 3,708                                                         |       | 2,840 |   | 3,820 |   |
| Deferred income  taxes                                                                  |       | 1,643                                                         |       | 3,529 |   | (18,716 | ) |
| Changes in—                                                                        |       |                                                          |       |   |   |   |   |
| Accounts  receivable and accrued revenue receivables                                    |       | (3,066                                                        | )          | (2,805 | ) | (3,613 | ) |
| Other current  assets                                                                   |       | (597                                                          | )          | (223 | ) | 1,584 |   |
| Other assets                                                                            |       | 84                                                            |       | 77 |   | 88 |   |
| Accounts payable  and accrued liabilities                                               |       | (233                                                          | )          | 854 |   | 3,668 |   |
| Deferred revenue  and customer advances                                                 |       | 968                                                           |       | (64 | ) | 1,261 |   |
| Other  liabilities                                                                      |       | (230                                                          | )          | 2 |   | (82 | ) |
| Discount on seller  notes and senior subordinated notes paid                            |       | (4,651                                                        | )          | — |   | — |   |
| Net cash provided by  operating activities                                              |       | 14,036                                                        |       | 16,110 |   | 15,164 |   |
|                                                                                    |       |                                                          |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                  |       |                                                          |       |   |   |   |   |
| Purchases of property  and equipment                                                    |       | (4,417                                                        | )          | (3,077 | ) | (2,848 | ) |
| Proceeds from  disposition of property and equipment                                    |       | 8                                                             |       | — |   | 6 |   |
| Capitalized internal-use  software development costs                                    |       | (1,549                                                        | )          | (1,339 | ) | (1,809 | ) |
| Goodwill adjustments  from deferred taxes and business acquisition costs                |       | 338                                                           |       | 353 |   | (208 | ) |
| Restricted cash to  investments                                                         |       | —                                                        |       | — |   | (516 | ) |
| Net cash used in  investing activities                                                  |       | (5,620                                                        | )          | (4,063 | ) | (5,375 | ) |
|                                                                                    |       |                                                          |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                  |       |                                                          |       |   |   |   |   |
| Proceeds from issuance  of common stock                                                 |       | 1,463                                                         |       | 4,927 |   | 2,551 |   |
| Payment of stock  issuance costs                                                        |       | —                                                        |       | — |   | (10 | ) |
| Proceeds from  sale-leaseback arrangements                                              |       | —                                                        |       | — |   | 409 |   |
| Payments on sale-leaseback  arrangements                                                |       | —                                                        |       | — |   | (125 | ) |
| Payments on line of  credit, net                                                        |       | —                                                        |       | — |   | (9,365 | ) |
| Payments on capital  lease                                                              |       | (501                                                          | )          | (243 | ) | — |   |
| Tax benefit from the  issuance of stock-based awards                                    |       | 714                                                           |       | — |   | — |   |
| Payments on term loan                                                                   |       | —                                                        |       | (1,917 | ) | (1,000 | ) |
| Payment on seller notes                                                                 |       | (1,152                                                        | )          | — |   | (10,000 | ) |
| Payment on senior  subordinated notes                                                   |       | (15,696                                                       | )          | — |   | — |   |
| Net cash provided by  (used in) financing activities                                    |       | (15,172                                                       | )          | 2,767 |   | (17,540 | ) |
|                                                                                    |       |                                                          |       |   |   |   |   |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                   |       | (6,756                                                        | )          | 14,814 |   | (7,751 | ) |
| DISCONTINUED OPERATIONS  CASH ACTIVITY INCLUDED ABOVE:                                  |       |                                                          |       |   |   |   |   |
| Add: Cash  Balance of discontinued operations at beginning of the year                  |       | 13,410                                                        |       | 5,110 |   | 965 |   |
| Less: Cash  Balance of discontinued operations at end of the year                       |       | 8,741                                                         |       | 13,410 |   | 5,110 |   |
| CASH AND CASH  EQUIVALENTS, beginning of year                                           |       | 9,627                                                         |       | 3,113 |   | 15,009 |   |
| CASH AND CASH  EQUIVALENTS, end of year                                                 |       | $                                                             | 7,540      |   | $ | 9,627 |   | $ | 3,113 |   |
|                                                                                    |       |                                                          |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                      |       |                                                          |       |   |   |   |   |
| Cash paid for interest                                                                  |       | 2,238                                                         |       | 2,681 |   | 4,146 |   |
| Cash paid for income  taxes                                                             |       | $                                                             | 426        |   | $ | 120 |   | $ | 115 |   |
|                                                                                    |       |                                                          |       |   |   |   |   |
| SCHEDULE OF  NON-CASH INVESTING AND FINANCING ACTIVITIES:                          |       |                                                          |       |   |   |   |   |
| Financed software and  equipment purchases                                              |       | $                                                             | 966        |   | $ | 529 |   | $ | — |   |
| Acquisition of treasury stock included in accrued liabilities                           |       | $                                                             | —     |   | $ | — |   | $ | 67 |   |

 

The accompanyingnotes to consolidated financial statements are an integral part of thesestatements.

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**eCollege.com**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(1)    Organization,Nature of Business and Basis of Presentation**

**CompanyHistory**

eCollege.com is aDelaware corporation.  eCollegeInternational, Inc. is a wholly owned subsidiary of eCollege and wasincorporated in the state of Colorado on January 9, 2002. OnOctober 31, 2003, eCollege.com acquired all of the capital stock ofDatamark, Inc., a Delaware corporation (“Datamark”), at which timeDatamark became a wholly owned subsidiary of eCollege.com.

**BusinessActivity**

eCollegeis an outsource provider of value-added information services to thepost-secondary education industry. eCollege’s eLearning division is anoutsource provider of on-demand technology, products and services that enablecolleges, universities, and K-12 schools to offer online, distance and hybrideducational programs as well as on-campus courses. Datamark, the Company’sEnrollment division, is an outsource provider of integrated enrollmentmarketing services to the proprietary post-secondary education industry.

**Reclassificationof Prior Periods**

 The Company’s Consolidated Statements ofOperations for the years ended December 31, 2005 and 2004, as well as theConsolidated Balance Sheet as of December 31, 2005, have been reclassified topresent the Datamark business as a discontinued operation and its assets andliabilities as held for sale.** **In October 2006, the Company’sBoard of Directors determined that the Company should initiate a process forthe sale of Datamark. The Company has engaged Evercore Group L.L.C. to assistin marketing Datamark to prospective purchasers. As required by the GAAP, theConsolidated Financial Statements separately reflect the Datamark operationsheld for sale as discontinued operations for all periods reported. For furtherinformation on the discontinued operations, refer to Note 3 of theseConsolidated Financial Statements.

**(2)    Summaryof Significant Accounting Policies**

**Consolidation**

Theaccompanying consolidated financial statements have been prepared by theCompany in accordance with GAAP. The Company has eliminated intercompanytransactions and balances in consolidation. As a result of the Board’s decisionto initiate a process to sell Datamark, the results of operations of Datamarkhave been presented as discontinued operations for all periods presented, andthe Company now operates in one segment: eLearning.  Substantially all of the Company’sidentifiable assets are in the United States, and results of operations outsideof the United States are not material. Foreign sales comprised less than onepercent of revenues from continuing operations in the year ended December 31,2006.

**Use ofEstimates in the Preparation of Financial Statements**

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions. These estimates and assumptions may affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual resultscould differ from those estimates. Some of the most significant areas for whichmanagement uses significant estimates and assumptions are the valuation of goodwilland identified intangible assets, establishing reserves for uncollectibleaccounts receivable, establishing estimated useful lives for long-lived assets,revenue recognition, accounting for the issuance of debt obligations,establishing the valuation reserve for deferred tax assets, estimating the fairvalue of stock options, stock appreciation rights and warrants and recognizingand reporting business dispositions.

**Cash andCash Equivalents**

TheCompany considers investments in highly liquid instruments purchased with anoriginal maturity of 90 days or less to be cash equivalents. Suchinvestments are held in money market accounts, certificates of deposit, oravailable-for-sale securities.

**AccountsReceivable**

Theterms of our accounts receivable are predominantly net 30 days for theeLearning division. The Company maintains an allowance for doubtful accountsbased upon management’s estimate of the expected collection of accountsreceivable. At December 31, 2006 and 2005, the allowance for doubtful accounts forcontinuing operations was $49,000 and $86,000, respectively. One customeraccounted for 10% of accounts receivable for continuing operations at December31, 2006 and one customer accounted for 25% of accounts receivable forcontinuing operations at December 31, 2005. Two customers accounted for 14% and12% respectively, of accounts receivable at December 31, 2004. No customeraccounted for 10% or more of revenue from continuing operations in the yearsended December 31, 2006 and 2005, and one customer accounted for 12% of revenuefrom continuing operations in the year ended December 31, 2004.

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**FairValue of Financial Instruments**

The carrying amountsreported in the balance sheets for cash and cash equivalents, accountsreceivable, accrued revenue receivable, accounts payable, and accruedliabilities approximate their fair values due to the short-term nature of thesefinancial instruments.

**Concentrationof Credit Risk**

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist primarily of cash and cash equivalents, and accountsreceivable. The Company has no off-balance sheet concentrations of credit risk,such as foreign exchange contracts, option contracts or other foreign currencyhedging arrangements. The Company maintains its cash balances in the form ofbank demand deposits and money market accounts with financial institutions thatmanagement believes are credit worthy. Accounts receivable are typicallyunsecured and are derived from transactions with and from educationalinstitutions primarily located in the United States. Accordingly, the Companymay be exposed to credit risk generally associated with educationalinstitutions. The Company performs ongoing credit evaluations of its customersand maintains reserves for estimated credit losses. The Company historicallyhas not had significant write-offs of accounts receivable.

**Propertyand Equipment**

Propertyand equipment are stated at historical cost. Depreciation is provided using thestraight-line method, generally over estimated useful lives of two to sevenyears. Maintenance and repairs are expensed as incurred and major additions,replacements, and improvements are capitalized. Leasehold improvements aredepreciated using the straight-line method over the shorter of the useful lifeor the life of the related lease. The components of property and equipment forcontinuing operations are as follows (in thousands):
|                                                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Computer equipment (3 -  5 years)             |       | $                     | 9,786      |   | $ | 7,138 |   |
| Purchased software (3 -  5 years)             |       | 4,576                 |       | 4,005 |   |
| Office furniture and  equipment (3 - 7 years) |       | 1,337                 |       | 1,268 |   |
| Leasehold improvements  (2 - 7 years)              |       | 466                   |       | 448 |   |
|                                               |       |                  |       |   |   |
| Less: accumulated  depreciation and amortization   |       | (11,738               | )          | (9,425 | ) |
| Property and Equipment, net                        |       | $                     | 4,427      |   | $ | 3,434 |   |

 

Depreciationexpense for continuing operations for the years ended December 31, 2006,2005 and 2004 was $2.5 million, $1.8 million and $1.6 million, respectively.

Propertyand equipment at December 31, 2006 and 2005 includes assets under capitalleases. See Note 4.

Propertyand equipment used in discontinued operations are recognized in theConsolidated Financial Statements at the lower of carrying amount or fairvalue, less cost to sell, and are not depreciated after being classified asheld for sale.  See Note 3.

**Long-LivedAssets—Including Identified Intangible Assets with Finite Lives**

Intangibleassets with finite lives are amortized using the straight-line method over theestimated economic lives of the assets, ranging from five toeight years.  In accordance withSFAS 144, the Company reviews long-lived assets to be held and used forimpairment whenever there is an indication that the carrying amount may not berecoverable from future estimated cash flows.

Intangibleassets and related amortization associated with Datamark are reported indiscontinued operations within the Consolidated Financial Statements.  Assets used in discontinued operations arenot amortized after being classified as held for sale.  ****See Note 3 for further discussion of the Company’s discontinuedoperations and assets held for sale.  Inthe third quarter of 2006, the Company wrote off $573,000 of capitalizedsoftware developed in connection with a discontinued product line of itsEnrollment division.****

In the fourth quarter of 2006, the Company recognizedan impairment loss related to its goodwill and other indefinite life intangibleassets associated with discontinued operations. See below under the heading  “Goodwill****andIdentified Intangible Assets with Indefinite Lives” for a discussion ofsuch loss and resulting adjustments to assets held for sale.

See “Software Development Costs” below for discussionof intangible capitalized software.

**Goodwill and Identified Intangible Assets with IndefiniteLives**

Goodwill and purchased intangible assets withindefinite useful lives are not amortized. In accordance with SFAS 142, the Company reviews goodwill and identifiedintangible assets with indefinite lives for impairment on an annual basis andwhenever events or changes in circumstances indicate the carrying value of anasset may not be recoverable.

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Following the Board’s decision in October 2006 to initiatea process for the sale of the Enrollment division, the Company completed ananalysis to assess the recoverability of the carrying value of the Enrollmentdivision’s assets.  This analysis, asrequired by SFAS 142, consisted of a two-step impairment test.  In the first step we compared the fair valueof the reporting unit to its carrying value. In the second step, we compared the carrying value to the implied fairvalue of the goodwill under a theoretical purchase allocation scenario.  This review was comprehensive across all ofthe identified intangible assets established as part of the acquisition ofDatamark, in addition to those assets reported in the divisional financialstatements of the Enrollment division. Based upon this analysis, it was determined that the overall fair marketvalue of Datamark’s assets was less than the current carrying value of itstangible and intangible assets.

As a result of theCompany’s impairment analysis and in accordance with SFAS 142 and SFAS 144, werecorded $9.7 million, on a pre-tax basis, impairment charges to discontinuedoperations during the fourth quarter of 2006.  This impairment charge had the balance sheet-effect of reducing assetsheld for sale: goodwill by $9.3 million and trademark by $420,000.   On an after-tax basis, these impairmentcharges amounted to $8.9 million, with corresponding reductions to assets heldfor sale: goodwill and trademark of $8.6 million and $260,000 respectively.

All goodwill, amortization of intangibles andimpairment charges are reported in discontinued operations within the Company’sfinancial statements.  At December 31,2006, long-term assets held for sale included $45.1 million of goodwill and$7.0 million of other intangible assets.

See Note 3 for further discussion of the Company’sdiscontinued operations and assets held for sale.

**SoftwareDevelopment Costs**

TheCompany’s activities include ongoing development of internal-use software usedin connection with delivery of services via its proprietary software platformand network. Pursuant to the provisions of the AICPA’s Statement of Position98-1, “*Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use*,” costs incurred during theapplication development stage are capitalized and costs incurred during thepreliminary project and the post-implementation stages are expensed asincurred. Capitalized software development costs are amortized using thestraight-line method over their estimated useful lives, generally threeyears.  Capitalized software developmentcosts for continuing operations for the years ended December 31, 2006, 2005 and2004 were $1.5 million, $1.1 million and $1.2 million, respectively.  Amortization begins when the products areready for their intended use.  TheCompany recorded $0.7 million, $0.3 million and $0.3 million ofamortization expense for continuing operations for the years ended December 31,2006, 2005 and 2004, respectively. The Company currently expects softwareamortization expense for continuing operations for the years ended 2007, 2008,2009,  2010 and 2011 to total $1.1million, $1.0 million, $645,000, $204,000 and $0, respectively.

**OtherAccrued Liabilities**

Otheraccrued liabilities for continuing operations as of each reporting date areshown below (in thousands):
|                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accrued  compensation and related taxes |       | $                     | 2,709      |   | $ | 2,561 |   |
| Other accruals                          |       | 1,909                 |       | 1,438 |   |
| Total other accrued  liabilities        |       | $                     | 4,618      |   | $ | 3,999 |   |

 

**RevenueRecognition**

**      **TheCompany recognizes revenue in accordance with SAB 101, “*RevenueRecognition in Financial Statements*,” as modified by SAB 104, whichprovides guidance on revenue recognition for public companies. Revenue isrecognized when all of the following criteria are met: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the seller’s price to the buyer is fixed ordeterminable; and, (4) collectibility is reasonably assured.  We follow EITF 00-21, “*Accountingfor Revenue Arrangements with Multiple Deliverables*,” to identifyunits of accounting in revenue arrangements with multiple deliverables.  The Company enters into agreements that maycontain multiple-elements. For multiple-element arrangements, the Companyrecognizes revenue for delivered elements when the delivered item hasstand-alone value to the customer, fair values of undelivered elements areknown, customer acceptance has occurred, and there are only customary refund orreturn rights related to the delivered elements. Fair value is generallydetermined based on the price charged when the element is sold separately.  In absence of evidence of fair value of adelivered element, revenue is allocated first to the undelivered elements basedon fair value and the residual revenue to the delivered elements. With respectto our discontinued operations, we follow EITF 99-19, “*ReportingRevenue Gross as a Principal vs. Net as an Agent*,” for mediaservices where the Company is not at risk with vendors for services and theCompany receives a commission for such services.

*ContinuingOperations*

TheCompany enters into contracts with customers to provide online learningproducts and services.  The contractstypically have initial terms of one to three years. Each contract specifies thetype and price of the online campus purchased and the number and price of onlinecourses purchased, as well as the fees for student enrollments and any otherproducts or services purchased. Since

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customer contracts aregenerally applicable campus-wide, colleges and universities can add new onlineprograms and schools without the need to negotiate new contract terms.

Themajority of eLearning division revenue is earned by charging a per-enrollmentstudent technology service fee to our customers for access to their eCoursesand our help desk. A smaller percentage of revenue is generated by oureCompanion product for which we typically charge an annual license fee for upto a predetermined number of users with revenue being recognized on a straightline basis over the contract year. For our Program Administration Solutions, wegenerally charge a one time set-up and design fee to implement an onlinecampus, and an annual license, hosting and maintenance fee for access tosoftware. We sell our professional services on a fixed-fee contract basis aswell as a standard hourly rate basis.

Studentfees are recognized on a per enrollment basis over each course’s specificacademic term or over the length of the student fee license purchased by thecustomer, depending upon contract terms. An enrollment is generally defined asone user in one course for one academic term. No billing occurs, and no revenue is recognized, for cancelled classesand student withdrawals or drops that occur before the agreed-upon enrollmentcensus date. Campus license, hosting, and maintenance fees, including thedesign and development of a customer’s campus, are recognized on astraight-line basis from the campus launch date through the end of the relevantcontract period or the expected life of the customer relationship, whichever isgreater. The average recognition period for these campus fees is approximatelythree years.

Professionalservices revenue is derived from either fixed fee or time and materialsconsulting contracts and recognized as services are performed. The Company alsooffers customers the option of purchasing blocks of course development servicehours, based on our standard hourly rates. These revenues are also recognized as services are performed.

Revenuethat is recognized is reflected as accrued revenue receivable on theconsolidated balance sheets to the extent that the customer has not yet beenbilled for such services. The Company records deferred revenue for amountsreceived from or billed to customers in excess of the revenue that has beenearned. The Company also records a liability for customer advances (deposits)that it requires customers to pay for interactive media services.

*DiscontinuedOperations*

Enrollmentdivision revenues are primarily generated from the sale of direct mail,interactive marketing, and media placement services. During some of the periodscovered by the Consolidated Financial Statements, the Company also derivedother revenue from research services, admissions training, admissions shopperand retention services. Effective September 30, 2006, Datamark discontinued itsretention and admissions training products.

It is the Company’spractice to execute contracts or work orders of various lengths for direct mailadvertising campaigns, which typically have durations of up to three months. Inmost cases, individual direct mail projects take 10 to 18 business days to completewith payments due two days before marketing materials are mailed. Fees aredetermined based on the number of pieces mailed and the associated revenue isrecognized when the marketing materials are mailed. Revenue from direct mailservices includes all applicable postage costs.

Interactivemedia arrangements usually range from three months to one year in duration.Pricing is typically based on a fee-per-lead-generated model, with an up frontdeposit typically due at the time the customer’s agreement is signed andmonthly invoices thereafter based on the number of leads generated. Depositsare recorded as customer advances (a liability) until the leads are generated,at which point the revenue is recognized.

In2005, Datamark introduced a service fee-based interactive product model underwhich the customer procures the lead and Datamark provides lead “scrubbing,”media management, analytic and other services. Under these contracts, whichtypically have terms of one year, Datamark receives monthly fixed managementfees, with opportunities for performance-based bonuses. Fixed fees from thesearrangements are recognized as revenue when services are provided, andincentive revenue is recognized as the incentives are earned.

Datamarkgenerally executes master services agreements with customers for which weprovide media placement services. Datamark charges customers for the cost ofthe advertisement placed with the third-party media supplier (i.e. newspaper,television, radio station, etc.), in addition to a commission for workperformed. Revenue is recognized when the media advertisements are run by thethird-party media supplier. Revenue is recorded on a net basis, meaning thatthe Company includes in consolidated revenue only the commission portion of theamount it charges, not the gross amount of fees invoiced to, and collectedfrom, customers. Accordingly, the Company excludes the direct cost of theadvertisement charged by the media supplier from cost of revenue in theConsolidated Statements of Operations.

Other enrollmentmarketing revenue sources include retention services, admissions training,admissions shopper, research services and bundled lead generation andadmissions services. Student retention services agreements had terms of notless than six months and typically were for a period of one year. Datamarkcharged a fee based on the number of students actively enrolled in a particularmonth, as well as a one-time implementation fee that was recognized as revenueover the contract period. Contracts for

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admissions training, admissions shopper and researchservices are negotiated based on scope of work. These services are provided onan hourly or project rate and are recognized at the time of performance of theservice or over the length of the service period. Datamark receives a share oftuition revenue per enrollment for its bundled lead generation and admissionsservices solution. Such revenues are recognized at the time the leads areenrolled and attending class.

**Stock-BasedCompensation**

EffectiveJanuary 1, 2003, we adopted the fair value recognition provisions of SFAS123 using the prospective adoption method. Under this method of adoption,compensation expense was recognized over the related service periods based onthe fair value of employee stock awards granted on or after January 1, 2003.Under SFAS 123, stock awards granted in periods prior to January 1, 2003continued to be accounted for under the intrinsic value method prescribed byAPB 25.

OnJanuary 1, 2006 we adopted SFAS 123(R) using the modified-prospectivetransition method. Under this transition method, compensation cost recognizedduring the year ended December 31, 2006 includes: (a) compensation costfor all share-based awards granted prior to, but not yet vested as of, January1, 2006 (including awards granted prior to January 1, 2003) based on thegrant-date fair values and related service periods estimated in accordance withthe original provisions of SFAS 123 and (b) compensation cost for allshare-based awards granted subsequent to January 1, 2006, based on thegrant-date fair values and related service periods estimated in accordance withthe provisions of SFAS 123(R).

SFAS123(R) clarifies and expands the guidance in SFAS 123 in several areas,including measuring fair value and attributing compensation cost to reportingperiods. Changes prescribed by SFAS 123(R) include a requirement that weestimate forfeitures of share-based awards at the date of grant, rather thanrecognizing forfeitures as incurred as permitted by SFAS 123. As a result ofadopting SFAS 123(R), in the first quarter of 2006 we recognized an after-taxgain of $28,000 ($46,000 pre-tax), or $0.00 per diluted share, as thecumulative effect of this change in accounting principle. The adoption of SFAS123(R) did not otherwise have a material effect on our condensed consolidatedfinancial statements for the year ended December 31, 2006.

TheCompany’s Consolidated Statements of Cash Flows include a line item thatpresents the cash flows resulting from income tax deductions in excess ofcompensation costs recognized on stock issued pursuant to share-based awards (“excesstax benefits”). Prior to adopting SFAS 123(R), we presented excess tax benefitsas operating cash flows in the Consolidated Statements of Cash Flows. SFAS123(R) requires that excess tax benefits be classified as financing cash flowsin the Consolidated Statements of Cash Flows. In addition, as a result ofadopting SFAS 123(R), certain balance sheet amounts associated with share-basedcompensation costs have been reclassified within the equity section of thebalance sheet. This change in presentation had no net effect on our totalequity. Effective January 1, 2006, stock-based compensation expense hasbeen reclassified from other stockholders’ equity into additional paid-incapital in the Consolidated Balance Sheet.

