##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number:
    001-33140
  CAPELLA EDUCATION
    COMPANY
 (Exact name of registrant as
    specified in its charter)
   Minnesota

41-1717955(State or other jurisdiction
    of
    Incorporation or organization)

(I.R.S. Employer
    Identification No.)   225 South Sixth Street,
    9th Floor
 Minneapolis, Minnesota 55402
 (Address, including zip code, of
    principal executive offices)
  (888) 227-3552
 (Registrants telephone number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
   Common stock, $.01 par
    value

Nasdaq Global MarketTitle of each class

Name of each exchange on which
    registered  Securities registered pursuant to section 12(g) of the
    Act:
  NONE
 (Title of class)
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
  non-affiliates
    DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



CAPELLA
    EDUCATION COMPANY
  FORM 10-K
 INDEX
  PagePART IItem 1


Business


1Item 1A


Risk Factors


19Item 1B


Unresolved Staff
    Comments


37Item 2


Properties


37Item 3


Legal Proceedings


38Item 4


Submission of
    Matters to a Vote of Security Holders


38Executive Officers
    of the Registrant


38PART IIItem 5


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


40Item 6


Selected Financial
    Data


43Item 7


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


44Item 7A


Quantitative and
    Qualitative Disclosures About Market Risk


57Item 8


Financial
    Statements and Supplementary Data


58Item 9


Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


81Item 9A


Controls and
    Procedures


81Item 9B


Other Information


81PART IIIItem 10


Directors,
    Executive Officers, and Corporate Governance


81Item 11


Executive
    Compensation


81Item 12


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


82Item 13


Certain
    Relationships and Related Transactions, and Director Independence


82Item 14


Principal
    Accountant Fees and Services


82PART IVItem 15


Exhibits and
    Financial Statement Schedule


82SIGNATURES


89CERTIFICATIONS


93SubsidiariesConsent of Ernst & Young LLPPowers of AttorneyCertification of CEOCertification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO




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##### Table of Contents



PART I  CAUTIONARY
    NOTICE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-K
  Forms 10-Q 8-K
  Item 1.
    Business  Overview
    end-of-year
 1




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Our
    History
    Industry
  Post-Secondary
         2




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Title IV-eligible, Title IV-eligible,
  Competition
      
    relevant, practical and accredited program offerings;
    regulatory approvals;
    reputation of the college or university and marketability of the
    degree;
    convenient, flexible and dependable access to programs and
    classes;
    qualified and experienced faculty;
    level of learner support;
    cost of the program;
    relative marketing and selling effectiveness; and
    the time necessary to earn a degree.  Our
    Competitive Strengths
    Commitment to Academic Quality.
  Exclusive Focus on Online Education.
 3




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Academic Programs and Specializations Designed for Working
    Adults.
  Extensive Learner Support Services.
  Experienced Management Team with Significant Business,
    Academic and Marketing Expertise.
  Our
    Operating Strategy
    Focus on Markets and Learners.
  Building Capella Brand
    Differentiation.
  Increasing Enrollment Effectiveness.
 4




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Delivering Both Superior Learning Outcomes and a Superior
    Learner Experience.
  Capella
    University
    Our
    Approach to Academic Quality
    Curricula.
  Faculty.
  Online Course Design.
  Learner Support.
 5




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Academic Oversight.
  Accreditation.
  Low student to faculty ratio.
  Diverse learner population.
  Practitioner-oriented course experience.
  Time efficiency.
  Residential colloquia experience. face-to-face
  Curricula
    Programs


Specialization


Programs


SpecializationDoctor of Philosophy in
    Organization and Management


 General 
     Human Resource Management 
     Information Technology
    Management 
     Leadership


Doctor of Psychology
    Doctor of Philosophy in
    Psychology


 Clinical Psychology 
     Counseling Psychology 
     General Psychology
     Industrial/Organizational
    Psychology
     Educational Psychology 6




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Programs


Specialization


Programs


SpecializationMaster of Science in Organization
    and Management
    Master of Business
    Administration


 General 
     Human Resource Management 
     Leadership 
     General Business 
     Accounting 
     Finance 
     Health Care Management 
     Information Technology
    Management 
     Marketing 
     Project Management


Masters of Science in
    Psychology


 Clinical Psychology
     Counseling Psychology
     School Psychology
     General Psychology
     Industrial/Organizational
    Psychology
     Educational Psychology
     Sport PsychologyBachelor of Science in
    Business


 Accounting 
     Business Administration 
     Finance 
     Human Resource Management 
     Management and Leadership 
     Marketing


Doctor of Philosophy in
    Human Services


 General Human
    Services
     Criminal Justice
     Counseling Studies
     Health Care Administration
     Management of Non-Profit
    Agencies
     Social and Community ServicesDoctor of Philosophy in
    Education


 Leadership in
    Educational
    Administration 
     Leadership in Higher Education 
     Curriculum and Instruction 
     Post-Secondary and Adult Education 
     Instructional Design for Online Learning 
     Training and Performance Improvement 
     Professional Studies in Education 
     K-12 Studies in Education


Masters of Science in
    Human Services


 General Human
    Services
     Criminal Justice
     Counseling Studies
     Health Care Administration
     Management of Non-Profit
    Agencies
     Marital, Couple, and Family Counseling/Therapy
     Mental Health Counseling
     Social and Community ServicesMaster of Science in
    Education


 Leadership in
    Educational
    Administration
     Leadership in Higher Education 
     Curriculum and Instruction 
     Post-Secondary and Adult
    Education 
     Instructional Design for Online
    Learning 
     Training and Performance
    Improvement 
     Professional Studies in
    Education 
     K-12 Studies in Education 
     Reading and Literacy 
     Enrollment Management


Masters of Science in
    Information Technology
    Bachelor of Science in
    Information Technology


 General Information
    Technology
     Information Security 
     Network Architecture and Design 
     Project Management and
    Leadership 
     System Design and Programming 
     General Information Technology
     Graphics and Multimedia 
     Information Assurance and
    Security 
     Network Technology 
     Project Management 
     Web Application Development    7




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Faculty
      Learner
    Support Services
    Academic Services.
  Administrative Services.
  Library Services. e-mail one-on-one
  Career Counseling Services. face-to-face
 8




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Admissions
    and/or
  Marketing
      Enrollment
   9




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EnrollmentNumber of


%Learners


of TotalDoctoral


7,473



41.6
%Masters


7,685



42.7
%Bachelors


2,729



15.2
%Other


89



0.5
%17,976



100.0
%   Tuition
    and Fees
  2005-2006 2005-2006 2005-2006
  2006-2007
  Employees
    and Adjunct Faculty
    course-by-course one-quarter
   10




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Intellectual
    Property
    www.capellaeducation.com www.capella.edu www.capellauniversity.edu
  Available
    Information
  Form 10-K, Form 10-Q, Form 8-K, www.sec.gov 1-800-SEC-0330.
  REGULATION
  Regulatory
    Environment
    Accreditation
   11




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State
    Education Licensure
          State
    Professional Licensure
     12




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Nature of
    Federal, State and Private Financial Support for Post-Secondary
    Education
      FFEL.
  Pell.
    Regulation
    of Federal Student Financial Aid Programs
        Congressional Action.
 13




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Distance Learning and Repeal of the 50%
    Rules.
        Administrative Capability.
 14




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Financial Responsibility.
    Title IV Return of Funds.
  The 90/10 Rule.
  Student Loan Defaults.
   15




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Incentive Compensation Rules. third-party
  Compliance Reviews.
  2002-2003, 2003-2004 2004-2005 2005-2006 2005-2006
   16




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2006-2007. 2005-2006
        Potential Effect of Regulatory
    Violations.
   17




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Restrictions on Adding Educational
    Programs.
    Eligibility and Certification
    Procedures.
  Change in Ownership Resulting in a Change of
    Control. Form 8-K
 18




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same-day same-day same-day and/or
    Item 1A.
    Risk
    Factors  Risks
    Related to the Extensive Regulation of Our Business
  If we
    fail to comply with the extensive regulatory requirements for
    our business, we could face significant restrictions on our
    operations and monetary penalties, including loss of access to
    federal loans and grants for our learners on which we are
    substantially dependent.
   19




