CAPELLA EDUCATION COMPANY

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                       CLASS E CONVERTIBLE PREFERRED STOCK
                            STOCK PURCHASE AGREEMENT

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                                TABLE OF CONTENTS



                                                                                                              PAGE
                                                                                                           
SECTION 1. ISSUANCE AND SALE OF THE CLASS E PREFERRED STOCK............................................         2
     1.1.     The Purchase..............................................................................        2
     1.2.     The Closing...............................................................................        2
     1.3.     Deliveries at the Closing.................................................................        2
     1.4.     Additional Issuances; Adjustment..........................................................        2

SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................         4
     2.1.     Organization and Standing.................................................................        4
     2.2.     Power.....................................................................................        4
     2.3.     Subsidiaries..............................................................................        4
     2.4.     Capitalization............................................................................        5
     2.5.     Authorization; No Breach..................................................................        7
     2.6.     Material Contracts........................................................................        8
     2.7.     Litigation................................................................................        8
     2.8.     Consents; Title IV Recertification; HSR...................................................        8
     2.9.     Title to Properties; Liens and Encumbrances; Assets of the Business.......................        9
     2.10.    Intellectual Property.....................................................................        9
     2.11.    Taxes.....................................................................................       11
     2.12.    Brokers...................................................................................       12
     2.13.    Compliance with Laws; Permits; Accreditation and State Regulatory Requirements............       12
     2.14.    Offering Exemption........................................................................       16
     2.15.    Employees; Proprietary Information Agreement..............................................       17
     2.16.    Insurance.................................................................................       17
     2.17.    [Intentionally Omitted]...................................................................       17
     2.18.    Financial Statements......................................................................       17
     2.19.    Related Party Transactions................................................................       18
     2.20.    Environmental Matters.....................................................................       19
     2.21.    Employee Benefit Plans....................................................................       19
     2.22.    Labor Relations; Employees................................................................       21
     2.23.    Absence of Changes........................................................................       22
     2.24.    Suppliers and Customers...................................................................       22
     2.25.    Suitability...............................................................................       23
     2.26.    Operations of the Company.................................................................       23


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     2.27     Recruitment; Admissions Procedures; Attendance; Reports...................................       23
     2.28     USDOE Demonstration Program...............................................................       24
     2.29.    Disclosure................................................................................       24

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..............................................       25
     3.1.     Power; Authorization......................................................................       25
     3.2.     No Breach.................................................................................       25
     3.3.     Investment; Securities Laws...............................................................       26
     3.4.     Accredited Investor.......................................................................       26
     3.5.     Rule 144..................................................................................       26
     3.6.     Availability of Funds.....................................................................       26
     3.7.     Brokers...................................................................................       26
     3.8.     Independent Investigation and Counsel.....................................................       26

SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.......................................................       27
     4.1.     Representations and Warranties Correct....................................................       27
     4.2.     Covenants.................................................................................       27
     4.3.     Material Adverse Change...................................................................       27
     4.4.     Compliance Certificate....................................................................       28
     4.5.     Opinion of Company's Counsel..............................................................       28
     4.6.     Officer's Certificate.....................................................................       28
     4.7.     Governmental and Other Authorizations, etc................................................       28
     4.8.     Board Membership..........................................................................       28

SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.........................................................       28
     5.1.     Representations and Warranties Correct....................................................       28
     5.2.     Covenants.................................................................................       29
     5.3.     Compliance Certificate....................................................................       29
     5.4.     Governmental Authorizations, etc..........................................................       29

SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.......................................       29
     6.1.     Cooperation...............................................................................       29
     6.2.     No Solicitation...........................................................................       29
     6.3.     Publicity.................................................................................       30
     6.4.     Conduct of Business Prior to the Closing..................................................       30
     6.5.     Directors and Officers Liability Insurance................................................       30

SECTION 7. POST-CLOSING AND ON-GOING COVENANTS..........................................................       31
     7.1.     Directors.................................................................................       31
     7.2.     Reimbursement of Directors................................................................       31
     7.3.     Indemnification of Directors..............................................................       31
     7.4.     Representative............................................................................       32
     7.5.     Financial Statements and Other Information................................................       33


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SECTION 8. TERMINATION..................................................................................       34
     8.1.     Termination...............................................................................       34
     8.2.     Effect on Obligations.....................................................................       35

SECTION 9. MISCELLANEOUS................................................................................       35
     9.1.     Survival..................................................................................       35
     9.2.     Indemnification...........................................................................       35
     9.3.     Expenses..................................................................................       37
     9.4.     Delays or Omissions; Remedies.............................................................       37
     9.5.     Further Assurances........................................................................       38
     9.6.     Successors and Assigns....................................................................       38
     9.7.     Entire Agreement..........................................................................       38
     9.8.     Notices...................................................................................       39
     9.9.     Counterparts..............................................................................       40
     9.10.    Titles and Subtitles; Definitions.........................................................       40
     9.11.    Governing Law; Consent to Jurisdiction; Waiver of Jury Trial..............................       41
     9.12.    Severability..............................................................................       41


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                             INDEX OF DEFINED TERMS

Articles of Incorporation......................     1.4(c)
Benefit Plan...................................    2.21(a)
Board..........................................        4.6
Board Representation Agreement.................   Recitals
Certificate of Designation.....................   Recitals
Claim Notice...................................     9.2(e)
Class A Preferred Stock........................        2.4
Class B Preferred Stock........................        2.4
Class C Preferred Stock........................        2.4
Class D Preferred Stock........................        2.4
Class E Preferred Stock........................   Recitals
Closing........................................        1.2
Closing Date ..................................        1.2
Code...........................................    2.21(a)
Common Stock...................................   Recitals
Company........................................   Preamble
Company Intellectual Property..................       2.10
Company's Accountants..........................     7.5(b)
Contract.......................................       9.10
Conversion Stock...............................        2.4
designated employee............................       9.10
Employee.......................................    2.21(a)
Employee Agreement.............................    2.21(a)
Encumbrances...................................        2.9
Environmental Law..............................       2.20
Equity VI......................................   Preamble
ERISA..........................................    2.21(a)
Exchange Act...................................       2.19
Financial Statements...........................       2.18
Fully Diluted Basis............................        1.1
Governmental Consents..........................        2.8
Governmental Entity............................        2.8
Governmental Filings...........................        2.8
including......................................       9.10
indemnified party..............................     9.2(c)
indemnifying party.............................     9.2(c)
Intellectual Property Rights...................       2.10
Investor Rights Agreement......................   Recitals
Investors......................................   Preamble
IRS............................................    2.21(c)
Laws...........................................        2.5
Litigation.....................................        2.7
Losses.........................................     9.2(b)
material.......................................       9.10
Material Adverse Effect on the Company.........       9.10
Material Contracts.............................        2.6
Orders.........................................        2.7
person.........................................       9.10
Preferred Stock................................        2.4
Purchase.......................................        1.1
Purchase Price.................................        1.1
Securities Act.................................       2.14
SmartForce.....................................   Preamble
Stock Rights...................................        2.4
Subsidiary.....................................       9.10
Tax Return.....................................    2.11(d)
Tax(es)........................................    2.11(d)
Third Party Consents...........................        6.1
to the Company's knowledge.....................       9.10
Transaction Documents..........................        2.2


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                                LIST OF EXHIBITS



Exhibits                                                                 Section
--------                                                                 --------
                                                                     
A    Certificate of Designation of Class E Convertible
     Preferred Stock..........................................          Recitals
B    Board Membership.........................................               4.8
C    People included in definition of "the
     Company's knowledge" and "designated employees"..........              9.10
D-1  Opinion of Faegre & Benson, LLP..........................               4.5
D-2  Opinion of Dow, Lohnes & Albertson, PLLC.................               4.5


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                            CAPELLA EDUCATION COMPANY

                       PREFERRED STOCK PURCHASE AGREEMENT

            AGREEMENT, dated as of April 20, 2000, by and among CAPELLA
EDUCATION COMPANY, a Minnesota corporation (the "Company"), and FORSTMANN LITTLE
& CO. EQUITY PARTNERSHIP - VI, L.P., a Delaware limited partnership ("EQUITY
VI"), and SmartForce plc, a corporation organized under the laws of Ireland
("SMARTFORCE" and, together with Equity VI, the "INVESTORS" ).

                              W I T N E S S E T H:

            WHEREAS, upon the terms and subject to the conditions contained in
this Agreement, the Company wishes to sell to the Investors and the Investors
wish to purchase from the Company shares of newly issued Class E Convertible
Preferred Stock, par value $.01 per share, of the Company (the "CLASS E
PREFERRED STOCK"), which shares will be initially convertible into the
equivalent number of shares of Common Stock, par value $.10 per share, of the
Company (the "COMMON STOCK"), and will have such other terms as are to be set
forth in the Certificate of Designation for the Class E Preferred Stock in the
form of Exhibit A (the "CERTIFICATE OF DESIGNATION"); and

            WHEREAS, concurrently with the execution hereof, the parties hereto,
National Computer Systems, Inc., Cherry Tree Ventures IV and Stephen Shank are
entering into an Amended and Restated Co-Sale and Board Representation Agreement
(the "BOARD REPRESENTATION AGREEMENT") to become effective simultaneously with
the Closing (as hereinafter defined); and

            WHEREAS, concurrently with the execution hereof, the parties hereto
are entering into an Investor Rights Agreement (the "INVESTOR RIGHTS AGREEMENT")
to become effective simultaneously with the Closing.

            NOW THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements set forth herein, the
parties agree as follows:

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      SECTION 1. ISSUANCE AND SALE OF THE CLASS E PREFERRED STOCK.

      1.1. The Purchase. Upon the terms and subject to the conditions contained
in this Agreement, at the Closing, the Investors shall purchase from the
Company, and the Company shall sell to the Investors (as set forth on Schedule
1.1), an aggregate of 2,596,491 shares of Class E Preferred Stock (the
"PURCHASE") at a purchase price of $14.25 per share and an aggregate purchase
price of $36,999,996.75 (the "PURCHASE PRICE"). Immediately following the
Closing, the Investors in the aggregate shall own 26.3384% of the equity of the
Company on a fully diluted basis (i.e., assuming the exercise of all 5,356,999
outstanding stock options and other outstanding Stock Rights (as hereinafter
defined) (including 135,088 warrants (the "Legg Mason Warrants") to be issued to
Legg Mason, the conversion of the Class E Preferred Stock, and the issuance of
all shares of Common Stock reserved for issuance upon the future grant of
533,137 employee options and other Common Stock-based awards, but excluding
future contributions under the Company's Employee Stock Ownership Plan), all as
of the Closing and as more fully described and set forth in Schedule 2.4 to this
Agreement ("FULLY DILUTED BASIS"); it being understood that the Class C
Preferred Stock shall not be taken into account for purposes of calculating the
foregoing percentage of the outstanding equity of the Company on a Fully Diluted
Basis.

      1.2. The Closing. The closing of the transactions contemplated by the
Purchase (the "CLOSING") shall take place at the offices of Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York, at 10:00
a.m. on the next business day following the satisfaction (or waiver) of all the
conditions set forth in Sections 4 and 5 (but no earlier than the 15th business
day after the date hereof) or at such other time or place or on such other date
as the Company and the Investors may mutually determine (such date, the "CLOSING
DATE").

      1.3. Deliveries at the Closing. At the Closing, the Company shall deliver
to each Investor a certificate or certificates representing the shares of Class
E Preferred Stock purchased by such Investor, registered in the name of such
Investor or its nominee affiliate, against receipt at the Closing by the Company
from such Investor of its portion of the Purchase Price, which shall be paid by
wire transfer to an account designated at least two business days prior to the
Closing Date by the Company.