Weissue share-based awards under two employee incentive plans. Substantially allemployees of the Company are eligible to participate in the ESPP.  Inaddition, the Company issues share-based awards to employees, non-employeedirectors and certain contractors pursuant to the 1999 Stock Plan.  Suchawards have been issued in the form of stock options, restricted share rights,stock appreciation rights and deferred stock units, each of which is discussedin more detail below.  New shares areissued upon the exercise of options or the vesting of other share basedawards.  Treasury shares are not issued.

Stock-basedcompensation expense for the year ended December 31, 2006 totaled approximately$3.7 million (comprised of  $2.7 millionfor continuing operations and $1.0 million for discontinued operations) andincluded $28,000 for stock options, $358,000 for the ESPP, $1.2 million forrestricted share rights, $2.0 million for stock appreciation rights and$165,000 for deferred stock units.  Stock-based compensation expense forthe year ended December 31, 2005 totaled approximately $2.8 million (comprisedof $2.6 million for continuing operations and $290,000 for discontinuedoperations) and included $15,000 for stock options, $514,000 for the ESPP,$813,000 for restricted share rights and $1.5 million for stock appreciationrights.  Stock-based compensation expense for the year ended December 31,2004 totaled approximately $3.8 million (comprised of $2.4 million forcontinuing operations and $1.4 million for discontinued operations) andincluded  $65,000 for stock options, $1.7 million for the ESPP, $1.7million for restricted share rights, $260,000 for stock appreciation rights and $25,000 for deferredcompensation from awards granted prior to 2003.

Stock-basedcompensation expense for continuing operations for the year ended December 31,2006 included $28,000 for stock options, $267,000 for the ESPP, $718,000 forrestricted share rights, $1.6 million for stock appreciation rights and$163,000 for deferred stock units.  Stock-based compensation expense forcontinuing operations for the year ended December 31, 2005 included $15,000 forstock options, $385,000 for the ESPP, $798,000 for restricted share rights and$1.4 million for stock appreciation rights.  Stock-based compensationexpense for continuing operations for the year ended December 31, 2004 included$65,000 for stock options, $1.5 million for the ESPP, $608,000 for restrictedshare rights, $203,000 for stock appreciation rights and $25,000 for deferredcompensation from awards granted prior to 2003.

Stock-basedcompensation expense for discontinued operations for the year ended December31, 2006 included $91,000 for the ESPP, $496,000 for restricted share rights,and $400,000 for stock appreciation rights.  Stock-based compensationexpense for

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discontinuedoperations for the year ended December 31, 2005 included $129,000 for the ESPP,$15,000 for restricted share rights, and $146,000 for stock appreciationrights. Stock-based compensation expense for discontinued operations forthe year ended December 31, 2004 included $197,000 for the ESPP,  $1.1 million for restricted share rights and$57,000 for stock appreciation rights.

Forthe years ended December 31, 2006, 2005 and 2004, $44,000, $37,000 and $0,respectively, of stock-based compensation was capitalized as a component of continuingoperations software development costs. The total income tax benefit forcontinuing operations recognized for these plans was $1.0 million, $879,000 and$407,000, respectively, for the years ended December 31, 2006, 2005 and 2004.

AtDecember 31, 2006, unrecognized compensation cost relating to non-vested stockawards totaled $8.9 million.  The cost of these non-vested awards isexpected to be recognized over a weighted average remaining vesting periodof 3 years.

Becausethe Company adopted SFAS 123 using the prospective method, it did not restateprior period results.  Pro forma disclosure of the Company’s net incomeusing the fair value-based accounting model for awards granted prior to January1, 2003 is shown below for the years ended December 31, 2005 and 2004 (inthousands, except per share data):
| ** **                                                           | ** ** | **Year Ended  December  31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net income                                                           |       |                                                   |       |                                             |       |
| As previously  reported                                              |       | $                                                      | 5,928      |                                             | $          | 19,360 |   |
| Add back:  Stock-based compensation expense, as reported, net of tax |       | 1,706                                                  |       | 2,349                                            |       |
| Subtract:  Stock-based compensation expense, pro forma net of tax    |       | (1,754                                                 | )          | (2,486                                           | )          |
| Pro forma net income                                                 |       | $                                                      | 5,880      |                                             | $          | 19,223 |   |
| Net  income per share, basic:                                   |       |                                                   |       |                                             |       |
| As reported                                                          |       | $                                                      | 0.27       |                                             | $          | 0.95 |   |
| Pro forma                                                            |       | 0.27                                                   |       | 0.94                                             |       |
| Net income per  share, diluted:                                      |       |                                                   |       |                                             |       |
| As reported                                                          |       | $                                                      | 0.26       |                                             | $          | 0.88 |   |
| Pro forma                                                            |       | 0.26                                                   |       | 0.87                                             |       |

 

The table belowsummarizes the awards granted and the respective fair values (in thousands,except share and per share data) of those awards for years ended December 31,2006, 2005 and 2004.
|                                                                    | ** ** | **For the Year  Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Deferred stock  units granted to non-employee board  members: |       |                                                     |       |   |   |   |   |
| Shares  underlying awards                                          |       | 2,000                                                    |       | — |   | — |   |
| Aggregate fair  value of awards                                    |       | $                                                        | 38         |   | $ | — |   | $ | — |   |
| Weighted average  grant date fair value                            |       | 19.11                                                    |       | — |   | — |   |
|                                                               |       |                                                     |       |   |   |   |   |
| Stock  appreciation rights granted to employees:              |       |                                                     |       |   |   |   |   |
| Shares  underlying awards                                          |       | 235,000                                                  |       | 1,170,000 |   | 1,110,000 |   |
| Aggregate fair  value of awards                                    |       | $                                                        | 1,748      |   | $ | 6,139 |   | $ | 4,388 |   |
| Weighted average  grant date fair value                            |       | 7.44                                                     |       | 5.25 |   | 3.95 |   |
|                                                               |       |                                                     |       |   |   |   |   |
| Restricted stock  awards granted to employees:                     |       |                                                     |       |   |   |   |   |
| Shares underlying  awards                                          |       | 62,353                                                   |       | 47,212 |   | 81,626 |   |
| Aggregate fair  value of awards                                    |       | $                                                        | 1,091      |   | $ | 681 |   | $ | 1,185 |   |
| Weighted average  grant date fair value                            |       | 17.50                                                    |       | 14.43 |   | 14.51 |   |
|                                                               |       |                                                     |       |   |   |   |   |
| Restricted share  awards granted to non-employee contractors:      |       |                                                     |       |   |   |   |   |
| Shares  underlying awards                                          |       | 4,525                                                    |       | — |   | — |   |
| Aggregate fair  value of awards                                    |       | $                                                        | 88         |   | $ | — |   | $ | — |   |
| Weighted average  grant date fair value                            |       | 19.44                                                    |       | — |   | — |   |
|                                                               |       |                                                     |       |   |   |   |   |
| Employee stock  purchase plan:                                     |       |                                                     |       |   |   |   |   |
| Shares  underlying awards                                          |       | 53,005                                                   |       | 103,464 |   | 42,673 |   |
| Aggregate fair  value of awards                                    |       | $                                                        | 336        |   | $ | 461 |   | $ | 270 |   |
| Weighted average  grant date fair value                            |       | 6.34                                                     |       | 4.46 |   | 6.34 |   |

 

43

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The Companyestimated the fair value of employee stock purchase plan awards using theBlack-Scholes option pricing model and estimated the fair value of stockappreciation rights using a Monte Carlo simulation for an Asian type award. Thefollowing assumptions were used:

 
|                                                       | ** ** | **For the Year  Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock  appreciation rights granted to employees: |       |                                                     |       |   |   |   |   |
| Expected lives  outstanding                           |       | 4.7 years                                                |       | 4.7 years |   | 4.7 years |   |
| Expected  volatility                                  |       | 59                                                       | %          | 77 | % | 77 | % |
| Risk-free  interest rates                             |       | 4.8                                                      | %          | 4.3 | % | 3.2 | % |
| Expected  dividend yield                              |       | 0                                                        | %          | 0 | % | 0 | % |
|                                                  |       |                                                     |       |   |   |   |   |
| Employee stock  purchase plan                         |       |                                                     |       |   |   |   |   |
| Expected lives  outstanding                           |       | 1 year                                                   |       | 1 year |   | 9 months |   |
| Expected  volatility                                  |       | 38                                                       | %          | 66 | % | 68 | % |
| Risk-free  interest rates                             |       | 5.0                                                      | %          | 3.3 | % | 1.6 | % |
| Expected dividend yield                               |       | 0                                                        | %          | 0 | % | 0 | % |

 

The estimated fairvalues of these awards are being amortized over the applicable vesting period.

***Employee Stock Options***

The1999 Stock Plan is the successor equity incentive program to the Company’s 1997Stock Option Plan (the “1997 Plan”).  Prior to the third quarter of 2003,share awards under these programs were issued primarily in the form of stockoptions, which allow employees to purchase shares of common stock at a setprice upon the completion of vesting requirements. All outstanding optionsunder the 1997 Plan were incorporated into the 1999 Stock Plan upon itsinception, and no further option grants will be made under the 1997 Plan. Allinformation disclosed below includes options issued under the 1999 Stock Planand the 1997 Plan (collectively, the “Plans”).

Optionsgranted may be incentive or non-qualified options.  Options vest overvarious terms, with a maximum vesting period of five years, and expire after amaximum of ten years. At December 31, 2006, 6.8 million shares had beenauthorized for issuance under the Plans, of which 1.5 million shares remainedavailable for grant.

Thefollowing table summarizes the employee stock option activity during the yearended December 31, 2006 (in thousands, except per share data).
| ** **                        | ** ** | ** ** | ** ** | **Weighted  Average  Exercise** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate**            | ** ** |
|-----------------------------------|------------|------------|------------|---------------------------------|------------|-------------------------------------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Price**                       | ** ** | **(years)**                                                 | ** ** | **Intrinsic Value** | ** ** |
| Outstanding,  December 31, 2005   |       | 1,007      |       | $                               | 5.4        |                                                        |       |                     |       |   |
| Granted                           |       | —     |       | —                          |       |                                                        |       |                     |       |
| Forfeited or  canceled            |       | (1         | )          | $                               | 5.73       |                                                        |       |                     |       |   |
| Exercised                         |       | (140       | )          | $                               | 3.85       |                                                        |       |                     |       |   |
| Outstanding,  December 31, 2006   |       | 866        |       | $                               | 5.67       |                                                        | 3.3        |                     | $          | 13,549 |   |
| Exercisable at December  31, 2006 |       | 854        |       | $                               | 5.69       |                                                        | 3.3        |                     | $          | 13,362 |   |

 

Thetotal intrinsic value of employee stock options exercised was $2.7 million,$2.4 million and $4.6 million, respectively, during the years ended December31, 2006, 2005 and 2004. The total cash received from employees as a result ofstock option exercises for the years ended December 31, 2006, 2005 and 2004 wasapproximately $564,000, $659,000 and $1.6 million, respectively. Theexcess tax benefit realized as a result of employee stock option exercises was$667,000, $400,000 and $1.9 million, respectively, for the years ended December31, 2006, 2005 and 2004.

OnFebruary 1, 2005, 955,760 of 1,000,000 options held by BTIP were exercised at aprice of $3.875 per share.  An additional 16,575 options were exercised onMarch 23, 2005 at the same exercise price. As a result of these exercises, theCompany realized an excess tax benefit of $2.7 million in the year endedDecember 31, 2005.

44

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***Restricted Share Rights***

Restrictedshare rights offer employees and consultants the opportunity to earn shares ofthe Company’s common stock over time. These rights generally vest over three tofour years. The Company recognizes the issuance of the shares related to thesestock-based compensation awards and the related compensation expense on astraight-line basis over the vesting period. In 2006, the Company granted atotal of 4,525 restricted share rights to certain individuals who providesoftware development and other services in Sri Lanka under contractarrangements. In accordance with EITF 96-18, “*Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services* ,” thestock-based compensation expense associated with these rights is based on theintrinsic value of the awards and will be remeasured at each reporting datethrough the vesting date. These rights vest over 34 months.

The followingtable summarizes the restricted stock award activity during the year endedDecember 31, 2006 (in thousands, except per share data).
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average Grant Date  Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005 |       | 205        |       | $                                                           | 17.66      |   |
| Granted                         |       | 69         |       | $                                                           | 17.63      |   |
| Forfeited or  canceled          |       | (25        | )          | $                                                           | 16.76      |   |
| Vested                          |       | (117       | )          | $                                                           | 18.29      |   |
| Outstanding, December  31, 2006 |       | 132        |       | $                                                           | 17.58      |   |

 

Thetotal fair value of restricted shares vested during the years ended December31, 2006, 2005 and 2004 was $2.2 million, $911,000 and $418,000, respectively.

***Stock Appreciation Rights***

OnSeptember 13, 2004 and March 23, 2005, the Company granted stock appreciationrights to executives and selected other key employees.  On May 2, 2005,August 15, 2006 and September 25, 2006, the Company granted stock appreciationrights to certain executives and key employees in connection with promotions,and on May 8, 2006, the Company granted stock appreciation rights to anewly-hired executive.  The rights will be settled in stock.  Eachgrant is separated into five different levels of base prices.  The baseprice for the first level is 10% higher than the reference price approved bythe Compensation Committee of the Board of Directors, which was the higher of(i) the closing stock price on September 10, 2004 and (ii) the average closingstock price over the period beginning on August 19, 2004 and ending onSeptember 10, 2004, and the base price for each successive level is 10% higherthan the previous level.  Except in the case of a change in control of theCompany, as described below, a participant will receive a distribution withrespect to the shares of common stock in each grant level only if the averageclosing price of our common stock for the last quarter in the five-year termbeginning on the grant date exceeds the base price for such shares.  Eachparticipant may elect to receive a distribution with respect to 10% of therights he or she was granted after the third anniversary of the grant and withrespect to an additional 10% after the fourth anniversary.  In the eventof a change in control, participants will be entitled to receive a distributionwith respect to a specified percentage of the shares granted (50% if the changein control had occurred on September 13, 2004, increasing by 1/36 each month to100% if the change of control occurs on or after September 13, 2007), and willforfeit the right to receive a distribution with respect to the unvested portionof the shares. The number of shares of common stock issued following a changein control will be based on the difference between the base prices and theshare price as of the date the change in control occurs. On March 23, 2005, theCompany granted substantially the same recipients additional stock appreciationrights with respect to 1.1 million shares of common stock, and at various timesin 2005 and 2006 the Company granted stock appreciation rights to executives inconnection with new hires and promotions, Such grants have the same terms asthe 2004 grants, including without limitation the same change in controlvesting schedules, except that they have different base prices and newfive-year performance periods.

Thefollowing table summarizes the stock appreciation rights activity during theyear ended December 31, 2006 (in thousands, except per share data).
| ** **                      | ** ** | **Shares** | ** ** | **Weighted   Average Grant Date   Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005 |       | 1,966      |       | $                                                                       | 4.63       |   |
| Granted                         |       | 234        |       | $                                                                       | 7.44       |   |
| Forfeited or  canceled          |       | (99        | )          | $                                                                       | 4.61       |   |
| Vested                          |       |       |       |                                                                    |       |
| Outstanding, December  31, 2006 |       | 2,101      |       | $                                                                       | 4.95       |   |

 

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***Deferred StockUnits***

OnFebruary 15, 2005, the Board of Directors approved the eCollege.com 2005Outside Directors Compensation Plan (the “Directors Compensation Plan”), whichprovides for the payment of cash and stock-based compensation to non-employeedirectors of the Company. The Directors Compensation Plan provides that on thefirst business day in January of each year beginning in 2006 for Robert H.Mundheim and 2007 for the other incumbent non-employee directors, eachnon-employee director will receive a grant of 2,000 deferred stock units. Eachdeferred stock unit is equal to the value of one share of common stock of theCompany and constitutes the right to a distribution of one share. Compensationexpense is based on the intrinsic value of the award, recognized over therequisite service period and re-measured at each reporting date through thevesting date.  On January 3, 2006, Mr. Mundheim received a grant of 2,000deferred stock units. Such units were fully vested on the date of grant, andMr. Mundheim will receive his distribution on the date on which his service asa non-employee director terminates. Directors received an additional 8,000deferred stock units in January 2007. Consistent with the requisiteservice period, compensation expense for these awards was recognized during2007.

The followingtable summarizes the deferred stock unit award activity during the year endedDecember 31, 2006.
| ** **                      | ** ** | **Shares** | ** ** | **Weighted   Average Grant Date   Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005 |       | —     |       | —                                                                  |       |
| Granted                         |       | 2,000      |       | $                                                                       | 19.11      |   |
| Forfeited or  canceled          |       | —     |       | —                                                                  |       |
| Vested                          |       | —     |       | —                                                                  |       |
| Outstanding, December  31, 2006 |       | 2,000      |       | $                                                                       | 19.11      |   |

 

***1999 Employee Stock Purchase Plan***

     The ESPP is designed to allow the Company’seligible employees to purchase shares of common stock, at specified intervals,with their accumulated payroll deductions.  Eligible employees areindividuals scheduled to work more than 20 hours per week for more thanfive calendar months per year. Under the ESPP, eligible employees maycontribute up to 15% of their cash earnings through payroll deductions, and theaccumulated deductions will be applied to the purchase of shares of commonstock once each year on the purchase date. The purchase price per share will beequal to 85% of the fair value of the Company’s common stock on the first dayof the one-year offering period that precedes the purchase date or, if lower,85% of the fair value on the purchase date. Purchases on any one purchase date arelimited to 2,000 shares for each participant and 333,334 shares for allparticipants.

The followingtable summarizes the ESPP activity during the year ended December 31, 2006 (inthousands, except per share data):
| ** **                      | ** ** | **Shares** | ** ** | **Weighted   Average Grant Date   Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005 |       | 103        |       | $                                                                       | 4.46       |   |
| Granted                         |       | 53         |       | $                                                                       | 6.34       |   |
| Forfeited or  canceled          |       | —     |       | —                                                                  |       |
| Vested                          |       | (103       | )          | $                                                                       | 4.46       |   |
| Outstanding, December  31, 2006 |       | 53         |       | $                                                                       | 6.34       |   |

 

**Leases**

Weaccount for leases under the provisions of SFAS No. 13, “*Accountingfor Leases”*, and subsequent amendments, which require that ourleases be evaluated and classified as either operating leases or capital leasesfor financial reporting purposes. Minimum base rents for our operating leases,which generally have scheduled rent increases over the term of the lease, arerecorded on a straight-line basis over the lease term. The initial lease termincludes the period from when we are given access and control over the leaseproperty, whether or not rent payments are due under the terms of thelease.  For leases with renewal periodsat our option, we generally consider the lease term to consist of the initiallease term, as exercise of the renewal options as determined at lease inceptionis not considered to be reasonably assured. However, if failure to exercise arenewal option imposes an economic penalty of sufficient magnitude to us, thenthe renewal, at inception, is reasonably assured and will be included in thedetermination of the appropriate lease term.

Incertain instances, we disburse cash for leasehold improvements, furnishings,fixtures and equipment to renovate leased premises. If costs are paid directlyby the landlord or reimbursed to us by the landlord, we record a deferred rentliability and amortize

46

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the deferred rentliability over the lease term as a reduction to rent expense. In otherinstances, we may expend cash for landlord additions that we make to leasepremises that are reimbursed to us by the landlord. Based on the specifics ofthe leased space and the lease agreement, during the renovation period, amountspaid will be recorded as prepaid rent and any landlord reimbursement will berecorded as an offset to prepaid rent.

**Recognitionand Reporting of Planned Datamark Disposition**

In light of the Company’s decision to initiate aprocess for the sale of the Enrollment division, it was necessary for theCompany to determine how Datamark’s results will be presented within the ConsolidatedFinancial Statements and whether the assets of that business are recoverable.The following summarizes the significant accounting policies and judgmentsassociated with a decision to dispose of a business.

A discontinued operation is a business componentthat meets several criteria. First, it must be possible to clearly distinguishthe operations and cash flows of the component from other portions of thebusiness. Second, the operations need to have been sold or classified as heldfor sale. Finally, after the disposal, the cash flows of the component must beeliminated from continuing operations and the corporation may not have anysignificant continuing involvement in the business. Significant judgments areinvolved in determining whether a business component meets the criteria fordiscontinued operations reporting and the period in which these criteria aremet.

If a business component is reported as adiscontinued operation, the results of operations through the date of sale arepresented on a separate line of the statement of operations. Any gain or lossrecognized upon the disposition of a discontinued operation is also reported ona separate line of the statement of operations. Prior to disposition, theassets and liabilities of discontinued operations are aggregated and reportedon separate lines of the balance sheet.

In order for a business to be held for sale, severalcriteria must be achieved. These criteria include, among others, an activeprogram to market the business and locate a buyer, as well as the probabledisposition of the business within one year. Upon being classified as held forsale, the recoverability of the carrying value of a business must be assessed.Evaluating the recoverability of the assets of a business classified as heldfor sale follows a defined order in which property and intangible assetssubject to amortization are considered only after the recoverability ofgoodwill, intangible assets not subject to amortization and other assets areassessed. After the valuation process is completed, the held for sale businessis reported at the lower of its carrying value or fair value less cost to sell.

**IncomeTaxes**

Thecurrent provision for income taxes represents actual or estimated amountspayable on tax return filings each year. Deferred tax assets and liabilitiesare recorded for the estimated future tax effects of temporary differencesbetween the tax bases of assets and liabilities and amounts reported in theaccompanying balance sheets, and for operating loss and tax creditcarryforwards. The change in deferred tax assets and liabilities for the periodmeasures the deferred tax provision or benefit for the period. Effects ofchanges in enacted tax laws on deferred tax assets and liabilities arereflected as adjustments to the tax provision or benefit in the period ofenactment. The Company’s deferred tax assets have been reduced by a valuationallowance to the extent that management has concluded that realization of theassets is not more likely than not at each balance sheet date (seeNote 8).  A windfall tax benefitoccurs when the actual tax benefit realized by the Company upon an employee’sdisposition of an equity based award exceeds the deferred tax asset, if any,associated with the award that we had previously recorded.  When assessing whether a tax benefit relatingto share-based compensation has been realized, we follow the tax law orderingmethod, under which current year share-based compensation deductions areassumed to be utilized before net operating loss carryforwards and other taxattributes.

**NetIncome Per Share**

Basicnet income per share is computed by dividing net income for the period by theweighted average number of common shares outstanding for the period.  Diluted net income per share is computed by(i) adjusting net income for the effects, if any, of assuming theconversion of certain convertible securities, and (ii) adjusting theweighted average number of shares outstanding for the effects, if any, ofcommon shares issuable upon the conversion or exercise of certain securitiessuch as warrants and options for common stock outstanding during the period, ifthe effect of such adjustments is dilutive. Certain options, warrants and other common stock equivalents weredilutive as of December 31, 2006, 2005 and 2004 and, using the treasurystock method, resulted in an additional 0.8 million, 0.7 million and 1.6million weighted-average common shares outstanding for the computation ofdiluted net income per share for the years ended December 31, 2006, 2005 and2004, respectively.