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and/or
  We
    must seek recertification to participate in Title IV
    programs no less than every six years, and may, in certain
    circumstances, be subject to review by the Department of
    Education prior to seeking recertification.
    Congress
    may change the law or reduce funding for Title IV programs,
    which could reduce our learner population, revenues and profit
    margin.
   20




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The
    Office of Inspector General of the U.S. Department of
    Education has commenced a compliance audit of Capella University
    which is ongoing and which may result in repayment of
    Title IV funds, interest, fines, penalties, remedial action
    and damage to our reputation in the industry.
  2002-2003, 2003-2004 2004-2005
  2006-2007 2005-2006
     21




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If we
    fail to maintain our institutional accreditation, we would lose
    our ability to participate in Title IV
    programs.
    If
    Capella University does not maintain its authorization in
    Minnesota, it may not operate or participate in Title IV
    programs.
    Our
    regulatory environment and our reputation may be negatively
    influenced by the actions of other
    for-profit
    institutions.
    We are
    subject to sanctions if we fail to correctly calculate and
    timely return Title IV program funds for learners who
    withdraw before completing their educational
    program.
   22




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A
    failure to demonstrate financial responsibility may
    result in the loss of eligibility by Capella University to
    participate in Title IV programs or require the posting of
    a letter of credit in order to maintain eligibility to
    participate in Title IV programs.
    A
    failure to demonstrate administrative capability may
    result in the loss of Capella Universitys eligibility to
    participate in Title IV programs.
    
    comply with all applicable Title IV program regulations;
    have capable and sufficient personnel to administer the federal
    student financial aid programs;
    have acceptable methods of defining and measuring the
    satisfactory academic progress of its students;
    not have cohort default debt rates above specified levels;
    have various procedures in place for safeguarding federal funds;
    not be, and not have any principal or affiliate who is, debarred
    or suspended from federal contracting or engaging in activity
    that is cause for debarment or suspension;
    provide financial aid counseling to its students;
    refer to the Department of Educations Office of Inspector
    General any credible information indicating that any applicant,
    student, employee or agent of the institution has been engaged
    in any fraud or other illegal conduct involving Title IV
    programs;
    submit in a timely manner all reports and financial statements
    required by the regulations; and 23




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
    not otherwise appear to lack administrative capability.    
    require the repayment of Title IV funds;
    transfer the institution from the advance system of
    payment of Title IV funds to cash monitoring status or to
    the reimbursement system of payment;
    place the institution on provisional certification
    status; or
    commence a proceeding to impose a fine or to limit, suspend or
    terminate the participation of the institution in Title IV
    programs.    We are
    subject to sanctions if we pay impermissible commissions,
    bonuses or other incentive payments to individuals involved in
    certain recruiting, admissions or financial aid
    activities.
    Our
    failure to comply with regulations of various states could
    result in actions taken by those states that would have a
    material adverse effect on our enrollments, revenues and results
    of operations.
     24




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State

Capella University Activity Constituting Presence Requiring
    Licensure or AuthorizationAlabama

Agreement with a former provider
    of library services to Capella students.Arizona

State agency broadly interprets
    presence requiring licensure to include the offering of degree
    programs by distance education; Capella also conducts in-state
    colloquia.Arkansas

Agreement with Wal-Mart Stores,
    Inc. under which Wal-Mart employees located in Arkansas receive
    discounted tuition for certain Capella University programs.Colorado

No determination of presence;
    authorization granted in order to have marketing and recruiting
    agents in the state.Florida

Recruiting activities in the state.Georgia

Direct marketing and recruiting
    activities in the state.Illinois

Authorization to conduct in-state
    colloquia.Kentucky

Direct marketing and recruiting
    activities in the state.Nevada

Direct marketing and recruiting
    activities in the state; agreements with community colleges.Ohio

Direct marketing and recruiting
    activities in the state for select programs.Virginia

Direct marketing and recruiting
    activities in the state; agreements with community colleges.Washington

Direct marketing and recruiting
    activities in the state; agreements with community colleges.West Virginia

Direct marketing and recruiting
    activities in the state.Wisconsin

State agency broadly interprets
    licensure requirements to cover all institutions serving
    residents of the state.       The
    inability of our graduates to obtain licensure in their chosen
    professional fields of study could reduce our enrollments and
    revenues, and potentially lead to litigation that could be
    costly to us.
   25




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If
    regulators do not approve or delay their approval of
    transactions involving a change of control of our company, our
    ability to participate in Title IV programs may be
    impaired.
    Government
    and regulatory agencies and third parties may conduct compliance
    reviews, bring claims or initiate litigation against
    us.
    We may
    lose eligibility to participate in Title IV programs if our
    student loan default rates are too high, which would
    significantly reduce our learner population.
   26




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We may
    lose eligibility to participate in Title IV programs if the
    50% Rules are reinstated temporarily or permanently, which would
    significantly reduce our learner population and have an adverse
    effect on our revenues and operating profits.
      We may
    lose eligibility to participate in Title IV programs if the
    percentage of our revenue derived from those programs is too
    high, which would significantly reduce our learner
    population.
    Risks
    Related to Our Business
  Our
    success depends in part on our ability to update and expand the
    content of existing programs and develop new programs and
    specializations on a timely basis and in a cost-effective
    manner.
   27




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Our
    financial performance depends on our ability to continue to
    develop awareness among, and attract and retain, working adult
    learners.
    
    the emergence of more successful competitors;
    factors related to our marketing, including the costs of
    Internet advertising and broad-based branding campaigns;
    performance problems with our online systems;
    failure to maintain accreditation;
    learner dissatisfaction with our services and programs;
    adverse publicity regarding us, our competitors or online or
    for-profit education generally;
    price reductions by competitors that we are unwilling or unable
    to match;
    a decline in the acceptance of online education; and
    a decrease in the perceived or actual economic benefits that
    learners derive from our programs.    Strong
    competition in the post-secondary education market, especially
    in the online education market, could decrease our market share,
    increase our cost of acquiring learners and put downward
    pressure on our tuition rates.
     28




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We
    operate in a highly competitive market with rapid technological
    change, and we may not have the resources needed to compete
    successfully.
    System
    disruptions and vulnerability from security risks to our online
    computer networks could impact our ability to generate revenue
    and damage the reputation of Capella University, limiting our
    ability to attract and retain learners; we are currently
    migrating to a new enterprise resource planning system, and
    unplanned costs
    and/or
    decreases in productivity could adversely impact our financial
    results.
         29




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At
    present we derive a significant portion of our revenues and,
    after the full allocation of corporate overhead expenses, all of
    our operating income from our doctoral programs.
    We
    recently transitioned our library services and resources
    in-house, and we will now have responsibility for providing
    library services directly to our learners. We have limited
    experience providing such services and any inability to do so
    effectively could limit our ability to attract and retain
    learners, and adversely affect our enrollments, revenues and
    operating profits.
      We may
    experience declines in our revenue and enrollment growth rates,
    and our growth may place a strain on our
    resources.
  year-over-year,
   30




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We
    rely on exclusive proprietary rights and intellectual property
    that may not be adequately protected under current laws, and we
    encounter disputes from time to time relating to our use of
    intellectual property of third parties.
      We may
    incur liability for the unauthorized duplication or distribution
    of class materials posted online for class
    discussions.
    A
    reclassification of our adjunct faculty by authorities may have
    a material adverse effect on our results of
    operations.
   31




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We may
    not be able to retain our key personnel or hire and retain the
    personnel we need to sustain and grow our
    business.
      Our
    learner population and revenues could decrease if the government
    tuition assistance offered to U.S. Armed Forces personnel
    is reduced or eliminated, if the tuition discounts which we
    offer to U.S. Armed Forces personnel are reduced or
    eliminated, or if our informal arrangements with any military
    bases deteriorate.
    Our
    expenses may cause us to incur operating losses if we are
    unsuccessful in achieving growth.
   32




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Seasonal
    and other fluctuations in our results of operations could
    adversely affect the trading price of our common
    stock.
  quarter-to-quarter
  Our
    current success and future growth depend on the continued
    acceptance of the Internet and the corresponding growth in users
    seeking educational services on the Internet.
    