      1.4. Additional Issuances; Adjustment. (a) In lieu of a claim for
indemnification under Section 9 of this Agreement arising out of the same
inaccuracy in such representation or warranty, in the event that at any time
after the Closing the representation and warranty set forth in the last sentence
of Section 2.4 is determined not

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to have been true as of the Closing, the Company shall issue to the Investors
(on a pro rata basis), at no cost to the Investors, and as an adjustment to the
purchase price paid by the Investors per share of Class E Preferred Stock, an
additional amount of Class E Preferred Stock such that, if such issuance of
additional Class E Preferred Stock had been made at the Closing, such
representation and warranty would have been true and accurate in all respects at
the Closing.

            (b) If at the time of any required adjustment pursuant to Section
1.4(a) all shares of Class E Preferred Stock have been converted into shares of
Common Stock, the Company shall, to the extent of authorized capital available
therefor, promptly issue to the Investors (on a pro rata basis), at no cost to
the Investors and as an adjustment to the purchase price paid by the Investors
per share of Class E Preferred Stock, an additional amount and kind of Common
Stock equal to the amount and kind of Common Stock issuable upon the conversion
(based on the conversion ratio in effect at the time the last shares of Class E
Preferred Stock were converted into shares of Common Stock) of the amount of
Class E Preferred Stock which would have been issued with respect to such
adjustment pursuant to Section 1.4(a) if such adjustment had been made
immediately prior to the time the last shares of Class E Preferred Stock were
converted into shares of Common Stock.

            (c) Any additional shares of Class E Preferred Stock and Common
Stock issued to the Investors pursuant to this Section 1.4 shall be treated as
if they were issued at the Closing and shall reflect any dividends or other
distributions which would have accrued or have been payable with respect to, and
the application of any anti-dilution, ratable treatment or similar provisions
(as set forth in the Articles of Incorporation of the Company (the "ARTICLES OF
INCORPORATION", the Certificate of Designation, applicable Law (as hereinafter
defined) or otherwise) which would have been applicable to, such shares of Class
E Preferred Stock and Common Stock had they been issued at the Closing.

            (d) In connection with any issuances of stock determined to be
required pursuant to this Section 1.4, the Company (i) shall take all action
within its control necessary to cause its Articles of Incorporation to be
amended to increase the authorized capital of the Company to permit such
issuances and (ii) shall reserve a sufficient number of shares of Common Stock
for issuance to the Investors upon the conversion of any shares of Class E
Preferred Stock so issued. Any shares of Class E Preferred Stock or Common Stock
issued to the Investors pursuant to this Section 1.4 shall, when issued, be
validly issued and fully paid and nonassessable with no personal liability
attaching to the ownership thereof and free and clear of all Encumbrances (as
hereinafter defined).

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      SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

            The Company represents and warrants to the Investors as of the date
hereof and as of the Closing to the extent set forth in Section 4.1 hereof
(except that the representations and warranties contained in Sections 2.6, 2.9,
2.10, 2.11, 2.15, 2.20. 2.21 and 2.22 are only made as of the date hereof,
except with respect to the representations and warranties contained in Section
2.21 which are made as of the date hereof and as of the Closing to the extent
that such representations and warranties relate in any way to ERISA) as follows
(with all references to the Company in this Section 2 (other than Sections 2.2,
2.4 and 2.5(b)) being deemed to include references to the Subsidiaries (as
hereinafter defined)):

      2.1. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the Laws of the
jurisdiction of its organization and has all requisite power and authority to
own, lease and operate its properties and to carry on its business as currently
conducted. Except as set forth on Schedule 2.1, the Company is duly qualified to
transact business as a foreign entity in, and is in good standing under the Laws
of, each jurisdiction where the failure to be so qualified would, individually
or in the aggregate, have a Material Adverse Effect on the Company (as
hereinafter defined). The Company has made available to the Investors true and
complete copies of the organization and governance documents of the Company.

      2.2. Power. The Company has all requisite power and authority (i) to
execute and deliver this Agreement; the Investor Rights Agreement; the
Certificate of Designation; the Board Representation Agreement; Amendment No. I
to the Registration Rights Agreement, dated as of June 16, 1998, by and among
the Company and National Computer Systems, Inc., Amendment No. 1 to the Warrant
to purchase Common Shares of the Company issued on June 16, 1998 to Legg Mason
Wood Walker, Incorporated; the Schedules to this Agreement and all other
certificates, instruments and other documents executed and delivered at the
Closing pursuant to Section 4 hereof (collectively with this Agreement, the
"TRANSACTION DOCUMENTS") and (ii) to carry out and perform its obligations
hereunder and thereunder.

      2.3. Subsidiaries. (a) Except as set forth on Schedule 2.3, the Company
has no Subsidiaries and does not own, hold or control, directly or indirectly,
any rights to

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acquire any shares of stock or any other debt or equity interest in any person
(as hereinafter defined).

            (b) Schedule 2.3 sets forth the authorized and outstanding equity
capitalization of each of the Subsidiaries, including the amount and kind of
equity interests held by the Company in the Subsidiary and the percentage
interest represented thereby. All of the outstanding shares of capital stock of
each of the Subsidiaries have been validly issued and are fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and are owned by the Company free and clear of all Encumbrances. There are no
outstanding warrants, options, agreements, convertible securities or other
Contracts (as hereinafter defined) pursuant to which either of the Subsidiaries
is or may become obligated to issue any shares of the capital stock of or other
equity interests in such Subsidiary, and there are no other rights, including
preemptive or similar rights, to purchase or otherwise acquire, or sell or
otherwise transfer, or otherwise relating to, any issued or unissued shares of
the capital stock of or other equity interests in either of the Subsidiaries
pursuant to any provision of Law, the Subsidiary's organizational documents, any
Contract to which the Subsidiary is a party or otherwise; and neither of the
Subsidiaries is a party to, and to the Company's knowledge there is not, any
Contract or Encumbrance (including a right of first refusal, right of first
offer, proxy, voting agreement, voting trust, registration rights agreement, or
shareholders agreement, whether or not the Subsidiary is a party thereto) with
respect to the purchase, sale or voting of any shares of capital stock of or any
other equity interests in either of the Subsidiaries (whether outstanding or
issuable upon conversion or exercise of outstanding securities).

      2.4. Capitalization. The authorized and outstanding equity capitalization
of the Company on the date hereof is as set forth on Schedule 2.4. As of the
date hereof and immediately prior to the Closing (except for exercise or
conversion of outstanding Stock Rights set forth in Schedule 2.4), capital stock
of the Company authorized, outstanding or reserved for issuance consists of (i)
10,000,000 shares of Common Stock, of which 1,371,565 shares are issued and
outstanding, (ii) 3,000,000 shares of Class A Convertible Preferred Stock
("CLASS A PREFERRED STOCK"), of which 2,810,000 shares are issued and
outstanding, (iii) 1,180,000 shares of Class B Convertible Preferred Stock
("CLASS B PREFERRED STOCK"), of which 460,000 shares are issued and outstanding,
(iv) 55,000 shares of Class C Preferred Stock ("CLASS C PREFERRED STOCK"), of
which 54,929 shares are issued and outstanding, (v) 1,022,222 shares of Class D
Convertible Preferred Stock ("CLASS D PREFERRED STOCK", and, together with the
Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and
Class D Preferred Stock, the "PREFERRED STOCK"), of which 1,022,222 shares are
issued and outstanding, (vi)

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7,742,778 shares of preferred stock, undesignated as to class or series, (vii)
730,729 shares of Common Stock are reserved for issuance pursuant to employee
stock options granted pursuant to the Company's stock option plans and 533,137
shares of Common Stock are reserved for issuance for future grants of employee
stock options pursuant to the Company's stock option plans, (viii) 198,960
shares of Common Stock are reserved for issuance upon the exercise of any
outstanding warrants of the Company and (ix) 4,292,222 shares of Common Stock
have been duly reserved for issuance upon conversion of the outstanding shares
of convertible Preferred Stock. Immediately following the Closing, the capital
stock of the Company authorized, outstanding or reserved for issuance will be as
set forth in the preceding sentence except that (i) 2,596,491 shares of Class E
Preferred Stock will have been issued and be outstanding, (ii) 2,596,491 shares
of Common Stock will be reserved for issuance upon conversion of the shares of
Class E Preferred Stock (the "CONVERSION STOCK") and (iii) 135,088 shares of
Common Stock will be reserved for issuance upon exercise of the Legg Mason
Warrant. All of the outstanding shares of capital stock of the Company were duly
authorized and validly issued and are fully paid and nonassessable.

            Except for exercise or conversion of outstanding Stock Rights set
forth in Schedule 2.4 and Stock Rights granted pursuant to existing stock option
plans, Schedule 2.4 sets forth a list of (i) all holders of equity interests in
the Company on the date hereof, including the amount and kind of equity
interests held by each such holder, (ii) all holders of capital stock of the
Company immediately following the Closing, and the number and type of shares to
be held by each, and (iii) all outstanding warrants, options, agreements,
convertible securities or other Contracts pursuant to which the Company is or
may become obligated to issue any shares of the capital stock or other
securities of or other equity interests in the Company ("STOCK RIGHTS") and the
holders thereof. Except as set forth in this Section 2.4 or on Schedule 2.4,
there are, and immediately following the Closing there will be, no Stock Rights
or other rights, including preemptive or similar rights, to purchase or
otherwise acquire, or sell or otherwise transfer, or otherwise relating to, any
issued or unissued shares of the capital stock of or other equity interests in
the Company pursuant to any provision of Law, the Company's organizational
documents, any Contract to which the Company is a party or otherwise; and,
except as set forth on Schedule 2.4 or as contemplated by the Transaction
Documents, the Company is not a party to, and to the Company's knowledge there
is not, and immediately after the Closing, there will not be, any Contract or
Encumbrance (including a right of first refusal, right of first offer, proxy,
voting agreement, voting trust, registration rights agreement, or shareholders
agreement, whether or not the Company is a party thereto) with respect to the
purchase, sale or voting of any shares of capital stock of or any other equity
interests in the Company (whether outstanding or

                                       -6-

<PAGE>

issuable upon conversion or exercise of outstanding securities). The execution,
delivery and performance of this Agreement and the Transaction Documents by the
parties hereto and thereto and the consummation of the transactions contemplated
hereby and thereby will not trigger any anti-dilution adjustments under the
terms of any equity securities disclosed or required to be disclosed pursuant to
this Section 2.4. Except as set forth on Schedule 2.4 and other than under the
Investor Rights Agreement, the Company has not agreed to register any of its
authorized or outstanding securities under the Securities Act (as defined
hereinafter). Immediately following the Closing, the shares of Common Stock
issuable upon conversion of the Class E Preferred Stock issued to the Investors
under this Agreement will represent, in the aggregate, 26.3384% of the
outstanding capital stock of the Company on a Fully Diluted Basis, and the
voting power of such issued shares of Class E Preferred Stock will represent, in
the aggregate, no less than 26.3384% of the total number of votes able to be
cast on any matter by any voting securities of the Company on a Fully Diluted
Basis.

      2.5. Authorization; No Breach. (a) The execution, delivery and performance
by the Company of this Agreement and the other Transaction Documents to which
the Company is a party, and the consummation by the Company of the transactions
contemplated hereby and thereby, including the offer, sale and issuance of the
Class E Preferred Stock pursuant to this Agreement, and the issuance of the
Conversion Stock upon conversion of the Class E Preferred Stock, have been duly
authorized by all required actions of the Company and its equityholders and,
except as set forth on Schedule 2.5, will not (i) conflict with, or result in
any violation of, any provision of the organizational documents of the Company
or any federal, state, local or foreign law, statute, rule or regulation
("LAWS") or Orders (as hereinafter defined) to which the Company is subject,
(ii) conflict with, or result in any default or breach, or give rise to a right
of termination, cancellation, modification or acceleration, or cause the
forfeiture of any right, under, any Contract, Company Intellectual Property,
Accreditation, License or Permit (as hereinafter defined), except for conflicts,
defaults, breaches, rights or forfeitures which would not, individually or in
the aggregate, have a Material Adverse Effect on the Company or (iii) require
any consent to be obtained or notice to be given under any Contract,
Accreditation, License or Permit except for consents and notices the lack of
which would not, individually or in the aggregate, have a Material Adverse
Effect on the Company.