47

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Thefollowing table provides a reconciliation of net income per share, basic anddiluted, for the years indicated.
|                                                                                         | ** ** | **Year Ended December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                              | ** ** | **(In thousands,**                      | ** ** |
| ** **                                                                              | ** ** | **except per share amounts)** | ** ** |
|                                                                                    |       |                                         |       |   |   |   |   |
| Income from  continuing operations before discontinued operations and accounting change |       | $                                            | 8,007      |   | $ | 4,058 |   | $ | 19,345 |   |
| (Loss) income  from discontinued operations                                             |       | (10,293                                      | )          | 1,870 |   | 15 |   |
| Net (loss)  income before accounting change                                             |       | $                                            | (2,286     | ) | $ | 5,928 |   | $ | 19,360 |   |
| Cumulative  effect of accounting change                                                 |       | 28                                           |       | — |   | — |   |
| Net (loss)  income                                                                      |       | $                                            | (2,258     | ) | $ | 5,928 |   | $ | 19,360 |   |
|                                                                                    |       |                                         |       |   |   |   |   |
| Weighted average  number of basic shares outstanding                                    |       | 22,174                                       |       | 21,729 |   | 20,358 |   |
| Dilutive effect  of:                                                                    |       |                                         |       |   |   |   |   |
| Stock options  related to the purchase of common stock                                  |       | 528                                          |       | 602 |   | 1,546 |   |
| Restricted stock  units                                                                 |       | 65                                           |       | 63 |   | 15 |   |
| Stock  appreciation rights                                                              |       | 170                                          |       | 3 |   | — |   |
| Employee stock  purchase plan                                                           |       | 16                                           |       | 8 |   | 15 |   |
| Warrants related  to the purchase of common stock                                       |       | 61                                           |       | — |   | 62 |   |
| Deferred stock units                                                                    |       | 2                                            |       | — |   | — |   |
| Diluted shares  outstanding                                                             |       | 23,016                                       |       | 22,405 |   | 21,996 |   |
|                                                                                    |       |                                         |       |   |   |   |   |
| Income from  continuing operations per share                                            |       |                                         |       |   |   |   |   |
| -Basic                                                                                  |       | $                                            | 0.36       |   | $ | 0.19 |   | $ | 0.95 |   |
| -Diluted                                                                                |       | $                                            | 0.35       |   | $ | 0.18 |   | $ | 0.88 |   |
|                                                                                    |       |                                         |       |   |   |   |   |
| (Loss) income  from discontinued operations per share                                   |       |                                         |       |   |   |   |   |
| -Basic                                                                                  |       | $                                            | (0.46      | ) | $ | 0.09 |   | $ | 0.00 |   |
| -Diluted                                                                                |       | $                                            | (0.45      | ) | $ | 0.08 |   | $ | 0.00 |   |
|                                                                                    |       |                                         |       |   |   |   |   |
| Cumulative  effect of accounting change                                                 |       |                                         |       |   |   |   |   |
| -Basic                                                                                  |       | $                                            | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   |
| -Diluted                                                                                |       | $                                            | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   |
|                                                                                    |       |                                         |       |   |   |   |   |
| Net (loss)  income per share                                                            |       |                                         |       |   |   |   |   |
| -Basic                                                                                  |       | $                                            | (0.10      | ) | $ | 0.27 |   | $ | 0.95 |   |
| -Diluted                                                                                |       | $                                            | (0.10      | ) | $ | 0.26 |   | $ | 0.88 |   |

 

The table belowsummarizes common stock equivalents for 2006, 2005 and 2004 which would havebeen included except for their anti-dilutive effect (in thousands):
|                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options                             |       | —                |       | 1 |   | 2 |   |
| Employee stock  purchase plan             |       | 7                     |       | 10 |   | 10 |   |
| Warrants                                  |       | —                |       | — |   | — |   |
| Stock  appreciation rights                |       | 78                    |       | 448 |   | 224 |   |
| Restricted share  rights and common stock |       | —                |       | 87 |   | 52 |   |
| Total                                     |       | 85                    |       | 546 |   | 288 |   |

 

**ComprehensiveIncome**

Comprehensiveincome includes all changes in stockholders’ equity from non-owner sources.Comprehensive income was the same as net income for the years endedDecember 31, 2006, 2005 and 2004.

**TreasuryStock**

TheCompany accounts for treasury stock purchases at cost. In 2005 and 2004, theCompany withheld 0 and 4,000 shares of common stock with a cost of $0 and$67,000, respectively, in satisfaction of statutory tax withholdingrequirements upon the vesting of restricted share rights held by an officer ofthe Company. These shares are presented as treasury stock in the consolidatedbalance sheet.

**RecentAccounting Pronouncements**

InJuly 2006, the FASB issued FIN 48, which clarifies the accounting for uncertaintax positions. This Interpretation provides that the tax effects from anuncertain tax position will be recognized in the Company’s financial statementsonly if the position is more likely than not to be sustained on audit, based onits technical merits.  The provisions of FIN 48 were effective for eCollegeas of January 1, 2007. The Company is currently evaluating the impact on ourconsolidated financial statements of adopting FIN 48.

InSeptember 2006, the SEC issued SAB 108 which provides guidance on how theeffects of carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement.  This

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interpretation wasfirst effective for our year ending December 31, 2006.  The adoption of this interpretation did nothave an impact on our financial position or results of operations.

In September 2006,the FASB issued SFAS 157, which defines fair value, establishes a framework andgives guidance regarding the methods used for measuring fair value, and expandsdisclosures about fair value measurements. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. We are currently assessing theimpact that SFAS 157 will have on our results of operations and financialposition.

In June 2006, the EITFratified the consensus on EITF Issue 06-03.** EITF 06-03 concluded that the presentation oftaxes assessed by a governmental authority that are directly imposed on arevenue-producing transaction between a seller and a customer, such as sales,use, value added and certain excise taxes, is an accounting policy decisionthat should be disclosed in a company’s financial statements. In addition,companies that record such taxes on a gross basis should disclose the amountsof those taxes in interim and annual financial statements for each period forwhich an income statement is presented if those amounts are significant. EITF06-03 is effective for interim and annual reporting periods beginning afterDecember 15, 2006. The Company is currently evaluating the impact ofadopting EITF 06-03 on our Consolidated Financial Statements.

In February 2007, theFASB issued SFAS No. 159, which expands the use of fair value accounting butdoes not affect existing standards which require assets or liabilities to becarried at fair value.  Under SFAS 159, acompany may elect to use fair value to measure accounts and loans receivable,available-for-sale and held-to-maturity securities, equity method investments,accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instrumentsthat otherwise would not be recognized at inception and non-cash warrantyobligations where a warrantor is permitted to pay a third party to provide thewarranty goods or services.  If the useof fair value is elected, any upfront costs and fees related to the item mustbe recognized in earnings and cannot be deferred, *e.g*.,debt issuance costs.  The fair valueelection is irrevocable and generally made on an instrument-by-instrumentbasis, even if a company has similar instruments that it elects not to measurebased on fair value.  At the adoptiondate, unrealized gains and losses on existing items for which fair value hasbeen elected are reported as a cumulative adjustment to beginning retainedearnings.  Subsequent to the adoption ofSFAS 159, changes in fair value are recognized in earnings.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany currently is determining whether fair value accounting is appropriatefor any of its eligible items and cannot estimate the impact, if any, whichSFAS 159 will have on its consolidated results of operations and financialcondition.

**(3) Discontinued Operation**

****In the fall of 2006, the Companyundertook an in-depth strategic analysis of the Enrollment division’s businessand prospects and determined that although the prospects for the businessremain positive, its projected growth rates were not consistent with theCompany’s strategic plans.  In October2006, the Company’s Board of Directors determined that the Company shouldinitiate a process for the sale of the Enrollment division, and the Companyengaged Evercore Group L.L.C to assist in marketing Datamark to prospectivepurchasers.  The marketing processcontinues as of the filing date of this Annual Report on Form 10-K.****As a result of the Board’s decision, the Company evaluated the future reportingof the Enrollment division business within the Company’s financial statementsto determine whether the net assets of that business were recoverable.

Basedupon its review of applicable accounting policies, the Company believes thatthe operations of the Enrollment division should be reported as discontinuedoperations.  See Note 2 as well as a discussion of other accounting policies thatimpact discontinued operations for a discussion of the significant accountingpolicies and judgments involved in this determination. Results of operationsfrom discontinued businesses are reported in the Company’s ConsolidatedStatements of Operations, net of taxes, in income (loss) from discontinuedoperations.  The assets and liabilitiesof discontinued operations are separately reported in the Company’sConsolidated Balance Sheets.  TheConsolidated Statements of Operations for the years ended December 31, 2005 and2004 have been reclassified to present Datamark as a discontinuedoperation.  Assets and liabilities(current and long-term) for Datamark have been reclassified as held for sale onthe Consolidated Balance Sheet dated December 31, 2005.

Inthe fourth quarter of 2006, the Company completed an analysis to assess therecoverability of the carrying value of the Datamark business.  Thisanalysis determined a decline in the estimated fair value of Datamark’sintangible assets reflecting the negative impact of several contributingfactors, which reduced the forecasted cash flows and growth rates used tooriginally estimate fair value.  Basedupon an analysis performed in accordance with SFAS 142 and SFAS 144, theCompany recorded $9.7 million in non-cash impairment charges to discontinuedoperations during the fourth quarter of 2006.  These pre-tax charges hadthe balance sheet-effect of reducing assets held for sale: goodwill by $9.3million and trademark by $420,000.  On an after-tax basis, theseimpairment charges amounted to $8.9 million, with corresponding reductions toassets held for sale: goodwill and trademark by $8.6 million and $260,000respectively.

*Resultsof Discontinued Operations*

Summary results ofoperations for the Enrollment division, which are reflected as discontinuedoperations in our Consolidated Statements of Operations for the years endedDecember 31, 2006, 2005, and 2004, are as follows:
|                                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Enrollment Division**                          | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                                      | ** ** |
| Revenue                                               |       | $                                                            | 64,384     |   | $ | 61,408 |   | $ | 54,485 |   |
| Operating income  (loss)                              |       | (6,974                                                       | )          | 6,827 |   | 4,761 |   |
| Interest income  (expense) - net                      |       | (4,717                                                       | )          | (3,554 | ) | (7,339 | ) |
| Income (loss)  before income tax                      |       | (11,691                                                      | )          | 3,273 |   | (2,578 | ) |
| Income tax  expense (benefit)                         |       | (1,398                                                       | )          | (1,403 | ) | (2,593 | ) |
| Total net income (loss)  from discontinued operations |       | $                                                            | (10,293    | ) | $ | 1,870 |   | $ | 15 |   |

 

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TheCompany has suspended further depreciation and amortization of assets that havebeen reclassified as held for sale and relate to discontinued operations.  This suspension resulted in a reduction ofdepreciation and amortization expense of approximately $600,000 and isreflected in the operating results of discontinued operations for the yearended December 31, 2006.

TheCompany records stock-based compensation expense in connection with the grantof stock options, stock awards under our ESPP, stock appreciation rights,deferred stock units and restricted share rights to employees, officers, anddirectors in accordance with SFAS 123(R), which we adopted January 1,2006, and previously, in accordance with SFAS 123, adopted January 1, 2003.  The deferred charges are amortized over therelevant vesting periods of such awards, which range from one tofive years. The discontinued operations included recording of $1.0 million,$290,000 and $1.4 million of stock-based compensation in the years endedDecember 31, 2006, 2005 and 2004, respectively.

Weallocate interest to discontinued operations in accordance with EITF Issue No.87-24 “*Allocation of Interest to Discontinued Operations.*”

*Assets and Liabilities ofDiscontinued Operations*

Assets and liabilities classified as discontinuedoperations held for sale on our consolidated balance sheets as ofDecember 31, 2006 and 2005 include the following:
|                                         | ** ** | **December 31,**   | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
| **Assets:**                             | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash and cash  equivalents              |       | $                       | 8,741      |   | $ | 13,410 |   |
| Receivables                             |       | 10,186                  |       | 10,405 |   |
| Deferred income tax  assets             |       | 697                     |       | 665 |   |
| Other current assets                    |       | 933                     |       | 673 |   |
| Total current  assets                   |       | $                       | 20,557     |   | $ | 25,153 |   |
| Property and equipment,  net            |       | 3,644                   |       | 2,667 |   |
| Software development  costs, net        |       | 167                     |       | 873 |   |
| Goodwill                                |       | 45,134                  |       | 54,745 |   |
| Intangible assets, net                  |       | 6,953                   |       | 8,745 |   |
| Other assets                            |       | 125                     |       | 853 |   |
| Total assets                            |       | $                       | 76,580     |   | $ | 93,036 |   |
|                                    |       |                    |       |   |   |
| **Liabilities:**                        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Accounts payable                        |       | $                       | 7,447      |   | $ | 7,514 |   |
| Customer advances                       |       | 1,298                   |       | 1,273 |   |
| Other current liabilities               |       | 2,940                   |       | 2,767 |   |
| Total current  liabilities              |       | $                       | 11,685     |   | $ | 11,554 |   |
| Long-term debt, net of  current portion |       | 930                     |       | 20,023 |   |
| Deferred income tax  liabilities        |       | 3,652                   |       | 5,936 |   |
| Other long-term  liabilities            |       | 40                      |       | — |   |
| Total liabilities                       |       | $                       | 16,307     |   | $ | 37,513 |   |

 

*Debt*

A majority of the Company’s debt and relatedfinancing transactions are directly associated with the Datamark business andhave been classified in discontinued operations on our Consolidated Statementsof Operations and as liabilities of discontinued operations held forsale on our Consolidated Balance Sheets. Specifics of this debt and related financing transactions are discussedbelow.

**Long-TermDebt**

*TermLoan*

TheCompany obtained the $3.0 million Term Loan from a bank in October 2003and repaid it in full in March 2005. The Term

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Loan, which bore interestat the rate of 7% per annum, had a three-year term and was used to refinance aprevious term loan and the outstanding debt on an equipment leasefacility.  The Company incurredapproximately $56,000 in debt issuance costs in connection with the Term Loan.These debt issuance costs were deferred and amortized as interest expense overthe term of the loan, with the remaining balance written-off to interestexpense upon loan repayment.

*OperatingLeases*

Discontinuedoperations include operating lease obligations with aggregate future minimumlease commitments as follows: $1,052,000 in 2007, $1,031,000 in 2008,$1,006,000 in 2009, $929,000 in 2010, $702,000 in 2011 and $381,000 thereafter.

*CapitalLease*

In June 2006, Datamarkacquired a printing press costing $437,000 under a capital lease carrying animputed interest rate of 7.5% and payable in 60 monthly installments.  The accumulated depreciation on the lease at December31, 2006 was $51,000.  At December 31,2006, the lease had the following scheduled repayments (in thousands):
| Year ending December 31,    | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2007                                       |       | $          | 105        |   |
| 2008                                       |       | 105        |       |
| 2009                                       |       | 105        |       |
| 2010                                       |       | 105        |       |
| 2011                                       |       | 44         |       |
| Total                                      |       | 464        |       |
| Less: Interest  included in above payments |       | 70         |       |
| Lease obligation at  December 31, 2006     |       | $          | 394        |   |

 

*SubordinatedNotes*

In connection with the Company’s acquisition ofDatamark in October 2003, the Company issued $20.0 million in SeniorSubordinated Notes. The Senior Subordinated Notes had principal payments due in$5.0 million quarterly increments beginning on December 31, 2007,with interest payments due quarterly beginning on December 31, 2003, at arate of 12.5% per annum.

In connection with the issuance of the SeniorSubordinated Notes, the Company issued warrants to the lender to purchase200,000 shares of common stock at a price of $13.00 per share. However, if atthe time of exercise of all or any portion of the warrants, the trading priceof the Company’s common stock is less than $13.00 per share for the 30 tradingdays immediately preceding the date of such exercise, then the exercise priceshall be automatically adjusted such that the exercise price will be equal to$10.00 per share with respect to such exercise. The warrants expire onOctober 31, 2008. The net proceeds received in connection with theissuance of the Senior Subordinated Notes totaled $20.0 million, which wasallocated to the Senior Subordinated Notes and the warrants. The Companyallocated $3.3 million of the net proceeds to the warrants based upon thefair value of the warrants, which was estimated using the Black-Scholes optionpricing model, a risk free interest rate of 3.0%, volatility of 85%, 0%dividend yield, and an expected life of 5 years (the contractual life).The remaining $16.7 million of the net proceeds was allocated to theSenior Subordinated Notes.

On October 31, 2006, the Company prepaid the $20.0million outstanding principal balance of the Senior Subordinated Notes togetherwith $215,000 of accrued interest. The prepayment resulted in a one timeinterest charge of $1.9 million in the fourth quarter of 2006, whichincludes $1.5 million related to unamortized discount attributable to the warrantsissued to the lender and $400,000 related to unamortized debt issuance costspreviously recorded as discount on the debt.

Also in connection with the acquisition of Datamark inOctober 2003, the Company issued Seller Notes totaling$12.0 million.  The Seller Notes,with interest and principal due in 2008, were comprised of a series of notesissued to the selling stockholders, aggregating to $7.0 million (faceamount) and bearing simple interest at a rate of 10.0% per annum, and anotherseries of notes, aggregating to $5.0 million (face amount) and bearinginterest at a rate of 10.0%, compounded annually. All of the simple interestnotes, as well as $3.0 million (face amount) of the annually compounding notes,were repaid in 2004.  The Companyrecorded $8.9 million for the Seller Notes at the time of their issuancebased upon their estimated fair value, resulting in a discount in the originalamount of $3.1 million, which is being amortized over the term of the debtusing the interest method.  The effectiveinterest rate on these notes, including the amortization of the recorded discount,is 14.9%.  The fair value of the SellerNotes was determined by an independent third party who considered, among otherfactors, the effective interest rate of the Senior Subordinated Notes, andother comparable debt securities. Due to the discounts on the SeniorSubordinated Notes and Seller Notes, any payment of these debt obligationsprior to their maturity results in additional interest expense due to therealization of the unamortized portions of the costs and discounts recorded.The early repayment of $7.5 million carrying value ($10.0 million face value)of Seller Notes during the fourth quarter of 2004 resulted in an additional$2.5 million interest charge, and the early repayment of $1.9 million carryingvalue ($1.5 million face value) of Seller Notes during the second quarter of2006 resulted in an additional $226,000 interest charge.

Thecarrying value of the Seller Notes was $614,000 at December 31, 2006, with anunamortized discount of $63,000 and accrued interest payable of $177,000, and$2.1 million at December 31, 2005, with an unamortized discount of $343,000 andaccrued interest payable of $460,000.

The following is a summary of the Company’s long-termdebt and capital lease obligations relating to discontinued operations as ofDecember 31, 2006 and 2005, respectively (in thousands):

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|                                                                                                                                                                                                           | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Seller note, 10% face  interest rate, 14.9% effective interest rate, interest and principal due  October 31, 2008, face amounts of $.5 and $2.0 million                                                   |       | $                           | 614        |                        | $          | 2,117 |   |
| Senior subordinated  notes, 12.5% face interest rate, 19.7% effective interest rate,  $5.0 million quarterly payments starting December 2007, due October 31,  2008, principal of $20.0 million |       | —                      |       | 17,906                      |       |
| Capital lease  obligations                                                                                                                                                                                |       | 394                         |       | —                      |       |
| Total                                                                                                                                                                                                     |       | 1,008                       |       | 20,023                      |       |
| Less current portion                                                                                                                                                                                      |       | (78                         | )          | —                      |       |
| Long-term portion                                                                                                                                                                                         |       | $                           | 930        |                        | $          | 20,023 |   |

 

The following is aschedule by year of future principal debt payments, as of December 31,2006. Amounts represent the contractual cash payments of our debt and excludethe debt discounts discussed above (in thousands):
| Year  ending  December 31, | ** ** | **Seller Notes** | ** ** | **Capital  Lease** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|--------------------|------------|-----------|------------|
| 2007                                      |       | $                     | —     |               | $          | 78        |       | $ | 78 |   |
| 2008                                      |       | 500                   |       | 84                 |       | 584       |       |
| 2009                                      |       | —                |       | 91                 |       | 91        |       |
| 2010                                      |       | —                |       | 98                 |       | 98        |       |
| 2011                                      |       | —                |       | 43                 |       | 43        |       |
|                                      |       |                  |       |               |       |      |       |
| Total principal                           |       | $                     | 500        |               | $          | 394       |       | $ | 894 |   |

 

**(4)   Debt**

A majority of the Company’s debt and relatedfinancing transactions are directly associated with the Datamark business andhave been classified within the results of discontinued operations in theConsolidated Financial Statements. See Note 3 for detailed informationconcerning these transactions.

**RevolvingLine of Credit**

InOctober 2005, the Company restructured its bank credit facility and obtained a$15.0 million line of credit (the “Revolver”) that matures on October 31, 2007.The Revolver replaced a $10.0 million revolving line of credit which wasobtained in October 2003.   The interestrate on the Revolver is equal to the bank’s prime rate, which was 8.25% atDecember 31, 2006. The Revolver contains certain financial covenants,including requirements that the Company maintain a specified minimum ratio ofquick assets to current liabilities and a specified minimum level of EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”). The Revolveris secured by all of the Company’s assets. The Company was in compliance with all financial covenants as ofDecember 31, 2006 and 2005. The Company had no borrowings under theRevolver at December 31, 2006.

TheCompany anticipates that borrowings under the Revolver in 2007, if any, will befor short-term working capital needs and expects to be able to extend or refinancethe Revolver on acceptable terms at maturity should it wish to do so.

TheCompany maintains two letters of credit with the bank in the amounts of$300,000 and $62,000 as described below under “Long-Term Debt - Letters ofCredit.”  These letters of crediteffectively reduce the borrowing ability under the Revolver by $362,000.

**Long-TermDebt**

*Letters of Credit*

TheCompany maintains two letters of credit with the provider of the Revolver inthe amounts of $300,000 and $62,000 under which the vendor of the Company’sback-up computer systems and the landlord of the Company’s Denver facilitiesare the respective beneficiaries.

Inaddition, the Company maintains a letter of credit in the amount of $250,000with Colorado Business Bank under which Silicon Valley Bank is the beneficiary.The letter of credit is secured by a certificate of deposit in the amount of$258,000 as of

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December 31, 2006. The letterof credit will automatically renew for one year on May 5, 2007 and on each May5 thereafter unless the Company provides notice of its desire not to renew.

*Capital Lease Obligations*

TheCompany has acquired certain computer hardware and software under two capitalleases provided by the vendors.  The principal terms of the leases are asfollows (in thousands):
| Lease Date | ** ** | **Term** | ** ** | **Imputed Interest  Rate** | ** ** | **Balance Outstanding  at December 31, 2006** | ** ** |
|-----------------|------------|----------|------------|---------------------------------|------------|-------------------------------------------------------------------|------------|
| April 2005      |       | 3 years  |       | 7.5                             | %          | $                                                                 | 250        |   |
| February 2006   |       | 3 years  |       | 5.3                             | %          | $                                                                 | 390        |   |
| Total           |       |     |       |                            |       | $                                                                 | 640        |   |

 

The following is a summary of the Company’s long-termcapital lease obligations for continuing operations as of December 31,2006 and 2005, respectively (in thousands):
|                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Capital lease  obligations |       | $                           | 640        |                        | $          | 570 |   |
| Less current portion       |       | 360                         |       | 320                         |       |
| Long-term portion          |       | $                           | 280        |                        | $          | 250 |   |

 

The following is aschedule by year of future capital lease payments, as of December 31, 2006(in thousands):
| Year  ending December 31, | ** ** | **Capital  Lease** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
| 2007                                          |       | $                  | 389        |   |
| 2008                                          |       | 257                |       |
| 2009                                          |       | 31                 |       |
| Total payments                                |       | $                  | 677        |   |
| Less: Interest included  in the above         |       | (37                | )          |
| Capital lease obligation at December 31, 2006 |       | $                  | 640        |   |

 

Capital lease obligations for continuing operationsat December 31, 2006 and 2005 included assets with original cost of$1,058,000 and $890,000, respectively. The combined accumulated depreciationfor such leases totaled $470,000 and $394,000, respectively, at December 31,2006 and 2005.