    inadequate Internet infrastructure;
    security and privacy concerns; and
    the unavailability of cost-effective Internet service and other
    technological factors.    Government
    regulations relating to the Internet could increase our cost of
    doing business, affect our ability to grow or otherwise have a
    material adverse effect on our business.
    An
    increase in interest rates could adversely affect our ability to
    attract and retain learners.
   33




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The
    price of our common stock may fluctuate
    significantly.
    
    our quarterly or annual earnings or those of other companies in
    our industry;
    the publics reaction to our press releases, our other
    public announcements and our filings with the SEC;
    changes in earnings estimates or recommendations by research
    analysts who track our common stock or the stocks of other
    companies in our industry;
    changes in our number of enrolled learners;
    new laws or regulations or new interpretations of laws or
    regulations applicable to our business;
    seasonal variations in our learner population;
    changes in accounting standards, policies, guidance,
    interpretations or principles;
    changes in general conditions in the U.S. and global economies
    or financial markets, including those resulting from war,
    incidents of terrorism or responses to such events;
    litigation involving our company or investigations or audits by
    regulators into the operations of our company or our
    competitors; and
    sales of common stock by our directors, executive officers and
    significant shareholders.    Future
    sales of our common stock in the public market could lower our
    stock price.
  lock-up lock-up manner-of-sale lock-up lock-up
  S-8
 34




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S-8 lock-up
  lock-up
  S-8
    Our
    executive officers, directors and principal existing
    shareholders own a large percentage of our voting stock, which
    may allow them to collectively control substantially all matters
    requiring shareholder approval and, in the case of certain of
    our principal shareholders, have other unique rights that may
    afford them access to our management.
  Form 10-K, Form 10-K, Form 10-K, Form 10-K, Form 10-K.
 35




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Our
    articles of incorporation, bylaws, Minnesota law and regulations
    of state and federal education agencies may discourage takeovers
    and business combinations that our shareholders might consider
    in their best interests.
    Being
    a public company will increase our expenses and administrative
    workload.
    
    create or expand the roles and duties of our board of directors,
    our board committees and management;
    institute more comprehensive compliance and internal audit
    functions;
    evaluate and maintain our system of internal control over
    financial reporting, and report on managements assessment
    thereof, in compliance with the requirements of Section 404
    of the
    Sarbanes-Oxley
    Act of 2002 and the related rules and regulations of the SEC and
    the Public Company Accounting Oversight Board;
    prepare and distribute periodic public reports in compliance
    with our obligations under the federal securities laws;
    implement more comprehensive internal policies, such as those
    relating to disclosure controls and procedures and insider
    trading; 36




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
    involve and retain to a greater degree outside counsel and
    accountants in the above activities;
    hire investor relations support personnel; and
    hire additional personnel to perform external reporting and
    internal accounting functions, including tax accounting
    functions.      We
    will be exposed to risks relating to evaluations of controls
    required by Section 404 of the
    Sarbanes-Oxley
    Act of 2002.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties   37




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Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   EXECUTIVE
    OFFICERS OF THE REGISTRANT    Name

Age

PositionStephen G. Shank


63


Chairman and Chief Executive
    Officer (Mr. Shank also serves as Chancellor and as a
    director of Capella University)Kenneth J. Sobaski


51


President and Chief Operating
    Officer (Mr. Sobaski also serves as a director of Capella
    University)Michael J. Offerman


59


Senior Vice President
    (Dr. Offerman also serves as President of Capella
    University)Lois M. Martin


44


Senior Vice President and Chief
    Financial OfficerPaul A. Schroeder


47


Senior Vice President, Operations
    and Business TransformationReed A. Watson


48


Senior Vice President, MarketingScott M. Henkel


52


Vice President and Chief
    Information OfficerGregory W. Thom


50


Vice President, General Counsel,
    and SecretaryElizabeth M. Rausch


55


Vice President, Human Resources   Stephen G. Shank
  Kenneth J. Sobaski
  Dr. Michael J. Offerman
 38




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Lois M. Martin
  Paul A. Schroeder day-to-day end-to-end
  Reed A. Watson
  Scott M. Henkel
 39




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Gregory W. Thom
  Elizabeth M. Rausch
 PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
    2006

High


LowFourth Quarter (November 10,
    2006  December 31, 2006)

$
26.68


$
23.29   Holders
    Dividends
   40




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Performance
    Graph
    
  Recent
    Sales of Unregistered Securities
  Form S-8 No. 333-138742).
  Use of
    Proceeds from our Initial Public Offering
  Form S-1 No. 333-124119)
 41




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Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers
    Total Number of


Approximate DollarShares Purchased as


Value of SharesPart of Publicly


That May Yet BeTotal Number of


Average Price Paid


Announced Plans or


Purchased Under thePeriod

Shares Purchased


per Share


Programs


Plans or Programs10/1/2006
    to 10/31/2006














11/1/2006
    to 11/30/2006


48,392


$
25.27







12/1/2006
    to 12/31/2006














Total


48,392


$
25.27







    42




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Item 6.
    Selected
    Financial Data  Form 10-K. Form 10-K. Form 10-K.
  Year Ended December 31,2006(a)


2005


2004


2003


2002(In thousands, except per share and enrollment data)Statement of Operations
    Data:Revenues

$
179,881


$
149,240


$
117,689


$
81,785


$
49,556Costs and expenses:Instructional costs and services


83,627



71,243



58,850



43,759



28,074Selling and promotional


56,646



45,623



35,089



22,246



15,894General and administrative


21,765



17,501



13,885



11,710



11,582Total costs and expenses


162,038



134,367



107,824



77,715



55,550Operating income (loss)


17,843



14,873



9,865



4,070



(5,994
)Other income, net


4,472



2,306



724



427



327Income (loss) before income taxes


22,315



17,179



10,589



4,497



(5,667
)Income tax expense (benefit)


8,904



6,929



(8,196
)


104



Net income (loss)

$
13,411


$
10,250


$
18,785


$
4,393


$
(5,667
)Net income (loss) per common share:Basic

$
1.09


$
0.89


$
1.68


$
0.41


$
(0.58
)Diluted

$
1.06


$
0.86


$
1.62


$
0.39


$
(0.58
)Weighted average number of common
    shares outstanding:Basic


12,271



11,476



11,189



10,804



9,698Diluted


12,629



11,975



11,599



11,154



9,698Other Data:Depreciation and
    amortization(b)

$
8,195


$
6,474


$
5,454


$
4,177


$
3,108Net cash provided by operating
    activities

$
28,901


$
28,940


$
16,049


$
15,399


$
123Capital expenditures

$
15,354


$
9,079


$
7,541


$
3,719


$
3,805EBITDA(c)

$
26,038


$
21,347


$
15,319


$
8,247


$
(2,886
)Enrollment(d)


17,976



14,613



12,252



9,313



6,578   As of December 31,2006


2005


2004


2003


2002(In thousands)Consolidated Balance Sheet
    Data:Cash, cash equivalents and
    short-term marketable securities

$
87,661


$
72,133


$
49,980


$
41,190


$
22,060Working
    capital(e)


69,147



53,718



37,935



27,516



15,340Total assets


129,314



106,562



80,026



55,402



35,380Total redeemable preferred stock






57,646



57,646



57,646



50,401Shareholders equity (deficit)


93,745



14,414



(5
)


(20,416
)


(26,250
)     (a)
    
    Operating income, income before income taxes and EBITDA for the
    year ended December 31, 2006 included $4.2 million of
    stock-based compensation expense recognized under
    FAS 123(R). Net income 43




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##### Table of Contents



and net income per common share for the year ended
    December 31, 2006 included $3.1 million of stock-based
    compensation expense recognized under FAS 123(R). In
    accordance with the modified prospective transition method
    provided under FAS 123(R), our consolidated financial
    statements for prior periods have not been restated to reflect,
    and do not include, the impact of FAS 123(R).  (b)
    
    Depreciation and amortization is calculated using the
    straight-line method over the estimated useful lives of the
    assets. Amortization includes amounts related to purchased
    software, capitalized website development costs and internally
    developed software.(c)
    