      (b) The Transaction Documents to which the Company is a party constitute
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, subject to Laws of general application relating to
bankruptcy, insolvency and the relief of debtors and Laws governing specific
performance, injunctive

                                       -7-

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relief or other equitable remedies. The Class E Preferred Stock and the
Conversion Stock, when issued in compliance with the provisions of this
Agreement, will be validly issued and outstanding, fully paid and nonassessable
with no personal liability attaching to the ownership thereof. Subject to
applicable law, the terms, designations, powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions, of the Class E Preferred Stock will be as stated
in the Certificate of Designation.

      2.6. Material Contracts. Copies (or, where oral, a written description) of
the mortgages, indentures, leases and other Contracts to which the Company is a
party or by which it is bound and which involve current obligations of, or
payments to, the Company in excess of $50,000 or are otherwise, material to the
Company (the "MATERIAL CONTRACTS") have been delivered or made available to the
Investors. The Material Contracts are listed on Schedule 2.6. All of the
Material Contracts are valid and binding agreements of the Company and in full
force and effect and enforceable against and, to the Company's knowledge, by the
Company in accordance with their respective terms, subject to Laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
Laws governing specific performance, injunctive relief or other equitable
remedies, except as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. Except as set forth on Schedule 2.6, the Company
is not in default or breach under any of the Material Contracts and, to the
Company's knowledge, no other party to any of the Material Contracts is in
default or breach thereunder.

      2.7. Litigation. Except as set forth on Schedule 2.7, there are no
actions, suits, proceedings, or governmental investigations, inquiries or audits
("LITIGATION") pending, or, to the Company's knowledge threatened, to which the
Company is a party or its property, including without limitation any Company
Intellectual Property, is subject or against any officer, director or employee
of the Company in connection with such person's relationship with or actions
taken on behalf of the Company. The Company is not subject to any outstanding
judgment, order, writ, injunction, stipulation, ruling, decree or award
("ORDERS").

      2.8. Consents; Title IV Recertification; HSR. (a) Except as set forth on
Schedule 2.8, no consent, approval, qualification, order or authorization or
acknowledgement ("GOVERNMENTAL CONSENTS") of, or registration, declaration,
notification, application, or filing ("GOVERNMENTAL FILINGS") with, any court,
administrative agency or commission, Accrediting Body, State Approval Agency or
other governmental authority or instrumentality ("GOVERNMENTAL ENTITY") is
required to be obtained or made in connection with the valid execution, delivery
or performance by

                                       -8-

<PAGE>

the Company of any of the Transaction Documents or the consummation of any of
the transactions contemplated thereby.

            (b) No application for recertification of eligibility to participate
in Title IV programs is required to be made to the United States Department of
Education ("USDOE") in order to continue the School's eligibility to participate
in Title IV upon consummation of the transactions contemplated hereby.

            (c) The Company is the "ultimate parent entity" as defined under the
rules and regulations promulgated under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"). The total assets and
annual net sales of the Company and all entities it controls, determined at the
time of the Closing in accordance with the HSR Act, are each less than $10
million.

      2.9. Title to Properties; Liens and Encumbrances; Assets of the Business.

      (a) Except as set forth on Schedule 2.9 or the Financial Statements or as
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company, the Company has good and marketable title to all of the assets and
properties which it purports to own, and, with respect to the assets and
properties leased by the Company, holds valid and subsisting leasehold interests
therein, free and clear of any mortgages, judgments, claims, liens, security
interests, pledges, escrows, charges or other encumbrances of any kind or
character whatsoever ("ENCUMBRANCES") except (i) Encumbrances for taxes not yet
due and payable, and (ii) Encumbrances for taxes and charges and other claims,
the validity of which the Company is contesting in good faith by appropriate
proceedings and which are disclosed in Schedule 2.9. Except as set forth on
Schedule 2.9, the assets and properties owned by, or leased to, the Company are
sufficient for the conduct of the business and operation of the Company as
currently conducted.

      (b) The business of the Company is conducted exclusively by the Company
and the Subsidiaries. All assets used or held for use in the conduct of such
business are owned by the Company and/or the Subsidiaries or the rights to use
such assets are held by the Company and/or the Subsidiaries pursuant to valid
and binding contracts, leases, agreements or other rights.

      2.10. Intellectual Property. The term "INTELLECTUAL PROPERTY RIGHTS" shall
mean (a) all inventions (whether patentable or unpatentable and whether or not
reduced to practice), all improvements thereon, and all patents, patent
applications and patent disclosures, together with all reissues, continuations,
continuations-in-part, revisions, divisions, extensions and reexaminations
thereof, (b) all trademarks, service marks, trade

                                       -9-

<PAGE>

dress, logos, trade names, domain names and corporate names, and including all
goodwill associated therewith, and all applications, registrations and renewals
in connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations and renewals in connection therewith, (d) all mask
works and all applications, registrations and renewals in connection therewith,
(e) all trade secrets and confidential business information (including but not
limited to research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, methods, schematics,
technology, flowcharts, block diagrams, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all copies and tangible
embodiments of any of the foregoing (in whatever form or medium) and (h) all
licenses, sublicenses, permissions or Contracts in connection with any of the
foregoing. The term "COMPANY INTELLECTUAL PROPERTY" shall mean all Intellectual
Property Rights which are used in connection with the conduct of the business of
the Company as currently conducted.

      Other than off-the-shelf software and work for hire agreements, each item
of Company Intellectual Property which is material to the Company's business and
is a patent, patent application, trademark, trademark application, service mark,
service mark application, trade name, domain name, corporate name, copyright
registration, copyright application, mask work registration, mask work
application or license, sublicense, agreement, or permission, is set forth on
Schedule 2.10. Except as set forth on Schedule 2.10:

            (a) except as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, the Company either (i) is the sole and
exclusive owner of and possesses all right, title and interest in and to (free
and clear of any Encumbrances), all Company Intellectual Property (including but
not limited to the Intellectual Property Rights set forth on Schedule 2.10),
(ii) has rights to the use of all Company Intellectual Property pursuant to
license, sublicense, Contract, or permission (and is not contractually obligated
to grant any rights to any third party in respect thereof) or (iii) has the
right to require the applicant of any Company Intellectual Property which
constitutes an application for registration, including, but not limited to, all
patent applications, trademark applications, service mark applications,
copyright applications and mask work applications, to transfer ownership to the
Company of the application and of the registration once it issues;

            (b) all Company Intellectual Property which are registrations,
including, but not limited to, all registered patents, trademarks, service
marks, copyrights

                                      -10-

<PAGE>

and mask works, are valid and subsisting and in full force and effect except
where the failure to be valid, subsisting and in full force and effect would not
have a Material Adverse Effect on the Company;

            (c) to the Company's knowledge, no third party, including any
employee or former employee of the Company, has interfered with, infringed upon,
misappropriated, come into conflict with or used without authorization any
Company Intellectual Property; and

            (d) to the Company's knowledge, the Company has not infringed on,
interfered with or misappropriated, and the continued operation of the Company's
business as currently conducted, will not infringe on, interfere with,
misappropriate or otherwise come into conflict with, any Intellectual Property
Right of any other person, and no such claim has been asserted or, to the
Company's knowledge, is threatened by any person (including any claim that the
Company must license or refrain from using any Intellectual Property Rights of
any third party).

      2.11. Taxes. (a) Except as set forth on Schedule 2.11, (i) the Company has
timely filed in accordance with all applicable Laws (taking into account valid
extensions) all Tax Returns (as hereinafter defined) required to be filed by it,
and all such Tax Returns are true, correct and complete in all material
respects, (ii) all Taxes (as hereinafter defined) which are due and payable by
the Company, including any Taxes levied upon any of its properties, assets,
income or franchises, have been timely paid, (iii) all amounts required to be
collected or withheld by the Company have been collected or withheld and any
such amounts that are required to be remitted to any taxing authority have been
duly and timely remitted by the Company, (iv) no examination, claim, assessment,
deficiency or other Litigation is pending or, to the Company's knowledge,
threatened, with regard to any Taxes or Tax Returns of the Company and (v) the
Company is not (nor has it ever been) a party to or bound by any Tax sharing or
Tax allocation or similar Contract.

            (b) Schedule 2.11 sets forth the method of accounting used by the
Company for federal, state, local and foreign Tax purposes, and such method has
been used by the Company at all times since the date of its organization.

            (c) For purposes of this Agreement, "TAX" or "TAXES" means any
taxes, assessment, duties, fees, levies, imposts, deductions, or withholdings,
including income, gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll, transaction, capital,
net worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility,

                                      -11-

<PAGE>

severance, production, unemployment compensation, occupation, premium, windfall
profits, transfer and gains taxes, or other governmental charges of any nature
whatsoever, imposed by any taxing authority of any government or country or
political subdivision of any country, and any liabilities with respect thereto,
including any penalties, additions to tax, fines or interest thereon and
includes any liability for Taxes of another person by Contract, as a transferee
or successor, under Treasury Regulation 1.1502-6 or analogous state, local or
foreign law provision or otherwise, and "TAX RETURN" means any report, return,
statement, estimate, declaration, notice, form or other information required to
be supplied to a taxing authority in connection with Taxes.

      2.12. Brokers. Except as set forth on Schedule 2.12, the Company has not
incurred, and will not incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the transactions contemplated by this Agreement and the other
Transaction Documents.

      2.13. Compliance with Laws; Permits; Accreditation and State Regulatory
Requirements. Except as set forth on Schedule 2.13, the Company and Capella
University Inc. (the "SCHOOL") (a) have complied in all material respects with
all Laws applicable to them and their business and that pertain to the operation
of the School (b) have all licenses, accreditations, certificates, permits,
consents, franchises, approvals, authorizations, and other approvals of federal,
state and local governments or regulatory bodies, State Approval Agencies and of
Accrediting Bodies (the "ACCREDITATIONS, LICENSES AND PERMITS") material to and
necessary in the conduct of the education, learning or training business and
operations of the Company and the School as currently conducted. Schedule 2.13
contains a complete and correct list and summary description of all
Accreditations, Licenses and Permits. Except for instances that would not,
individually or in the aggregate, have a Material Adverse Effect on the Company,
(i) all of the Accreditations, Licenses and Permits of each of the Company and
the School are in full force and effect, (ii) the Company and the School are in
compliance with the terms and conditions of such Accreditations, Licenses and
Permits and have received no notices that the Company or the School are in
violation of any of the terms or conditions of such Accreditations, Licenses and
Permits or alleging the failure to hold or obtain any accreditation, permit,
license, franchise, certificate, approval or authorization and (iii) no
Litigation, hearing or other proceeding is pending or, to the Company's
knowledge, threatened to revoke or limit the use of any of its Accreditations,
Licenses and Permits. Neither the Company nor the School has received notice
that any of the Accreditations, Licenses and Permits will not be renewed and to
the Company's knowledge, there is no reasonable basis for nonrenewal. In
addition, and without limiting the foregoing:

                                      -12-

<PAGE>

            (a) Schedule 2.13 contains a complete and correct description of the
accreditation granted to the School, the date that accreditation was last
granted, and the current term of accreditation. Neither the School nor the
educational and training programs offered by the School are on probation or
warning, have been directed to show cause why accreditation should not be
revoked, or are subject to an action by an Accrediting Body to withdraw or deny
accreditation. To the Company's knowledge, there are no facts, circumstances, or
omissions concerning the School that would reasonably be expected to lead to
such actions by an Accrediting Body.

            (b) The Company and the School have complied in all material
respects with all stipulations, conditions and other requirements imposed by the
School's Accrediting Bodies and State Approval Agencies at the time of, or
since, the last grant of accreditation or approval, including but not limited to
the timely filing of all required reports and responses.