**(5)    Commitmentsand Contingencies**

**OperatingLease Obligations**

TheCompany leases office space and equipment under various non-cancelableoperating leases. At December 31, 2006 the aggregate future minimum leasecommitments for continuing operations were as follows (in thousands):

 
| Year  ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
| 2007                                          |       | $          | 1,331      |   |
| 2008                                          |       | 1,431      |       |
| 2009                                          |       | 1,475      |       |
| 2010                                          |       | 1,062      |       |
| TOTAL                                         |       | $          | 5,299      |   |

 

Rentexpense for the years ended December 31, 2006, 2005 and 2004 was $1.0million, $1.0 million and $1.1 million, respectively.  In connection with the lease on the Company’sDenver office facility, the Company has recognized $151,000 in deferred rentliability as of December 31, 2006, as the amount of the monthly cashrental payments increases over the lease term.

**OffshoreDevelopment Commitment**

In January 2004, theCompany entered into a contract with a third party to establish an offshore developmentfacility in Sri

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Lanka.  Thecontract currently expires in April 2007 with one or more extensions, at theCompany’s election, through January 2008. Minimum future commitments under thiscontract were $763,000 at December 31, 2006. If the Company terminates the agreement prior to April 2007, it will berequired to pay a termination penalty equal to six months expense at the thencurrent minimum staffing level.

**EmployeeBenefit Plan**

TheCompany has a defined contribution plan under Section 401(k) of theInternal Revenue Code. Eligible employees are permitted to contribute apercentage of their annual compensation up to the maximum allowed by IRSregulations. In addition, the Company may make discretionary and/or matchingcontributions on behalf of participating employees. No such contributions weremade under this plan in 2005 or 2004. With the acquisition of Datamark, theCompany continued to use Datamark’s 401(k) plan for the Enrollment divisionthrough 2005. Datamark’s 401(k) plan featured a discretionary matchingprovision in which the Board determined matching levels yearly.  During 2005 and 2004, the Company madediscretionary matching contributions to the Datamark plan of $27,875 and$37,954.

EffectiveJanuary 1, 2006, the Datamark plan was merged into the Company plan with theCompany plan surviving.  The Companyinstituted a match, effective January 1, 2006, in an amount equal to tenpercent of participant contributions up to a maximum six percent of salary.  During 2006, the Company made matchingcontributions to the Company plan of $93,000 of which $33,000 related todiscontinued operations.

**LegalMatters**

In July 2005, the Company received a letter fromcounsel to Arthur Benjamin, who was Datamark’s chief executive officer untilApril 2005. The letter alleged unspecified breaches by eCollege and/or Datamarkof Mr. Benjamin’s employment agreement and related agreements, includingwithout limitation Mr. Benjamin’s stock appreciation rights agreement, anddemanded that the Company submit such disputes to binding arbitration asrequired by the employment agreement. The Company agreed to arbitrate thedispute. In December 2005, Mr. Benjamin filed suit against eCollege andDatamark in the United States District Court, District of Utah, alleging, amongother things, that Mr. Benjamin terminated his employment for “good reason,”and that eCollege and Datamark breached Mr. Benjamin’s employment and stockappreciation rights agreements by failing to pay him severance and acceleratethe vesting of stock appreciation rights and restricted stock. Using an assumedcommon stock price of up to $150 per share, Mr. Benjamin seeks compensatorydamages of up to $38 million and punitive damages of up to $380 million.

In December 2005, the Company filed a motion todismiss the federal lawsuit or in the alternative stay the litigation pendingarbitration as required by Mr. Benjamin’s employment agreement and to compelarbitration. In April 2006, the court issued an order granting the Company’smotions to stay the litigation and compel arbitration. The parties have agreedupon a panel of three arbitrators and the arbitration hearing is scheduled forSeptember 2007.

The Company believes that Mr. Benjamin’s allegationsare without merit and that his calculations of alleged damages are in error.The Company intends to vigorously defend against these allegations in thearbitration proceeding. However, due to the uncertainty inherent in arbitrationproceedings, we are unable to predict the outcome of this dispute. An outcomeunfavorable to the Company could have a material adverse effect on ourbusiness, results of operations and financial condition.

**Salesand Use Tax**

In the second quarter of 2005, as part of theCompany’s effort to remediate identified material weaknesses in internalcontrols, the Company conducted a preliminary study of sales and use taxobligations for the eLearning and Enrollment divisions. That study revealedthat the Enrollment division could have liability for uncollected sales and usetax in various states. Accordingly, the Company retained outside advisors toconduct a more detailed analysis of the issue by examining, on a state-by-statebasis for 2001 through 2005, whether the Enrollment’s division’s activities inthe state were sufficient to create a sales and use tax collection obligationand, if so, whether some or all of the services provided by the Enrollmentdivision in the state were subject to taxation. As a result of the detailedanalysis, the Company determined that Datamark may have been obligated tocollect sales/use taxes in certain jurisdictions and thus faces potentialliability. To the extent that the liability relates to periods that precededthe date of the Datamark acquisition, the Company believes that the former Datamarkstockholders are required to indemnify the Company for such liability.

To date, no jurisdiction has audited or indicatedany intention of auditing Datamark’s sales and use tax compliance. However, inan effort to mitigate its potential liability, the Company approached certainstates (in which Datamark faces the most significant risk of liability)pursuant to voluntary disclosure arrangements (“VDAs”). VDAs permit taxpayers,in many situations, to resolve outstanding tax obligations for less than thefull amount of the potential exposure, and at a minimum enable taxpayers toavoid penalties. In addition, Datamark will likely register with theStreamlined Sales Tax Project (“SSTP”), which provides amnesty for past taxobligations in member states in exchange for the registrant’s agreement tocollect and remit taxes for three years going forward.

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Whilethe Company cannot predict with certainty either Datamark’s potential exposurefor prior tax periods or the outcome of the actions it has undertaken in mitigationof the potential liability as described in the preceding paragraph, it hasestimated its exposure to sales and use tax liability and related interest andpenalties, if any, in all jurisdictions at issue to be within a range of$773,000 to $1,697,000. Of this exposure, an estimated range of $176,000 to$401,000 relates to periods that precede eCollege’s acquisition and should beborne by selling stockholders; the remaining range of $597,000 to $1,296,000relates to periods between the acquisition date and the dates on which VDAswere filed.  As of December 31, 2006, the Company had a reserve of$691,000 (net of $115,000 of payments made prior to December 31, 2006)associated with sales and use tax liability for prior tax periods, as well as anoffsetting receivable of $176,000 from Datamark’s former stockholders toreflect that portion of the estimated liability that relates to periodspreceding the Datamark acquisition. The reserve and offsetting receivable areincluded in the assets of discontinued operations on the Consolidated BalanceSheet. The Company believes that the reserve and the receivable are reasonable;however, we will evaluate Datamark’s sales and use tax liability associatedwith the prior periods on a periodic basis and may adjust our reserve andreceivable estimates in future periods based on the outcome of our mitigationefforts. Datamark is also recording sales tax liabilities as required forperiods subsequent to the periods covered by the VDAs. Datamark has begun tocollect sales tax from its customers as required by the three states in whichVDAs are completed, and following the completion of the VDA process and theSSTP registration in various other states, Datamark intends to collect andremit taxes from its customers in those states as well. The Company does notbelieve that Datamark will incur material liability for sales and use taxesgoing forward.

**Datamark AcquisitionIndemnification**

TheDatamark stock purchase agreement provides for certain indemnification ofeCollege by the selling stockholders, severally and not jointly. eCollege hasthe right to offset up to the $500,000 balance owed under the Seller Notes forindemnified claims. The former stockholders of Datamark are liable to eCollegefor indemnification if and only to the extent that the aggregate indemnifiabledamages incurred by eCollege exceed the sum of $500,000. This limitation onindemnification does not apply to claims involving certain disputes known atthe time of the acquisition or to certain breaches of the representations ofthe selling stockholders under the stock purchase agreement, includingindemnification for damages incurred by eCollege associated with any unpaid orunrecorded liabilities for taxes related to periods prior to October 31,2003.

**ProductIndemnifications**

TheCompany’s eLearning contracts generally include a product indemnificationprovision pursuant to which the Company is required to indemnify and defend aclient in actions brought against the client based upon claims by a third partythat the Company’s products or services infringe upon the intellectual propertyrights of the third party. Historically, the Company has not incurred anysignificant costs related to product indemnification claims, and as a result,does not maintain a reserve for such exposure.

**(6)    OtherRelated Party Transactions**

Duringthe years ended December 31, 2005 and 2004, Datamark received payments of$1,344,516 and $454,823, respectively, for services provided to a customer forwhom the then-Chief Executive Officer of the Enrollment Division served on theBoard of Directors.

Inconjunction with the Datamark acquisition, the Company entered into a five yearconsulting agreement beginning January 1, 2004 with Leeds EquityAdvisors Inc., of which Jonathan Newcomb, a former director, was aprincipal. Under the terms of the consulting agreement, in 2006, 2005 and 2004the Company paid Leeds Equity Advisors, Inc. the sum of $200,000 plusexpenses incurred by Mr. Newcomb during his term as a director. The agreementcontinues for two additional years at $200,000 per year plus expenses, if any.

OnFebruary 1, 2005, 955,760 of 1.0 million options held by BTIP, an investmentfund affiliated with the Company’s Chief Executive Officer, were exercised at aprice of $3.875 per share. An additional 16,575 options were exercised on March23, 2005 at the same price per share.

As ofDecember 31, 2006, 2005 and 2004, approximately $19,000, $76,000 and $473,000,respectively, of the outstanding principal amount of the Seller Notes was heldby executive officers of the Company.

**(7)    Stockholders’Equity**

**Warrants**

Inconnection with the Senior Subordinated Notes issued in 2003, the Companyissued warrants to the lender to purchase 200,000 shares of common stock at aprice of $13.00 per share.  However, ifat the time of exercise of all or any portion of the warrants, the tradingprice of the Company’s common stock is less than $13.00 per share for thethirty trading days immediately preceding the date of such exercise, then theexercise price shall be automatically adjusted such that the exercise pricewill be equal to $10.00 per share with respect to such exercise.  The warrants were immediately exercisable atthe grant date and expire October 31, 2008. The value of the warrants at thedate of issuance was $3.3 million, which resulted in a discount on theSenior Subordinated Notes that was being amortized as interest expense over thefive-year term of the Senior Subordinated Notes and was written off as

55

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interest expense inOctober 2006 upon the prepayment of the Senior Subordinated Notes.  See Note 3.

**(8)****            Income Taxes**

Components of the incometax provision applicable to federal and state income taxes for continuingoperations are as follows (in thousands):
|                                         | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current income tax  expense (benefit):  |       |                                       |       |   |   |   |   |
| Federal                                 |       | $                                          | 249        |   | $ | — |   | $ | 60 |   |
| State                                   |       |                                       |       |   |   |   |   |
| Total current                           |       | 249                                        |       | — |   | 60 |   |
|                                    |       |                                       |       |   |   |   |   |
| Deferred income tax expense  (benefit): |       |                                       |       |   |   |   |   |
| Federal                                 |       | 4,773                                      |       | 2,472 |   | 1,704 |   |
| State                                   |       | 68                                         |       | 213 |   | 152 |   |
| Total deferred                          |       | 4,841                                      |       | 2,685 |   | 1,856 |   |
|                                    |       |                                       |       |   |   |   |   |
| Total gross tax expense                 |       | 5,090                                      |       | 2,685 |   | 1,916 |   |
| Valuation allowance                     |       | (588                                       | )          | 4 |   | (17,820 | ) |
| Net income tax expense (benefit)        |       | $                                          | 4,502      |   | $ | 2,689 |   | $ | (15,904 | ) |

 

Thedifference between the statutory federal income tax rate and the Company’seffective income tax rate for continuing operations is summarized as follows(in thousands):
|                                            | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal income tax rate                    |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| Increase (decrease) as  a result of—  |       |                                       |       |   |   |   |   |
| State income taxes net  of federal benefit |       | 3.1                                        | %          | 3.2 | % | 4.4 | % |
| Stock based  compensation                  |       | 0.2                                        | %          | 1.2 | % | 16.0 | % |
| Other                                      |       | 2.4                                        | %          | 0.4 | % | 0.3 | % |
| Change in valuation  allowance             |       | (4.7                                       | )%         | 0.1 | % | (518.0 | )% |
| Effective income tax rate                  |       | 36.0                                       | %          | 39.9 | % | (462.3 | )% |

 

Deferred tax assets andliabilities for continuing operations result from the following (in thousands):
|                                                  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets—                       |       |                  |       |   |   |
| Current:                                         |       |                  |       |   |   |
| Accrued  liabilities and other                   |       | $                     | 439        |   | $ | 483 |   |
| Deferred revenue                                 |       | 1,306                 |       | 937 |   |
| Other                                            |       | 82                    |       | 61 |   |
|                                             |       | 1,827                 |       | 1,481 |   |
| Non-current:                                     |       |                  |       |   |   |
| Stock-based  compensation                        |       | 895                   |       | 421 |   |
| Other                                            |       | 327                   |       | 152 |   |
| Net operating  loss carryforward                 |       | 19,980                |       | 25,279 |   |
| Total deferred  tax assets                       |       | 23,029                |       | 27,333 |   |
| Valuation  allowance                             |       | (8                    | )          | (596 | ) |
| Deferred tax  assets, net of valuation allowance |       | 23,021                |       | 26,737 |   |
|                                             |       |                  |       |   |   |
| Deferred tax  liabilities—                  |       |                  |       |   |   |
| Current:                                         |       |                  |       |   |   |
| Non-current:                                     |       |                  |       |   |   |
| Depreciation on  property and equipment          |       | (753                  | )          | (515 | ) |
| Total deferred  tax liabilities                  |       | (753                  | )          | (515 | ) |
|                                             |       |                  |       |   |   |
| Net deferred tax assets  and liabilities         |       | $                     | 22,268     |   | $ | 26,222 |   |

 

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Through 2002, the Companygenerated losses for both financial reporting and tax purposes. As a result,for income tax reporting purposes, the Company may use approximately $46million of net operating loss carryforwards, which begin to expire in 2019 andare available as late as 2023. The Tax Reform Act of 1986 contains provisionswhich may limit the net operating loss carryforwards available to be used inany given year if certain events occur, including significant changes inownership interests.

Thefollowing table details the timing of the expiration of net operating losscarryforwards for continuing operations:
| Year of expiration | ** ** | **Net  operating loss  carryforwards** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| Prior to 2019                |       | $                                           | —     |   |
| 2019                         |       | 5,877                                       |       |
| 2020                         |       | 25,612                                      |       |
| 2021                         |       | 12,266                                      |       |
| 2022                         |       | 1,536                                       |       |
| 2023                         |       | 482                                         |       |
|                         |       | $                                           | 45,773     |   |

 

Prior to the fourth quarter of 2004, the Company hadfully provided a valuation allowance for the potential benefits of theaforementioned net operating loss carryforwards in excess of deferred taxliabilities as management believed it was more likely than not that thebenefits would not be realized. During the fourth quarter of 2004, the Companyreversed $21.3 million of the valuation allowance related to the net operatingloss carryforwards and other temporary items as management believes it is nowmore likely than not that the Company will be able to use the benefit to reducefuture tax liabilities. This conclusion was based on the Company’s demonstratedprofitability in 2003 and 2004 and expected future profitability. The 2004reversal resulted in recognition of an income tax benefit of $18.5 million in2004 and an increase in the deferred tax asset on the Consolidated BalanceSheet.  The income tax benefit tocontinuing operations was $15.9 million and the benefit to discontinuedoperations was $2.6 million. The reversal also resulted in an increase of$1.9 million to additional paid in capital associated with tax benefits fromstock-based compensation and an increase of $907,000 of goodwill associatedwith certain tax benefits related to the Datamark acquisition. The goodwilladjustment has been recorded as a component of assets held for sale.  Approximately $591,000 in valuation reservesassociated with state net operating loss carryforwards were not reversed as theCompany determined that it was more likely than not that the benefits will notbe realized.  This conclusion was primarilybased on the shorter expiration period of these net operating losses. In thesecond quarter of 2006, approximately $587,000 of the state valuation reserveswere reversed as management has concluded that these net operating losscarryforwards are more likely than not to be realized based upon expectedfuture profitability.  The 2006 reversalresulted in recognition of an income tax benefit of $587,000.

In 2006, theCompany recognized a $714,000 increase to additional paid in capital related totax benefits associated with stock-based compensation.  The Company recorded a $338,000 reduction togoodwill during 2006 associated with tax benefits related to the Datamarkacquisition.  The goodwill reduction andrelated tax effect are reflected in assets held for sale at December 31, 2006.  In 2005, the Company recorded a $3.1 millionincrease to additional paid in capital related to tax benefits associated withstock based compensation, including $2.7 million related to the exercise of972,335 options held by BTIP.

In 2006, the Company recorded $4.5 million of incometax expense for continuing operations, and we expect to continue to recordincome tax expense related to our pretax income in future years.

**(9)    Valuationand Qualifying Accounts**
|                                      | ** ** | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance  at end of  period** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------|------------|
| Year ended December 31,  2006        |       |                                           |       |          |       |           |       |                                     |       |
| Allowance for doubtful  accounts     |       | $                                              | 86         |          | $          | 43             |       | $                                        | (80        | ) | $ | 49 |   |
| Allowance for deferred  income taxes |       | 596                                            |       | —        |       | (588           | )          | 8                                        |       |
|                                 |       |                                           |       |          |       |           |       |                                     |       |
| Year ended  December 31, 2005   |       |                                           |       |          |       |           |       |                                     |       |
| Allowance for doubtful  accounts     |       | $                                              | 90         |          | $          | 27             |       | $                                        | (31        | ) | $ | 86 |   |
| Allowance for deferred  income taxes |       | 591                                            |       | 5             |       | —         |       | 596                                      |       |
|                                 |       |                                           |       |          |       |           |       |                                     |       |
| Year ended  December 31, 2004   |       |                                           |       |          |       |           |       |                                     |       |
| Allowance for doubtful  accounts     |       | $                                              | 165        |          | $          | —         |       | $                                        | (75        | ) | $ | 90 |   |
| Allowance for deferred income taxes  |       | 21,922                                         |       |          |       | (21,331        | )          | 591                                      |       |

 

**(10)   Selected Quarterly Information (Unaudited)**

The followingsummarizes selected quarterly information with respect to the Company’soperations for the last eight fiscal quarters. For purposes of this presentation, the cumulative effect of accountingchanges amounting to $28,000 of income during the first quarter of 2006 isincluded in income from continuing operations. Information is presented in thousands except per share data.

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| ** **                                  | ** ** | **2006 Quarter Ended (unaudited)** | ** ** | **2005 Quarter Ended (unaudited)** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **Dec. 31**                                  | ** ** | **Sep. 30**                                  | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** |
| Total revenue                               |       | $                                                 | 13,851     |                                              | $          | 13,040 |   | $ | 13,165 |   | $ | 12,029 |   | $ | 11,031 |   | $ | 10,412 |   | $ | 10,011 |   | $ | 10,006 |   |
| Gross profit                                |       | 10,034                                            |       | 9,124                                             |       | 9,321 |   | 8,866 |   | 7,761 |   | 7,180 |   | 6,885 |   | 7,335 |   |
| Income from continuing operations           |       | 2,445                                             |       | 1,905                                             |       | 2,407 |   | 1,278 |   | 1,251 |   | 889 |   | 1,163 |   | 755 |   |
| (Loss) income from  discontinued operations |       | (9,023                                            | )          | (232                                              | )          | (838 | ) | (200 | ) | 751 |   | 877 |   | 397 |   | (155 | ) |
| Net income                                  |       | (6,578                                            | )          | 1,673                                             |       | 1,569 |   | 1,078 |   | 2,002 |   | 1,766 |   | 1,560 |   | 600 |   |
|                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic income per share:                     |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing  operations          |       | 0.11                                              |       | 0.09                                              |       | 0.11 |   | 0.06 |   | 0.06 |   | 0.04 |   | 0.05 |   | 0.04 |   |
| Income from  discontinued operations        |       | (0.40                                             | )          | (0.01                                             | )          | (0.04 | ) | (0.01 | ) | 0.03 |   | 0.04 |   | 0.02 |   | (0.01 | ) |
| Net income                                  |       | $                                                 | (0.29      | )                                                 | $          | 0.08 |   | $ | 0.07 |   | $ | 0.05 |   | $ | 0.09 |   | $ | 0.08 |   | $ | 0.07 |   | $ | 0.03 |   |
|                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted income per  share:                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing  operations          |       | 0.11                                              |       | 0.08                                              |       | 0.10 |   | 0.06 |   | 0.05 |   | 0.04 |   | 0.05 |   | 0.03 |   |
| (Loss) income from  discontinued operations |       | (0.39                                             | )          | (0.01                                             | )          | (0.04 | ) | (0.01 | ) | 0.03 |   | 0.04 |   | 0.02 |   | (0.01 | ) |
| Net income                                  |       | (0.28                                             | )          | $                                                 | 0.07       |   | $ | 0.07 |   | $ | 0.05 |   | $ | 0.08 |   | $ | 0.08 |   | $ | 0.07 |   | $ | 0.03 |   |

 

**ITEM9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURES**

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

**(a)Evaluation of Disclosure Controls and Procedures**

The Company maintains aDisclosure Committee comprised of the Chief Executive Officer, President andChief Operating Officer, Chief Financial Officer, General Counsel, ChiefExecutive Officer of Datamark, Chief Operating Officer of Datamark, Presidentof the eLearning division, Chief Technology Officer and Director of CorporateAccounting. The Company is required to maintain disclosure controls andprocedures (as such is defined in Rules 13a-15(e) or 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), that aredesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is recorded, processed,summarized and reported on a timely basis and that such information isaccumulated and communicated to the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that as of December 31,2006, the Company’s disclosure controls and procedures were effective to ensurethat information required to be disclosed by us in the reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the SEC’s rules and forms.

**(b) Management’s Report on InternalControl over Financial Reporting**

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies and procedures may deteriorate.

Management performed anassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, using the criteria set forth inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Based upon such assessment,management has concluded that, as of December 31, 2006, the Company’s internalcontrol over financial reporting was effective based on the COSO criteria.

Grant Thornton LLP, theindependent registered public accounting firm that also audited the Company’sconsolidated financial

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statements, has issued an audit report on management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, which is filed herewith.

**(c) Changes in Internal Control overFinancial Reporting**

During the fourth quarterof 2006 the Company took certain actions to remediate deficiencies in internalcontrols related to the Company’s accounting for income taxes. Such actionsincluded expanding resources provided and work performed by the Company’sexternal tax advisors, engaging an outside consultant to review the Company’sinternal tax processes and controls and revising procedures to includequarterly review of potential tax issues with outside tax advisors and thecreation of additional schedules for use in analyzing tax accounts. Apart fromsuch remediation, there were no changes in the Company’s internal control overfinancial reporting during the fourth quarter of 2006 which have materiallyaffected, or are reasonably likely to materially affect, such internal controlover financial reporting.

**ITEM 9B. OTHER INFORMATION**

None.