    EBITDA consists of net income minus other income, net plus
    income tax expense (benefit) and plus depreciation and
    amortization. Other income, net consists primarily of interest
    income earned on
    short-term
    marketable securities, net of any interest expense for capital
    leases and notes payable. We use EBITDA as a measure of
    operating performance. However, EBITDA is not a recognized
    measurement under U.S. generally accepted accounting
    principles, or GAAP, and when analyzing our operating
    performance, investors should use EBITDA in addition to, and not
    as an alternative for, net income (loss) as determined in
    accordance with GAAP. Because not all companies use identical
    calculations, our presentation of EBITDA may not be comparable
    to similarly titled measures of other companies. Furthermore,
    EBITDA is not intended to be a measure of free cash flow, as it
    does not consider certain cash requirements such as tax payments.      
    as a measurement of operating performance, because it assists us
    in comparing our performance on a consistent basis, as it
    removes depreciation, amortization, interest and taxes; and
    in presentations to the members of our board of directors to
    enable our board to have the same measurement basis of operating
    performance as is used by management to compare our current
    operating results with corresponding prior periods and with the
    results of other companies in our industry.    Year Ended December 31,2006


2005


2004


2003


2002(In thousands)Net income (loss)

$
13,411


$
10,250


$
18,785


$
4,393


$
(5,667
)Other income, net


(4,472
)


(2,306
)


(724
)


(427
)


(327
)Income tax expense (benefit)


8,904



6,929



(8,196
)


104



Depreciation and amortization


8,195



6,474



5,454



4,177



3,108EBITDA

$
26,038


$
21,347


$
15,319


$
8,247


$
(2,886
)     (d)
    
    Enrollment reflects the total number of learners registered in a
    course as of the last day of classes for such periods.(e)
    
    Working capital is calculated by subtracting total current
    liabilities from total current assets.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion of our historical results of
    operations and our liquidity and capital resources should be
    read in conjunction with the consolidated financial statements
    and related notes that appear elsewhere in this report.
 44




---



##### Table of Contents



Overview
  Background
      Regulation
  2005-2006
 45




---



##### Table of Contents



Our
    key financial results metrics
  Revenues.
      Year Ended December 31,2006


2005


2004Doctoral


7,473



6,471



5,611Masters


7,685



5,640



4,543Bachelors


2,729



2,380



1,859Other


89



122



239Total


17,976



14,613



12,252   Tuition and Fees. 2005-2006 2005-2006 2005-2006 2005-2006
  2006-2007
 46




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##### Table of Contents



2006-2007 four-year
    Costs and expenses.
        Other income, net.
  Factors
    affecting comparability
    Stock option expense. Share-based Payment
 47




---



##### Table of Contents



Accounting for Stock Issued to Employees
        Instructional costs and services

$
748Selling and promotional


357General and administrative


3,074Stock-based compensation expense
    included in operating income


4,179Tax benefit


1,075Stock-based compensation expense,
    net of tax

$
3,104     Income tax benefits resulting from reversal of valuation
    allowance. Accounting for Income Taxes ,
  Critical
    Accounting Policies and Use of Estimates
   48




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##### Table of Contents



Revenue recognition.
  Allowance for doubtful accounts.
    Impairment of long-lived assets.
  Contingencies.
 49




---



##### Table of Contents



Stock-based compensation. Accounting for Stock
    Issued to Employees
    Accounting for Stock-Based Compensation
        Item 7-
  Accounting for income taxes.
 50




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##### Table of Contents



Results
    of Operations
    Year Ended December 31,2006


2005


2004Revenues


100.0
%


100.0
%


100.0
%Costs and expensesInstructional costs and services


46.5



47.7



50.0Selling and promotional


31.5



30.6



29.8General and administrative


12.1



11.7



11.8Total costs and expenses


90.1



90.0



91.6Operating income


9.9



10.0



8.4Other income, net


2.5



1.5



0.6Income before income taxes


12.4



11.5



9.0Income tax expense (benefit)


4.9



4.6



(7.0
)Net income


7.5
%


6.9
%


16.0
%   Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenues. End-of-period
  Instructional costs and services
    expenses.
 51




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##### Table of Contents



Selling and promotional expenses.
  General and administrative
    expenses.
  Other income, net.
  Income tax expense (benefit).
  Net income.
  Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenues. End-of-period
  Instructional costs and services
    expenses.
 52




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##### Table of Contents



Selling and promotional expenses.
  General and administrative
    expenses.
  Other income, net.
  Income tax expense (benefit).
  Net income.
 53




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##### Table of Contents



Quarterly
    Results and Seasonality
    First Quarter


Second Quarter


Third Quarter


Fourth Quarter(In thousands, except for per share and enrollment data)2006Revenues

$
41,858


$
43,518


$
43,902


$
50,603Operating income


1,884



4,203



4,063



7,693Net income


1,642



3,055



3,041



5,673Net income per common share:Basic

$
0.14


$
0.26


$
0.26


$
0.40Diluted

$
0.14


$
0.25


$
0.25


$
0.39Enrollment


15,792



16,078



16,374



17,9762005Revenues

$
34,610


$
35,408


$
37,303


$
41,919Operating income


4,145



3,523



2,925



4,280Net income


2,705



2,356



2,204



2,985Net income per common share:Basic

$
0.24


$
0.21


$
0.19


$
0.26Diluted

$
0.23


$
0.20


$
0.18


$
0.25Enrollment


12,955



13,208



13,308



14,613     face-to-face
   54




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Liquidity
    and Capital Resources
  Liquidity
  short-term
        Operating
    Activities
      Investing
    Activities
     55




---



##### Table of Contents



Financing
    Activities
      Contractual
    Obligations
    Payments Due by PeriodLess Than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsCapital leases

$
12


$
5


$
7


$



$
Operating
    leases(a)


9,745



2,773



6,972







Total contractual obligations

$
9,757


$
2,778


$
6,979


$



$
     (a)
    
    Minimum lease commitments for our headquarters and miscellaneous
    office equipment.  Off-Balance
    Sheet Arrangements
    Impact
    of Inflation
    Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes  an
    Interpretation of FASB Statement No. 109
 56




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  Market
    Risk
    Interest
    Rate Risk
   57




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  CAPELLA
    EDUCATION COMPANY
  Index to
    Consolidated Financial Statements
  PageReport of
    Independent Registered Public Accounting Firm


59Consolidated
    Balance Sheets as of December 31, 2006 and 2005


60Consolidated
    Statements of Income for the years ended December 31, 2006,
    2005 and 2004


61Consolidated
    Statement of Shareholders Equity (Deficit) for the years
    ended December 31, 2006, 2005 and 2004


62Consolidated
    Statements of Cash Flows for the years ended December 31,
    2006, 2005 and 2004


63Notes to
    Consolidated Financial Statements


64  58




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm             
    59




---



##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Consolidated
    Balance Sheets
  As of December 31,2006


2005(In thousands, except par value)ASSETSCurrent assets:Cash and cash equivalents

$
22,491


$
13,972Short-term marketable securities


65,170



58,161Accounts receivable, net of
    allowance of $1,119 in 2006 and $1,299 in 2005


7,401



7,720Prepaid expenses and other current
    assets


3,703



4,758Deferred income taxes


1,800



1,243Total current assets


100,565



85,854Property and equipment, net


28,749



19,559Deferred income taxes






1,149Total assets

$
129,314


$
106,562LIABILITIES, REDEEMABLE
    PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
5,113


$
4,222Accrued liabilities


18,598



17,223Income taxes payable


214



Deferred revenue


7,488



8,044Notes payable and current portion
    of capital lease obligations


5



2,647Total current liabilities


31,418



32,136Deferred rent


1,813



2,366Capital lease obligations


7



Deferred income taxes


2,331



Total liabilities


35,569



34,502Redeemable preferred stock:Class E Redeemable Convertible
    Preferred Stock, $0.01 par value:Authorized shares  2,596Issued and outstanding
    shares  0 in 2006 and 2,596 in 2005






34,985Class G Redeemable Convertible
    Preferred Stock, $0.01 par value:Authorized shares  2,185Issued and outstanding
    shares  0 in 2006 and 2,185 in 2005






22,661Total redeemable preferred stock






57,646Shareholders equity:Class A Convertible Preferred
    Stock, $1.00 par value:Authorized shares  3,000Issued and outstanding
    shares  0 in 2006 and 2,810 in 2005