            (c) The Company and the School have secured all requisite approvals
from their institutional accrediting bodies for the educational and training
programs currently offered.

            (d) The Company and the School have secured all requisite licenses
to operate from the respective State Approval Agencies in the states in which
the School is located or has a presence that requires the School to obtain such
a license (including without limitation all such states in which the School
offers residency programs, residency courses or residency seminars) and the
Company has similarly secured all requisite approvals from State Approval
Agencies for the educational and training programs currently offered. There are
no proceedings pending to revoke or withdraw such licenses and approvals. To the
Company's knowledge, there are no facts, circumstances or omissions concerning
the School that would reasonably be expected to lead to such action.

            (e) Schedule 2.13 contains a complete and correct description of the
USDOE certification and eligibility status for the School, including the date
that certification was last granted and the current term of certification. The
School is certified by the USDOE to participate in the student financial
assistance programs authorized by Title IV of the Higher Education Act of 1965,
as amended ("TITLE IV"), and is a party to, and is in compliance with, a valid
and effective Program Participation Agreement with the USDOE, except for any
instances of non-compliance which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Company. The
School is not subject to limitation, suspension or termination proceedings, or
subject to any other investigation, action or proceeding by

                                      -13-

<PAGE>

the USDOE that could result in the loss of certification or eligibility or a
material liability or fine. To the Company's knowledge, there are no facts,
circumstances, or omissions concerning the School that would reasonably be
expected to lead to such an action by the USDOE.

            (f) The School is in compliance in all material respects with all
rules, regulations and requirements established by the USDOE pertaining to the
School's eligibility to participate in the programs authorized by Title IV and
other federal student financial aid funding programs as set forth at 34 C.F.R.
Sections 600 et. seq. To the Company's knowledge, there are no facts,
circumstances, or omissions concerning the School that would be expected to
result in a finding of material non-compliance with regard to such rules,
regulations and requirements of Law. Without limiting the foregoing:

                  (i) Each educational or training program offered by the School
is an eligible program in accordance with the requirements of 34 C.F.R. Section
668.8.

                  (ii) For each of the past (2) fiscal years ending after
October 7, 1998, the School has received no greater than ninety percent (90%) of
its revenues from programs authorized by Title IV and satisfies the requirements
regarding Title IV program funds established by the USDOE as set forth at 34
C.F.R. Section 600.5. The attached Compliance Schedule contains a correct
statement of the School's percentage of revenue from Title IV program funds for
such years.

                  (iii) The School has timely filed all compliance audits and
audited financial statements required by 34 C.F.R. Section 668.23.

                  (iv) The School meets the USDOE standards of financial
responsibility set forth at 34 C.F.R. Sections 668.171-668.175 and for the
fiscal years ended December 31, 1998 and December 31, 1999 achieved a composite
score of 1.5 or higher under the financial ratios set forth at 34 C.F.R. Section
668.172.

            (g) USDOE program review and compliance audits conducted at the
School since the date of the School's last recertification have not materially
adversely affected the Company or the School, nor has any program review or
compliance audit resulted in the imposition of any liability, financial or
otherwise, adversely affecting the Company or the School. The Company and the
School have complied with all the findings and conditions arising from the
program reviews and compliance audits. To the extent that any program review or
audit remains pending or unresolved, there are no

                                      -14-

<PAGE>

issues or findings of non-compliance of which the Company has notice which could
result in the loss of certification or eligibility or a material liability or
fine.

            (h)(i) Since July 1, 1994, neither the Company, nor, to the
Company's knowledge, any person or entity that exercises Substantial Control
over the Company or the School (the term "Substantial Control" being defined in
34 C.F.R. 668.15(f)(2)), nor member of such person's family (as the term
"family" is defined in 34 C.F.R. 668.15(f)(3)), alone or together, (A) exercises
or exercised Substantial Control over another institution or third-party
servicer (as that term is defined in 34 C.F.R. 668.2) that owes a liability for
a violation of a Title IV, HEA program requirement, or (B) owes a liability for
a Title IV, HEA program violation.

                  (ii) Since July 1, 1994, neither the Company, nor, to the
Company's knowledge, any person or entity that exercises Substantial Control
over the Company or the School, or who will have the power to direct or cause
the direction of the management or policies of the Company or the School, has
filed for relief in bankruptcy or has had entered against it an order for relief
in bankruptcy.

                  (iii) Neither the Company, nor, to the Company's knowledge,
any person or entity that exercises Substantial Control over the Company or the
School, nor any person or entity which is an owner of the School, has pled
guilty to, has pled nolo contendere to or has been found guilty of, a crime
involving the acquisition, use or expenditure of funds under the Title IV
programs or has been judicially determined to have committed fraud involving
funds under the Title IV programs.

                  (iv) To the Company's knowledge, neither the Company nor, the
School has employed any individual or entity in a capacity that involves the
administration or receipt of funds under the Title IV programs, or contracted
with any institution or third-party servicer, which has been terminated from the
Title IV programs for a reason involving the acquisition, use, or expenditure of
federal, state or local government funds, or has been convicted of, or has pled
nolo contendere or guilty to, a crime involving the acquisition, use or
expenditure or federal, state, or local government funds, or has been
administratively or judicially determined to have committed fraud or any other
material violation of law involving federal, state or local government funds.

            (i) Since July 1, 1994, the Company and the School have complied
with all requirements or standards of the USDOE, any State Approval Agency or
any Accrediting Body that pertain to the provision of commissions, bonuses or
other incentive payments to admissions representatives, agents and other persons
engaged in

                                      -15-

<PAGE>

student recruiting or admissions activities or in making decisions regarding the
awarding of Title IV program funds for or on behalf of the Company or School.

            (j) To the knowledge of the Company, there exists no facts or
circumstances attributable to the Company or the School that would reasonably be
expected to cause any State Approval Agency whose authorization or consent or
similar approval is required in connection with the transactions contemplated by
this Agreement, as set forth in schedule 7.5(g)(i), to refuse to deliver such
authorization, consent or similar approval.

            (k) For purposes of this Agreement, "ACCREDITING BODY" means any
entity or organization which engages in granting or withholding accreditation or
similar approval for the School and its educational programs, in accordance with
standards relating to the performance, operation, financial condition and/or
educational quality of such schools and programs.

            (l) For purposes of this Agreement, "STATE APPROVAL AGENCY" means
any authority, whether governmental or quasi-governmental, in any state in which
the School is located, or operates or has a presence that requires the School to
obtain an approval license or permit from such state approval agency (including,
but not limited to, all such states in which the School offers residency
programs, courses or seminars) and that engages in the granting or withholding
of approvals, licenses or permits for and regulates private postsecondary
schools and educational programs in accordance with standards relating to the
operation, financial condition, or academic standards of such schools or
programs or regulates the provision of the provision of financial assistance
including, without limitation, the Minnesota Higher Education Services Office,
Minnesota Department of Children, Families and Learning, Arizona State Board for
Private Postsecondary Education, California Bureau for Private Postsecondary and
Vocational Education, Connecticut Department of Higher Education, Colorado
Commission on Higher Education, Florida State Board of Independent Colleges and
Universities, New Mexico Commission on Higher Education, and Washington State
Higher Education Coordinating Board Degree Authorization Agency.

      2.14. Offering Exemption. Assuming the accuracy of the representations and
warranties made by the Investors in Section 3 of this Agreement, the offer, sale
and issuance of the Class E Preferred Stock as contemplated hereby are, the
issuance of the Conversion Stock upon the conversion of the Class E Preferred
Stock in accordance with the terms of the Certificate of Designation will be,
and all prior issuances of securities of the Company were at the time made,
exempt from registration under the Securities Act

                                      -16-

<PAGE>

of 1933, as amended (the "SECURITIES ACT"), and otherwise effected in compliance
with all applicable federal and state securities Laws.

      2.15. Employees; Proprietary Information Agreement. To the Company's
knowledge, no officer or designated employee (as hereinafter defined) of the
Company, and except as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, no independent contractor utilized by
the Company or any other person who performs services for or on behalf of the
Company (including any employee of the Company) is in violation of any term of
any employment Contract, patent disclosure agreement or any other Contract or
Order relating to the relationship of such person with the Company or any other
party because of the nature of the business conducted by the Company. To the
Company's knowledge, none of its officers or designated employees has any
obligations under any Contract or Order that would interfere with such person's
exercising his or her best efforts to promote the interests of the Company or
that would conflict with the Company's business as currently conducted.

      2.16. Insurance. The Company has procured, and maintains insurance with
respect to its properties and business against such casualties and
contingencies, of such types (including, without limitation, errors and
omissions coverage), on such terms and in such amounts (including deductibles,
co-insurance and self-insurance, if adequate reserves are maintained with
respect thereto) as the Company believes is customary in the case of similarly
situated entities engaged in the same or a similar business. Schedule 2.16 sets
forth a list of all insurance policies maintained by the Company, including the
name of the insurer and the nature and amount of coverage. The Company has not
received any notice of increase in premiums with respect to, or cancellation or
nonrenewal of, any of its insurance policies, and the Company has not made any
claim against an insurance policy as to which the insurer is denying coverage or
defending the claim under a reservation of rights. Each insurance policy
maintained by the Company is in full force and effect, except as would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The Company is not in default in any material respect under any insurance policy
maintained by it.

      2.17. [Intentionally Omitted]

      2.18. Financial Statements. Schedule 2.18 sets forth (a) the balance sheet
of the Company at December 31, 1999, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the fiscal year
ended December 31, 1999 audited by Ernst & Young LLP and (b) the unaudited
consolidated balance sheet of the Company as of March 31, 2000 and the related
unaudited consolidated statements of operations, changes in shareholders' equity
and cash flows for the three months ended

                                      -17-

<PAGE>

March 31, 2000 (the "FINANCIAL STATEMENTS"). The Financial Statements are
complete in all material respects, are in accord with the books and records of
the Company and have been prepared in accordance with generally accepted
accounting principles consistently applied (except that the March 31, 2000
Financial Statements do not contain all footnotes required by generally accepted
accounting principles and are subject to normal year-end audit adjustments). The
Financial Statements fairly present the financial condition, results of
operations and cash flows of the Company as of the respective dates and for the
respective periods indicated therein. Except as disclosed on Schedule 2.18 or
any other Schedule to this Agreement, the Company has no liabilities or
obligations, contingent or otherwise (and whether or not the subject of any
other representation or warranty hereunder), other than (a) liabilities or
obligations reserved against or otherwise disclosed in the Financial Statements
and (b) liabilities or obligations which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. The Company maintains
and will continue to maintain accounting methods, practices and procedures and
maintains and will continue to maintain accounting systems and controls which
permit financial statements to be prepared in accordance with generally accepted
accounting principles. The books and records of the Company are in all material
respects true and complete, are maintained in accordance with good business
practice and all applicable Laws, and accurately present and reflect in all
material respects all of the transactions that are or should be therein
described.

      2.19. Related Party Transactions. (a) Schedule 2.19 sets forth a list of
all obligations and transactions, other than compensation in the ordinary course
of business, (i) between the Company and any of the Company's affiliates, (ii)
between the Company and any of the Company's officers, directors, equityholders
or employees, or any of their affiliates or associates (each term as defined in
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) and (iii)
between any of the Company's affiliates and any of the Company's officers,
directors or employees, or any of their affiliates or associates, directly
pertaining to the Company. Except as set forth on Schedule 2.19, no officer or
director of the Company or person who owns at least ten percent of the
outstanding equity of the Company (nor any parent, child or spouse of any of
such persons, or any trust, partnership or corporation in which any of such
persons has or has had an interest), has or has had, directly or indirectly, (i)
any interest or involvement in any entity which furnished or sold, or furnishes
or sells, services or products which the Company furnishes or sells, or proposes
to furnish or sell or (ii) any interest or involvement in any entity which
purchases from or sells or furnishes to, the Company, any goods or services;
provided, that ownership of no more than one percent of the

                                      -18-

<PAGE>

outstanding voting stock of a publicly traded corporation shall not be deemed an
interest in any entity for purposes of this Section 2.19.