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**PART III.**

**ITEM10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

The directors and executive officers of eCollege as ofMarch 14, 2007 are as follows:
| **Name**                         | ** ** | **Age**    | ** ** | **Position**                                         |
|----------------------------------|------------|------------|------------|------------------------------------------------------|
| ** **                       | ** ** | ** ** | ** ** | ** **                                           |
| Directors and Executive Officers |       |       |       |                                                 |
| Oakleigh Thorne                  |       | 49         |       | Chief Executive Officer and Chairman of the Board    |
| Douglas H. Kelsall               |       | 53         |       | President, Chief Operating Officer and Director      |
| Reid E. Simpson                  |       | 50         |       | Chief Financial Officer                              |
| Marguerite M. Elias              |       | 52         |       | Senior Vice President, General Counsel and Secretary |
| Robert S. Haimes                 |       | 46         |       | Senior Vice President                                |
| James V. Allen                   |       | 40         |       | Chief Technology Officer                             |
| Thomas L. Dearden                |       | 50         |       | Chief Executive Officer of Enrollment Division       |
| Matthew T. Schnittman            |       | 35         |       | President of eLearning Division                      |
| Donald L. Bailey                 |       | 57         |       | Chief Operating Officer of Enrollment Division       |
| Jack W. Blumenstein(1)           |       | 63         |       | Director                                             |
| Christopher E. Girgenti(2)(3)    |       | 43         |       | Director                                             |
| Jeri L. Korshak(2)(3)            |       | 52         |       | Director                                             |
| Robert H. Mundheim(1) 2)(3)      |       | 74         |       | Director                                             |

 

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(1)  Member of the Nominating Committee.

(2)  Member of the Audit Committee.

(3)  Member of the Compensation Committee.

*Oakleigh Thorne* has served as our ChiefExecutive Officer since May 30, 2000 and as a member of our Board ofDirectors since February 1998. Mr. Thorne has been the co-Presidentof Blumenstein/Thorne Information Partners, L.L.C. since October 1996, andis a co-founder of this private equity investment firm. FromSeptember 1986 to August 1996, Mr. Thorne served in variousmanagement positions, including most recently as President and Chief ExecutiveOfficer, of CCH Incorporated, a leading provider of tax and business lawinformation, software, and services. Mr. Thorne is a director of ShopperTrak,Inc. and AirCell, Inc. Mr. Thorne is also a member of various charitableboards, including the Art Institute of Chicago and the Lake Forest Open LandsAssociation.

*Douglas H. Kelsall* has served as theCompany’s President and Chief Operating Officer since November 2003 and asa member of the Board of Directors since August 2002. Mr. Kelsall served as ourExecutive Vice President from November 2000 to November 2003, as ChiefFinancial Officer and Treasurer from September 1999 to May 2004 and asSecretary from November 2000 to July 2004. From July 1997 toAugust 1999, Mr. Kelsall served as Chief Financial Officer of TAVATechnologies, Inc.; from December 1995 to June 1997, he servedas Chief Financial Officer of Evolving Systems, Inc.; and fromJune 1993 to December 1995, he served as President of Caribou CapitalCorporation. Prior to that time, Mr. Kelsall served in various managementand vice president positions at Colorado National Bank. Mr. Kelsallpresently serves on the board of directors of Smart Move, Inc and as a directorof various charitable organizations.

*Reid E. Simpson*was named Chief Financial Officer in May 2004. From September 1999 to April2004, Mr. Simpson served as executive vice president and CFO of CCCInformation Services (CCC), a publicly held company providing software andservices to the automobile claims industry. Prior to CCC, Mr. Simpson heldCFO positions at The Signature Group and Delphi Information Systems.Additionally, Mr. Simpson spent 16 years with the Dun & BradstreetCorporation where he held a number of senior finance positions, including CFOfor three of the corporation’s businesses: Dun & Bradstreet Plan Services,Nielsen Marketing Research and DonTech.

*Marguerite M. Elias*joined the Company in July 2004 as Senior Vice President, General Counsel andSecretary. From January 2004 until joining eCollege, Ms. Elias was apartner in the law firm of Hogan Marren, Ltd. From April 2001 to December 2003,Ms. Elias served as senior vice president and general counsel ofCenterprise Advisors, Inc., a national professional services firm. Prior tothat time, Ms. Elias was in private practice focusing on securities andcorporate law. She was a partner in Katten Muchin Zavis Rosenman from August1995 to April 2001 and an associate at Skadden Arps Slate Meagher and Flom fromSeptember 1986 to July 1995.

*RobertS. Haimes* has served as Datamark’s Executive Vice President,Special Initiatives, since January 2007, and continues to serve as a SeniorVice President of eCollege, a position he has held since 2001. Mr. Haimesserved as Datamark’s Chief Marketing Officer from May 2006 until January 2007and as Datamark’s Chief Operating Officer from March 2005 until May 2006. Heserved as our Senior Vice President of Strategy from January 2004 to March2005, as our Senior Vice President of Strategy and Market Communication fromJanuary 2003 to January 2004 and as our Senior Vice President of Marketand Product Management from August 2001to January 2003 and as our VicePresident of Marketing from November 1999 through August 2001. From1996 to 1999,

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he served as the Brand Marketing Director and theDirector of Market Development for Coors Brewing Company. In 1995 and 1996,Mr. Haimes was Director of New Products and New Business Development atBoston Chicken, Inc. Prior to September of 1995, Mr. Haimes heldpositions in brand management, new business development and operationsmanagement at Procter and Gamble.

*James V. Allen* was named Chief Technology Officer of the Company in August 2006.  He previously served as our VicePresident of Engineering from June 2005 through July 2006, as Vice President ofProduct Systems Engineering from April 2000 to June 2005, as Director ofProduct Systems Development from September 1999 to April 2000 and as Directorof Systems Development from August 1998 to September 1999.

*Thomas L. Dearden* was named Chief ExecutiveOfficer of the Enrollment Division in March 2005. He previously served as thePresident and Chief Operating Officer of the Enrollment Division from October31, 2003 until March 2005, as Executive Vice President and Chief OperatingOfficer of Datamark from June 2000 to October 2003 and as Vice President ofOperations for the Datamark division of Focus Direct, Inc. from 1998 to June2000. Mr. Dearden joined Datamark in 1989 as the original member of itscreative staff. Before joining Datamark, Mr. Dearden was a founder of andsenior partner in Bennett/Allen Associates, a Salt Lake City based advertisingagency. Mr. Dearden serves as the Industry Co-Chair of the Utah PostalCustomer Council.

*Matthew T. Schnittman* has served asPresident of the eLearning Division since April 2005. He previously served asExecutive Vice President/General Manager of the eLearning Division fromNovember 2003 to April 2005, as Senior Vice President of Account Managementfrom January 2003 to November 2003 and as Vice President of ProfessionalServices from July 2001 to January 2003. Mr. Schnittman servedas our Director of Strategic Planning and Analysis from July 1999 toJune 2001. Before joining eCollege, Mr. Schnittman worked atPricewaterhouseCoopers from June 1998 to June 1999 in the ManagementConsulting Strategy group, where he provided strategic consulting services toFortune 1000 companies. From January 1995 to June 1997,Mr. Schnittman was with CCD, LLP, a consulting boutique focused onconsumer product strategy.

*Donald L.Bailey*has served as Chief Operating Officer of theEnrollment Division since May 2006. Mr. Bailey has more than 35 years ofexperience in advertising management and agency operations. From November 2004until joining Datamark, Mr. Bailey served as Senior Vice President, Operations,for the Salt Lake City office of McCann Worldgroup, a global advertisingagency. In such capacity, Mr. Bailey was responsible for integrating a localagency into the operations and processes of McCann Worldgroup. From 2001 until November2004, Mr. Bailey served as Global Applications Director for Euro RSCGWorldwide, and from 1989 to 2001, he was employed as the Chief OperationsOfficer for the Salt Lake City office of Euro RSCG Tatham Partners.

*Jack W. Blumenstein* has served as a memberof our Board of Directors since January 1998 and currently serves as chairof our Nominating Committee. Mr. Blumenstein has been the co-President ofBlumenstein/Thorne Information Partners, L.L.C. since October 1996, and isa co-founder of this private equity investment firm. From October 1992 toSeptember 1996, Mr. Blumenstein held various positions with TheChicago Corporation (now ABN AMRO, Inc.), serving most recently asExecutive Vice President, Debt Capital Markets Group and a member of the boardof directors. Mr. Blumenstein was President and CEO of Ardis, a jointventure of Motorola and IBM, and held various senior management positions inproduct development and sales and marketing for Rolm Corporation and IBM.Mr. Blumenstein also presently is chairman and CEO of AirCell, Inc.,and serves on the board of directors of ShopperTrak, Inc. and Consolidated Communications, Inc.

*Christopher E. Girgenti* has served as amember of our Board of Directors since June 1997 and currently serves aschairman of our Audit Committee and as a member of our Compensation Committee.Mr. Girgenti has been Senior Managing Director of New WorldEquities, Inc. since November 1996 and Managing Director of New WorldVenture Advisors, LLC since January 1998. From April 1994 throughOctober 1996, Mr. Girgenti served as Vice President and was co-headof the technology investment banking group of The Chicago Corporation (now ABNAMRO, Inc.). He held various corporate finance positions with KemperSecurities, Inc. and KPMG Peat Marwick (now KPMG LLP) . Mr. Girgentiis a Chartered Financial Analyst. Mr. Girgenti presently serves on theadvisory board of Illinois Technology Enterprise Corporation—Evanston, and alsoserves on the board of directors of Firm 58, Inc., Reserve Brands, Inc., TheV.I.P. Tour Company (d/b/a Tickets Now) and Univa Corporation.

*Jeri L. Korshak*has served as a member of our Board of Directors since February 1999, andis currently a member of our Audit and Compensation Committees.Ms. Korshak has over twenty years of experience in marketing and businessdevelopment. Since 2001, Ms. Korshak has been an independent consultant. Priorto that time, Ms. Korshak served as Senior Vice President of Marketing andBusiness Development for AuraServ Communications from June 2000 toMarch 2001 and Vice President of Strategy for MediaOne Group fromJune 1998 to June 2000. Ms. Korshak was Vice President andGeneral Manager of US WEST Dex— Mountain Region from September 1995 toMay 1998, and Vice President and General Manager of Interactive Televisionof US WEST Multimedia from November 1994 to September 1995. In theseand other positions, Ms. Korshak has been involved in developing andintroducing interactive services.

*Robert H. Mundheim* has served as a memberof our Board of Directors since January 2001, and currently serves aschairman of our Compensation Committee and as a member of our Audit andNominating Committees. Mr. Mundheim has been Of Counsel toShearman & Sterling since March 1999. Mr. Mundheim formerlyheld the position of Senior Executive Vice President and General Counsel ofSalomon Smith Barney Holdings Inc. Before that he was Executive VicePresident and General Counsel of Salomon Inc., a firm which he joined inSeptember 1992. Prior to joining Salomon Inc., Mr. Mundheim wasco-Chairman of the New York law firm of

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Fried, Frank, Harris,Shriver & Jacobson. Until 1992, Mr. Mundheim was the UniversityProfessor of Law and Finance at the University of Pennsylvania Law School,where he had taught since 1965. He served as Dean of that institution from 1982through 1989. Among his other professional activities, Mr. Mundheim hasbeen General Counsel to the U.S. Treasury Department (1977-1980); SpecialCounsel to the Securities and Exchange Commission (1962-1963); and ViceChairman, Governor-at-Large and a member of the Executive Committee of theNational Association of Securities Dealers (1988-1991). He is a trustee of the NewSchool University, the Curtis Institute of Music and a member of the Council ofthe American Law Institute. Mr. Mundheim also serves on the board of directorsof Arnhold & S. Bleichroeder, Inc. and Quadra Realty Trust, Inc.

**Directors’and Executive Officers’ Terms**

Alldirectors hold office until the next annual meeting of stockholders or untiltheir successors have been duly elected and qualified. All executive officersare elected by the Board of Directors to serve in their respective capacitiesuntil their successors are elected and qualified or until their earlierresignation or removal.

**AuditCommittee**

Themembers of the Company’s Audit Committee of the Board of Directors are Mr.Girgenti (chairman), Mr. Mundheim and Ms. Korshak, all of whom areindependent under the Nasdaq rules. The Board has determined that Mr. Girgentiis an “audit committee financial expert” within the meaning of SEC regulationsand is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14Aunder the Exchange Act.

**Section16(a) Beneficial Ownership Reporting Compliance**

Section 16(a)of the Exchange Act requires that the Company’s officers and directors, andpersons who own more than ten percent of a registered class of the Company’sequity securities, file with the SEC and the Nasdaq Stock Market reports ofownership of Company securities and changes in reported ownership. Officers,directors and greater than ten percent shareholders are required by SEC rulesto furnish the Company with copies of all Section 16(a) reports they file.

Basedsolely on a review of the reports furnished to the Company, or writtenrepresentations from reporting persons that all reportable transactions werereported, the Company believes that during the fiscal year endedDecember 31, 2006, the Company’s officers, directors and greater than tenpercent owners timely filed all reports they were required to file underSection 16(a).

**Code ofEthics**

Wehave adopted a Code of Ethics which is applicable to all of our employees anddirectors. We have posted the Code of Ethics, which is titled “Code of BusinessConduct and Ethics” on our website at *www.ecollege.com*and any waivers of, or amendments to, the Code of Ethics will be approved bythe Board of Directors and disclosed on our website. The Company encourages allemployees and directors to properly report any violation of the Code of Ethicsto the appropriate persons identified in the Code of Ethics.

**ITEM11.    EXECUTIVE COMPENSATION**

**CompensationDiscussion and Analysis**

This section providesinformation regarding the compensation program in place for our principalexecutive officer, principal financial officer and the three mosthighly-compensated executive officers other than the principal executiveofficer and principal financial officer (collectively, the “Named ExecutiveOfficers” or “NEOs”) for 2006. The Compensation Committee of our Board ofDirectors (the “Committee”), which acts pursuant to a charter approved by theBoard, has responsibility for setting the compensation  of our Chief Executive Officer and our ChiefOperating Officer/President and reviewing and approving the compensation of theother NEOs. To assist it in determining compensation, the Committee engages anationally-known compensation consulting firm, Frederic W. Cook & Co., Inc.(“FWC”).  FWC reports directly to theCommittee and performs no work on behalf of management of the Company.  Our Chairman and Chief Executive Officermakes recommendations to the Committee and participates in Committeediscussions concerning the compensation of other NEOs but is not present whenthe Committee discusses or determines his compensation.

*Compensation Philosophy andObjectives*

eCollege’s philosophy in establishing compensationpolicies for our executive officers is to align compensation with our strategicobjectives, while concurrently providing competitive compensation that enablesus to attract and retain top-quality executive talent. The primary objectivesof our compensation policies for executive officers are to:

·                  Attract andretain executive officers by offering total compensation that is competitivewith that offered by similarly situated companies and rewarding outstandingpersonal performance; 

·                  Promote andreward the achievement of short-term objectives that our board of directors andmanagement believe will lead

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|   |   |   | to  long-term growth in stockholder value; and                                                                                                                                                         |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                   |
|   | · |   | More  closely align the interests of executive officers with those of our  stockholders by making long-term incentive compensation dependent upon  financial performance and total shareholder return. |

*Principal Components of Executive Compensation*

The principal components of our executive compensationprogram are:
|   | · |   | Base  salary; |
|--------|--------|--------|---------------|

 
|   | · |   | Annual  bonuses; and |
|--------|--------|--------|----------------------|

 
|   | · |   | Long-term,  equity-based incentives. |
|--------|--------|--------|--------------------------------------|

*Mix of Compensation Components*

Executive compensation is based on ourpay-for-performance philosophy, which emphasizes executive performance measuresthat correlate closely with the achievement of both shorter-term performanceobjectives and longer-term stockholder value. To this end, a substantialportion of our executives’ annual and long-term compensation is at-risk. Theportion of compensation at risk increases with the executive’s position level.This provides more upside potential and downside risk for more senior corporateor divisional positions because these roles have greater influence on theperformance of the company or the division, as applicable.

*Annual Compensation Programs*

Our Named Executive Officers receive two forms ofannual compensation — base salary and annual cash bonuses payable under aperformance-based bonus plan — which together constitute an executive’s totalannual compensation. “Total Annual Compensation”, as discussed in thisCompensation Discussion and Analysis, differs from the “Total Compensation”column of the Summary Compensation Table below, which includes long-term equityincentive compensation and other forms of compensation valued on a basisconsistent with financial statement reporting requirements. Salary is includedin the compensation package because the Committee believes it is appropriatethat some portion of the compensation provided to executives be provided in aform that is fixed and liquid. Performance-based bonuses are included in thepackage because they permit the Committee to motivate our executives, in anyparticular year, to pursue objectives that the Committee believes areconsistent with both objectives established for that year and the Company’slonger-term strategy. The components comprising the annual cash portion oftotal compensation are described below:

Salary.  Base salary for NEOs for any given year isgenerally fixed by the Committee at a March meeting, with adjustments effectiveApril 1. Increases or decreases in base salary on a year-over-year basis aredependent on the Committee’s assessment of Company, division and individualperformance. For each NEO, a minimum level of salary is specified in hisemployment agreement. Otherwise, the Committee is free to set an NEO’s salaryat any level it deems appropriate. In determining the salaries effective April1, 2006, the Committee considered information provided by FWC concerning thecompensation paid by fourteen education and software companies (the “Peer Group”).The Peer Group is intended to be representative of the market in which wecompete most directly for executive talent. The Committee regularly reviewsthis group of companies with FWC to assure that it remains an appropriatebenchmark for us.  Our Peer Group for2006, which was unchanged from the peer group used in the prior year, consistedof the 14 companies listed below:
| Blackboard, Inc.    |   | Corinthian Colleges |   | DeVry             |   | Education Management |   | ITT      |
|---------------------|--------|---------------------|--------|-------------------|--------|----------------------|--------|----------|
|                |   |                |   |              |   |                 |   |     |
| Laureate            |   | Learning Tree       |   | Plato Learning    |   | Princeton Review     |   | Proquest |
|                |   |                |   |              |   |                 |   |     |
| Scientific Learning |   | Skillsoft           |   | Strayer Education |   | Sumtotal Systems     |   |     |

The Committee also considered survey data regardingcompensation practices of high-technology companies and reviewed, but did notuse as benchmarks, information provided by FWC concerning the compensation paidby 14 additional software companies in the Company’s GICS Sub-IndustryClassification (Internet Software & Services).

Based upon the Committee’s review of performance andmarket data as discussed above, the salaries of all NEOs were increasedeffective April 1, 2006. Mr. Thorne’s 2006 salary was set at $400,000,representing a 6.7% increase from the amount he received in the prior year. Mr.Kelsall’s salary was increased by 6.3% to $335,000. The salaries of Messrs.Simpson, Dearden and Schnittman were set at $270,000, $225,000 and $225,000,respectively, representing increases of 3.8%, 4.7% and 4.7%, respectively, fromthe prior year. The resulting salaries approximated the median of the PeerGroup.

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Bonus Plan.  Each year, we establish a cash bonus plan(the “Bonus Plan”) in which NEOs and substantially all other full-timeemployees participate. This plan provides cash compensation to participants,including NEOs, only if and to the extent that performance conditions set bythe Committee are met. Target bonuses for NEOs are set each year by theCommittee, generally at the same time that salary determinations are made. Indetermining target bonuses, which are established as a percentage of salary,the Committee considers several factors, including:

·                  Thetarget bonuses set, and actual bonuses paid, in recent years;

·                  Thedesire to ensure, as discussed above, that a substantial portion of totalcompensation is performance-based; and

·                  theadvice of FWC as to compensation practices at other companies in the Peer Group

After considering such factors, the Committee set the2006 target bonuses for the NEOs as follows: Mr. Thorne – 90% of salary, Mr.Kelsall – 75% of salary, Mr. Simpson – 60% of salary, Mr. Schnittman – 70% ofsalary, and Mr. Dearden – 80% of salary. Total 2006 target cash compensation for the NEOs was slightly above themedian of the Peer Group.

Payouts under the Bonus Plan for 2006 were determinedby comparing the revenue and earnings of the consolidated Company and itsdivisions to targets approved by the Committee in February 2006. The Committeebelieves that such metrics are viewed by investment analysts and stockholdersas important indicia of the Company’s success in delivering value tostockholders. In establishing the performance targets, the Committee consideredthe 2006 budget approved by the Board, as well as the Company’s longer-termgrowth objectives. The Committee strives to insure that the incentives underthe Bonus Plan are consistent with the budget and strategic goals establishedby the Board, that the goals are sufficiently ambitious to provide a meaningfulincentive and that bonus payments, assuming target levels of performance areattained, will be consistent with the overall NEO compensation programestablished by the Committee.  Under the2006 Bonus Plan, payouts with respect to particular financial metrics can rangefrom zero (if performance falls below 90% to 96% of goal depending upon thedivision and metric) to 150% of related target bonus (if performance exceedsgoal by 3% to 14%). Financial metrics and related payouts were established suchthat achievement of a goal for a particular revenue or earnings metric wouldresult in a payout ranging from 80% to 110% of related target opportunity (withthe exact amount again depending upon the division and metric).

For each division, the revenue and earnings metricswere weighted to reflect particular objectives identified for 2006, and thebonuses of divisional employees were based in part on the results of theconsolidated Company. For Messrs. Thorne, Kelsall and Simpson, bonuses weredetermined with respect to revenue and free cash flow of the consolidatedCompany.  Free cash flow, a non-GAAPmeasure of liquidity used by the Company in managing its business, is definedas EBIDTA plus stock-based compensation, less cash interest and capitalexpenditures.  Mr. Dearden’s bonus wasdetermined with respect to revenue and EBITDA of Datamark and, to a lesserdegree, the revenue and free cash flow of the consolidated Company.  Mr. Schnittman’s bonus was calculated basedupon the revenue and EBITDA of the eLearning division and, to a lesser extent,the revenue and free cash flow of the consolidated Company.  Based upon the Company’s 2006 results (andwithout taking into account the reclassification of Datamark as discontinuedoperations), Messrs. Thorne, Kelsall and Simpson received bonuses equal to2.93% of their respective targets, Mr. Dearden received a bonus equal to 0.88%of his target and Mr. Schnittman received a bonus equal to 59.9% of histarget.  The Committee reserves thediscretion to vary the objective results obtained under the Bonus Plan byreducing, not paying or increasing bonuses. The Committee did not exercise thisdiscretion in determining 2006 bonuses.

*Long-Term Incentive Compensation*

The Committee believes that long-term incentivecompensation is an important component of our program because it has the effectof retaining executives, aligning executives’ financial interests with theinterests of stockholders and rewarding the achievement of eCollege’s long-termstrategic goals. Payment of long-term incentive awards is based solely onCompany performance.

Equity awards to NEOs are made pursuant to our 1999Stock Plan, which provides for awards in the form of stock options, restrictedstock units (referred to herein interchangeably as “RSUs” or “share rights”),deferred stock units (“DSUs”) and stock appreciation rights (“SARs”). The formof award used to compensate executives has varied from time to time. TheCompany did not grant any equity incentives to NEOs in 2006. In 2005 and 2004,the Company granted SARs to a group of executives that included the NEOs; theSARs are discussed in more detail below. Prior to 2004, the Company awarded equity to NEOs in the form of stockoptions and RSUs.