2,810Class B Convertible Preferred
    Stock, $2.50 par value:Authorized shares  1,180Issued and outstanding
    shares  0 in 2006 and 460 in 2005






1,150Class D Convertible Preferred
    Stock, $4.50 par value:Authorized shares  1,022Issued and outstanding
    shares  0 in 2006 and 1,022 in 2005






4,600Common stock, $0.01 par value:Authorized shares 
    100,000Issued and outstanding
    shares  16,002 in 2006 and 2,431 in 2005


160



24Additional paid-in capital


156,513



9,527Accumulated other comprehensive
    income (loss)


(7
)


(8
)Retained earnings (accumulated
    deficit)


(62,921
)


(3,689
)Total shareholders equity


93,745



14,414Total liabilities, redeemable
    preferred stock and shareholders equity

$
129,314


$
106,562   The accompanying notes are an integral part of these
    consolidated financial statements.
 60




---



##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Consolidated
    Statements of Income
  Year Ended December 31,2006


2005


2004(In thousands, except per share amounts)Revenues

$
179,881


$
149,240


$
117,689Costs and expenses:Instructional costs and services


83,627



71,243



58,850Selling and promotional


56,646



45,623



35,089General and administrative


21,765



17,501



13,885Total costs and expenses


162,038



134,367



107,824Operating income


17,843



14,873



9,865Other income, net


4,472



2,306



724Income before income taxes


22,315



17,179



10,589Income tax expense (benefit)


8,904



6,929



(8,196
)Net income

$
13,411


$
10,250


$
18,785Net income per common share:Basic

$
1.09


$
0.89


$
1.68Diluted

$
1.06


$
0.86


$
1.62Weighted average number of common
    shares outstanding:Basic


12,271



11,476



11,189Diluted


12,629



11,975



11,599   The accompanying notes are an integral part of these
    consolidated financial statements.
 61




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Consolidated
    Statement of Shareholders Equity (Deficit)
  Class A


Class B


Class D














Accumulated


RetainedConvertible


Convertible


Convertible








Additional





Other


Earnings/Preferred Stock


Preferred Stock


Preferred Stock


Common Stock


Paid-In


Deferred


Comprehensive


(Accumulated





ComprehensiveShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Capital


Compensation


Income (Loss)


Deficit)


Total


Income(In thousands)Balance at December 31, 2003


2,810


$
2,810



460


$
1,150



1,022


$
4,600



1,826


$
18


$
3,734


$
(4
)

$



$
(32,724
)

$
(20,416
)Exercise of stock options


























205



2



856















858Income tax benefits associated with
    stock-based compensation


































150















150Issuance of common stock to the
    Employee Stock Ownership Plan


























47







641















641Amortization of deferred
    compensation






































4











4Employee Stock Ownership Plan
    distribution


























(4
)






(27
)














(27
)Net income














































18,785



18,785


$
18,785Balance at December 31, 2004


2,810



2,810



460



1,150



1,022



4,600



2,074



20



5,354











(13,939
)


(5
)

$
18,785Exercise of stock options


























52



1



277















278Exercise of stock warrants


























271



3



3,036















3,039Issuance of common stock to the
    Employee Stock Ownership Plan


























46







928















928Employee Stock Ownership Plan
    distribution


























(12
)






(280
)














(280
)Issuance of restricted stock


























3







50



(50
)










Amortization of deferred
    compensation






































19











19Cancellation of restricted stock


























(3
)






(50
)


31











(19
)Stock-based compensation


































202















202Income tax benefits associated with
    stock-based compensation


































10















10Net income














































10,250



10,250


$
10,250Unrealized loss on marketable
    securities










































(8
)






(8
)


(8
)Balance at December 31, 2005


2,810



2,810



460



1,150



1,022



4,600



2,431



24



9,527







(8
)


(3,689
)


14,414


$
10,242Exercise of stock options


























99



1



797















798Repurchase of stock options


































(412
)














(412
)Stock-based compensation


































4,179















4,179Income tax benefits associated with
    stock-based compensation


































166















166Employee Stock Ownership Plan
    contribution


























62



1



1,240















1,241Employee Stock Ownership Plan
    distribution


































(6
)














(6
)Issuance of common stock, net of
    underwriters commissions and offering costs


























4,232



42



74,908















74,950Conversion of convertible preferred
    stock


(2,810
)


(2,810
)


(460
)


(1,150
)


(1,022
)


(4,600
)


4,292



43



8,517















Conversion of redeemable
    convertible preferred stock


























4,886



49



57,597















57,646Payment of special distribution














































(72,643
)


(72,643
)Net Income














































13,411



13,411


$
13,411Unrealized gain on marketable
    securities










































1







1



1Balance at December 31, 2006





$







$







$




16,002


$
160


$
156,513


$



$
(7
)

$
(62,921
)

$
93,745


$
13,412   The accompanying notes are an integral part of these
    consolidated financial statements.
 62




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Consolidated
    Statements of Cash Flows
  Year Ended December 31,2006


2005


2004(In thousands)Operating activitiesNet income

$
13,411


$
10,250


$
18,785Adjustments to reconcile net income
    to net cash provided by operating activities:Provision for bad debts


2,855



2,263



1,376Depreciation and amortization


8,195



6,474



5,454Amortization of investment
    discount/premium


(366
)


(158
)


Gain on disposal of assets






(35
)


Asset impairment


63



156



1,020Stock-based compensation


4,179







Noncash equity-related expense


169



1,381



1,135Excess tax benefits from
    stock-based compensation


(79
)






Deferred income taxes


2,926



6,203



(8,445
)Changes in operating assets and
    liabilities:Accounts receivable


(2,536
)


(4,106
)


(4,278
)Prepaid expenses and other assets


(627
)


(409
)


(1,905
)Accounts payable and accrued
    liabilities


1,274



3,329



268Income taxes payable


546



(292
)


140Deferred rent


(553
)


2,366



Deferred revenue


(556
)


1,518



2,499Net cash provided by operating
    activities


28,901



28,940



16,049Investing activitiesCapital expenditures


(15,354
)


(9,079
)


(7,541
)Purchases of marketable securities


(181,980
)


(59,879
)


(39,700
)Sales of marketable securities


175,340



46,360



35,050Net cash used in investing
    activities


(21,994
)


(22,598
)


(12,191
)Financing activitiesPayments of capital lease
    obligations and notes payable


(2,666
)


(1,278
)


(629
)Change in restricted cash






391



80Excess tax benefits from
    stock-based compensation


79







Net proceeds from exercise and
    repurchase of stock options


386



278



858Proceeds from exercise of warrants






3,039



Employee Stock Ownership Plan
    distributions


(6
)


(280
)


(27
)Net proceeds from issuance of
    common stock


76,462







Payment of special distribution


(72,643
)






Net cash provided by financing
    activities


1,612



2,150



282Net increase in cash and cash
    equivalents


8,519



8,492



4,140Cash and cash equivalents at
    beginning of year


13,972



5,480



1,340Cash and cash equivalents at end of
    year

$
22,491


$
13,972


$
5,480Supplemental disclosures of cash
    flow informationInterest paid

$
24


$
23


$
56Income taxes paid

$
5,433


$
1,080


$
109Noncash transactions:Purchase of equipment and increase
    in prepaid asset through proceeds from issuance of notes payable

$



$
3,595


$
Purchase of equipment included in
    accounts payable and accrued liabilities

$
2,078


$
2,477


$
1,445Purchase of equipment through
    capital lease obligations

$
16


$



$
Issuance of common stock to the
    Employee Stock Ownership Plan

$
1,241


$
928


$
641Reclassification of deferred
    initial public offering costs from prepaid expenses to equity

$
1,512


$



$
   The accompanying notes are an integral part of these
    consolidated financial statements.
 63




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes
    to Consolidated Financial Statements
 (In
    thousands, except per share data)
  1.
    Nature of
    Business    2.
    Summary
    of Significant Accounting Policies  Consolidation
    Revenue
    Recognition
    Cash
    and Cash Equivalents
    Marketable
    Securities
  Accounting for Certain Investments in Debt and
    Equity Securities available-for-sale Available-for-sale other-than-temporary
 64