            (b) Each transaction set forth on Schedule 2.19 is on terms that are
(i) consistent with past practice of the Company and (ii) no less favorable to
the Company as would be available with independent third parties dealing at
arms' length.

      2.20. Environmental Matters. The Company is in compliance in all material
respects with all applicable Environmental Laws (as hereinafter defined). There
are no past or present conditions, events, circumstances or facts that would
reasonably be expected to form the basis of any claim or Litigation against or
involving the Company based on or related to any violation of any Environmental
Law that could, individually or in the aggregate, have a Material Adverse Effect
on the Company. For purposes of this Agreement, the term "ENVIRONMENTAL LAW"
shall mean any Law relating to human health, employee safety or the protection
of the environment, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and the
Occupational Safety and Health Act.

      2.21. Employee Benefit Plans. (a) Schedule 2.21 sets forth a list of (i)
each plan, program, policy or Contract providing for incentive compensation,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded, written or oral, and whether or not legally
binding, which is now or previously has been sponsored, maintained, contributed
to or required to be contributed to by the Company or any of its subsidiaries
and pursuant to which the Company or any of its subsidiaries has or may have any
liability, contingent or otherwise, including any "employee benefit plan" within
the meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") (each a "BENEFIT PLAN"), (ii) each management, bonus,
option, equity (or equity related), severance, non-compete, confidentiality or
similar Contract between the Company and any current, former or retired
employee, officer, consultant, independent contractor, agent or director of the
Company (an "EMPLOYEE") under which the Company has or may have any liability
and (iii) each employment or consulting Contract between the Company and an
Employee (each Contract in clauses (ii) and (iii), an "EMPLOYEE AGREEMENT"). The
Company currently does not sponsor, maintain, contribute to, and is not required
to contribute to, nor has the Company ever sponsored, maintained, contributed to
or been required to contribute to, or incurred any liability with respect to,
(i) any "defined benefit plan" (as defined in ERISA Section 3(35)), (ii) any
"multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit
Plan which provides, or has any material liability to provide, life insurance,
medical, severance or other employee welfare benefits to any Employee upon

                                      -19-

<PAGE>

his or her retirement or termination of employment, except as required by
Section 4980B of the Internal Revenue Code of 1986, as amended (the "CODE") or
any similar state law regarding continuation of coverage. Except as set forth on
Schedule 2.21, to the Company's knowledge, the Company has not committed to
establish any new employee benefit plan, program or arrangement or to modify or
terminate any Benefit Plan which, individually or in the aggregate, would
materially increase the obligation of the Company to any or all of its
employees.

            (b) The Company has no liability, contingent or otherwise, with
respect to any employee benefit plan maintained by or contributed to by any
ERISA Affiliate. For this purpose, an ERISA affiliate is any entity (other than
any current subsidiary of the Company) that is or ever has been (i) a member of
a "controlled group of corporations," under "common control" or an "affiliated
service group" within the meaning of Sections 414(b), (c) or (m) of the Code,
(ii) required to be aggregated under Section 414(o) of the Code or (iii) under
"common control," within the meaning of Section 4001(a)(14) of ERISA, or any
regulations promulgated or proposed under any of the foregoing Sections, in any
such case with the Company.

            (c) The Company has made available to the Investors true and
complete copies of all documents embodying or relating to each Benefit Plan and
each Employee Agreement, including all amendments thereto, trust or funding
agreements relating thereto (if any), the two most recent annual reports (Series
5500 and related schedules) required under ERISA (if any), the two most recent
annual actuarial valuations (if any), the most recent determination letter
received from the Internal Revenue Service (the "IRS") (if any) and the most
recent summary plan description (with all material modifications) (if any)
relating to any Benefit Plan or Employee Agreement required to be listed on
Schedule 2.21.

            (d) Each Benefit Plan and Employee Agreement has been established
and maintained in accordance with its terms and in compliance in all material
respects with all applicable Laws, including but not limited to ERISA and the
Code, and each Benefit Plan intended to qualify under Section 401 of the Code
is, and since its inception has been, so qualified.

            (e) (i) To the knowledge of the Company, no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 of
ERISA, has occurred with respect to any Benefit Plan, (ii) there is no
Litigation pending, or to the Company's knowledge, threatened (other than
routine claims for benefits) with respect to any Benefit Plan or Employee
Agreement, (iii) to the Company's knowledge, no Employee has been hired by the
Company in violation of any restrictive covenant or any non-

                                      -20-

<PAGE>

compete Contract with any other Person, (iv) no liability under any Benefit Plan
has been funded, nor has any such obligation been satisfied, with the purchase
of a contract from an insurance company as to which the Company has received
notice that such insurance company is insolvent or is in rehabilitation or any
similar proceeding, (v) the Company has not receive notice that any Benefit Plan
is under audit or investigation by the IRS, the Department of Labor or the
Pension Benefit Guaranty Corporation, and, to the Company's knowledge, no such
audit or investigation is threatened and (vi) with respect to each Benefit Plan
which provides medical benefits or long-term disability benefits, all claims
incurred by the Company under such Benefit Plan are either insured pursuant to a
contract of insurance whereby the insurance company bears any risk of loss with
respect to such claims or covered under a contract with a health maintenance
organization pursuant to which such health maintenance organization bears the
liability for such claims.

            (f) The execution and delivery of, and performance of the
transactions contemplated by, this Agreement and the other Transaction Documents
will not (either alone or upon the occurrence of any additional or subsequent
events) (i) constitute an event under any Benefit Plan or Employee Agreement
that will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligations to fund benefits with respect to any Employee or (ii)
result in the triggering or imposition of any restrictions or limitations on the
right of the Company to amend or terminate any Benefit Plan, or upon the right,
upon any such amendment or termination, to receive the full amount of any excess
assets remaining or resulting from such amendment or termination. No payment or
benefit which will or may be made by the Company or any of its affiliates with
respect to any Employee will be characterized as an "excess parachute payment,"
within the meaning of Section 280G(b)(1) of the Code.

      2.22. Labor Relations; Employees. Except as set forth on Schedule 2.22,
(a) the Company is in compliance in all material respects with all applicable
Laws respecting employment, employment practices, labor, terms and conditions of
employment and wages and hours, (b) the Company is not a party to any Contract
with any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company, (c) there is no labor strike, dispute, slowdown or
stoppage pending, or, to the Company's knowledge, threatened against or
involving the Company, (d) the Company is not involved in or, to the Company's
knowledge, threatened with any Litigation relating to labor matters (including
discrimination complaints and charges of unfair labor practices) and (e) to the
Company's knowledge, no officer of the Company or employee whose annual

                                      -21-

<PAGE>

compensation is in excess of $70,000 has any plans to terminate his or her
employment with the Company. The Company has not received notice of any worker's
compensation claims.

      2.23. Absence of Changes. Except as set forth on Schedule 2.23 or as
contemplated by this Agreement or the other Transaction Documents or reflected
in the Financial Statements, since December 31, 1999, the Company has conducted
its business in the ordinary course, consistent with past practice, and there
has not been (a) any event or condition which has had or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
the Company, (b) any waiver of any material right, claim or debt held by the
Company, (c) any payment or declaration of dividends on, or other distribution
with respect to, or any direct or indirect redemption or acquisition of, any
securities of or other equity interest in the Company, (d) any issuance of any
securities of or other equity interest in the Company other than pursuant to the
exercise of the previously outstanding options set forth on Schedule 2.4, (e)
any sale, assignment or transfer of any tangible or intangible assets of the
Company, except (i) in the ordinary course of business and (ii) assets for which
the book value does not exceed $50,000 and which are not, individually or in the
aggregate, material, (f) any loan by the Company to any officer, director,
employee, consultant or equityholder of the Company (other than advances to such
persons in the ordinary course of business in connection with travel and
travel-related expenses), (g) any damage, destruction or loss (whether or not
covered by insurance) which would, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on the Company, (h) any increase,
direct or indirect, in the compensation paid or payable to any officer or
director of the Company, or, other than in the ordinary course of business, to
any other employee, consultant or agent of the Company, (i) any change in the
accounting or Tax methods, practices or policies or in any Tax election of the
Company, (j) any indebtedness incurred for borrowed money other than in the
ordinary course of business or pursuant to a Contract set forth on Schedule
2.23, (k) any amendment to or termination of any Material Contract, (1) any
changes with respect to the regulation of the Company or its products and
services by any Governmental Entity which would, individually or in the
aggregate, have a Material Adverse Effect on the Company, (m) any material
change in the manner of business or operations of the Company, (n) any
transaction except in the ordinary course of business or as otherwise
contemplated hereby or (o) any commitment by the Company (contingent or
otherwise) to do any of the foregoing.

      2.24. Suppliers and Customers. Since December 31, 1999, there has been no
termination, cancellation or, to the Company's knowledge, threatened termination
or cancellation or any material modification or change in, or any material
dissatisfaction

                                      -22-

<PAGE>

with, the business relationship between the Company and any supplier, vendor,
customer or client of the Company which would reasonably be expected to have a
Material Adverse Effect on the Company.

      2.25. Suitability. Neither the Company nor, to its knowledge, any of its
directors or officers (a) has ever been indicted for or convicted of any felony
or any crime involving fraud or misrepresentation, (b) is subject to any Order
barring, suspending or otherwise limiting the right of the Company or such
person to engage in any activity conducted by the Company, (c) has ever been the
subject of any bankruptcy or similar proceeding or (d) to the Company's
knowledge, has ever been denied any Accreditation, License or Permit affecting
the Company's or such person's ability to conduct any activity conducted by the
Company, nor, to the Company's knowledge, is there any basis upon which such
Accreditation, License or Permit would reasonably be expected to be denied.

      2.26. Operations of the Company. Schedule 2.26 sets forth a list of the
Company's uniform resource locators (each, a "URL"). The Company has registered
each URL listed on Schedule 2.26 for the periods set forth on Schedule 2.26. The
Company's web site (www.capellauniversity.edu) (the "WEB SITE") is commercially
operational, and has performed, for the six-month period prior to the date of
this Agreement. The Company has used commercially reasonable efforts to ensure
that customers or clients of the Company will not be adversely affected by a
failure or disruption of any of the computer networks or the Web Site of the
Company.

      2.27. Recruitment; Admissions Procedures; Attendance; Reports

            (a) Schedule 2.27 contains a complete and correct list of all policy
manuals and other statements of procedures or instructions relating to (i)
recruitment of students for the School, including procedures for assisting in
the application by prospective students for direct or indirect state or federal
financial assistance; (ii) admissions procedures, including any descriptions of
procedures for insuring compliance with federal, state and accreditation
requirements applicable to such procedures; and (iii) procedures for encouraging
and verifying attendance, minimum required attendance policies, and other
relevant criteria relating to course performance requirements and completion
(collectively, the "POLICY GUIDELINES"). The Company has made available to the
Investors true and complete copies of all Policy Guidelines.

            (b) The operations of the Company and the School have been conducted
in accordance with the Policy Guidelines, except where the failure to do so
would not have a Material Adverse Effect on the Company, and all relevant
standards

                                      -23-

<PAGE>

and requirements imposed by applicable Accrediting Bodies or State Approval
Agencies, and other agencies administering state or federal governmental
financial assistance programs in which the Company or the School participate,
and other applicable legal requirements.

            (c) The Company has submitted all reports, audits, and other
information, whether periodic in nature or pursuant to specific requests, for
the Company and the School to all agencies or other entities with which such
filings are required related to its compliance with (i) applicable accreditation
standards and State Approval Agency requirements, (ii) legal requirements
governing programs pursuant to which the School or its students receive student
financial assistance funding, and (iii) all articulation agreements between the
School and other institutions of higher education in effect as of the date
hereof except for any such reports, audits and other information the failure to
file would not have a Material Adverse Effect on the Company.