Inmid-2004 the Committee decided to implement an equity compensation program thatwas designed to motivate executives to remain with the Company, achieve solidfinancial performance and contribute to the creation of sustained stockholdervalue over a five-year performance period by granting long-term awards withvalue based solely on appreciation in the market value of the Company’s commonstock. In designing the specifics of such program, the Committee consulted withFWC, which provided information concerning the value of total annual andlong-term compensation paid to executives in a peer group. Following itsdeliberations, the Committee decided, in lieu of annual grants of options orRSUs, to issue SARs with a five-year performance period and a total valueintended to approximate the value of five years of annual grants.  SARs were selected as the form of suchincentives

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primarily because theyare less dilutive to existing stockholders than options and RSUs.  On September 13, 2004, the Company grantedSARs with respect to 1.1 million shares of common stock to executives,including the NEOs and selected other key employees.  The SARs had a weighted average grant datefair value of $3.95.  Each grant isseparated into five different levels of base prices to reflect minimum requiredlevels of stockholder return over a five-year performance period.  The base price for the first level is 10%higher than the reference price approved by the Committee, which was the higherof (i) the closing stock price on September 10, 2004 and (ii) the averageclosing stock price over the period beginning on August 19, 2004 and ending onSeptember 10, 2004. The base price for each successive level is 10% higher thanthe previous level. Except in the case of a change in control of the Company,as described below, a participant will receive a distribution with respect tothe shares of common stock in each grant level only if the average closingprice of our common stock for the last quarter in the five-year term exceedsthe base price for such shares.  Eachparticipant may elect to receive a distribution with respect to 10% of the SARshe or she was granted after the third anniversary of the grant date and withrespect to an additional 10% after the fourth anniversary of the grant date. Inthe event of a change in control, participants will be entitled to receive adistribution with respect to a specified percentage of the shares granted (50%if the change in control had occurred on September 13, 2004, increasing by 1/36each month to 100% if the change of control occurs on or after September 13,2007), and will forfeit the right to receive a distribution with respect to theunvested portion of the shares. The number of shares of common stock issuedfollowing a change in control will be based on the difference between the baseprices and the share price as of the date the change in control occurs.

OnMarch 23, 2005, the Company granted substantially the same recipients,including the NEOs, additional SARs with respect to 1.1 million shares ofcommon stock.   On May 2, 2005, theCompany granted  SARs with respect to30,000 shares of common stock to Mr. Dearden in connection with his promotionto the position of Chief Executive Officer of Datamark. Such grants have thesame terms as the 2004 grants, including without limitation the same change incontrol vesting schedule, except that they have different base prices(established as premiums over the closing stock prices on March 22, 2005 andMay 2, 2005 respectively) and different five-year performance periods beginningon the grant dates.

Detailedinformation concerning SARs awarded to each NEO in 2004 and 2005 may be foundbelow in the table entitled “Outstanding Equity Awards at Fiscal Year-End”.

As discussed above, the SARs awarded to NEOs in 2004and 2005 were intended to motivate executives over a five-year period.  Accordingly, the Company does not intend toissue additional equity compensation to NEOs prior to September 2009, except inconnection with promotions or other special circumstances.

*Our Policies with Respect to theGranting of Equity Awards*

##### Equity awards may be granted by either the Committee or the Chief Executive Officer as itsdelegate. The Committee onlydelegates authority to grant equity awards in amounts not exceeding 5,000shares of common stock or $25,000.

*Perquisites and Other Benefits*

##### eCollege does not provide the NEOs anybenefits which are not offered to all other full time, non-exempt employees,nor does the Company provide any meaningful perquisites. NEOs who participatein the eCollege 401(k) Plan received Company matching contributions in 2006 inan amount equal to ten percent of participant contributions up to a maximum sixpercent of salary. The value of such contributions is included in the SummaryCompensation Table under the heading “All Other Compensation.”

*Post-Termination Compensation*

The employment agreements of the NEOs provide forpayments and in some cases other benefits, if the officer’s employmentterminates for a qualifying event or circumstance, such as being terminatedwithout “Cause” or resigning for “Good Reason,” as these terms are defined inthe agreements. The employment agreements of Messrs. Thorne, Kelsall andSimpson provide for additional payments and benefits upon a qualifying event orcircumstance after there has been a change of control of the Company.Additional information regarding such severance provisions, including adefinition of key terms and a quantification of benefits that would have beenreceived by our NEOs had termination occurred on December 29, 2006, is foundbelow under the heading  “PotentialPayments upon Termination or Change in Control.”

We believe that these severance arrangements serve tomaintain the focus of our senior executives and ensure that their attention,efforts and commitment are aligned with maximizing the success of eCollege andstockholder value. These arrangements help to avoid distractions involving executivemanagement that arise when the Board is considering possible strategictransactions involving a change in control and assure continuity of executivemanagement and objective input to the Board when it is considering anystrategic transaction.

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*Regulatory Considerations*

The tax and accounting consequences of utilizingvarious forms of compensation are considered when adopting new or modifyingexisting compensation. For example, under Section 162(m) of the InternalRevenue Code, publicly-held corporations may not take a tax deduction forcompensation in excess of $1 million paid to any of the Named ExecutiveOfficers during any fiscal year. There is an exception to the $1 millionlimitation for performance-based compensation meeting certain requirements. Tomaintain flexibility in compensating executives in a manner designed to promotevarying corporate goals, the Committee has not adopted a policy requiring allcompensation to be deductible under Section 162(m). However, the Committeeconsiders deductibility under Section 162(m) with respect to compensationarrangements for executives. We believe our annual and long-term incentivecompensation programs for executives qualify as performance-based compensationand are not subject to any deductibility limitations under Section 162(m).

*Stock Ownership Policy*

The Committee hasestablished a policy that senior executives, including the NEOs, must retain atleast 75% of all shares of common stock received as compensation or as aconsequence of exercising options or SARs received as compensation. Thepolicy excludes any shares of eCollege common stock purchased under the ESPP aswell as shares of common stock purchased by Datamark executives in conjunctionwith eCollege’s acquisition of Datamark in 2003.

**COMPENSATIONCOMMITTEE REPORT**

The Committee overseesthe Company’s executive compensation program on behalf of the Board ofDirectors. In fulfilling its oversight responsibilities, the Committee reviewedand discussed with management the Compensation Discussion and Analysis setforth in this Annual Report on Form 10-K. In reliance on such review and discussion the Committee recommended tothe Board that the Compensation Discussion and Analysis be included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006 andthe Company’s Proxy Statement to be filed in connection with the Company’s 2007Annual Meeting of Stockholders, each of which will be filed with the Securitiesand Exchange Commission.

**CompensationCommittee**

Robert H. Mundheim (Chair)

Christopher E. Girgenti

Jeri L. Korshak

**Compensation Committee Interlocks and Insider Participation**

The Committee is composedentirely of directors who are not our current or former employees, each of whommeets the applicable definition of “independent” in the current rules of theNasdaq Stock Market.  None of the membersof the Committee during fiscal 2006 (i) had any relationships requiringdisclosure by the Company under the SEC’s rules requiring disclosure of relatedparty transactions, or (ii) was an executive officer of a company of which anexecutive officer of the Company is a director.

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**Compensationof Executive Officers**

Thefollowing table sets forth information with respect to compensation earned bythe Named Executive Officers.

**SummaryCompensation Table**
| **Name and Principal Position**                              | ** ** | **Year** | ** ** | **Salary** | ** ** | **Stock  Awards  (1)** | ** ** | **Option  /SAR  Awards  (2)** | ** ** | **Non-Equity  Incentive Plan  Compensation (3)** | ** ** | **All Other  Compensation  (4)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------|------------|-----------|------------|
| Oakleigh Thorne,  Chairman and Chief Executive Officer                      |       | 2006     |       | $          | 392,708    | (5)                    | $          | 54,230                        |       | $                                                          | 475,842    |                                  | $          | 10,531    |       | — |   | $ | 933,311 |   |
| Douglas Kelsall,  President and Chief Operating Officer                     |       | 2006     |       | $          | 329,166    | (6)                    | $          | 28,265                        |       | $                                                          | 339,887    |                                  | $          | 7,349     |       | $ | 270 |   | $ | 704,937 |   |
| Reid Simpson,  Chief Financial Officer                                      |       | 2006     |       | $          | 267,083    | (7)                    | $          | 62,033                        |       | $                                                          | 203,932    |                                  | $          | 4,739     |       | $ | 660 |   | $ | 538,447 |   |
| Thomas Dearden,  President and Chief Executive Officer, Enrollment Division |       | 2006     |       | $          | 222,500    | (8)                    | $          | 276,813                       |       | $                                                          | 139,012    |                                  | $          | 1,580     |       | $ | 322 |   | $ | 640,227 |   |
| Matthew Schnittman,  President, eLearning Division                          |       | 2006     |       | $          | 222,083    | (9)                    | $          | 41,301                        |       | $                                                          | 135,955    |                                  | $          | 94,295    |       | $ | 268 |   | $ | 493,902 |   |

 

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(1)       The amounts in this columnreflect the expense recognized for financial statement reporting purposes forthe year ended December 31, 2006, in accordance with FAS 123(R), in connectionwith RSUs granted as part of the long-term incentive components of ourcompensation program described above under “Compensation Discussion andAnalysis – Long-term Incentive Compensation.” The assumptions used incalculating these amounts are set forth in Note 2 to the Consolidated FinancialStatements included in Item 8 of this Annual Report on Form 10-K.  Compensation cost is generally recognizedover the vesting period of the award.

(2)       Theamounts in this column reflect the expense recognized for financial statementreporting purposes for the year ended December 31, 2006, in accordance with FAS123(R), in connection with SARs granted as part of the long-term incentivecomponents of our compensation program described above under “CompensationDiscussion and Analysis – Long-term Incentive Compensation.” The assumptionsused in calculating these amounts are set forth in Note 2 to the ConsolidatedFinancial Statements  included in Item 8of this Annual Report on Form 10-K. Compensation cost is generally recognized over the vesting period of theaward.

(3)       Theamounts in this column reflect performance-based cash incentive awards for 2006that were determined by the Committee at its March 2, 2007 meeting.  A portion ($26,995) of Mr. Schnittman’s awardwas paid in September 2006; all other awards will be paid shortly after thefiling of this Annual Report on Form 10-K. See “Compensation Discussion and Analysis – Annual Compensation Programs– Bonus Plan.”

(4)         Theamounts in this column reflect Company contributions to the eCollege.com 401(k)Plan.

(5)         OnJanuary 1, 2006, the annual salary for Mr. Thorne was $375,000. On April 1,2006, a regular annual salary increase brought his salary to $400,000.

(6)         OnJanuary 1, 2006, the annual salary for Mr. Kelsall was $315,000. On April 1,2006, a regular annual salary increase brought his salary to $335,000.

(7)          OnJanuary 1, 2006, the annual salary for Mr. Simpson was $260,000. On April 1,2006, a regular annual salary increase brought his salary to $270,000.

(8)          OnJanuary 1, 2006, the annual salary for Mr. Dearden was $215,000. On April 1,2006, a regular annual salary increase brought his salary to $225,000.

(9)          OnJanuary 1, 2006, the annual salary for Mr. Schnittman was $215,000. On April 1,2006, a regular annual salary increase brought his salary to $225,000.

**2006Grants of Plan-Based Awards**
|                    | ** ** | **Estimated Future Payouts Under Non-Equity  Incentive Plan Awards (1)(2)** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Threshold  ($)**                                                                                        | ** ** | **Target  ($)** | ** ** | **Maximum  ($)** | ** ** |
| Oakleigh Thorne    |       | -0-                                                                                                       |       | 360,000 |   | 540,000 |   |
| Douglas Kelsall    |       | -0-                                                                                                       |       | 251,250 |   | 376,875 |   |
| Reid Simpson       |       | -0-                                                                                                       |       | 162,000 |   | 243,000 |   |
| Thomas Dearden     |       | -0-                                                                                                       |       | 180,000 |   | 270,000 |   |
| Matthew Schnittman |       | -0-                                                                                                       |       | 135,000 |   | 202,500 |   |

 

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(1) Payouts with respect to 2006 performance have beendetermined. See the column entitled “Non-Equity Incentive Plan Compensation”and the related footnote in the Summary Compensation Table, as well as thediscussion earlier in this Item 11 under the heading “Compensation Discussionand Analysis – Annual Compensation – Bonus Plan.”

(2) The Committee reserves the discretion to vary theobjective results obtained under the Bonus Plan by reducing, not paying orincreasing bonuses. The Committee did not exercise this discretion in determining2006 bonuses.

**EmploymentAgreements**

The Company has enteredinto employment agreements with the Named Executive Officers. On August 10,2004, the Company entered into agreements with Messrs. Thorne, Kelsall andSimpson. Mr. Thorne’s agreement provides for an annual salary ($400,000 for2006) and bonus potential of 90% of base salary, or $360,000. Mr. Kelsall’sagreement provides for an annual salary ($335,000 for 2006) and bonus potentialof 75% of base salary, or $251,250. Mr. Simpson’s agreement provides for anannual salary (270,000 for 2006) and bonus potential of 60% of base salary, or$162,000. Each agreement also provides that the employee is entitled to receivea specified percentage of the equity pool established under a new long-term equityprogram as approved by the Committee. The Committee subsequently approved along-term stock incentive program pursuant to which each of the Named ExecutiveOfficers received SARs in 2004 and 2005 as described above under “CompensationDiscussion and Analysis – Mix of Compensation Components – Long-term IncentiveCompensation.” The agreements also provide that future long-term equitycompensation will be determined by the Committee.

Upon the closing of theDatamark acquisition, the Company entered into an employment agreement with Mr.Dearden dated September 15, 2003. The agreement provides for an annual basesalary ($225,000 for 2006) and a target bonus of 80% of base salary, or$180,000. The agreement also provides that Mr. Dearden will receive 50,000 sharerights, which were issued to him on October 31, 2003.

On July 31, 2002, theCompany entered into an employment agreement with Mr. Schnittman. The agreementprovides for an annual salary ($225,000 in 2006) and bonus potential of 60% ofbase salary, or $135,000. The agreement also provides that Mr. Schnittmanmay receive equity compensation from time to time as determined by theCommittee or the Chief Executive Officer.

Each of the contractsbetween the Company and its Named Executive Officers includes the followingterms:

·                  Standardbenefits including vacation days, participation in a flexible reimbursementplan and medical/dental insurance;

·                  Employmentmay be terminated by eCollege or employee at any time and for any reason;

·                  Non-competitionand non-solicitation provisions ranging from six months to two years from thedate of separation;

·                  Confidentialityprovisions;

·                  Assignmentof ideas and inventions; and

·                  Nondisparagementprovisions.

In addition, each employment contract between eCollegeand the NEOs contains provisions that require severance payments if the NEO’semployment terminates under certain circumstances. For details of suchprovisions, see below under the heading “Potential Payments upon Terminationand Change in Control”.

The Company did not grantany equity awards to Named Executive Officers in the year ended December 31,2006.

**2006Outstanding Equity Awards at Fiscal Year-End**
| ** **      | ** ** | **Options/SARs**                                                                                     | ** ** | **Awards**                                                                                             | ** ** |
|-----------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| **Name**        | ** ** | **Number of  Securities  Underlying  Unexercised  Options/SARs (#)  Exercisable (1)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options/SARs (#)  Unexercisable (2)** | ** ** | **Option /SARs  Exercise /Base  Price ($)** | ** ** | **Option /SAR  Expiration Date** | ** ** | **Number of  Shares or Units  of Stock That  Have Not  Vested (#)** | ** ** | **Market Value of  Shares or Units  of Stock That  Have Not Vested  ($)(3)** | ** ** |
| Oakleigh Thorne |       | 10,695                                                                                               |       |                                                                                                   |       | 3.85 |   | 7/18/2012 |   | — |   | — |   |
|            |       | 27,665                                                                                               | (4)        |                                                                                                   |       |   |   |   |   |   |   |   |   |
|            |       |                                                                                                 |       | 42,000                                                                                                 |       | 9.72 |   | 9/13/2009 |   |   |   |   |   |
|            |       |                                                                                                 |       | 42,000                                                                                                 |       | 10.70 |   | 9/13/2009 |   |   |   |   |   |
|            |       |                                                                                                 |       | 42,000                                                                                                 |       | 11.77 |   | 9/13/2009 |   |   |   |   |   |
|            |       |                                                                                                 |       | 42,000                                                                                                 |       | 12.94 |   | 9/13/2009 |   |   |   |   |   |
|            |       |                                                                                                 |       | 42,000                                                                                                 |       | 14.24 |   | 9/13/2009 |   |   |   |   |   |

 

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|        |   |   |   | 42,000 |   | 12.672 |   | 3/23/2010 |   |   |   |   |   |
|--------|--------|--------|--------|--------|--------|--------|--------|-----------|--------|--------|--------|--------|--------|
|   |   |   |   | 42,000 |   | 13.939 |   | 3/23/2010 |   |   |   |   |   |
|        |   |   |   | 42,000 |   | 15.333 |   | 3/23/2010 |   |   |   |   |   |
|   |   |   |   | 42,000 |   | 16.866 |   | 3/23/2010 |   |   |   |   |   |
|        |   |   |   | 42,000 |   | 18.553 |   | 3/23/2010 |   |   |   |   |   |
|   |   |   |   |   |   |   |   |      |   |   |   |   |   |

 
| Douglas Kelsall     |   | 133,333 |   |   |   | 9.00   |   | 9/16/2009  |   | — |   | —  |   |
|---------------------|--------|---------|--------|--------|--------|--------|--------|------------|--------|--------|--------|---------|--------|
|                |   | 38,888  |   |   |   | 9.00   |   | 12/9/2009  |   |   |   |    |   |
|                |   | 9,723   |   |   |   | 2.875  |   | 6/19/2010  |   |   |   |    |   |
|                |   | 50,000  |   |   |   | 6.313  |   | 10/19/2010 |   |   |   |    |   |
|                |   | 25,000  |   |   |   | 2.85   |   | 6/20/2011  |   |   |   |    |   |
|                |   | 30,000  |   |   |   | 3.75   |   | 7/17/2012  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 9.72   |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 10.70  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 11.77  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 12.94  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 14.24  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 12.672 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 13.939 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 15.333 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 16.866 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 30,000 |   | 18.553 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   |   |   |   |   |       |   |   |   |    |   |
| Reid Simpson        |   | —  |   | 18,000 |   | 9.72   |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 10.70  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 11.77  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 12.94  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 14.24  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 12.672 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 13.939 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 15.333 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 16.866 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 18,000 |   | 18.553 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   |   |   |   |   |       |   | 1,668  | (5)    | 26,104  |   |
|                |   |    |   |   |   |   |   |       |   |   |   |    |   |
| Thomas Dearden      |   | —  |   | 9,000  |   | 9.72   |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 10.70  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 11.77  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 12.94  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 14.24  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 12.672 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 13.939 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 15.333 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 16.866 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 9,000  |   | 18.553 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 6,000  | (6)    | 12.166 |   | 5/2/2010   |   |   |   |    |   |
|                |   |    |   | 6,000  | (6)    | 13.383 |   | 5/2/2010   |   |   |   |    |   |
|                |   |    |   | 6,000  | (6)    | 14.721 |   | 5/2/2010   |   |   |   |    |   |
|                |   |    |   | 6,000  | (6)    | 16.193 |   | 5/2/2010   |   |   |   |    |   |
|                |   |    |   | 6,000  | (6)    | 17.812 |   | 5/2/2010   |   |   |   |    |   |
|                |   |    |   |   |   |   |   |       |   | 18,751 | (7)    | 293,453 |   |
|                |   |    |   |   |   |   |   |       |   |   |   |    |   |
| Matthew  Schnittman |   | 6,666   |   |   |   | 9.00   |   | 7/31/09    |   |   |   |    |   |
|                |   | 3,334   |   |   |   | 9.00   |   | 12/9/09    |   |   |   |    |   |
|                |   | 5,000   |   |   |   | 7.00   |   | 3/30/10    |   |   |   |    |   |
|                |   | 5,000   |   |   |   | 2.875  |   | 6/19/10    |   |   |   |    |   |
|                |   | 35,000  |   |   |   | 2.80   |   | 6/24/11    |   |   |   |    |   |
|                |   | 10,000  |   |   |   | 3.75   |   | 7/17/12    |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 9.72   |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 10.70  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 11.77  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 12.94  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 14.24  |   | 9/13/2009  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 12.672 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 13.939 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 15.333 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 16.866 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   | 12,000 |   | 18.553 |   | 3/23/2010  |   |   |   |    |   |
|                |   |    |   |   |   |   |   |       |   | 762    | (8)    | 11,925  |   |

 

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(1)          Allsecurities shown in this column underlay options.

(2)          Allsecurities shown in this column underlay SARs. SARs were granted to the Named Executive Officers on September 13, 2004and March 23, 2005 and are exercisable on September 13, 2009 and March 23,2010, respectively. At the exercise date, if the average fair market value pershare of common stock (the “Performance Price”) for the three month periodpreceding the exercise date (the “Performance Period”) exceeds the base pricefor a SAR, then the recipient will be entitled to receive a distribution of

69

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shares of common stock witha value calculated by dividing the excess of the Performance Price over thebase price per SAR by the Performance Price. The recipient may elect to receive10% of his distribution on each of the third and fourth anniversaries of thegrant date. Subject to vesting provisions, the distributions will accelerateupon the occurrence of a change in control.

(3)       Awardsshown in this column are RSUs, each of which entitles the holder to one shareof common stock upon the completion of a specified vesting period (three yearsfor Messrs. Simpson and Schnittman and four years for Mr. Dearden).  Market value was calculated by multiplyingthe number of unvested shares by the closing price of the common stock reportedfor December 29, 2006 on the Nasdaq Global Market.

(4)         Representsvested options granted to Blumenstein/Thorne Information Partners I, L.P. (“BTIP”),an investment fund affiliated with Mr. Thorne, in lieu of salary, benefitsand other compensation to Mr. Thorne in 2000 and 2001.

(5)       Thisaward will vest 834 RSUs in each of February and May 2007.

(6)          OnMay 2, 2005 Mr. Dearden was granted an additional award of 30,000 stockappreciation rights which are exercisable May 2, 2010. At such time, if thePerformance Price for the Performance Period exceeds the base price for SAR,then the recipient will be entitled to receive a distribution of shares ofcommon stock with a value calculated by dividing the excess of the PerformancePrice over the base price per SAR by the Performance Price. Mr. Dearden mayelect to receive 10% of his distribution on each of the third and fourthanniversaries of the grant date. Subject to vesting provisions, thedistributions will accelerate upon the occurrence of a change in control.

(7)         Thisaward will vest in nine monthly installments of 2,083 RSUs from January 2007through September 2007.

(8)         This awardwill vest 381 RSUs in each of January and April 2007.

**2006Option Exercises and Stock Vested**

|                    | ** ** | **Option Awards**                                              | ** ** | **Stock Awards**                              | ** ** |
|--------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Name**           | ** ** | **Number of Shares  Acquired on  Exercise (#)** | ** ** | **Value Realized on  Exercise ($)** | ** ** | **Number of Shares  Acquired on  Vesting (#)** | ** ** | **Value Realized  on Vesting ($)(1)** | ** ** |
| Oakleigh Thorne    |       | 0                                                                   |       | N/A                                                |       | 11,627 |   | 232,884 |   |
| Douglas Kelsall    |       | 0                                                                   |       | N/A                                                |       | 7,369 |   | 147,614 |   |
| Reid Simpson       |       | N/A                                                                 |       | N/A                                                |       | 3,333 |   | 67,182 |   |
| Thomas Dearden     |       | N/A                                                                 |       | N/A                                                |       | 25,000 |   | 467,192 |   |
| Matthew Schnittman |       | 0                                                                   |       | N/A                                                |       | 3,391 |   | 67,279 |   |

 

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(1) All awards shown in this column are RSUs.  Value realized was calculated by multiplyingthe number of vested shares by the closing price of the common stock reportedfor the vesting date on the Nasdaq Global Market.