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Restatement and Revision of Accounting
    Research Bulletins
  Allowance
    for Doubtful Accounts
    Concentration
    of Credit Risk
              Property
    and Equipment
   65




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
  98-1, Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use.
  Computer equipment


2-3 yearsFurniture and office equipment


5-7 yearsComputer software


3-7 years     Income
    Taxes
  Accounting
    for Income Taxes
  Use of
    Estimates
    Contingencies
    Impairment
    of Long-Lived Assets
     66




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Advertising
    Net
    Income Per Common Share
      Year Ended December 31,2006


2005


2004Numerator:Net income

$
13,411


$
10,250


$
18,785Denominator:Denominator for basic net income
    per common share  weighted average shares
    outstanding


12,271



11,476



11,189Effect of dilutive stock options
    and warrants


358



499



410Denominator for diluted net income
    per common share


12,629



11,975



11,599Basic net income per common share

$
1.09


$
0.89


$
1.68Diluted net income per common share

$
1.06


$
0.86


$
1.62     Deferred
    Initial Public Offering Costs
    Comprehensive
    Income
  available-for-sale
 67




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Stock-Based
    Compensation
  Share-based
    Payment Accounting for Stock Issued to Employees
    Accounting for Stock-Based Compensation
      New
    Accounting Standards
  Accounting for Uncertainty in Income Taxes  an
    Interpretation of FASB Statement No. 109
 68




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Marketable
    Securities  available-for-sale
  December 31, 2006Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


(Losses)


ValueAuction rate

$
35,100


$



$



$
35,100Corporate debt


29,282



6



(16
)


29,272U.S. Agency


799







(1
)


798Total

$
65,181


$
6


$
(17
)

$
65,170   December 31, 2005Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


(Losses)


ValueAuction rate

$
44,775


$



$



$
44,775Corporate debt


8,550



2



(8
)


8,544U.S. Agency


4,851







(9
)


4,842Total

$
58,176


$
2


$
(17
)

$
58,161   other-than-temporarily
    As of December 31,2006


2005Due in one year or less

$
13,575


$
11,382Due in one to five years


8,426



2,004Due after ten years


43,169



44,775$
65,170


$
58,161   Restatement and Revision of
    Accounting Research Bulletins
  available-for-sale available-for-sale
 69




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   4.
    Property
    and Equipment    As of December 31,2006


2005Computer software

$
30,871


$
18,469Computer equipment


12,531



10,235Furniture and office equipment


8,059



6,612Leasehold improvements


1,975



1,31853,436



36,634Less accumulated depreciation and
    amortization


(24,687
)


(17,075
)Property and equipment, net

$
28,749


$
19,559   5.
    Accrued
    Liabilities    As of December 31,2006


2005Accrued instructional fees

$
4,470


$
3,189Accrued compensation and benefits


3,618



4,510Accrued vacation


1,047



1,386Customer deposits


1,218



1,010Other


8,245



7,128$
18,598


$
17,223   6.
    Financing
    Arrangements      7.
    Operating
    and Capital Lease Obligations   70




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Capital


Operating2007

$
5


$
2,7732008


5



2,8032009


2



2,3052010






1,8642011






Total minimum payments

$
12


$
9,745Less amount representing interest


Present value of net minimum
    payments


12Less current portion


(5
)Long-term portion of capital lease
    obligations

$
7         8.
    Litigation    9.
    Common
    Stock   71




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
       10.
    Preferred
    Stock          11.
    Redeemable
    Preferred Stock        12.
    Stock-Based
    Compensation   72




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   Stock-based
    compensation plans
           73




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Weighted-Plan Options


AverageAvailable


Outstanding


Exercise PriceService-based Stock Options

for Grant


Incentive


Non-Qualified


per ShareBalance, December 31, 2005


1,318



1,120



594


$
14.67Granted


(573
)


107



466



20.00Exercised






(119
)


(3
)


10.25Canceled


23



(130
)


(47
)


14.56Shares reserved for issuance


1,400











Balance, December 31,
    2006(a)


2,168



978



1,010



16.46     (a)
    
    The total available for grant, including the 190 outstanding
    performance-based stock options, was 1,978.  Weighted-Weighted-


AverageAverage


Remaining


AggregateNumber of


Exercise


Contractual


IntrinsicService-based Stock Options

Shares


Price


Term


ValueBalance at December 31, 2006


1,988


$
16.46



6.8


$
15,500Vested and expected to vest,
    December 31, 2006


1,908


$
16.32



6.7


$
15,125Exercisable, December 31, 2006


1,033


$
13.94



5.6


$
10,652   in-the-money
      Proceeds from stock options
    exercised

$
798Tax benefits related to stock
    options exercised


166Intrinsic value of stock options
    exercised


1,357    74




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Instructional costs and services

$
748Selling and promotional


357General and administrative


3,074Stock-based compensation expense
    included in operating income


4,179Tax benefit


1,075Stock-based compensation expense,
    net of tax

$
3,104       Year EndedDecember 31,2005


2004Net income

$
10,250


$
18,785Stock-based compensation expense
    included in net income as reported


202



4Compensation expense determined
    under fair- value-based method, net of tax


(1,966
)


(2,154
)Pro forma net income

$
8,486


$
16,635Net income per common share:Basic  as reported

$
0.89


$
1.68Basic  pro forma

$
0.74


$
1.49Diluted  as reported

$
0.86


$
1.62Diluted  pro forma

$
0.71


$
1.45     Year Ended December 31,2005


20042006


(Pro Forma)


(Pro Forma)Expected life (in
    years)(1)


4.25-6.25



6.0



6.0Expected
    volatility(2)


45.6
%


38.5
%


44.1
%Risk-free interest
    rate(3)


4.4-5.1
%


3.9-4.4
%


3.9
%Dividend
    yield(4)


0.0
%


0.0
%


0.0
%Weighted-average fair value of
    options granted

$
9.84


$
8.87


$
8.54     (1)
    
    For the year ended December 31, 2006, the expected option
    life was determined using the simplified method for estimating
    expected option life for service-based stock options. Prior to
    the year ended December 31, 2006, the expected option life
    was based on the average expected option life experienced by our
    peer group of post-secondary education companies.(2)
    
    As the Companys stock had not been publicly traded prior
    to November 2006, the expected volatility assumption for the
    year ended December 31, 2006 reflects a detailed evaluation
    of the stock price of its 75




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
  peer group of public post-secondary education companies for a
    period equal to the expected life of the options, starting from
    the date they went public. Prior to the year ended
    December 31, 2006 the expected volatility assumption
    reflects the public disclosures of the Companys peer group
    of post-secondary education companies.(3)
    
    The risk-free interest rate assumption is based upon the
    U.S. Treasury zero coupon yield curve on the grant date for
    a maturity similar to the expected life of the options.(4)
    
    The dividend yield assumption is based on the Companys
    history and expectation of regular dividend payments.    13.
    Warrants        14.
    Income
    Taxes     76




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
     Year Ended December 31,2006


2005


2004Current:Federal

$
5,670


$
345


$
187State


312



381



62Deferred


2,922



6,203



(8,445
)$
8,904


$
6,929


$
(8,196
)     Year Ended December 31,2006


2005


2004Statutory rate


35.0
%


35.0
%


35.0
%State income taxes


2.6



2.6



3.5FAS 123R expense related to
    incentive stock options


2.0







Other


0.3



2.7



2.0Change in rate applied to deferred
    tax assets and liabilities










3.6Change in valuation allowance










(121.5
)39.9
%


40.3
%


(77.4
)%     As of December 31,2006


2005Deferred tax assets:Net operating loss carryforwards

$
179


$
1,878Accounts receivable


419



489Alternative minimum tax credit


87



646Goodwill


75



89Accrued liabilities


2,179



1,810Nonqualified stock options


1,075



Other


3



54,017



4,917Deferred tax liabilities:Property and equipment


(4,548
)


(2,525
)(4,548
)


(2,525
)Net deferred tax asset (liability)

$
(531
)

$
2,392    77




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
    15.
    Regulatory      2005-2006
     78




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
    16.
    Other
    Employee Benefit Plans         79