            (d) All student financial aid grants and loans, disbursements and
record keeping relating thereto have been completed in compliance with all
federal and state requirements, except where the failure to do so would not have
a Material Adverse Effect on the Company, and there are no material deficiencies
in respect thereto. Except as set forth on Schedule 2.27, except where the
failure to do so would not have a Material Adverse Effect on the Company and
except as previously disclosed in prior audits or compliance reviews by the
USDOE, no student at the School has been funded prior to the date for which such
student was eligible for funding or any amount other than the amount such
student was eligible to receive, and such student's records conform in form and
substance to all relevant regulatory requirements.

      2.28. USDOE Demonstration Program. The School is authorized by the USDOE
to participate in the Distance Education Demonstration Program ("DEMONSTRATION
PROGRAM") authorized under section 486 of the Higher Education Act of 1965, as
amended. The School is in compliance with all terms and conditions of the
February 21, 2000 agreement with the USDOE amending the School's Program
Participation Agreement to permit the School's participation in the
Demonstration Program, except for any instances of non-compliance which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on the Company. To the Company's knowledge, there exists
no fact or circumstances that would reasonably be expected to cause the USDOE to
revoke or limit the School's authorization to participate in the Demonstration
Program.

      2.29. Disclosure. (a) Neither this Agreement nor any of the Transaction
Documents contains any untrue statement by or on behalf of the Company of a
material

                                      -24-

<PAGE>

fact or omits to state a material fact necessary in order to make the statements
by or on behalf of the Company contained herein and therein, in light of the
circumstances under which they were made, not misleading.

            (b) The projections set forth on Schedule 2.29 (a) have been
prepared by management of the Company in good faith, (b) are based on
assumptions believed by management of the Company to be reasonable and (c)
represent good faith estimates by management of the Company as to the financial
performance of the Company for the periods indicated, but do not represent any
guarantee or assurance of the future financial results of the Company. The
Investors acknowledge that unanticipated future events and circumstances may
occur, that the Company's business, financial condition and results of
operations are subject to risks and uncertainties, and that actual results
achieved during any future period may vary from the projections and the
variations may be material and adverse.

      SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

      Each of the Investors severally, and not jointly, represents and warrants
to the Company as of the date hereof and as of the Closing as follows:

      3.1. Power; Authorization. The execution, delivery and performance of this
Agreement and the other Transaction Documents to which such Investor is a party,
and the consummation of all transactions contemplated hereby and thereby have
been duly authorized by all required actions on the part of the Investor. Each
of the Transaction Documents constitutes a valid and binding obligation of such
Investor enforceable against such Investor in accordance with its terms, subject
to Laws of general application relating to bankruptcy, insolvency and the relief
of debtors and Laws governing specific performance, injunctive relief or other
equitable remedies.

      3.2. No Breach. The execution, delivery and performance by such Investor
of this Agreement and the other Transaction Documents and the consummation by
such Investor of the transactions contemplated hereby and thereby will not (i)
conflict with, or result in any violation of, any provision of the
organizational or formation documents of such Investor or any Law or Order to
which such Investor is subject or (ii) conflict with, or result in any default
or breach, or give rise to a right of termination, cancellation, modification or
acceleration, or cause the forfeiture of any right, under, any of its Contracts,
Accreditations, Licenses or Permits.

                                      -25-
<PAGE>

      3.3. Investment; Securities Laws. Such Investor is acquiring the Class E
Preferred Stock to be purchased under this Agreement for its own account, not as
a nominee or agent, for investment and not with a view to the distribution
thereof (within the meaning of the Securities Act) except in compliance with all
applicable federal and state securities Laws. Such Investor understands that (i)
the Class E Preferred Stock has not been, and the Conversion Stock will not be,
registered under the Securities Act or any state securities Laws, and (ii) the
Class E Preferred Stock and the Conversion Stock may not be sold unless such
disposition is registered under the Securities Act and applicable state
securities Laws or is exempt from registration thereunder.

      3.4. Accredited Investor. Such Investor is an "Accredited Investor" (as
defined in Rule 501(a) under the Securities Act). The state in which such
Investor's principal office is located is set forth in Schedule 3.4 Such
Investor has such knowledge and experience in financial and business matters
that such Investor is capable of evaluating the merits and risks of the
investment to be made hereunder by such Investor. Such Investor has and has had
access to all of the Company's material books and records and access to the
Company's executive officers has been provided to such Investor or to such
Investor's qualified agents. No Investor was formed for the purpose of this
investment within the meaning of Rule 501 under the Securities Act.

      3.5. Rule 144. Such Investor acknowledges that the exemption from
registration afforded by Rule 144 promulgated under the Securities Act (the
provisions of which Rule are known to the Investor) depends on the satisfaction
of various conditions, and that, if applicable, Rule 144 may afford the basis
for sales only in limited amounts.

      3.6. Availability of Funds. Such Investor has available sufficient funds
or available capital commitments to pay its portion of the Purchase Price.

      3.7. Brokers. Such Investor has not incurred, and will not incur, directly
or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the transactions
contemplated by this Agreement and the other Transaction Documents.

      3.8. Independent Investigation and Counsel. Such Investor acknowledges to
the Company and to the other Investor that it has had an opportunity to conduct
its own independent due diligence investigation of the Company and no Investor
is relying on any other Investor for such Investor's due diligence investigation
of the Company. Such Investor acknowledges to the other Investor that it was
represented by counsel of its own

                                      -26-
<PAGE>

choosing and no Investor is relying on the counsel of the Company or the other
Investor for any purpose whatsoever.

            SECTION 4. CONDITIONS TO CLOSING OF THE INVESTORS.

      Each Investor's obligation to purchase the Class E Preferred Stock at the
Closing is subject to the fulfillment at or prior to the Closing of the
following conditions:

      4.1. Representations and Warranties Correct. The representations and
warranties made by the Company in (a) Sections 2.6, 2.9, 2.10, 2.11, 2.15, 2.20,
2.21 (other than with respect to ERISA matters) and 2.22 shall have been true
and correct in all material respects when made, other than such representations
and warranties as are expressly stated to be made as of another date, which
shall have been true and correct in all material respects as of such date, (b)
Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.8, 2.12, 2.14 and 2.21 (with respect to
ERISA matters) shall be true and correct in all material respects when made and
as of the time of the Closing with the same force and effect as if made at such
time, other than such representations and warranties as are expressly stated to
be made as of another date, which shall be true and correct in all material
respects as of such date and (c) Sections 2.7, 2.13, 2.16, 2.18, 2.19, 2.23,
2.24, 2.25, 2.26, 2.27, 2.28 and 2.29 shall be true and correct when made and as
of the time of the Closing with the same force and effect as if made at such
time, other than such representations and warranties as are expressly stated to
be made as of another date, which shall be true and correct as of such date,
except, in the case of this clause (c) only, for failures to be true and correct
which individually or in the aggregate would not reasonably be expected to have
a Material Adverse Effect on the Company. For purposes of determining whether
the foregoing condition has been satisfied, all references in such
representations and warranties to "material," "material adverse change,"
"Material Adverse Effect," "in all material respects" and words of similar
import or similar expressions shall be disregarded.

      4.2. Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company at or prior to the Closing shall have
been performed or complied with in all material respects.

      4.3. Material Adverse Change. Since the date of this Agreement, there
shall have been no change which has had, or would reasonably be expected to
have, a Material Adverse Effect on the Company.

                                      -27-
<PAGE>

      4.4. Compliance Certificate. The Company shall have delivered to such
Investor a certificate of the Company, executed by the Chief Executive Officer
of the Company, dated the Closing Date, and certifying as to the fulfillment of
the conditions specified in Sections 4.1, 4.2, 4.3, 4.7 and 4.8.

      4.5. Opinion of Company's Counsel. Such Investor shall have received from
(a) Faegre & Benson LLP, counsel to the Company, an opinion addressed to each of
the Investors, dated the Closing Date, in the form set forth in Exhibit D-1 and
(b) Dow, Lohnes & Albertson, PLLC, special counsel to the Company, an opinion
addressed to each of the Investors, dated the Closing Date, in the form set
forth in Exhibit D-2.

      4.6. Officer's Certificate. The Company shall have delivered to such
Investor a certificate executed by an appropriate officer of the Company dated
as of the Closing Date, certifying the following matters: (a) the corporate
proceedings taken by the Company's Board of Directors (the "BOARD") and, if
required, stockholders approving this Agreement and the other Transaction
Documents and the transactions contemplated hereby and thereby; (b) the Articles
of Incorporation, (c) the By-laws of the Company and (d) the Certificate of
Designation.

      4.7. Governmental and Other Authorizations, etc. The Governmental Filings
required to have been made by the Company set forth on Schedule 4.7 shall have
been made; the Governmental Consents required to have been obtained by the
Company or any of the Investors set forth on Schedule 4.7 shall have been
obtained; the Third-Party Consents (as hereinafter defined) the lack of which
would., individually or in the aggregate, have a Material Adverse Effect on the
Company, and which are set forth on Schedule 4.7 shall have been obtained.

      4.8. Board Membership. The five people listed on Exhibit B shall have been
elected to, and shall comprise, the Board.

            SECTION 5. CONDITIONS TO CLOSING OF THE COMPANY.

      The Company's obligation to sell the Class E Preferred Stock to the
Investors at the Closing is subject to the fulfillment at or prior to the
Closing of the following conditions:

      5.1. Representations and Warranties Correct. The representations and
warranties made by the Investors in Section 3 of this Agreement shall be true
and correct

                                      -28-
<PAGE>

in all material respects as of the time of Closing with the same force and
effect as if made as of such time, other than such representations and
warranties as are expressly stated to be made as of another date which shall be
true and correct in all material respects as of such date.

      5.2. Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Investors at or prior to the Closing shall have
been performed or complied with in all material respects.

      5.3. Compliance Certificate. The Investors shall have delivered to the
Company a certificate executed by the Investors, dated the Closing Date, and
certifying as to the fulfillment of the conditions specified in Sections 5.1 and
5.2.

      5.4. Governmental Authorizations, etc. The Governmental Filings required
to have been made by the Investors and set forth in Schedule 4.7 shall have been
made, and all Governmental Consents required to have been obtained by the
Company or the Investors and set forth in Schedule 4.7 shall have been obtained
and shall be in full force and effect on the Closing Date.

            SECTION 6. PRE-CLOSING COVENANTS OF THE COMPANY AND THE INVESTORS.

      6.1. Cooperation. From the date hereof and prior to the Closing, each of
the parties shall use its best efforts to make all Governmental Filings required
to be made by it, and to obtain all Governmental Consents and all necessary
consents from other third parties ("THIRD PARTY CONSENTS") as shall be required
to be obtained by it, for the consummation of the transactions contemplated
hereby and by the other Transaction Documents, all as set forth in Schedule 4.7,
and shall otherwise use its best efforts and cooperate with the other parties to
cause the consummation of such transactions in accordance with the terms and
conditions hereof and thereof

      6.2. No Solicitation. Except as set forth on Schedule 6.2, from the date
hereof and until the Closing, other than in connection with the transactions
contemplated hereby and in connection with the Company's preparation for its
initial public offering of securities of the Company, the Company shall not
solicit, propose or facilitate (including by way of providing information
regarding the Company or its business to any person or providing access to any
person), directly or indirectly, any inquiries, discussions or proposals
regarding, continue or enter into negotiations looking toward, or enter into or

                                      -29-
<PAGE>

consummate any agreement or understanding in connection with any proposal
regarding, any purchase or other acquisition of all or any portion of the
Company (other than the ordinary course of business sale of products or services
or replacement of assets) or any equity securities (whether newly issued or
currently outstanding) of the Company, any merger, business combination or
recapitalization involving the Company, the liquidation, dissolution or
reorganization of the Company, or any similar transaction. If any such inquiries
or proposals are received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated or continued with,
the Company or any of its representatives, then the Company shall promptly
notify the Investors of the nature and terms of any of the foregoing and the
identity of the parties involved.