**Potential Payments UponTermination and Change in Control**

Asnoted above, we have entered into employment agreements with our NamedExecutive Officers that provide for payments and other benefits in connectionwith the officer’s termination under certain circumstances. A description ofthe relevant terms of these agreements follows:

*SeveranceProvisions*

Theemployment agreements provide for certain payments and benefits, as describedin the table below, upon the termination of the employment of a Named ExecutiveOfficer. The Named Executive Officer’s rights upon a termination of hisemployment depend upon the circumstances of the termination. Central to anunderstanding of such rights is an understanding of the definitions of  “Cause,” “Good Reason” and “Change in Control” that are used in some or all ofthe employment agreements. For purposes of such agreements:

·                  Wehave “*Cause*” to terminate the Named ExecutiveOfficer if he has engaged in any of a list of specified activities,including:  willfully failing to complywith the Company’s policies, standards and regulations; engaging in fraud,dishonesty or any other act of material misconduct; or failing to perform anymaterial provision of the employment agreement.

·                  Inthe case of Messrs. Thorne, Kelsall, Simpson and Dearden, the Named ExecutiveOfficer has “*Good Reason*” to terminate hisemployment (and thereby gain access to the payments and benefits describedbelow) if we engage in any of a list of specified activities, including:materially breaching the employment agreement; materially lessening the officer’srole, duties or status; relocating the officer’s principal office; or assigningto the officer duties materially inconsistent with his position.

·                  A“*Change in Control*” means a change inownership or control of eCollege effected through any of the followingtransactions:

(i)  amerger, consolidation or reorganization approved by the Company’s stockholders,unless securities representing more than 50% of the total combined voting powerof the voting securities of the successor corporation are immediatelythereafter beneficially owned, directly or indirectly and in substantially thesame proportion, by the persons who beneficially owned the Company’s outstandingvoting securities immediately prior to such transaction,

70

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(ii)  anystockholder-approved transfer or other disposition of all or substantially allof the Company’s assets, or

(iii)  theacquisition, directly or indirectly by any person or related group of persons(other than the Company or a person that directly or indirectly controls, iscontrolled by, or is under common control with, the Company), of beneficialownership (within the meaning of Rule 13d-3 of the Exchange Act) of securitiespossessing more than 50% of the total combined voting power of the Company’soutstanding securities pursuant to a tender or exchange offer made directly tothe Company’s stockholders which the Board recommends such stockholders accept.

Theemployment agreements require, as a precondition to the receipt of thesepayments, that the Named Executive Officer sign a release in which he waivesall claims that he might have against the Company and certain associatedindividuals and entities. They also include: nonsolicit provisions that apply for two years following termination ofemployment in the case of Mr. Dearden and one year in the case of the otherNamed Executive Officers; non-compete provisions that apply for two yearsfollowing termination for Mr. Dearden, one year for Messrs. Thorne, Kelsall andSimpson and six months for Mr. Schnittman; and confidentiality provisions thatwould apply to all Named Executive Officers for an unlimited period of timefollowing termination of employment.

**PotentialPayments and Benefits upon Termination**

Thefollowing table sets forth the payments and benefits to which each NEO would beentitled in the event of a termination of his employment as of December 29,2006 under the circumstances specified in each column.  For certain NEOs, payments and benefits upontermination without cause or for good reason vary depending upon whethertermination takes place prior to or in connection with or after a Change inControl, as shown in the first two columns of the table.
| ** **                                        | ** ** | **Without Cause or For Good  Reason** | ** ** | ** **                         | ** ** | ** **         | ** ** | ** **                | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------|------------|--------------------|------------|---------------------------|------------|
| **Executive**                                     | ** ** | **Prior to  Change in  Control**                | ** ** | **After  Change in  Control** | ** ** | **For Cause** | ** ** | **Without  Good  Reason** | ** ** | **Death or  Disability** | ** ** |
| Oakleigh Thorne                                   |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Unpaid base salary through date of termination    |       | $                                                         | 16,667     |                               | $          | 16,667             |       | $                         | 16,667     |   | $ | 16,667 |   | $ | 16,667 |   |
| Accrued but unpaid vacation                       |       | 7,692                                                     |       | 7,692                              |       | —             |       | —                    |       | — |   |
| Earned but unpaid annual bonus (1)                |       | 10,531                                                    |       | 10,531                             |       | —             |       | 10,531                    |       | 10,531 |   |
| Payment equal to multiple of base salary (2)      |       | 400,000                                                   |       | 800,000                            |       | —             |       | —                    |       | 400,000 |   |
| Payment equal to target annual bonus              |       | 360,000                                                   |       | 360,000                            |       | —             |       | —                    |       | — |   |
| Continued medical, dental and vision benefits (3) |       | 7,113                                                     |       | 14,226                             |       | —             |       | —                    |       | — |   |
| Accelerated vesting under stock plans             |       | -0-                                                       | (4)        | 877,946                            | (5)        | —             |       | —                    |       | — |   |
| Excise tax and gross-up                           |       | —                                                    |       | -0-                                | (6)        | —             |       | —                    |       | — |   |
| TOTAL                                             |       | $                                                         | 802,003    |                               | $          | 2,087,062          |       | $                         | 16,667     |   | $ | 27,198 |   | $ | 427,198 |   |
|                                              |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Douglas Kelsall                                   |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Unpaid base salary through date of termination    |       | $                                                         | 13,958     |                               | $          | 13,958             |       | $                         | 13,958     |   | $ | 13,958 |   | $ | 13,958 |   |
| Accrued but unpaid vacation                       |       | 6,442                                                     |       | 6,442                              |       | —             |       | —                    |       | — |   |
| Earned but unpaid annual bonus (1)                |       | 7,349                                                     |       | 7,349                              |       | —             |       | 7,349                     |       | 7,349 |   |
| Payment equal to multiple of base salary (2)      |       | 335,000                                                   |       | 670,000                            |       | —             |       | —                    |       | 335,000 |   |
| Payment equal to target annual bonus              |       | 251,250                                                   |       | 251,250                            |       | —             |       | —                    |       | — |   |
| Continued medical, dental and vision benefits (3) |       | 7,113                                                     |       | 14,226                             |       | —             |       | —                    |       | — |   |
| Accelerated vesting under stock plans             |       | -0-                                                       | (4)        | 627,104                            | (5)        | —             |       | —                    |       | — |   |
| Excise tax and gross-up                           |       | —                                                    |       | -0-                                | (6)        | —             |       | —                    |       | — |   |
| TOTAL                                             |       | $                                                         | 621,112    |                               | $          | 1,590,329          |       | $                         | 13,958     |   | $ | 21,307 |   | $ | 356,307 |   |
|                                              |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Reid Simpson                                      |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Unpaid base salary through date of termination    |       | $                                                         | 11,250     |                               | $          | 11,250             |       | $                         | 11,250     |   | $ | 11,250 |   | $ | 11,250 |   |
| Accrued but unpaid vacation                       |       | 5,192                                                     |       | 5,192                              |       | —             |       | —                    |       | — |   |
| Earned but unpaid annual bonus (1)                |       | 4,739                                                     |       | 4,739                              |       | —             |       | 4,739                     |       | 4,739 |   |
| Payment equal to multiple of base salary (7)      |       | 270,000                                                   |       | 405,000                            |       | —             |       | —                    |       | 270,000 |   |
| Payment equal to target annual bonus              |       | 162,000                                                   |       | 162,000                            |       | —             |       | —                    |       | — |   |
| Continued medical, dental and vision benefits (8) |       | 7,113                                                     |       | 10,670                             |       | —             |       | —                    |       | — |   |
| Accelerated vesting under stock plans             |       | 26,104                                                    | (3)        | 402,367                            | (5)        | —             |       | —                    |       | — |   |
| Excise tax and gross-up                           |       | —                                                    |       | -0-                                | (6)        | —             |       | —                    |       | — |   |
| TOTAL                                             |       | $                                                         | 486,398    |                               | $          | 1,001,218          |       | $                         | 11,250     |   | $ | 15,989 |   | $ | 285,989 |   |
|                                              |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Tom Dearden                                       |       |                                                      |       |                               |       |               |       |                      |       |   |   |
| Unpaid base salary through date of termination    |       | $                                                         | 9,375      |                               | $          | 9,375              |       | $                         | 9,375      |   | $ | 9,375 |   | $ | 9,375 |   |
| Accrued but unpaid vacation                       |       | 32,033                                                    |       | 32,033                             |       | 32,033             |       | 32,033                    |       | 32,033 |   |

 

71

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| Earned but unpaid annual bonus (1)             |   | 1,580   |    | 1,580   |   | —  |   | — |   | 1,580  |   |
|------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|--------|--------|--------|--------|
| Payment equal to multiple of base salary (9)   |   | 112,500 |    | 112,500 |   | —  |   | — |   | — |   |
| Accelerated vesting under stock plans          |   | 293,453 | (10)    | 516,657 | (5)    | —  |   | — |   | — |   |
| TOTAL                                          |   | $       | 448,941 |    | $      | 672,145 |   | $      | 41,408 |   | $      | 41,408 |   | $ | 42,988 |   |
|                                           |   |    |    |    |   |    |   |   |   |   |   |
| Matthew  Schnittman                            |   |    |    |    |   |    |   |   |   |   |   |
| Unpaid base salary through date of termination |   | $       | 9,375   |    | $      | 9,375   |   | $      | 9,375  |   | $      | 9,375 |   | $ | 9,375 |   |
| Accrued but unpaid vacation                    |   | 4,327   |    | 4,327   |   | 4,327   |   | 4,327  |   | 4,327  |   |
| Payment equal to multiple of base salary (9)   |   | 112,500 |    | 112,500 |   | —  |   | — |   | — |   |
| Accelerated vesting under stock plans          |   | —  |    | 262,767 | (5)    | —  |   | — |   | — |   |
| TOTAL                                          |   | $       | 126,202 |    | $      | 388,969 |   | $      | 13,702 |   | $      | 13,702 |   | $ | 13,702 |   |

 

----

| (1)  | Payment of bonuses is based upon performance through  termination date as compared to targets.                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Messrs. Thorne and Kelsall are entitled to receive  one year’s salary, payable on normal payroll dates, if they are terminated  without cause or resign for good reason prior to the occurrence of a Change  in Control. If they are terminated without cause or resign for good reason  within two years following a Change in Control, they are entitled to receive  two years’ salary in a lump sum.                                                                                                                            |
| (3)  | Messrs. Thorne and Kelsall are entitled to the  continuation of their medical benefits, at the Company’s expense, for one  year if they are terminated without cause or resign for good reason prior to  the occurrence of a Change of Control and for two years if they are  terminated without cause or resign for good reason within two years following  a Change in Control.                                                                                                                                                       |
| (4)  | The employment agreements of Messrs. Thorne, Kelsall  and Simpson provide that all unvested equity incentives other than SARs will  vest if they are terminated without cause or resign for good reason. Messrs.  Thorne and Kelsall had no unvested equity incentives other than SARs as of  December 29, 2006. The amount shown for Mr. Simpson is calculated by  multiplying the number of shares underlying unvested RSUs by the closing  price of the common stock on December 29, 2006.                                                |
| (5)  | Under the 1999 Stock Plan and award agreements, all  unvested equity incentives vest upon a change in control, irrespective of  whether the participant remains employed thereafter. Amounts shown are  calculated (i) with respect to RSUs, by multiplying the number of unvested  shares by the closing stock price on December 29, 2006 and (ii) with respect  to each SAR, by subtracting the base price of such SAR from the closing stock  price on December 29, 2006.                                                                 |
| (6)  | The employment agreements of Messrs. Thorne, Kelsall  and Simpson provide that if payments to the executive in connection with or  following a Change in Control result in the imposition of an excise tax upon  the executive under the Internal Revenue Code of 1986, as amended, the  executive will be entitled to an additional payment from the Company in an  amount such that the executive will be made whole on an after-tax basis. No  excise tax would have been imposed had a change in control occurred on  December 29, 2006. |
| (7)  | Mr. Simpson is entitled to receive one year’s  salary, payable on normal payroll dates, if he is terminated without cause or  resigns for good reason prior to the occurrence of a Change in Control. If he  is terminated without cause or resigns for good reason within two years  following a Change in Control, he is entitled to receive eighteen months’  salary in a lump sum.                                                                                                                                             |
| (8)  | Mr. Simpson is entitled to the continuation of his  medical benefits, at the Company’s expense, for one year if he is terminated  without cause or resigns for good reason prior to the occurrence of a Change  in Control and for eighteen months if he is terminated without cause or  resigns for good reason within two years following a change in control.                                                                                                                                                                        |
| (9)  | Messrs. Dearden and Schnittman are entitled to  receive six months’ salary if they are terminated without cause or resign for  good reason.                                                                                                                                                                                                                                                                                                                                                                                             |
| (10) | Mr. Dearden’s employment agreement provides that if  he is terminated without cause or resigns for good reason, his unvested share  rights will vest upon termination. The amount shown is calculated by  multiplying the number of unvested shares by the closing stock price on  December 29, 2006.                                                                                                                                                                                                                                   |

 

*PotentialPayments and Benefits Upon or Following the Occurrence of a Change in Control*

Additional Salary andBenefits Payable upon Termination. The employment agreementsof Messrs. Thorne and Kelsall provide that in the event they are terminatedwithout cause or resign for good reason within two years following a change in control, they will be entitled toreceive an additional year’s salary ($400,000 for Mr. Thorne and $335,000 forMr. Kelsall as of December 31, 2006)  asseverance. In addition, their medical benefits will continue for an additionalyear (such continued benefit would have a value of $7,112 for each of Messrs.Thorne and Kelsall as of December 31, 2006). Mr. Simpson’s employment agreementprovides for an additional six months’ salary ($135,000 as of December 31,2006) and continuation of medical benefits for an additional six months (valuedat $3,556 as of December 31, 2006) if he is terminated without cause or resignsfor good reason within two years following a Change in Control.  The total payments and benefits payable insuch circumstance are shown in the second column of the table above.

Acceleration of EquityIncentives. In the event of a Change in Control, the 1999Stock Plan and award agreements provide that the participant will be entitledto full vesting acceleration of unvested stock options, RSUs and SARs,irrespective of whether the

72

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participant remains employed by the Companythereafter.  See the table above andfootnote (5) thereto.

Tax Gross-Up.  If payments following a Change in Controlresult in the imposition of an excise tax on Mr. Thorne, Mr. Kelsall or Mr.Simpson, such executive will be entitled to a make-whole payment from theCompany.  See the table above andfootnote (6) thereto.

**DirectorCompensation**

Allnon-employee directors are reimbursed for their reasonable travel expensesincurred in connection with attending the Company’s meetings.

On February 15, 2005 theBoard of Directors approved the eCollege.com 2005 Outside DirectorsCompensation Plan (the “Directors Compensation Plan”), which provides for thepayment, beginning in 2005, of a $15,000 annual cash retainer to eachnon-employee director for services performed as a member of the Board ofDirectors. The Directors Compensation Plan also provides for the payment,beginning in 2005, of an annual cash retainer to each non-employee director foreach committee of the Board of Directors on which he or she serves, as follows:

|                             | ** ** | **Committee Member** | ** ** | **Committee Chair** | ** ** |
|-----------------------------|------------|---------------------------|------------|--------------------------|------------|
| **Audit  Committee**        |       | $                         | 7,500      |                     | $          | 15,000 |   |
| **Compensation  Committee** |       | $                         | 5,000      |                     | $          | 10,000 |   |
| **Nominating Committee**    |       | $                         | 5,000      |                     | $          | 7,500 |   |

 

Each non-employee director may elect to defer all ora portion of the annual cash retainers payable to him or her in a particularyear and in such case the director will receive a grant of deferred stock unitsthat are issued pursuant to the Stock Issuance Program established under the1999 Stock Incentive Plan. The number of deferred stock units credited to anon-employee director’s stock account will equal the amount of compensation heor she has deferred divided by the fair market value of a share of common stockon the day the compensation would otherwise have been paid to the non-employeedirector.

In addition to the cashretainers, the Directors Compensation Plan provides that each individual whobecomes a non-employee director on or after January 1, 2005 will receive agrant of 4,000 deferred stock units (an “Initial Grant”) on the first businessday coinciding with or immediately following the date his or her service on theBoard of Directors commences. The Company’s current non-employee directors willnot receive such grants. The Directors Compensation Plan also provides that onthe first business day in January of each year, each non-employee director willreceive a grant (an “Annual Grant”) of 2,000 deferred stock units. With respectto the Company’s current non-employee directors, Mr. Mundheim received hisfirst Annual Grant in January 2006 and Messrs. Blumenstein and Girgenti and Ms.Korshak will begin to receive Annual Grants in 2007. Individuals who becomeoutside directors after January 1, 2005 will receive Annual Grants beginning inthe year after the year in which service as a member of the Board of Directorscommenced. Initial Grants vest in monthly increments over a three-year period,subject to acceleration upon a change in control of the Company, and AnnualGrants vest immediately upon grant.

**Non-EmployeeDirector Compensation Table**

| Name                  | ** ** | **Fees Earned or  Paid in Cash ($)  (1)** | ** ** | **Option  Awards ($) (2)** | ** ** | **Stock Awards  ($) (3)** | ** ** | **Total ($)** | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------|------------|
| Jack Blumenstein      |       | 22,500                                                             |       | 8,723                                |       | 31,300                              |       | 62,523             |       |
| Christopher  Girgenti |       | 35,000                                                             |       | 8,723                                |       | 31,300                              |       | 75,023             |       |
| Jeri Korshak          |       | 27,500                                                             |       | 7,056                                |       | 31,300                              |       | 66,856             |       |
| Robert Mundheim       |       | 37,500                                                             |       | 550                                  |       | 69,520                              |       | 107,570            |       |

 

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(1)         The amounts in thiscolumn represent cash retainers paid to non-employee directors for service onthe Board and its committees. See “Compensation Discussion and Analysis –Director Compensation.”

(2)         The amounts in thiscolumn reflect the expense recognized for financial statement reportingpurposes for the year ended December 31, 2006, in accordance with FAS 123(R),in connection with options granted to non-employee directors in years prior to2006. The assumptions used in calculating these amounts are set forth in Note 2to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.  Compensation cost for options is generallyrecognized over the vesting period of the award. As of December 31, 2006,36,126 options issued to Mr. Blumenstein as compensation for his services as adirector were outstanding and exercisable with an exercise price of $4.00 pershare; 44,964 options issued to Mr. Girgenti as compensation were outstandingand exercisable with 36,126 options at an exercise price of $4.00 per share,7,614 options at an exercise price of $3.50 per share and 1,224 options at anexercise price of $18.38 per share; 67,331 options issued to Ms. Korshak ascompensation were outstanding and exercisable with 5,806 options at an exerciseprice of $1.29 per share, 5,555 options at an exercise price of $1.35 pershare, 50,078 options at an exercise price of $2.95 per share, 5,076 options atan exercise price of $3.50 per share and 816 options at an exercise price of$18.38 per share; and 18,838 options issued to Mr. Mundheim as compensationwere outstanding and exercisable with 10,000 options at an

73

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exercise price of $3.85 per share, 7,614 options at an exercise priceof $3.50 per share and 1,224 options at an exercise price of $18.38 per share.

(3)         The amounts in thiscolumn reflect the expense recognized for financial statement reportingpurposes for the year ended December 31, 2006, in accordance with FAS 123(R),in connection with DSUs awarded to non-employee directors as discussed under “CompensationDiscussion and Analysis – Director Compensation.” The assumptions used incalculating these amounts are set forth in Note 2 to the Consolidated FinancialStatements  included in Item 8 of thisAnnual Report on Form 10-K.  Compensationcost for DSUs is based on the intrinsic value of the award, recognized over therequisite service period and remeasured at each reporting date. Amounts shownfor all non-employee directors include expense associated with DSU grants thatoccurred in January 2007 but for which the service period began in January 2006under applicable GAAP. As of December 31, 2006, vested DSUs issued to Mr. Mundheimrepresenting 2000 shares of common stock were outstanding.

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**ITEM12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

The followingtable sets forth certain information known to the Company with respect to thebeneficial ownership of its common stock as of March 29, 2007 (unless otherwisestated in the footnotes) by (i) each of the Named Executive Officers,(ii) each director, (iii) each stockholder that the Company knows isthe beneficial owner of more than 5% of the common stock, and (iv) allexecutive officers and directors as a group. Unless otherwise indicated, eachof the security holders has sole voting and investment power with respect tothe shares beneficially owned, subject to community property laws, whereapplicable. We received the information with respect to beneficial ownershipfrom the respective stockholders and from reports filed with the SEC by certainstockholders.
| **Name of Beneficial Owner**                  | ** ** | **Amount and Nature of  Beneficial  Ownership** | ** ** | **Percentage  of Common  Stock** | ** ** |   |
|--------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------|------------|--------|
| Oakleigh Thorne                                              |       | 3,939,495                                                      | (1)        | 17.6                                  | %          |
| Douglas H. Kelsall                                           |       | 386,865                                                        | (2)        | 1.7                                   | %          |
| Reid E. Simpson                                              |       | 13,201                                                         | (3)        | *                                     |       |
| Thomas L. Dearden                                            |       | 59,260                                                         | (4)        | *                                     |       |
| Matthew T. Schnittman                                        |       | 76,377                                                         | (5)        | *                                     |       |
| Jack W. Blumenstein                                          |       | 2,668,074                                                      | (6)        | 11.9                                  | %          |
| Christopher E. Girgenti                                      |       | 50,437                                                         | (7)        | *                                     |       |
| Jeri L. Korshak                                              |       | 71,180                                                         | (8)        | *                                     |       |
| Robert H. Mundheim                                           |       | 98,838                                                         | (9)        | *                                     |       |
| Blumenstein/Thorne  Information Partners I, L.P.             |       | 2,622,975                                                      | (10)       | 11.7                                  | %          |
| William Blair Capital  Management LLC                        |       | 2,468,949                                                      | (11)       | 11.0                                  | %          |
| Tiger Technology  Management LLC                             |       | 2,008,306                                                      | (12)       | 9.0                                   | %          |
| Federated Investors,  Inc.                                   |       | 1,983,015                                                      | (13)       | 8.9                                   | %          |
| Earnest Partners LLC.                                        |       | 1,585,721                                                      | (14)       | 7.1                                   | %          |
| Oakleigh B. Thorne                                           |       | 722,222                                                        | (15)       | 3.2                                   | %          |
| All executive officers and directors as a group (13 persons) |       | 4,934,404                                                      | (16)       | 21.4                                  | %          |
|                                                              |            |                                                                |            |                                       |            |        |  |

 

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*                                         Lessthan one percent.

(1)                                  Includesoptions to purchase 10,695 shares of the Company’s common stock and an optiongrant to BTIP to purchase up to 27,665 shares of the Company’s common stock atan exercise price of $3.875 per share. Also includes 2,595,310 sharesbeneficially owned by BTIP, 75,955 shares owned by the Oakleigh ThorneIrrevocable GST Trust, 247,100 shares owned by the Oakleigh L. Thorne Trust U/Adated December 15, 1976, and 68,500 shares owned by the Oakleigh Thorne GSTTrust III. Mr. Thorne is a co-President of Blumenstein/Thorne InformationPartners L.L.C, the general partner of BTIP. Mr. Thorne disclaimsbeneficial ownership of the shares owned by BTIP, except to the extent of hispecuniary interest, if any. The address for Mr. Thorne is One N. LaSalleStreet, Suite 1800, Chicago, Illinois 60602.