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Notes to
    Consolidated Financial
    Statements  (Continued)
   17.
    Quarterly
    Financial Summary (unaudited)  First


Second


Third


Fourth


Total2006Revenues

$
41,858


$
43,518


$
43,902


$
50,603


$
179,881Operating income


1,884



4,203



4,063



7,693



17,843Net income


1,642



3,055



3,041



5,673



13,411Net income per common shareBasic

$
0.14


$
0.26


$
0.26


$
0.40


$
1.09Diluted

$
0.14


$
0.25


$
0.25


$
0.39


$
1.06   First


Second


Third


Fourth


Total2005Revenues

$
34,610


$
35,408


$
37,303


$
41,919


$
149,240Operating income


4,145



3,523



2,925



4,280



14,873Net income


2,705



2,356



2,204



2,985



10,250Net income per common shareBasic

$
0.24


$
0.21


$
0.19


$
0.26


$
0.89Diluted

$
0.23


$
0.20


$
0.18


$
0.25


$
0.86  80




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Changes
    in internal control over financial reporting.
  Rule 13a-15(d) 15d-15(d)
  Item 9B.
    Other
    Information   PART III  Form 10-K Form 10-K.
  Item 10.
    Directors,
    Executive Officers, and Corporate Governance  Form 10-K.
  Item 11.
    Executive
    Compensation   81




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##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Party Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedule  Form 10-K:
                        ExhibitNumber

Description

Method of Filing3
.1

Amended and Restated Articles of
    Incorporation.

Incorporated by reference to
    Exhibit 3.1 to the Companys Current Report on
    Form 8-K
    filed with the SEC on November 11, 2006.3
.2

Amended and Restated By-Laws.

Incorporated by reference to
    Exhibit 3.4 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.4
.1

Specimen of common stock
    certificate.

Incorporated by reference to
    Exhibit 4.1 to Amendment No. 4 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 19, 2006. 82




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##### Table of Contents



ExhibitNumber

Description

Method of Filing4
.2

Third Amended and Restated Co-Sale
    and Board Representation Agreement, dated as of January 22,
    2003, by and among the Registrant and the shareholders named
    therein.

Incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1
    filed with the SEC on April 18, 2005.4
.3

Second Amended and Restated
    Investor Rights Agreement, dated as of January 22, 2003, by
    and among the Registrant and the shareholders named therein.

Incorporated by reference to
    Exhibit 4.7 to the Companys Registration Statement on
    Form S-1
    filed with the SEC on April 18, 2005.4
.4

Warrant, dated as of June 16,
    1998, issued by the Registrant to Legg Mason Wood Walker,
    Incorporated.

Incorporated by reference to
    Exhibit 4.8 to the Companys Registration Statement on
    Form S-1
    filed with the SEC on April 18, 2005.4
.5

Amendment No. 1 to Warrant,
    dated as of April 20, 2000, by and between the Registrant
    and Legg Mason Wood Walker, Incorporated.

Incorporated by reference to
    Exhibit 4.9 to the Companys Registration Statement on
    Form S-1
    filed with the SEC on April 18, 2005.4
.6

Amendment No. 2 to Warrant,
    dated as of February 21, 2002, by and between the
    Registrant and Legg Mason Wood Walker, Incorporated.

Incorporated by reference to
    Exhibit 4.10 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.7

Amendment No. 3 to Warrant,
    dated as of January 22, 2003, by and between the Registrant
    and Legg Mason Wood Walker, Incorporated.

Incorporated by reference to
    Exhibit 4.11 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.8

Warrant, dated as of May 11,
    2000, issued by the Registrant to Legg Mason Wood Walker,
    Incorporated.

Incorporated by reference to
    Exhibit 4.12 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.9

Amendment No. 1 to Warrant,
    dated as of February 21, 2002, by and between the
    Registrant and Legg Mason Wood Walker, Incorporated.

Incorporated by reference to
    Exhibit 4.13 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.10

Amendment No. 2 to Warrant,
    dated as of January 22, 2003, by and between the Registrant
    and Legg Mason Wood Walker, Incorporated.

Incorporated by reference to
    Exhibit 4.14 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.11

Exchange Agreement, dated as of
    January 22, 2003, by and among the Registrant and the
    shareholders named therein.

Incorporated by reference to
    Exhibit 4.15 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.12

Class F Convertible Preferred
    Stock Purchase Agreement, dated as of January 31, 2002, by
    and among the Registrant and the shareholders named therein.

Incorporated by reference to
    Exhibit 4.17 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.4
.13

Class E Convertible Preferred
    Stock Purchase Agreement, dated as of April 20, 2000, by
    and among the Registrant and the shareholders named therein.

Incorporated by reference to
    Exhibit 4.18 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.1*

Capella Education Company 2005
    Stock Incentive Plan.

Incorporated by reference to
    Exhibit 10.1 to Amendment No. 1 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on June 3, 2005.10
.2*

Forms of Option Agreements for the
    Capella Education Company 2005 Stock Incentive Plan.

Incorporated by reference to
    Exhibit 10.2 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.3*

Capella Education Company 1999
    Stock Option Plan, as amended.

Incorporated by reference to
    Exhibit 10.3 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005. 83




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##### Table of Contents



ExhibitNumber

Description

Method of Filing10
.4*

Form of Non-Statutory Stock Option
    Agreement (Director) for the Capella Education Company 1999
    Stock Option Plan.

Incorporated by reference to
    Exhibit 10.4 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.5*

Form of Non-Statutory Stock Option
    Agreement (Employee) for the Capella Education Company 1999
    Stock Option Plan.

Incorporated by reference to
    Exhibit 10.5 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.6*

Form of Incentive Stock Option
    Agreement for the Capella Education Company 1999 Stock Option
    Plan.

Incorporated by reference to
    Exhibit 10.6 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.7*

Learning Ventures International,
    Inc. 1993 Stock Option Plan, as amended.

Incorporated by reference to
    Exhibit 10.7 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.8*

Form of Option Agreement for the
    Learning Ventures International, Inc. 1993 Stock Option Plan.

Incorporated by reference to
    Exhibit 10.8 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.9*

Capella Education Company Employee
    Stock Ownership Plan and the First Amendment thereto.

Incorporated by reference to
    Exhibit 10.9 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.10*

Capella Education Company
    Retirement Plan with Adoption Agreement and EGTRRA Amendment.

Incorporated by reference to
    Exhibit 10.10 to Amendment No. 1 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on June 3, 2005.10
.11*

Capella Education Company
    Executive Severance Plan.

Incorporated by reference to
    Exhibit 10.11 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.10
.12*

Capella Education Company Employee
    Stock Purchase Plan.

Incorporated by reference to
    Exhibit 10.12 to Amendment No. 1 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on June 3, 2005.10
.13*

Confidentiality, Non-Competition
    and Inventions Agreement, dated as of April 16, 2001, by
    and between the Registrant and Michael J. Offerman.

Incorporated by reference to
    Exhibit 10.14 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.14*

Confidentiality, Non-Competition
    and Inventions Agreement, dated as of May 9, 2001, by and
    between the Registrant and Paul A. Schroeder.

Incorporated by reference to
    Exhibit 10.15 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.15*

Form of Confidentiality,
    Non-Competition and Inventions Agreement (executed by Scott M.
    Henkel).

Incorporated by reference to
    Exhibit 10.16 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.16*

Offer Letter, dated as of
    March 9, 2001, by and between the Registrant and Paul A.
    Schroeder.

Incorporated by reference to
    Exhibit 10.17 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.17*

Offer Letter, dated as of
    November 10, 2003, by and between the Registrant and
    Michael J. Offerman.

Incorporated by reference to
    Exhibit 10.18 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.18*

Offer Letter, dated as of
    December 22, 2003, by and between the Registrant and Scott
    M. Henkel.

Incorporated by reference to
    Exhibit 10.19 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005. 84




---



##### Table of Contents



ExhibitNumber

Description

Method of Filing10
.19*

Form of Nondisclosure Agreement
    (executed by Scott M. Henkel, Paul A. Schroeder, Stephen G.
    Shank, Michael J. Offerman and Lois M. Martin).

Incorporated by reference to
    Exhibit 10.21 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.20

Office Lease, dated as of
    February 23, 2004, by and between the Registrant and 601
    Second Avenue Limited Partnership.