      6.3. Publicity. Prior to the Closing, no public release or announcement or
other disclosure concerning the transactions contemplated hereby and by the
Transaction Documents or the terms hereof and thereof shall be made by any
party, without the prior consent of the other party (which consent shall not be
unreasonably withheld), except as such release or announcement may be required
by Law or the rules or regulations of any securities exchange, in which case the
party required to make the release or announcement shall give notice to and
consult with the other party in advance of such issuance.

      6.4. Conduct of Business Prior to the Closing. The Company covenants and
agrees that, except as set forth in Schedule 6.4, between the date hereof and
the Closing, neither the Company nor any of the Subsidiaries shall conduct its
business other than in the ordinary course and consistent with prior practice.
Without limiting the generality of the foregoing, except as set forth in
Schedule 6.4, between the date hereof and the Closing, the Company shall, and
shall cause each Subsidiary and otherwise use commercially reasonable efforts
to, (A) preserve intact the business organization of the business, (B) keep
available the services of the Employees, (C) continue in full force and effect
without material modification all existing policies or binders of insurance
presently maintained in respect of the business, (D) preserve its current
relationships with its customers, suppliers and other persons with which it has
significant business relationships; and (E) not engage in any practice, take any
action, embark on any course of inaction or enter into any transaction which
could result in any misrepresentation or breach of any warranty or covenant made
by the Company in this Agreement or in any Transaction Document.

      6.5. Directors and Officers Liability Insurance. Prior to the Closing, the
Company shall use commercially reasonable efforts to obtain directors and
officers

                                      -30-
<PAGE>

liability insurance with coverage, deductibles and other terms as are customary
for companies of similar size and engaging in a similar line of business.

      SECTION 7. POST-CLOSING AND ON-GOING COVENANTS.

      7.1. Directors. Effective at the Closing, the holders of shares of Class E
Preferred Stock and Conversion Stock shall have the right to designate directors
of the Company in accordance with the provisions of Section 3 of the Board
Representation Agreement.

      7.2. Reimbursement of Directors. The Company shall reimburse each director
designated by the holders of the shares of Class E Preferred Stock and
Conversion Stock for all reasonable costs and expenses associated with attending
meetings of the Board or any committee thereof.

      7.3. Indemnification of Directors. (a) The Company shall indemnify, defend
and hold harmless each person who serves as a member of the Board or committee
thereof from and against all losses, claims, damages and expenses (including
reasonable attorneys' fees and expenses) to the fullest extent permitted from
time to time under applicable Law.

            (b) To the fullest extent permitted from time to time under
applicable Law, the Company shall pay, on an as-incurred basis, the reasonable
fees and expenses of the directors (including reasonable attorneys' fees and
expenses) in advance of the final disposition of any Litigation that is the
subject of the right to indemnification.

            (c) In the event of any Litigation, subject to the provisions of any
insurance policy the director shall be entitled to control the defense thereof
with counsel of the director's own choosing reasonably acceptable to the Company
and the Company shall cooperate in the defense thereof; provided, that, such
director shall have no power to settle or compromise any Litigation for which
indemnification is being sought without the prior written consent of the Company
which shall not be unreasonably withheld.

            (d) The Articles of Incorporation and By-Laws of the Company shall
contain provisions for the indemnification and exculpation of directors to the
maximum extent permitted under applicable Law, and shall be amended as and when
necessary to effectuate the foregoing.

                                      -31-
<PAGE>

      7.4. Representative. (a) From and after the Closing and so long as it
holds any shares of Class E Preferred Stock or Conversion Stock, if Equity VI is
no longer entitled to designate a director under the Investor Rights Agreement,
Equity VI shall be entitled to designate one representative (the
"REPRESENTATIVE") to observe Board meetings and all committees thereof. The
Company shall, after receiving notice from Equity VI as to the identity of the
Representative, except to the extent necessary to preserve attorney-client
privilege, (i) permit the Representative to attend all Board meetings and all
committees thereof, (ii) provide the Representative advance notice of each such
meeting, including such meeting's time and place, at the same time and in the
same manner as such notice is provided to the members of the Board (or such
committee thereof) and copies of all materials distributed to the members of the
Board (or such committee thereof) at the same time as such materials are
distributed to the Board (or such committee thereof) and shall permit the
Representative to have the same access to information concerning the business
and operations of the Company as the directors (or committee members) have, and
(iii) permit the Representative to discuss the affairs, finances and accounts of
the Company with, and to make proposals and furnish advice with respect thereto
to, the Board, without voting. The Board (or any committee thereof) and the
Company's management shall give due consideration to the advice given and any
proposals made by the Representative. In addition, Equity VI shall have the
right to consult with and advise management of the Company on significant
business issues, including management's proposed annual operating plans, and
management will meet with a representative of Equity VI at the Company's
facilities at mutually agreeable times for such consultation and advice,
including to review progress in achieving said plans. The Company shall give
Equity VI reasonable advance written notice of any significant new initiatives
or material changes to existing operating plans and shall afford Equity VI
adequate time to meet with management to consult on such initiatives or changes
prior to implementation. The Company shall furnish Equity VI with such financial
and operating data and other information with respect to the Business and the
properties of the Company as the Representative may request, except to the
extent necessary to preserve attorney-client privilege. The Company shall permit
Equity VI to discuss the affairs, finances and accounts of the Company with, and
to make proposals and furnish advice with respect thereto to, the principal
officers of the Company, except to the extent necessary to preserve
attorney-client privilege. The Company shall give due consideration to the
advice given and any proposals made by Equity VI.

            (b) The rights set forth in Sections 7.1 and 7.4 are intended to
satisfy the requirement of contractual management rights for purposes of
qualifying the ownership interests of Equity VI in the Company as venture
capital investments for purposes of the Department of Labor's "plan assets"
regulations, and in the event such

                                      -32-
<PAGE>

rights are not satisfactory for such purpose, the Company and Equity VI shall
reasonably cooperate in good faith to agree upon mutually satisfactory
management rights which satisfy such regulations.

      7.5. Financial Statements and Other Information. From and after the
Closing, so long as an Investor holds not fewer than 500,000 shares of Class E
Preferred Stock, or 50,000 shares of Class E Preferred Stock with respect to the
covenants set forth in (a) and (b) below (adjusted from time to time to reflect
stock splits, dividends, recapitalizations, combinations or the like), the
Company shall furnish to such Investor the following:

            (a) as soon as available but in any event within 30 days after the
end of the first, second and third quarterly accounting periods in each fiscal
year, (i) unaudited consolidated statements of income, stockholders' equity and
cash flows of the Company and its subsidiaries for such quarterly period and for
the period from the beginning of the fiscal year to the end of such quarterly
period and consolidated balance sheet of the Company and its subsidiaries as of
the end of such quarterly period, setting forth in each case comparisons to the
annual budget and to the corresponding period in the preceding fiscal year, all
prepared in accordance with generally accepted accounting principles
consistently applied (subject to normal year-end audit adjustments), plus (ii) a
statement certified by the Chief Financial Officer of the Company, certifying
that the financial statements referred to in subparagraph (i) are presented
fairly and have been prepared in accordance with generally accepted accounting
principles consistently applied (subject to normal year-end audit adjustments);

            (b) as soon as practicable and in any event within 90 days after the
end of each fiscal year, audited consolidated statements of income,
stockholders' equity and cash flows of the Company and its subsidiaries for such
fiscal year, and consolidated balance sheet of the Company and its subsidiaries
as of the end of such fiscal year, all prepared in accordance with generally
accepted accounting principles consistently applied, and accompanied by an audit
opinion, without qualification or reservation, by a nationally recognized public
accounting firm selected by the Company (the "COMPANY'S ACCOUNTANTS");

            (c) promptly upon receipt thereof, a copy of the annual management
letter of the Company's Accountants to the Board and any additional written
reports or management letters concerning material aspects of the Company's
operations and financial affairs delivered by the Company's Accountants to the
audit committee (and not otherwise contained in other materials provided
hereunder);

                                      -33-
<PAGE>

            (d) at least 15 days prior to the end of each fiscal year, an annual
operating budget prepared on a monthly basis for the Company for the succeeding
fiscal year (displaying anticipated statements of income and cash flows, changes
in financial position and balance sheets), an annual budget for capital
expenditures of the Company for the succeeding fiscal year, and a strategic plan
for the succeeding fiscal year, which budgets and strategic plan shall have been
approved by the Board, and promptly upon preparation thereof any other
significant budgets which the Company prepares, and any revisions of such annual
or other budgets or strategic plan;

            (e) as soon as available, copies of any independent accountants'
reports prepared for federal or state educational regulatory purposes, together
with any related reports prepared by the Company;

            (f) with reasonable promptness, such other information and financial
data concerning the Company as such Investor may reasonably request and;

            (g) the School shall timely make all required notifications or
applications to the USDOE, State Approval Agencies and Accrediting Bodies that
are required as a result of this transaction and, if necessary, timely make all
applications for and obtain all required approvals of the transaction from such
State Approval Agencies that were not required to be made or obtained, as the
case may be, prior to Closing, all as set forth on Schedule 7.5 (g).

      SECTION 8. TERMINATION.

      8.1. Termination. This Agreement may be terminated and the transaction
contemplated hereby may be abandoned at any time prior to the Closing Date:

            (a) by mutual written consent of Equity VI and the Company;

            (b) by either Equity VI or the Company, by giving written notice to
the other party, if any Governmental Entity with jurisdiction over such matters
shall have issued an Order restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such Order shall have become
final and nonappealable; provided, however, that the provisions of this Section
8 shall not be available to the Company or Equity VI unless the Company or the
Investors, as the case may be, shall have complied with their respective
obligations under Section 6.1 and 6.2, or otherwise used their reasonable best
efforts to oppose any such Order or to have such

                                      -34-
<PAGE>

Order vacated or made inapplicable to the transactions contemplated by this
Agreement; or

            (c) by either Equity VI or the Company, by giving written notice to
the other party, if the Closing shall not have occurred on or prior to May 18,
2000 after the date hereof, provided that the terminating party is not in
material breach of its obligations under this Agreement.

      8.2. Effect on Obligations. Termination of this Agreement pursuant to this
Section 8 shall terminate all obligations of the parties hereunder, except for
the obligations under Sections 9.1, 9.2, 9.8 and 9.11; provided, however, that
nothing herein shall relieve the defaulting or breaching party from any
liability to the other party hereto.

      SECTION 9. MISCELLANEOUS.

      9.1. Survival. All representations and warranties hereunder shall survive
the Closing until the end of the 18th month following the Closing, and shall in
no way be affected by any knowledge possessed by, or investigation of the
subject matter thereof made by or on behalf of, the Investors, provided,
however, that the representations and warranties set forth in Sections 2.2, 2.4,
2.5(b), 2.19, 3.1, 3.3 and 3.4 shall survive indefinitely. All statements
contained in any Transaction Document shall constitute representations and
warranties by the Company under this Agreement. All covenants and agreements
contained herein shall survive indefinitely until performed in accordance with
their terms.

      9.2. Indemnification. (a) The Company shall indemnify, defend and hold
harmless each Investor, its affiliates, and each of their respective officers,
directors, partners (and the partners of such partners), managing directors,
employees, agents, advisors, consultants, representatives, successors and
assigns (including any transferee of Class E Preferred Stock) from and against
all Losses (as hereinafter defined) incurred or suffered by any of the foregoing
(whether incurred or suffered directly or indirectly through ownership of
Conversion Stock or Class E Preferred Stock) arising out of, relating to or
resulting from (i) any breach of any of the representations or warranties made
by the Company in this Agreement or in any of the Transaction Documents, and
(ii) any breach of any of the covenants or agreements made by the Company in
this Agreement or in any of the Transaction Documents. The Investors shall each,
severally and not jointly, indemnify, defend and hold harmless the Company, its
affiliates, and each of their respective officers, directors, employees, agents,
advisors, consultants,

                                      -35-
<PAGE>

representatives, successors and assigns against all Losses arising from the
breach of any of the representations, warranties, covenants or agreements made
by such Investor in this Agreement or in any of the Transaction Documents or in
any certificate or instrument delivered pursuant to Section 5.