(2)                                  Includesoptions to purchase 286,944 shares of the Company’s common stock.  Also includes 30,200 shares pledged by Mr.Kelsall and 4,500 shares held by Mr. Kelsall’s spouse and 1,500 sharesheld by Mr. Kelsall’s children. The address for Mr. Kelsall is 4900South Monaco Street, Denver, Colorado 80237.

(3)                                  Includes834 shares of the Company’s common stock issuable pursuant to a Share RightsAward within 60 days of March 29, 2007. The address for Mr. Simpson is One N.LaSalle Street, Suite 1800, Chicago, Illinois 60602.

(4)                                  Includes4,167 shares of the Company’s common stock issuable pursuant to a Share RightsAward within 60 days of March 29, 2007. The address for Mr. Dearden is 2305Presidents Drive, Salt Lake City, Utah 84120.

(5)                                  Includesoptions to purchase 65,000 shares of the Company’s common stock and 381 sharesof the Company’s common stock issuable pursuant to a Share Rights Awardissuable within 60 days of March 29, 2007. The address for Mr. Schnittmanis 4900 South Monaco Street, Denver, Colorado 80237.

(6)                                  Consistsof options to purchase 39,599 shares of the Company’s common stock, 2,000shares of the Company’s common stock issuable pursuant to a Deferred Stock Unitaward and an option granted to BTIP to purchase up to 27,665 shares of theCompany’s common stock at an exercise price of $3.875 per share. Also consistsof 2,595,310 shares beneficially owned by BTIP and 3,500 shares owned by theJack Wray Blumenstein Contributory IRA. Mr. Blumenstein is a co-Presidentof Blumenstein/Thorne Information Partners L.L.C., the general partner of BTIP.Mr. Blumenstein disclaims beneficial ownership of the shares owned byBTIP, except to the extent of his pecuniary interest, if any. The address forMr. Blumenstein is P.O. Box 871, Lake Forest, Illinois 60045.

(7)                                 Consistsof options to purchase 48,437 shares of the Company’s common stock and 2,000shares of the Company’s common stock issuable pursuant to a Deferred Stock Unitaward. The address for Mr. Girgenti is 1603 Orrington Avenue,Suite 1600, Evanston, Illinois 60201.

(8)                                  Includesoptions to purchase 68,180 shares of the Company’s common stock and 2,000shares of the Company’s common stock issuable pursuant to a Deferred Stock Unitaward.  The address for Ms. Korshakis c/o eCollege, 4900 South Monaco

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Street, Denver, Colorado 80237.

(9)                                 Includesoptions to purchase 1,224 shares of the Company’s common stock and 4,000 sharesof the Company’s common stock issuable pursuant to two Deferred Stock Unitawards. The address for Mr. Mundheim is 599 Lexington Avenue,Room 1640, New York, New York 10022.

(10)                           Includesan option to purchase up to 27,665 shares of the Company’s common stock at anexercise price of $3.875 per share. The address for Blumenstein/ThorneInformation Partners I, L.P. is P.O. Box 871, Lake Forest, Illinois 60045.

(11)                           Theaddress for William Blair Capital Management LLC is 222 West Adams Street, 13thfloor, Chicago, Illinois, 60606.

(12)                           Theaddress for Tiger Technology Management LLC is 101 Park Avenue, 48th floor, NewYork, New York 10178-4700.

(13)                           Theaddress for Federated Investors, Inc. is 1001 Liberty Avenue, Pittsburgh,Pennsylvania 15222.

(14)                           Theaddress for Earnest Partners LLC is 1180 Peachtree Street, Suite 2300, Atlanta,GA 30309.

(15)                           Excludesshares beneficially owned by BTIP. Mr. Oakleigh B. Thorne is thebeneficiary of a trust that is a limited partner in BTIP. Mr. Oakleigh B.Thorne is the father of Oakleigh Thorne, the Company’s Chief Executive Officer.

(16)                           Includes728,827 shares issuable upon the exercise of options and 5,746 shares of theCompany’s common stock issuable pursuant to Share Rights Awards and DeferredStock Unit Awards issuable within 60 days of March 29, 2007.

**EquityCompensation Plans**

The following table summarizes the status of theCompany’s equity compensation plans as of December 31, 2006:
| **Plan Category**                                       | ** ** | **Number of Securities  to be  Issued upon Exercise  of  Outstanding Options,  Warrants, and Rights** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for  Future Issuance under  Equity Compensation  Plans (excluding  securities  reflected in column  (a))** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **(a)**                                                                                                                                       | ** ** | **(b)**                                                                                                          | ** ** | **(c)**                                                                                                                                                                                              | ** ** |
| Equity  Compensation Plans approved by security holders:     |       | $                                                                                                                                             | 3,092,953  |                                                                                                             | $          | 11.51                                                                                                                                                                                                |       | 1,931,105 |   |
|                                                         |       |                                                                                                                                          |       |                                                                                                             |       |                                                                                                                                                                                                 |       |
| Equity  Compensation Plans not approved by security holders: |       | $                                                                                                                                             | 33,471     | (1)                                                                                                              | $          | 3.43                                                                                                                                                                                                 |       | — |   |
|                                                         |       |                                                                                                                                          |       |                                                                                                             |       |                                                                                                                                                                                                 |       |
| **Total**                                                    |       | $                                                                                                                                             | 3,126,424  |                                                                                                             |       |                                                                                                                                                                                                 | 1,931,105  |   |

 

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(1) Includes:   (i)  options topurchase 27,665 shares of the Company’s common stock at an exercise price of$3.875 per share granted to BTIP  (seefootnote 1 under the heading “2006 Outstanding Equity Awards at Fiscal Year-End” in Item 11 of this AnnualReport on Form 10-K); and (ii) options to purchase up to 5,806shares of the Company’s common stock granted to Jeri L. Korshak forservices rendered as a director of the Company from January 1, 2000through December 31, 2000.

**ITEM13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ANDDIRECTOR INDEPENDENCE**

We may occasionally enterinto transactions with certain “related persons.”  Related persons include our executiveofficers, directors, 5% or more beneficial owners of our common stock,immediate family members of these persons and entities in which one of thesepersons has a direct or indirect material interest.  We refer to transactions with these relatedpersons as “related party transactions.” The Audit Committee considers all relevant factors when determiningwhether to approve a related party transaction including, without limitation,whether the terms of the proposed transaction are at least as favorable to usas those that might be achieved with an unaffiliated third party.  Among other relevant factors, the AuditCommittee considers the following:

·      thesize of the transaction and the amount of consideration payable to a related person;

·      thenature of the interest of the applicable executive officer, director or 5%stockholder in the transaction;

·      whetherthe transaction may involve a conflict of interest;

·      whetherthe transaction involves the provision of goods or services to us that areavailable from unaffiliated third parties; and

·      whetherthe proposed transaction is on terms and made under circumstances that are atleast as favorable to us as would be available in comparable transactions withor involving unaffiliated third parties.

The Company did not enterinto any related party transactions in 2006.

In accordance with therules of the Nasdaq National Market, the Board of Directors affirmativelydetermines the independence of each director in accordance with the standards ofindependence set forth in the Nasdaq listing standards. Based on thesestandards, and after consulting with the Company’s legal counsel, the Board ofDirectors determined that each of the following non-employee directors isindependent and has no material relationships with the Company except as adirector and stockholder:
| Jack W. Blumenstein     |   | Jeri L. Korshak    |
|-------------------------|--------|--------------------|
| Christopher E. Girgenti |   | Robert H. Mundheim |

 

**ITEM14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES**

Thefollowing table shows the fees billed for 2006 and 2005 for audit and otherservices provided to the Company by Grant Thornton, the Company’s independentregistered public accounting firm (in thousands):

|                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees          |       | $        | 824        |     | $          | 615 |   |
| Audit-Related  Fees |       | $        | 115        |     | $          | — |   |
| Tax Fees            |       | $        | —     |     | $          | — |   |
| All Other Fees      |       | $        | —     |     | $          | — |   |
| Total               |       | $        | 939        |     | $          | 615 |   |

 

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*Audit Fees.*    Thiscategory includes the audit of the Company’s annual financial statements,review of financial statements included in the Company’s Form 10-QQuarterly Reports, audit of controls over financial reporting and services thatare normally provided by the independent auditors in connection with statutoryand regulatory filings or engagements for those fiscal years. This category alsoincludes advice on audit and accounting matters that arose during, or as aresult of, the audit or the review of interim financial statements, and thepreparation of an annual “management letter” on internal control matters.

*Audit Related-Fees.*    Thiscategory consists of assurance and related services by the Company’s auditorsthat are reasonably related to the performance of the audit or review of theCompany’s financial statements and are not reported above under “Audit Fees.”The services for the fees disclosed under this category include benefit planaudits, consultation on other accounting matters not reported in the “AuditFees” category, due diligence pertaining to potential business combinations,and evaluating the effect of various accounting issues and changes inprofessional standards.

*Tax Fees.*    Thiscategory consists of professional services rendered by the Company’s auditorsfor tax compliance and tax advice. The services for the fees disclosed underthis category include tax return preparation and technical tax advice.

*All Other Fees.*    Thiscategory consists of fees for translation services, subscriptions, netoperating loss study, and other miscellaneous items.

*Pre-Approval of Audit and Permitted Non-Audit Services.*    TheAudit Committee charter requires the Company to have the Audit Committeepre-approve all audit and permitted non-audit services from the independentaccountants, provided, however, that neither the Committee nor the Company mayengage the Company’s independent accountants for the following services:

·                  Bookkeepingor other services related to the accounting records or financial statements ofthe Company;

·                  Financialinformation systems design and implementation;

·                  Appraisalor valuation services, fairness opinions or contribution-in-kind reports;

·                  Actuarialservices;

·                  Internalaudit outsourcing services;

·                  Managementor human resources functions;

·                  Brokeror dealer, investment adviser or investment banking services; or

·                  Legalservices and expert services unrelated to the audit.

TheCompany’s management submits requests to the Audit Committee for pre-approvalof any such allowable services by the Company’s independent accountants. TheCommittee may delegate to the Committee Chairperson the authority topreapprove, on behalf of the Committee, the provision of permitted non-auditservices, up to $2,500 per engagement, from the independent accountants as arepermitted under the applicable rules and regulations; provided, however, that areport of all non-audit services pre-approved pursuant to this paragraph shallbe presented to the Committee at its next scheduled meeting. In 2006, all ofthe audit and permitted non-audit services rendered by the Company’sindependent accountants were approved by the Audit Committee.

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**PART IV.**

**ITEM15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
| (a)    |                                                                                                                                                                                         | The following  documents are filed as part of this report:                                                                                                                                     |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                         |                                                                                                                                                                                           |
|   | 1)                                                                                                                                                                                           | Financial  Statements. (See Item 8 of this Annual Report on Form 10-K.)                                                                                                                        |
|   |                                                                                                                                                                                         |                                                                                                                                                                                           |
|   | 2)                                                                                                                                                                                           | Financial  Statement Schedules.                                                                                                                                                                |
|   |                                                                                                                                                                                         | None                                                                                                                                                                                           |
|   |                                                                                                                                                                                         |                                                                                                                                                                                           |
|   | 3)                                                                                                                                                                                           | Exhibits  required by Securities and Exchange Commission Regulation S-K, Item 601.                                                                                                             |
|   |                                                                                                                                                                                         |                                                                                                                                                                                           |
|   |                                                                                                                                                                                         | The Exhibits  filed as part of this Annual Report on Form 10-K are listed on the Exhibit  Index immediately preceding such Exhibits, which Exhibit Index is  incorporated herein by reference. |
|   |                                                                                                                                                                                         |                                                                                                                                                                                           |
| (b)    | Exhibits – see  Item 15(a)(3) above. The following exhibits are filed herewith or are  incorporated by reference to exhibits previously filed with the Securities  Exchange Commission. |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

**eCollege.com**
| By:    | /s/ OAKLEIGH  THORNE                         |   |
|--------|----------------------------------------------|--------|
|   | Name: Oakleigh  Thorne                       |
|   | Title: Chief Executive  Officer and Chairman |
|   | Date: April 2,  2007                    |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| By:    | /s/ OAKLEIGH  THORNE           |                                  |
|--------|--------------------------------|---------------------------------------|
|   | Name:                          | Oakleigh Thorne                       |
|   | Title:                         | Chief Executive  Officer and Chairman |
|   |                           | (principal  executive officer)        |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ REID SIMPSON               |                                  |
|   | Name: Reid  Simpson            |                                  |
|   | Title:                         | Chief Financial  Officer              |
|   |                           | (principal  financial officer)        |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ DAVID REIS                 |                                  |
|   | David Reis                     |
|   | Title:                         | Director of  Corporate Accounting     |
|   |                           | (principal  accounting officer)       |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ JACK W.  BLUMENSTEIN       |                                  |
|   | Name: Jack W. Blumenstein      |                                  |
|   | Title:                         | Director                              |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ CHRISTOPHER  E. GIRGENTI   |                                  |
|   | Name:  Christopher E. Girgenti |
|   | Title: Director                |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ DOUGLAS H.  KELSALL        |                                  |
|   | Name: Douglas H.  Kelsall      |
|   | Title:                         | Director                              |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ JERI L.  KORSHAK           |                                  |
|   | Name: Jeri L.  Korshak         |
|   | Title:                         | Director                              |
|   | Date: April 2,  2007      |
|   |                           |
| By:    | /s/ ROBERT H.  MUNDHEIM        |                                  |
|   | Name: Robert H.  Mundheim      |
|   | Title: Director                |
|   | Date: April 2,  2007      |
|        |                                |                                       |  |  |  |  |

 

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**EXHIBITINDEX**
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1(9)              |       | Stock Purchase  Agreement dated as of September 15, 2003, among Leeds Equity  Partners III, I.P., Other Selling Parties Party Thereto,  Datamark Inc. and the Registrant.                                                                                                      |
| 3.1(1)              |       | Second Amended  and Restated Certificate of Incorporation.                                                                                                                                                                                                                                         |
| 3.2(1)              |       | Amended and  Restated Bylaws.                                                                                                                                                                                                                                                                      |
| 4.1(1)              |       | Specimen Common  Stock Certificate.                                                                                                                                                                                                                                                                |
| 4.2(1)              |       | Amended and  Restated Registration Agreement made as of December 21, 1998 by and  among the Registrant, each of the Series A Investors, each of the  Series B Investors and each of the Series C Purchasers                                                                    |
| 4.3(2)              |       | Registration  Agreement between Company and Blumenstein/Thorne Information Partners I,  L.P.*                                                                                                                                                                                                 |
| 4.4(2)              |       | Stock Option  Agreement between Company and Blumenstein/Thorne Information Partners I,  L.P.*                                                                                                                                                                                                 |
| 4.5(8)              |       | Form of Stock  Purchase Agreement dated as of August 13, 2003, among eCollege.com and  the purchasers identified on the Schedule of Purchasers on Schedule A  thereto.                                                                                                                   |
| 4.6(10)             |       | Stock Purchase  Agreement dated as of October 31, 2003, among the Company and the  Investors listed on Schedule I attached thereto.                                                                                                                                                      |
| 4.7(10)             |       | Registration  Rights Agreement dated as of October 31, 2003, among the Company and the  stockholders listed on Exhibit A thereto.                                                                                                                                                        |
| 4.8(10)             |       | Registration  Rights Agreement dated as of October 31, 2003, between the Company and  Capital Resource Partners IV, L.P.                                                                                                                                                                 |
| 4.9(10)             |       | Form of  Promissory Note dated October 31, 2003 issued by the Company to the  parties identified on Schedule A thereto in the aggregate principle  amount of $5,000,000.                                                                                                                 |
| 4.10(10)            |       | Common Stock  Purchase Warrant of the Company dated October 31, 2003 issued to Capital  Resource Partners IV, L.P.                                                                                                                                                                       |
| 4.11(11)            |       | Waiver of  Registration Rights under Registration Agreement between Company and  Blumenstein/Thorne Information Partners I. L.P. dated August 15,  2003                                                                                                                                  |
| 4.12(11)            |       | Waiver of  Registration Rights under Amended and Restated Registration Agreement made as  of December 21, 1998 by and among the Registrant, each of the  Series A Investors, each of the Series B Investors and each of the  Series C Purchasers dated September 2, 2003. |
| 4.13(11)            |       | Waiver of  Registration Rights under Registration Agreement between Company and  Blumenstein/Thorne Information Partners I. L.P. dated October 28,  2003                                                                                                                                 |
| 4.14(11)            |       | Waiver of  Registration Rights under Amended and Restated Registration Agreement made as  of December 21, 1998 by and among the Registrant, each of the A  Investors, each of the Series B Investors and each of the Series C  Purchasers dated October 28, 2003.              |
| 10.1(1)             |       | Form of  Indemnification Agreement by and between the Company and its outside  directors.                                                                                                                                                                                                          |
| 10.2(1)             |       | 1999 Employee  Stock Purchase Plan.*                                                                                                                                                                                                                                                               |
| 10.3(1)             |       | 1999 Stock  Incentive Plan.*                                                                                                                                                                                                                                                                       |
| 10.4(4)             |       | Lease Agreement  dated March 29, 2002 between Bedford Property Investors, Inc. and  the Company.                                                                                                                                                                                         |
| 10.6(5)             |       | Employment  Agreement dated as of September 5, 2002 between Robert S. Haimes  and the Company.*                                                                                                                                                                                          |
| 10.7(5)             |       | Employment  Agreement dated as of July 31, 2002 between Matthew Schnittman and the  Company.*                                                                                                                                                                                                 |
| 10.8(5)             |       | First Amendment  to Lease Agreement dated September 30, 2002 between Bedford Property  Investors, Inc. and the Company.                                                                                                                                                                  |
| 10.9(10)            |       | Senior  Subordinated Secured Note and Warrant Purchase Agreement dated as of  October 31, 2003 among the Registrant, eCollege International, Inc.  and Capital Resource Partners IV, L.P.                                                                                           |
| 10.10(10)           |       | Loan and  Security Agreement dated as of October 30, 2003 among Silicon Valley  Bank, the Company and Datamark Inc.                                                                                                                                                                      |
| 10.12(10)           |       | Employment  Agreement dated as of September 15, 2003 between Datamark Inc. and  Thomas Dearden.*                                                                                                                                                                                         |
| 10.13(11)           |       | Lease Agreement  dated April 9, 1998 between Boyd Enterprises Utah, LLC and Datamark  Systems.                                                                                                                                                                                                |
| 10.14(11)           |       | First Amendment  to Lease Agreement dated as of April 12, 2001 between Boyd Enterprises  Utah, LLC and Datamark Systems, Inc.                                                                                                                                                            |
| 10.15(11)           |       | Second Amendment  to Lease Agreement dated as of January 15, 2004 between Boyd Enterprises  Utah, LLC and Datamark, Inc.                                                                                                                                                                 |
| 10.16(12)           |       | Employment  Agreement dated August 9, 2004 between Oakleigh Thorne and the Company.*                                                                                                                                                                                                               |
| 10.17(12)           |       | Employment  Agreement dated August 9, 2004 between Douglas H. Kelsall and the Company.*                                                                                                                                                                                                            |
| 10.18(12)           |       | Employment  Agreement dated August 9, 2004 between Reid E. Simpson and the Company.*                                                                                                                                                                                                               |
| 10.19(12)           |       | Employment  Agreement dated August 9, 2004 between Marguerite M. Elias and the Company.*                                                                                                                                                                                                           |
| 10.20(13)           |       | Lease Agreement  dated December 14, 2004 between One North LaSalle Properties LLC and  eCollege.com.                                                                                                                                                                                               |
| 10.21(13)           |       | Amendment No. 1  to Senior Subordinated Secured Note and Warrant Purchase Agreement dated May  30, 2004 among the Registrant, eCollege International, Inc. and Capital  Resource Partners IV, LP.                                                                                                  |
| 10.22(13)           |       | Amendment No. 2  to Senior Subordinated Secured Note and Warrant Purchase Agreement dated  December 28, 2004 among the Registrant, eCollege International, Inc. and  Capital Resource Partners IV, LP.                                                                                             |

 

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| 10.23(13) |   | Loan  Modification Agreement dated April 1, 2004 between Silicon Valley Bank,  eCollege.com and Datamark, Inc.                                                                                   |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24(13) |   | Loan  Modification Agreement dated December 28, 2004 between Silicon Valley Bank,  eCollege.com and Datamark, Inc.                                                                               |
| 10.25(13) |   | First Amendment  to the Employee Stock Purchase Plan dated October 15, 2004.*                                                                                                                    |
| 10.27(14) |   | Third Amendment  to the Lease Agreement dated January 27, 2005 between Boyd Enterprises Utah,  LLC and Datamark, Inc.                                                                            |
| 10.28(14) |   | First Amendment  to the 1999 Stock Incentive Plan dated March 22, 2005.*                                                                                                                         |
| 10.29(15) |   | Lease  Modification Agreement dated February 26, 2005 between Peyton Building LLC  and Datamark, Inc.                                                                                            |
| 10.30(15) |   | Second Amendment  to the 1999 Employee Stock Purchase Plan dated March 22, 2005.                                                                                                                 |
| 10.31(15) |   | Fourth Amendment  to the Loan and Security Agreement dated October 30, 2005 between Silicon  Valley Bank, eCollege.com and Datamark, Inc.                                                        |
| 10.32(16) |   | Fourth Amendment  to Lease Agreement dated March 28, 2006 between Boyd Enterprises Utah, LLC  and Datamark, inc.                                                                                 |
| 10.33     |   | Employment  Agreement dated May 8, 2006 between Datamark, Inc. and Donald Bailey. *                                                                                                              |
| 10.34     |   | Employment  Agreement dated August 8, 2006 between James V. Allen and the Company. *                                                                                                             |
| 10.35     |   | Third Amendment  to Full Service Office Lease dated December 28, 2006 between LBA Realty Fund  II — WBP III, LLC and eCollege.com.                                                          |
| 21.1      |   | Subsidiaries of  Registrant.                                                                                                                                                                     |
| 23.1      |   | Consent of Grant  Thornton LLP.                                                                                                                                                                  |
| 23.2      |   | Consent of KPMG  LLP.                                                                                                                                                                            |
| 31.1      |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended.                                                                |
| 31.2      |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended.                                                                |
| 32.1      |   | Certification of  Chief Executive Officer and Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

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*                                         Indicatesmanagement contract or compensatory plan or arrangement.

(1)                                  Incorporatedby reference from the Company’s Registration Statement on Form S-1 (FileNo. 333-78365).

(2)                                  Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed withthe Securities and Exchange Commission on November 14, 2000.

(3)                                  Incorporatedby reference from the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on April 2, 2001.

(4)                                  Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed withthe Securities and Exchange Commission on May 15, 2002.

(5)                                  Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed withthe Securities and Exchange Commission on November 13, 2002.

(6)                                  Filedas part of Current Report on 8-K filed with the Securities and ExchangeCommission on July 1, 2002.

(7)                                  Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed withthe Securities and Exchange Commission on August 12, 2003.

(8)                                  Incorporatedby reference from the Company’s 8-K filed with the Securities and ExchangeCommission on August 21, 2003.

(9)                                  Incorporatedby reference from the Company’s 8-K filed with the Securities and ExchangeCommission on November 3, 2003.

(10)                            Incorporatedby reference from the Company’s 8-K/A filed with the Securities and ExchangeCommission on December 2, 2003.

(11)                            Incorporatedby reference from the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 15, 2004.

(12)                            Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on August 16, 2004.

(13)                            Incorporatedby reference from the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2005.

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(14)                            Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on May 10, 2005.

(15)                            Incorporatedby reference from the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 16, 2006.

(16)                           Incorporatedby reference from the Company’s Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on May 10, 2006

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