Incorporated by reference to
    Exhibit 10.22 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.21

Short Term Office Space Lease,
    dated as of February 23, 2004, by and between the
    Registrant and 601 Second Avenue Limited Partnership.

Incorporated by reference to
    Exhibit 10.23 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.22

Memorandum of Lease, dated as of
    March 10, 2004, by and between the Registrant and 601
    Second Avenue Limited Partnership.

Incorporated by reference to
    Exhibit 10.24 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.23

Office Lease, dated as of
    June 28, 2000, as amended, by and between the Registrant
    and 222 South Ninth Street Limited Partnership and ND
    Properties, Inc. as successor in interest to 222 South Ninth
    Street Limited Partnership.

Incorporated by reference to
    Exhibit 10.25 to the Companys Registration Statement
    on
    Form S-1
    filed with the SEC on April 18, 2005.10
.24*

Capella Education Company Annual
    Incentive Plan for Management Employees  2006.

Incorporated by reference to
    Exhibit 10.26 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.25*

Form of Performance Vesting Option
    Agreement (Annual Incentive Plan for Management
    Employees  2006) for the Capella Education Company
    2005 Stock Incentive Plan.

Incorporated by reference to
    Exhibit 10.27 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.26*

Offer Letter, dated
    October 20, 2004, by and between the Registrant and Lois M.
    Martin.

Incorporated by reference to
    Exhibit 10.28 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.27*

Offer Letter, dated
    February 21, 2006, by and between the Registrant and
    Kenneth J. Sobaski.

Incorporated by reference to
    Exhibit 10.29 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.28*

Confidentiality, Non-Competition
    and Inventions Agreement dated as of February 27, 2006, by
    and between the Registrant and Kenneth J. Sobaski.

Incorporated by reference to
    Exhibit 10.30 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.29*

Offer Letter, dated June 6,
    2006, by and between the Registrant and Reed Watson.

Incorporated by reference to
    Exhibit 10.31 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.30*

Confidentiality, Non-Competition
    and Inventions Agreement dated as of June 20, 2006, by and
    between the Registrant and Reed Watson.

Incorporated by reference to
    Exhibit 10.32 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.31*

Employment Agreement dated
    May 30, 2006 between Capella Education Company and Michael
    J. Offerman.

Incorporated by reference to
    Exhibit 10.33 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006. 85




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##### Table of Contents



ExhibitNumber

Description

Method of Filing10
.32*

Amendment to Confidentiality,
    Non-Competition and Inventions Agreement, dated June 16,
    2005, by and between the Registrant and Michael J. Offerman.

Incorporated by reference to
    Exhibit 10.34 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.33*

Employment Agreement dated
    May 30, 2006 between Capella Education Company and Paul A.
    Schroeder.

Incorporated by reference to
    Exhibit 10.35 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.34

First Amendment to Lease, dated as
    of May 16, 2006, by and between the Registrant and 601
    Second Avenue Limited Partnership.

Incorporated by reference to
    Exhibit 10.36 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.35

Letter Agreement, dated
    July 5, 2006, between the Registrant and ASB Minneapolis
    225 Holdings, LLC

Incorporated by reference to
    Exhibit 10.37 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.36

Amendment No. 3 to Lease
    Agreement, dated as of June 16, 2005, by and between the
    Registrant and ND Properties, Inc. and ND Properties of
    Delaware, Inc.

Incorporated by reference to
    Exhibit 10.38 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.37*

Amendments to Capella Education
    Company Retirement Plan dated as of April 20, 2006 and
    June 1, 2006.

Incorporated by reference to
    Exhibit 10.39 to Amendment No. 2 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on August 29, 2006.10
.38*

Amendment 1 to Employment
    Agreement dated August 25, 2006 between Paul A. Schroeder
    and Capella Education Company

Incorporated by reference to
    Exhibit 10.40 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.10
.39*

Amendment 1 to Employment
    Agreement dated August 25, 2006 between Michael J. Offerman
    and Capella Education Company

Incorporated by reference to
    Exhibit 10.41 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.10
.40*

Amendment No. 1 to Capella
    Education Company 2005 Stock Incentive Plan.

Incorporated by reference to
    Exhibit 10.42 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.10
.41*

Capella Education Company Senior
    Executive Severance Plan.

Incorporated by reference to
    Exhibit 10.43 to Amendment No. 3 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 6, 2006.10
.42*

Second Amendment to the Capella
    Education Company Employee Stock Ownership Plan.

Incorporated by reference to
    Exhibit 10.44 to Amendment No. 5 to the Companys
    Registration Statement on
    Form S-1
    filed with the SEC on October 27, 2006.10
.43*

Annual Incentive Plan 
    Management Employees  2007

Incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    filed with the SEC on February 15, 2007.21


Subsidiaries of the Registrant.

Filed electronically.23


Consent of Ernst & Young
    LLP.

Filed electronically.24


Powers of Attorney.

Filed electronically. 86




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##### Table of Contents



ExhibitNumber

Description

Method of Filing31
.1

Certification of the Chief
    Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.

Filed electronically.31
.2

Certification of the Chief
    Financial Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.

Filed electronically.32
.1

Certification of Chief Executive
    Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed electronically.32
.2

Certification of Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed electronically.     *
    
    Management contract or compensatory plan or arrangement. 87




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##### Table of Contents



CAPELLA
    EDUCATION COMPANY
  Schedule II 
    Valuation and Qualifying Accounts
 Fiscal
    Years 2006, 2005 and 2004
  AdditionsBeginning


Charged to





EndingBalance


Expense


Deductions


Balance(In thousands)Allowance accounts for the
    years ended:December 31, 2006
    Allowance for doubtful accounts

$
1,299


$
2,855


$
(3,035
)(a)

$
1,119December 31, 2005
    Allowance for doubtful accounts


1,065



2,263



(2,029
)(a)


1,299December 31, 2004
    Allowance for doubtful accounts


713



1,376



(1,024
)(a)


1,065Deferred tax asset valuation
    allowance


12,863







(12,863
)(b)


     (a)
    
    Write-off of accounts receivables.(b)
    
    Reversal of deferred tax valuation allowance as a result of
    achieving three years of cumulative taxable income in 2004 along
    with expectations of future profitability. 88




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##### Table of Contents



SIGNATURES    CAPELLA EDUCATION COMPANY
  By:
    /s/  Lois
    M. Martin  Lois M. Martin
 Senior Vice President and Chief
    Financial Officer
 Date: March 5, 2007
    Signatures

Title

Date/s/  Stephen
    G. Shank*Stephen
    G. Shank

Chairman and Chief Executive
    Officer 
    (Principal Executive Officer)

March 5, 2007/s/  Lois
    M. MartinLois
    M. Martin

Senior Vice President and Chief
    Financial Officer (Principal Financial Officer)

March 5, 2007/s/  Amy
    L. Drifka*Amy
    L. Drifka

Vice President and Controller 
    (Principal Accounting Officer)

March 5, 2007/s/  S.
    Joshua
    Lewis*S.
    Joshua Lewis

Director

March 5, 2007/s/  James
    A. Mitchell*James
    A. Mitchell

Director

March 5, 2007/s/  David
    W. Smith*David
    W. Smith

Director

March 5, 2007/s/  Gordon
    A. Holmes*Gordon
    A. Holmes

Director

March 5, 2007/s/  Jody
    G. Miller*Jody
    G. Miller

Director

March 5, 2007/s/  Jeffrey
    W. Taylor*Jeffrey
    W. Taylor

Director

March 5, 2007/s/  Darrell
    R. Tukua*Darrell
    R. Tukua

Director

March 5, 2007/s/  Jon
    Q.
    Reynolds, Jr.*Jon
    Q. Reynolds, Jr.

Director

March 5, 2007/s/  Sandra
    E. Taylor*Sandra
    E. Taylor

Director

March 5, 2007   *
    Lois M. Martin, by signing her name hereto, does hereby sign
    this document on behalf of each of the above-named officers
    and/or directors of the Registrant pursuant to powers of
    attorney duly executed by such persons.  By:
    /s/  Lois
    M. Martin  Lois M. Martin
 Attorney-in- Fact
 89