      (b) For purposes hereof, "LOSSES" shall mean each and all of the following
items: claims, losses, liabilities, obligations, payments, actual and punitive
damages, charges, judgments, fines, penalties, amounts paid in settlement, costs
and expenses (including, without limitation, interest which may be imposed in
connection therewith, costs and expenses of investigation and fees, expenses and
disbursements of counsel, consultants and other experts), but excluding
consequential damages. Any payment by the Company to any Investor pursuant to
this Section 9.2 shall be treated for all income Tax purposes as an adjustment
to the price paid by such Investor for the Class E Preferred Stock pursuant to
this Agreement.

      (c) Each of the representations and warranties that contains any "Material
Adverse Effect," "in all material respects," or other materiality (or
correlative meaning) qualifications shall be deemed to have been given as though
there were no "Material Adverse Effect," "in all material respects," or other
materiality (or correlative meaning) qualifications for purposes of determining
the amount of Losses under this Section 9.2, but not the accuracy of any
representation or warranty.

      (d) Any claim for indemnification pursuant to this Section 9.2 must be
made before the expiration of the survival periods set forth in Section 9.1. No
party shall be entitled to indemnification against a Loss arising from the
breach of any representations or warranties of any other party unless the party
seeking indemnification (the "INDEMNIFIED PARTY") shall have given to the party
from whom indemnification is sought (the "INDEMNIFYING PARTY") a claim notice
relating to such Loss (a "CLAIM NOTICE") prior to expiration of the
representation or warranty upon which the claim is based. The written Claim
Notice shall be given reasonably promptly after the indemnified party becomes
aware of the facts indicating that a claim for indemnification may be warranted,
and shall state in reasonable detail (to the extent known) the nature of the
claim. The failure of any indemnified party to give a Claim Notice shall not
relieve the indemnifying party of its obligations under this Section 9.2, except
to the extent that the indemnifying party is actually materially prejudiced by
failure to give such Claim Notice. The indemnifying party may, through counsel
of its own choosing and reasonably satisfactory to the indemnified party, assume
the defense thereof or other indemnification obligation with respect thereto;
provided, however, that any indemnified party shall be (a) entitled to
participate in any such claim with counsel of its own choice but at its own
expense and (b) shall be entitled to participate in any such claim with

                                      -36-
<PAGE>

counsel of its own choice at the expense of the indemnifying party if
representation of both parties by the same counsel is otherwise inappropriate
under applicable standards of professional conduct. In any event, if the
indemnifying party disputes the claim or otherwise fails to take reasonable
steps necessary to defend diligently the action or proceeding within 20 days
after receiving notice from such indemnified party, the indemnified party may
assume such defense or other indemnification obligation and the fees and
expenses of its attorneys will be covered by the indemnity provided for in this
Section 9.2 if and upon determination of an indemnifying party's obligation
therefor. The indemnifying party shall not, without the written consent of the
indemnified party, which shall not be unreasonably withheld or delayed, settle
or compromise any pending or threatened Litigation or claim in respect of which
indemnification may be sought hereunder (whether or not the indemnified party is
an actual or potential party to such action or claim) or consent to the entry of
any judgment (i) which does not, to the extent that an indemnified party may
have any liability with respect to such action or claim, include as an
unconditional term thereof the delivery by the claimant or plaintiff to the
indemnified party of a written release from all liability in respect of such
action or claim, (ii) which includes any statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of any indemnified
party, or (iii) in any manner that involves any injunctive relief against the
indemnified party or may materially and adversely affect the indemnified party.
The indemnified party may not compromise or settle any claim without the prior
written consent of the indemnifying party (which consent shall not be
unreasonably withheld or delayed), unless the sole relief granted is equitable
relief for which the indemnifying party would have no liability or to which the
indemnifying party would not be subject.

      9.3. Expenses. At the Closing, the Company shall pay, or reimburse the
Investors for, all reasonable costs and expenses incurred by the Investors in
connection with the negotiation, execution, delivery, performance and
consummation of this Agreement and the transactions contemplated hereby; but in
no event shall the Company pay or reimburse the Investors for such costs and
expenses in an amount in excess of $30,000. The Company shall pay its own
expenses incurred in connection with the negotiation, execution, delivery,
performance and consummation of this Agreement and the transactions contemplated
hereby.

      9.4. Delays or Omissions; Remedies. Except as expressly provided herein,
no delay or omission to exercise any right, power or remedy accruing to any
holder of any shares of Class E Preferred Stock or shares of Conversion Stock
upon any breach or default of the Company under this Agreement shall impair any
such right, power or remedy of such holder nor shall it be construed to be a
waiver of any such breach or

                                      -37-
<PAGE>

default, or an acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any shares of Class E Preferred Stock or shares of
Conversion Stock with respect to any breach or default under this Agreement, or
any waiver on the part of any holder of shares of Class E Preferred Stock or
shares of Conversion Stock of any provisions or conditions of this Agreement,
must be in writing signed by such holder and shall be effective only to the
extent specifically set forth in such writing. All remedies, either under this
Agreement or by Law or otherwise afforded to any holder of shares of Class E
Preferred Stock or shares of Conversion Stock, shall be cumulative and not
alternative, and any person having any rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover
damages by reason of any breach of this Agreement and to exercise all other
rights granted by Law, equity or otherwise.

      9.5. Further Assurances. At any time or from time to time after the
Closing, the Company, on the one hand, and the Investors, on the other hand,
agree to cooperate with each other, and at the request of the other party, to
execute and deliver any further instruments or documents and to take all such
further action as the other party may reasonably request in order to evidence or
effectuate the consummation of the transactions contemplated hereby and by the
other Transaction Documents and to otherwise carry out the intent of the parties
hereunder and thereunder.

      9.6. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the Company and each of the Investors and the respective successors,
assigns, heirs and personal representatives of the Company and each of the
Investors. The Company may assign its rights or obligations under this Agreement
to any successor by merger, purchase, consolidation or otherwise of the Company,
provided that such successor becomes a signatory to this Agreement. Prior to the
Closing, the Investors may not assign their right or obligation under this
Agreement to purchase shares of Class E Preferred Stock. The Company
acknowledges that, after the Closing, subject to compliance with applicable
securities Laws and the applicable provisions of this Agreement and the other
Transaction Documents, any of the Investors may transfer all or part of the
securities acquired by it hereunder and may, in its discretion, assign all or
part of its rights and obligations under this Agreement to a transferee of such
securities.

      9.7. Entire Agreement. This Agreement and the Transaction Documents
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior and contemporaneous arrangements, understandings or

                                      -38-
<PAGE>

representations by or among the parties hereto, written or oral, to the extent
they relate in any way to the subject matter hereof.

      9.8. Notices. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or sent by telecopy (with a confirmatory
copy sent by a different means within three business days of such notice),
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:

                           (i)      if to the Company, to:

                                    Capella Education Company
                                    330 Second Avenue
                                    Suite 550
                                    Minneapolis, Minnesota 55401
                                    Telecopy:
                                    Attention: Chief Executive Officer

                                    with a copy to:

                                    Faegre & Benson LLP
                                    2200 Norwest Center
                                    90 South Seventh Street
                                    Minneapolis, Minnesota 55402-3901
                                    Telecopy: (612) 336-3026
                                    Attention: David B. Miller, Esq.

                                    and

                           (ii)     if to the Investors, to:

                                    Forstmann Little & Co.
                                    767 Fifth Avenue, 44th Floor
                                    New York, New York 10153
                                    Telecopy: (212) 759-9059
                                    Attention: Mr. S. Joshua Lewis

                                    with copies to:

                                      -39-
<PAGE>

                                    Fried, Frank, Harris, Shriver & Jacobson
                                    One New York Plaza
                                    New York, New York 10004
                                    Telecopy: (212) 859-4000
                                    Attention: Robert C. Schwenkel, Esq.

                                    and

                                    SmartForce plc
                                    900 Chesapeake Drive
                                    Redwood City, California 94063
                                    Telecopy: 650-817-5040
                                    Attention: David Drummond

      All such notices, requests, consents and other communications shall be
deemed to have been given when received.

      9.9. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

      9.10. Titles and Subtitles; Definitions. The titles and subtitles used in
this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement. The term "INCLUDING" shall mean
including without limitation, whether or not so stated, and is meant to be by
way of example rather than limitation. The term "MATERIAL ADVERSE EFFECT ON THE
COMPANY" shall mean a material adverse effect on the Company and the
Subsidiaries, taken as a whole, and the term "MATERIAL" (including when used in
the foregoing phrase or in the phrase "in all material respects") shall mean
material to the business, assets, liabilities, prospects, condition (financial
or otherwise) or results of operations of the Company and the Subsidiaries taken
as a whole; provided, that, the Company and the Investors agree that Material
Adverse Effect shall not include any such effect primarily attributable to or
resulting from (a) changes in general economic or business conditions, the
securities markets (public or private) or the Internet or education industries
generally as they may affect the Company, (b) the announcement to employees,
customers, suppliers or others of the transactions contemplated hereby, (c) the
incurrence of liabilities, obligations and losses in the ordinary course of
business substantially consistent with the Company's year 2000 plan (attached
hereto as Schedule 9.10), (d) the taking of any action required by this
Agreement or the other Transaction Documents and (e) any changes in generally
accepted accounting principles. The term "CONTRACT" shall mean any agreement,

                                      -40-
<PAGE>

contract, understanding or arrangement, whether written or oral, and including
all amendments thereto. The term "TO THE COMPANY'S KNOWLEDGE" shall mean the
knowledge of any of the persons set forth in Exhibit C, after reasonable
inquiry. The term "PERSON" shall mean any individual, corporation, association,
partnership, trust or other entity or organization, including a Governmental
Entity. The term "DESIGNATED EMPLOYEE" shall mean the persons listed as such on
Exhibit C. The term "SUBSIDIARY" shall mean each corporation or other person of
which shares of capital stock or other equity interests having ordinary voting
power to elect a majority of the board of directors or other managers of such
corporation or other person are at the time owned, directly or indirectly, or
the management of which is otherwise controlled, directly or indirectly, or
both, by the Company.

      9.11. Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This
Agreement shall be governed by and construed in accordance with the Laws of the
State of Minnesota without giving effect to the principles of conflict of laws.
Each of the parties irrevocably and unconditionally waives, to the fullest
extent permitted by applicable Law, any and all rights to trial by jury in
connection with any Litigation arising out of or relating to this Agreement or
the transactions contemplated hereby.

      9.12. Severability. Whenever possible, each provision of this Agreement
shall he interpreted in such manner as to be effective and valid, but if any
provision of this Agreement is held to be invalid or unenforceable in any
respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.

                                      -41-
<PAGE>

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.

                                CAPELLA EDUCATION COMPANY

                                By: /s/ Stephen Shank
                                   ---------------------------------------------
                                   Name:  Stephen Shank
                                   Title: President

                                FORSTMANN LITTLE & CO.
                                EQUITY PARTNERSHIP-VI, L.P.
                                By: FLC XXXII PARTNERSHIP, L.P., its
                                    general partner

                                By: /s/ S J Lewis
                                   ---------------------------------------------
                                   Name: S J Lewis
                                   Title: General Partner

                                SMARTFORCE PLC

                                By:/s/ David C. Prummend
                                   ---------------------------------------------
                                   Name: David C. Prummend
                                   Title: CEO

                                      -42-

Source: OneCLE Business Contracts.